Wood products market trends amid COVID-19

Friday 1 May 2020

 
2020 Q2 is going to be a struggle

In the new world of managing COVID-19, there are emerging issues, disruptions, dislocations and chaos almost daily as wood products buyers and sellers adapt to a new world order. The challenges are endless, and include the following (and others too numerous to list):

In the forest: For employees in terms of logging, trucking, ports, etc.
In mills: To maintain mill employees and log supply to mills.
In end-use market supply chains: From mills to ports to reloads to distribution to retail to contractors to building sites — the impacts go on and on.
In logistics: As highlighted in Timber.Exchange, there are many “blank sailings” (void sailings) for container shipments, meaning a vessel may skip a port or the carrier has cancelled the entire journey.

From country to country, the role of government is changing and becoming harder to predict. Below are some quick updates from around the world supplied by FEA (dated 20 April). These snippets are taken from various discussions with industry experts and a variety of other sources (including Holzkurier, Timber-Online, EUWID, ITTO, EOS, DeSH, Forest Industry Intelligence, etc.).

RUSSIA: As a result of the oil price war, the Russia ruble devalued from 62 rubles to the U.S. dollar to as low as 78 before settling back at 74; this has increased the competitiveness of log and lumber exports.

To combat the economic fallout from COVID-19, the Russian government has allowed quotas for log exports to rise by 2 million m3 for companies in the application stage, with a 0% export tariff (versus 13%) for pine logs. However, new log fumigation requirements were put in place this year for log exports to China, so this is an extra cost being paid by Russian log exporters. This benefits Siberia and the Russian Far East, but northwestern Russia is facing a tight sawlog supply and high log prices due to a mild winter. Lumber exports to China have been steady for larger mills (less so for smaller Chinese mills in Russia), but demand is still considered slow. On the other hand, higher Chinese prices (higher than selling to Egypt) are helping.

EUROPE: The European Organization of Sawmills (EOS) reports that the construction sector has taken a hit in such countries as Spain, Italy, the United Kingdom and France. In Scandinavia, Germany and the Netherlands, the local construction sector has been doing better. Sectors connected to logistics, e.g., pallets, are performing comparatively better than sectors connected to manufacturing, e.g., furniture. Double-digit production curtailments have been introduced by some mills due to slowing demand, with reductions in Scandinavia somewhat milder than in Central Europe. The DIY sector is one bright spot as people spend more time at home.

UNITED KINGDOM: The British government has announced that its lockdown will stay in place until the first week of May. This has caused several building materials’ merchants and importers to curtail operations, impacting one of the largest import markets in Europe. Bans against travelling are hindering the construction sector, e.g., in Greater London, it is estimated that 50% of construction employees are foreign workers.

SWEDEN: Some sawmill companies have announced temporary layoffs, while others continue to operate close to normal. A key reason: for many Swedish and Baltic mills, Great Britain is their largest export market for lumber, and demand has plummeted in both the U.K. and Ireland. Mills are adjusting their output in order to maintain a healthier balance between supply and demand, but curtailments appear to be looming. To replace the U.K. market, some firms are exploring markets in MENA and the U.S.

JAPAN: Japan began a month-long state of emergency on April 8, with strict government measures proposed for Tokyo and nearby Kanagawa, Saitama and Chiba prefectures, as well as Osaka, Hyogo and Fukuoka (the latter the worst-hit areas in terms of COVID-19). Several other prefectures had gone ahead and announced their own states of emergency.

While the Japanese market for logs and lumber is considered “stable,” house construction activity has slowed dramatically. In new housing starts, “owners’ units” (approximately 30% of total starts) were at their lowest pace in 57 years during the first two months of 2020, the result of poor timing and other issues; this follows a steady decline that had been already been underway for seven consecutive months. “Rental unit” starts (38% of total new housing) have seen 18 consecutive months of decline, while “2x4 housing” units (12% of total housing) have declined for 11 consecutive months. The pace of annual Japanese housing starts is now below 900,000 units for the first time in five years.

VIETNAM: COVID-19 has seriously affected Vietnam’s economy and wood processing industry. As of early/mid-April, some 80% of all export orders had been suspended, and producers had stopped taking new orders. Exports to some major markets have mostly ceased; this includes the U.S. and EU, which accounted for 51% and 9%, respectively, of the total wood export value in 2020Q1. Similarly, the cancellation/delay rate of orders in South Korea and Japan is reaching 60–80%. Furthermore, imports of wooden materials and accessories have decreased by 70–80%.

CHINA: With China now in recovery mode following COVID-19, forestry enterprises are getting back to work (with the exception of those in Hubei province, including Wuhan). According to the State Forestry and Grass Administration, the rate of resumption of work in forestry enterprises nationwide (excluding Hubei) exceeded 90% by March 22. However, the Chinese media has reported that many private employers are operating at a fraction of normal levels due to employees’ inability to return from their home provinces.

At present, there is strong pressure on some export-oriented furniture enterprises (e.g., in Vietnam), as offshore sales have slowed. Chinese sawmills operated at around 60–70% of capacity in March, but this has slipped to about 50% in April. The reason: rising log prices against relatively flat lumber prices, putting mills into a margin squeeze. The construction market for new apartments is still slow, with demand for construction lumber sluggish in kind.

The government’s ongoing strategy to replace shanty towns with new buildings appears to be changing, with the new plan being to renovate existing buildings. This shift is likely to result in lower construction lumber demand for use in concrete forming applications. In addition, while log and lumber inventories are coming down, it looks as if a ramp-up of New Zealand and European logs should be in full force by May; this points to a glut of arrivals by June/July.

China’s gross domestic product shrunk by 6.8% in 2020Q1 from a year earlier. China’s three major engines of growth — consumer spending, exports and fixed-asset investment — all sputtered as large swaths of the country were placed on lockdown in late January and February in an attempt to contain the spread of COVID-19. Retail spending dropped by 19% in 2020Q1, exports plunged by more than 13%, and fixed-asset investment declined by 16%. It appears that economic growth in China will depend partly on the strength of government stimulus policies, with fiscal policy playing a leading role; monetary policy will be modestly expansionary.

INDIA: As part of India’s general lockdown, ports in the country are closed to both imports and exports. Export containers cannot be moved given that the receiving-end ports are also closed in most cases, and import containers wait to be discharged, held up due to an inability of workers to travel. Until restrictions are lifted, nothing will really move in the country.

According to Indian importers, despite some factories in China being back at work, others have deferred reopening, reducing the flow of import (not only of furniture, but also of panel) products used by Indian manufacturers. Indian retailers, who turned to domestic manufacturers in response to the disruption, discovered that they are also unable to work (due to the Indian lockdown).

U.S. AND CANADA: Details are available in FEA’s Monthly Advisor Reports on macroeconomics, lumber and panels.

The global trend is clear: a slowdown is occurring around the world in early 2020Q2 — and will get worse before it gets better. The time for countries to relaunch their economies is moving nearer. A “V” (or quick) recovery remains the desired outcome, but many wild cards are in play.

Source: Russ Taylor, Managing Director, FEA-Canada

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