The global timber market has undergone its biggest period of sustained change in decades. Buyers of timber pallets and packaging are under pressure to justify recurring price rises within their business and are looking to their suppliers to provide a detailed insight into the market drivers and supply chain challenges. This update is therefore offered to assist timber pallet and packaging buyers grappling with the challenges and complexity associated with responsible timber procurement.
A starting point in understanding the market is recognising, like many mainland European countries, that to meet its domestic demand, the UK is a net importer of timber. Around 40% of sawn timber is produced domestically and 60% imported. This exposes UK timber buyers to global market influences, impacting both price and availability.
2018 has seen an exceptional mix of factors combine, including the relatively weak Sterling, to drive up timber prices and impact UK pallet and packaging timber supply.
Demand remains the most significant driver impacting supply and price. Trade of softwood sawn timber has reached an all-time high: in 2017 an estimated 126 million m3 of softwood timber was shipped from forest-rich countries such as Canada, Russia, Sweden and Finland to markets with a high consumption of timber including China, the US, the UK, Japan and Germany. Collectively, since the recession of 2008, international trade of timber has increased by as much as 50%.
In the last quarter however, European exports to China have slowed significantly with Finnish mills reporting as much as a 31% decline in sales. This region’s high timber deficit continues to support significant timber imports across all grades including smaller logs which would normally supply into the pallet and packaging timber market. China remains the largest importer and consumer of timber products: logs, sawn wood, and paper, almost doubled by volume in the last decade. Exports from the EU reached three million m3 in 2017 and China is still the largest single export market for many major producers.
Supply from some markets has improved. Increasing production capacity in Europe’s sawmills is a key strategy to meeting market demand and managing rising prices. Between Europe’s top 20 mills it is anticipated there will have been a 5% rise in production in 2018. Harvesting conditions have generally recovered and current market prices for pallet timber have fanned the interest of the Baltic suppliers who have access to good log stocks, bolstered by some unexpected windblown volumes as a result of storms earlier in the summer. As supply eases, the result of this is that there are early signs of some stability returning to the market so long as the Sterling/Euro exchange rate doesn’t create additional pressure.
The impact on timber prices over the last quarter has been well documented in a number of independent indices. The Q2 FEFPEB Pallet Timber Price Index confirms continued but slowing increases across the UK, Germany, Netherlands, Italy and Sweden. The German HPE http://www.hpe.de/assets/ver%C3%B6ffentlichung-holzpreisindex-2q-2018-engl.pdf , French CEEB and UK Poyry indices all independently corroborate the continuing upward trends.
In the US, according to the Random Lengths Lumber Market Report, which was published at the end of September, prices of framing lumber have continued to plummet. Although for some sellers, lower prices have generated more volume than they had seen in weeks. Some buyers cautiously stepped off the sideline to replenish, as prices fell to levels they hadn’t seen in more than a year.
Whilst new housing starts are slowing in many US states, it is understood that rebuilding programmes following hurricanes Harvey, Irma and Maria are still driving volumes.
The persistent backdrop of political and economic uncertainty continues to hang over the UK market. Until March 2019 the spectre of Brexit will undoubtedly remain a significant feature.
Our main domestic market for wood is the construction sector, where a sharp decline in commercial construction has been attributed to Brexit uncertainty (CPA). The picture is however variable within the sector (private housing and infrastructure reporting the rate of new orders is at its highest since May 2017). Overall though, the construction industry is expected to experience its first fall in six years.
This has impacted UK softwood sales volumes which have slowed over the summer. The domestic market remains supply driven and difficult to predict given the significant external influence of global demand and exchange rates. Therefore, the overall macroeconomic context of increasing demand for timber products and tightening supplies does little to suggest a weakening of prices in the foreseeable future. The expectation is that what we have experienced over the last eighteen months is a re-basing of timber values to a level that may now be sustainable within the supply chain.
For UK timber packaging and pallet suppliers, there are many significant issues challenging their business of which timber price and availability were highlighted as the most significant in a recent survey. In an industry where margins are already weak and the raw material cost is reportedly around 70% of sales price, any failure to pass on increased costs could exacerbate industry-wide problems such as those already being felt in relation to labour shortages.
The unprecedented high price for wood packaging recovery notes (PRNs) is also placing a significant additional pressure on pallet and packaging manufacturers, suppliers and new timber pallet users. The price rise is a result of increasing wood recycling targets. These are based on a draft Circular Economy Package and will inevitably increase price pressure further during the next two years.
Indeed labour shortages are being seen as probably the next most significant risk to the continuity of supply. Unemployment has fallen to its lowest level since February 1975 just at a point when vacancies for labour are growing. The key influence is the net outflow of EU nationals previously working in the UK.
It is not just new pallet suppliers and buyers that are facing rising prices and supply constraints head-on. Beyond the traditional seasonality familiar to most reconditioned pallet buyers and suppliers, the continued devaluation of Sterling is stimulating the export of significant volumes of reconditioned pallets, and diminishing the pool of available reconditioned pallets and driving prices. Despite these challenges, demand is growing as buyers look to switch from new to reconditioned supply in reaction to rising new pallet prices.
Despite rising costs, timber pallets remain the most economical and sustainable first choice for buyers. Increasingly buyers committed to sustainable procurement and collaborative practices are looking to work more effectively, in partnership with their pallet and timber packaging suppliers, to tailor a solution to meet their business’ needs. This could include initiatives such as redesigning pallets to reduce overall timber content while maintaining operational performance and safety criteria, sharing distribution data to support pallet recovery, repair and reuse, thus avoiding a PRN obligation, switching from new pallets to reconditioned pallets, working smarter to reduce logistics costs by establishing onsite operations, or making joint backhaul arrangements.
Even after such a prolonged period of rising prices, buyers are increasingly recognising the value of a pallet supply partner able to navigate the complexity of the timber market; offering secure supply and innovative solutions to help manage rising costs.
In such a challenging market, where even the strongest of customer relationships are being tested, experienced suppliers with credible technical support have the potential to deliver real value to the supply chain. If buyers adopt a willingness to be flexible with regard to their specification, are open to pallet reuse and make time to engage collaboratively with a well-informed, effectively resourced, innovative supplier, they may just manage to minimise or offset the escalating cost and manage potential operational disruption.
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