The London Hardwood Club
The London Hardwood Club

15th May 2019

THE  LONDON  HARDWOOD  CLUB

Bi-monthly Meeting

Wednesday, 15th May 2019

HAC

 

Following a well attended AGM, our annual market meeting drew 35 members. These included 9 individuals (both from the UK and overseas) attending for the first time for another good meeting.

 

A copy of the speakers presentations is below and attached for download. As ever the market discussion leads to a good Q&A session and the main points arising are below each section.

 

The LONDON HARDWOOD CLUB continues present interesting, relevant and engaging topics like this to its members and guests at these bi-monthly lunch meetings.

 

We look forward to seeing you on 26th June where we we have a double presentation: “Credit insurance” presented by Simon Berry of CBF and ‘Currency’ presented by George Vessey of Western Union.

 

 

African Hardwoods

 

Presented by:

Ken Walsh
Managing Director, Danzer UK Ltd

 

   

Congo Basin.
Most sawmills appear to have experienced decent trading conditions in 2018 with steady demand and stable pricing in most markets. Shipping delays in the port of Douala have significantly eased and shipments have now started from the newly built port of Kribi. This has helped to ease the severe cash flow problems that were being experienced previously although cash flow remains a concern for most due to the significant logistical and administrative challenges that remain. As an indication of these issues a major producer in the Congo Basin, Rougier, closed its productions in Cameroun and North Congo. It has subsequently sold its productions in Cameroun to a local entrepreneur and is only now restarting its production in North Congo which will no doubt have its own set of challenges.

Whilst demand in Europe has remained relatively strong in Q1 2019 this is now a much less significant market for African hardwoods than in previous years. Reports suggest that demand from China is down by as much as 40/50% which is starting to cause concern as the Chinese market generally takes a lower grade and has a more flexible width/length requirement which helps producers maximise their yields. Demand from the Gulf area has slowed somewhat as 2019 has developed and they are currently celebrating Ramadan which will further dampen activity for the next few weeks. Demand in the US is steady. New markets have emerged over recent years but these also present different challenges. For example, Pakistan has been an active importer but the new government under Imran Khan has severely increased the level of bureaucracy required in an attempt to reduce the high levels of corruption that exist.

Ivory Coast.
Specific supply lines of mainly kiln dried Iroko and Framire continue to exist but volumes are reducing year on year due to lack of raw material and limited availability of third party legality verification. The Ivory Coast is much less of an influence than in previous times.

Ghana.
Again, specific supply lines of mainly kiln dried Odum (Iroko), Sapele and Emeri (Framire) exist but Ghana's influence in this market continues to wane. A market in the UK continues for Wawa but at much reduced levels compared to former times.

Generally global demand for African hardwoods is stagnating and overall I think it is fair to say that sawmills in Africa in general are more concerned about demand moving forward than they have been for a while.

Pricing.
Obviously the main species of interest to the UK market are Framire, Iroko, Sapele and Sipo (Utile). The supply of Framire remains very tight whilst the supply Iroko, Sapele and Sipo is generally in line with demand.

In order to analyse what is happening price wise I think it is necessary to separate product that is third party legality verified as a minimum from product that is not and where second party due diligence takes place. Obviously, with the existence of the EUTR and the Lacey Act etc the third party legality verified products have a specific value and position in the marketplace in Europe and the US. This is helping to keep prices for these products in all species relatively stable right now. What we are hearing is that prices for non third party legality verified products are under pressure in markets where environmental due diligence is less of an issue (ie most countries outside of Europe and the US). It is also helpful to separate kiln dried and air dried availability in the equation. Obviously drying capacity, whilst having increased over recent years is still generally oversold and the drying premium has increased over this time as demand continues to exceed supply.

UK demand.
On the positive side we experienced an increase in our sales volumes of African hardwoods during 2018 compared to 2017 and have seen a further increase in 2019 so far. On the down side, whilst margins were consistent in 2018 (at the usual disappointing levels that Sapele in particular continue to provide) margin so far in 2019 has been under more pressure particularly when the Euro went from just over 1.10 in January to just under 1.18 in March - a movement of around 6/7%. This enabled those that keep their inventories in Euros (ie stockists in Continental Europe) to become more competitive and take market share. This demonstrates how much of an influence currency movement has on our industry fortunes.

