2017 saw a steady and sustained climb in the cost of wood, and this has intensified throughout in 2018. Price inflation in both Q1 and Q2 ran at 3% a month with little forward visibility and created a situation whereby prices have jumped by almost 40% since the Summer of 2017. Some independent reports indicate that wood prices have now risen for 23 consecutive months – trends which are resulting in pressures the like of which the timber packaging sector has never previously experienced.
The following overview attempts to illustrate the events that are both contributing and combining to create this unprecedented situation.
Successive Governments have failed to invest in nuclear power, focusing instead on greener energy sources. The power generating sector now receives subsidies to create electricity through burning timber; however, rather than using wood waste streams or pellets many energy producers are buying smaller diameter logs to use as fuel – materials that are normally used within the timber packaging and fencing sectors. The subsidies allow such companies to pay more for the logs than the remainder of the commercial market, shortages and escalating prices being the result. Sawmills are closing, some of our supply partners have found they have few logs to cut; others are unable to secure logs of the correct width to cut required component sizes, and the remainder appear to be scarcely able to secure 80% of the logs they need to satisfy the volumes being ordered.
Whilst the Forestry Commission were traditionally the main source for raw materials in the UK, private timber growers now provide over 60% of the stock. However, whilst many have mature forestry crops for sale some are electing to leave the timber ‘in the ground’ to gain better returns. Whilst the UK does have some decent forestry stocks available, attempts to bring this to market are being frustrated through issues of inaccessibility (poor historical planning); so fresh investment in specialist harvesting equipment and road building is required before such volumes can be reached.
Northern Europe is a major global source of forest products and critically important for Europe & the UK, but weather patterns are resulting in poor access and a lower level of yield from forestry. Latvia saw so much rainfall in late 2017 that a national state of emergency was announced, no access to forestry was possible and output was lost; then temperatures plummeted resulting in most of the timber crop being too frozen to cut. Since February ’18 the temperatures rose considerably above expectations with, for example, Poland only experiencing snowfall on only 2 or 3 occasions up to April. This provided ground that has been too soft to gain safe forestry access, leading to acute log shortages throughout mainland Europe, obviously impacting prices and leading to additional demands for logs from elsewhere … such as the UK.
Sterling remains comparatively weak against all major currencies and this, combined with the high global demand for timber is resulting in a situation where imported wood entering the UK marketplace are less competitively priced than our own native materials, so demand for homegrown timber is higher than the norm’. Furthermore, some UK forest products providers are selling materials into the EU where they can gain a better price for their products than the domestic market … this is apparently has been true of both OSB and chipboard manufacturers.
Chipboard and Composite Materials
To secure required log volumes, UK chipboard manufacturers implemented a 20% price rise earlier in 2018 and, in the face of timber shortages on the Continent, many manufacturers of four-way entry wooden pallets have now migrated the purchase of block timber to composite type materials, resulting in the lead-time for certain components sizes to quadruple.
The UK has insufficient forestry resources to support its annual requirements for timber and is therefore a net importer – in fact we are the second largest global importer of timber; and we therefore reliant on imports which are (as discussed) presently dearer than its UK counterpart. So, where possible UK timber buyers are sourcing homegrown materials as they are cheaper than imported stock, this is forcing domestic wood prices to rise. Meanwhile, in there is evidence in Scandinavia of additional demands being placed by the Chinese, and Norway is believed to be shipping more timber to that market than any other. The availability of larger diameter logs which offer better quality material at their core, and that are normally used for construction sector, is better than that of the smaller diameter logs which are traditionally used for packaging. However, larger logs are more expensive and sawmills who process packaging wood have automated handling systems which are unable to process logs of a wider diameter as efficiently. Therefore, packaging timber is, in some cases costing as much as wood sold to the construction market and sizes that have been traditionally used within packaging such as 75 mm and 16 mm are being cut less frequently because the yield from logs being achieved by sawmills is too poor. In addition, some rationalisation of sizes is taking place with some mills refusing to cut components such as 95 x 21 mm and offering 100 x 22 mm as an alternative – a change which equates to a volume increase of around 10% per linear metre.
Inventory and Lead-times
Log shortages have led sawmills to place their clients on supply quotas, with the aim of restricting supply to those attempting to shelter from the pricing trends by either ‘over’ or ‘panic’ buying. This practice is designed to allow the better supply continuity; however, the reality is that lead-times have lengthened, and certain component sizes have been subject to great delays. Raw material inventories within the timber packaging sector are exceptionally low and those producers who don’t have a secure supply chain are being forced to buy at exorbitant prices.
Despite raw material supply shortages, and cost increases which are forcing wood packaging prices upwards at an alarming rate, demand appears to be relatively unaffected and remains quite strong even in the face of what is an exceptionally uncertain marketplace as we approach 29th March 2019.