FSC.
Countries like The Netherlands have a relatively strong requirement for FSC product and are willing to pay a premium accordingly.
In the UK the demand for FSC certified African hardwoods is growing albeit very slowly and from a very low base with a premium of 3/10% achievable right now depending upon species.

Brexit.
Like everyone in this room I am sure, we have considered Brexit at length on many occasions and its implications on our business. With the long supply lead time that already exists we do not feel that there is much that we can do to reduce any impact that Brexit will have.
The one obvious issue is where African hardwoods are being dried in Continental Europe and the issue of VAT becoming payable in these countries in the event of a no deal Brexit. This is something that remains under investigation..

Moving forward.
The obvious difference between supply from Africa and most other areas is the lead time of up to 12 months (ie place a contract today for August production ie 3 months ahead. 5 months air drying time. 1 to 2 months in the kiln. One month export preparation and transport to the port. One month on the water). This makes it very difficult to position inventory levels in line with market conditions and expectations at any one time. If market conditions are not favourable and we reduce our purchases it is up to 12 months before we see any impact in our inventory. Similarly we cannot crank up volumes in the short to medium term if market conditions improve.

From our perspective it is difficult to predict what is going to happen to the supply of African hardwoods during the next 6 months. Looking at past experience in general the rainy season, particularly in the Congo Basin, affects log supply in the second half of any year with most sawmills taking the opportunity to close down/reduce production for around 4 weeks to carry out essential maintenance. This cocktail of events normally helps pricing remain firm over this period.

I think, similar to almost all other areas of supply it will be a case of buying what your sales budget suggests you will need with minimal speculation taking place.
 

 

Q&A

Q. What is the status and future of FSC in Africa?

A. Ultimately, buyers are not paying a sufficient premium to pay back the investment and ongoing costs of FSC certification. Danzer invested €5M and havent seen a return on this. This may be in part due to the EUTR setting a lower bar for legality. FSC requirements are becoming more difficult year on year, for example areas identified as ‘intact forest landscape’ within concessions are being removed from production, but not from the are on which surface tax is paid – increasing operating costs and unbalancing the established forest management plan and rotation cycles.

 

It was note that OLAM is now for sale (if you have €150m please apply!) and that they as one of thr pioneers of FSC in Africa felt it had not moved them forward as a company. Danzer – a family owned company -were sticking with it because that is the market they want to be in.

 

Q. It was asked what was happening with constructional hardwoods from Africa in the UK market?

A. Danzer have a second sawmill line at IFO that cuts exclusively FSC Azobe (Ekki), but this was mainly producing for the continental market that took all sizes. The UK tends to come late with small enquiries for difficult sizes and doesn’t understand why the mills aren’t interested!

 

It was also pointed out that the Environment Agency’s (EA) current policy put Temperate Hardwoods and Recycled Hardwoods above virgin FSC certified tropical hardwoods and this was not helping the industry.

 

Far Eastern Hardwoods

 

Presented by:

Nick Hornsey
Sales & Far Eastern Hardwood Purchasing, Timber Connection

 

West Malaysia

Dark Red Meranti (DRM)

Prices have softened since the beginning of the year from a high level due to the very long rainy season in 2018

 

These reasons for these are 3 fold:

 

Production has increased. We are in the dry season there’s more logs available.

 

The Malaysian Rinnget is stronger against the Dollar making export prices cheaper.

 

Weak demand in European Markets.

 

All these factors along with the easing of the political issues surrounding the election last year have meant more availability and a reduction in price of 5-10% depending on spec. Long rainy season.

 

Keruing

This is a different matter. Demand is still very high from markets such as India & USA and supply is not so plentiful especially in PEFC that the UK market needs. Prices are very firm and the typical truck flooring specs 7/8 - 1.1/4 x 6 are tough to get in length specs of 12’/up demanded by most buyers.

 

Indonesia

DRM

Machined Meranti accounts for very little of what any of us do so I won’t well on this too much. The market is pretty stable price wise but with demand for these products dwindling to such a degree traders such as ourselves will keep less and less product on the ground. Those importers that do stock mouldings will have to look further forward as they won’t be able to pick up many of these items on the shelf.

 

Balau decking

Although Composite and various modified / thermo treated products have eaten into this market it still a steady seller.

The supply has eased a lot from last year when it was very difficult to buy and prices went up dramatically to a more “normal” situation.

The price has come down quite considerably from the highs of £5.50/m we saw last year.

Most of what we are being offered is heavy 13’ due to the nature of the raw material. 12’ is quite adequate for most importers stocks but lengths outside this mid range are difficult to get and long lengths 14’ plus have to be cut from round logs and are much more expensive.

FSC is also very limited and hasn’t seen the drop in price of non FSC stock.

 

 

Keruing

This has the same pressures that we see from Malaysia. The same markets - India & USA are driving demand and supply is trickling. It has eased a little since the beginning of the year but still quite tough.

We find it more difficult to get good length specs from Indo. Again due to the nature of how a lot of logs are cut to 4.0m to transport them out of the forests so we are always fighting that when UK buyers demand long lengths.

 

Q&A

Q. When are Sabah and Sarawak going to become part of Malaysia in terms of PEFC and EUTR/FLEGT?

A. The two eastern Malaysian states have long operated separately from West Malaysia or the ‘federation’ as it is known. WM is ready for FLEGT but Sabah and Sarawak are a long way off. However it was noted that there was very little of interest to the UK market from this region as the species are the heavier PHND timbers like Oba Suluk.

 


 

European Hardwoods

 

Presented by:

Rupert Walker
Trader, Timber Link International


 

 

 

 

 

Q&A

Q. What is happening with FSC in Europe?

A. While there is very little in France or Germany, much of Poland and Croatia is FSC and this is unlikely to change. As such the square edged oak market is broadly FSC and the unedged and Fresh sawn markets are PEFC.

 

Q. What will be the result of the trade war between the US and China on European Oak.

A. The conventional thinking was that with higher tariffs on US Oak exports the Chinese would focus more attention on European resources, but as so much of the manufactured product from China goes to the US (irrespective of where the raw material is sourced) and they have to pay tariffs on selling finished goods back to the US, it is likely that overall demand may soften. There are currently a lot of unsold volume and containers of European Oak not being moved because the Chinese want a price reduction on raw material so they can offset the export duty they will have to pay when shipping to the US.

 

North and South American Hardwoods

 

Presented by:

 

Hank​

 

Marchal

Managing Director, Europe, Robinson Lumber Company

 

 

 

 

US Domestic market

  • “There are three kind of lies: lies, damned lies, and statistics.” The quote is famously linked to Mark Twain, although Mark Twain, himself, attributed it to British Prime Minister Benjamin Disraeli.
  • Trade deficit has never been bigger, Tariffs are not working and are driving up prices of consumer goods for Americans
  • GDP up 3.2%, Housing Starts down 10% year on year, sawmill production down 2.6%, lumber exports down 20%
  • Single housing family starts up every year since 2010, but still below the historical average
  • Estimate 2 million new homes needed, but supply is not keeping up with demand as costs rise and fewer people can afford a new home as real average earnings have stagnated during the recovery.
  • Unemployment at a 50 year low of 3.6%, Real Unemployed = 7.8% (underemployed, marginally attached and given up), down from peak of 17% in 2010.  Labor force participation is already very high.
  • BLS says there are over 1M more job openings than unemployed currently
  • 13M manufacturing jobs (19M in 1979)
  • Wood products, Furniture and related was 1M jobs in 1999, today barely 600k. Wood sector pay lags by $4/hour ($18 vs $22) = $160/week. -22%. Ripple up effect.

China

  • Elephant in the room
  • Trade war having drag on industry. People shutting shop or selling out.
  • Some green mills closing doors over next 3-4 months; Concentration yards for sale
  • Yards having to pay high price for green lumber, trading on small margins, still not able to get specific species mix they want.

Europe

  • Slower GDP growth, 0-3% avg 1.5%, UK 1.3% continued political uncertainty
  • US exports up 0.5% volume, 4% on value
  • 50% WO, up 4%
  • 23% POP down 8%
  • 8% Walnut up 12%
  • 8% Ash up 3%
  • 5% RO down 10%
  • 4 countries = 70% of the volume
    • UK 30%
    • Italy 15%
    • Germany 13%
    • Spain 11%
  • Specific to UK
    • WO up 3%
    • POP up 7%
    • Walnut up 23%
    • Ash up 50%
    • RO down 4%
  • Ireland up 3%

UK importers report

  • WO
    • Can’t get the 4/4” in fast enough, tough o other items as well
    • Firm pricing, but not necessarily rising except on 8/4”
  • POP
    • Same, good demand, slow ship,
    • Rising prices are a reality

Species

  • Strong sellers: WO (4/4” & 8/4”), POP, Soft Maple
  • Weak demand: RO, Cherry, Walnut, Hard Maple, Ash (mainly lower grades, uppers stayed steady), Hickory
  • Logs on East Coast – spotty, some have, some don’t.
  • White Oak -  do not believe it will get any less expensive in the near future due to continued demand in the stave and rift / quarter markets along with the record rain falls throughout the eastern half of the U.S.
  • Poplar – lack of supply to keep up with the demand due to mill shut downs and again, the record rain fall throughout eastern half of the U.S.

South America

  • Bolsonaro election has given some in the industry hope that some administrative excess will be reduced, but increased scrutiny from NGO’s because of new decree cutting off some of their funding
  • Withdrew Ipe from CITES consideration.  Seems to be decent Ipe supply still and prices no longer rising.
  • BRL 3.97 to USD, government intervening to keep it from going higher. Good for exports.
  • Very wet rainy season. Just starting to get the cold front that proceeds the dry weather, which would be early.  Depends on region.
  • Starting to get offers on new season supply from Brazil.  Some producers already have their management plans approved, but don’t know if those are new approvals for this year or late approvals from last year.
  • US/Asia demand has been muted, Europe still steady.  Some anecdotal evidence that Chinese looking more at tropical to replace US hardwoods with trial shipments.
  • Peru has been stable, with prices increasing steadily over the course of the season.  Logs starting to be harvested now but producers still shipping against last year’s orders and looking for higher pricing.
  • Under lots of environmental pressure from NGO’s. FSC is a good idea.
  • Not much


Q&A

Q. Is there more requirement for FSC product in Europe from the US and how about the difference between Controlled Wood and FSC 100%?

A. There are some strange anomalies here – take for example the fact that the whole of Indiana’s state forest is FSC – great, but the loggers are not and the sawmills are not. Robinson Lumber offered to pay for the COC for these essential parts of the chain, but they are not interested because of the extra work only involved for say 5% of their sales.

Q. Given that 95% of the US timber industry are Republicans what do they think of the current policies of Trump? In particular in respect of the migrant workforce.

A. They seem to be happy to lose the odd battle to win the overall war. Robinson lumber actively recruit migrant labour and pay a $2k bonus to employees who recruit a friend who stays for more than 12 months, but still they are short of labour.

Q. Will the jobs in timber manufacturing come back to the US from China?

A. No

C. It was noted that owning a sawmill wasn’t as ‘sexy’ as it was in the 1950’s. The return on investment that can be offered today doesn’t get banks too excited!

C. It was noted than many concentration yards had closed, with some big names noted as Shannon Lumber and Jones.

Q. Is California still an important market in the US?

A. Yes it would be the 8th biggest economy in the world if it was a country!

Q. Is there more laminated (engineered) product being shipped to the UK from the US?

A. No, the UK has no standardisation of sizes, so the mass market will never be served until it does.

 

 

 

European Hardwood Report
Market report - March 2019.pdf
Adobe Acrobat document [3.2 MB]
European report.pdf
Adobe Acrobat document [1.8 MB]
Exec_May19_Final.pdf
Adobe Acrobat document [3.2 MB]
051019 HRX.pdf
Adobe Acrobat document [667.2 KB]

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