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Report from
Europe
Steady EU hardwood trade despite uncertain political
situation
There are signs that the upturn in the eurozone economy in
the last 2 years will be short-lived and growth is stagnating
again. Meanwhile, the trade war between USA and China
has stirred fears of a new global recession and EU
countries are anxiously awaiting the outcome of Brexit
negotiations with the UK. None of which is good for
market stability.
The latest economic forecasts suggest that the eurozone
will be marked by significantly lower growth in 2019. An
FT survey of 24 economists at the end of last year, gave
forecasts of eurozone GDP growth across a wide range,
from 0% to 3%, a sign of the high level of uncertainty.
The majority forecast eurozone growth close to the middle
of this range, at around 1.5%.
With signs that economic growth slowed at the end of last
year, IMF forecasts issued in January 2019 suggest that
growth in Germany will slump to 1.3% in 2019, down
from their 1.9% forecast in October. Italy¡¯s GDP is now
forecast to grow only 0.6% in 2019, down from the
previous IMF forecast of 1%.
The IMF is now slightly more optimistic about the UK
economy, forecasting growth of 1.5% in 2019, 0.1%
higher than the October forecast, but this is dependent on
the UK securing an agreement to leave the EU. Brexit
aside, the UK economy appeared to be in quite good shape
at the end of last year.
Employment is at historically high levels, and wages have
been rising which should prop up consumer spending at
least for a time. However, indicators show that UK
consumer and business sentiment dipped in December
amid heightened Brexit uncertainties.
Despite these rather ominous signals, the hardwood sector
in the EU continues, for now, at a steady, albeit slow, rate.
To some extent this is merely a reflection of industry
structure. Compared to the softwood sector, which deals in
large volumes with rapid stock turnover, the hardwood
sector is a small volume business with very long lead
times, particularly for tropical products. Much of the
product is used in high-value, often bespoke, applications,
which are irregular and difficult to forecast.
In these circumstances, hardwood traders are naturally
cautious about building stock, extremely wary of being
caught out by currency fluctuations, and inclined to focus
on a limited number of well-known and favoured species
which have traditionally offered the best margins.
It maybe that significant change is just around the corner,
or already underway, driven by larger social and political
forces. But this is taking time to filter through into readily
observable trends in a highly conservative industry.
Feedback from EU hardwood importers suggests that
African supply has become more stable in recent weeks,
with fewer hold-ups at the Cameroon port of Douala. This
may be partly due to a recent slowdown in Chinese
demand, helping to free up shipments to Europe.
UK importers report that their imports of Malaysian
meranti and keruing are currently constrained by limited
supply of the PEFC certified material preferred for EUTR
conformance and other green procurement requirements.
Despite FLEGT licensing, there are no clear indications
yet of any significant rise in European trade in bangkirai
decking and other solid hardwood products from
Indonesia, with traders suggesting that FLEGT-licenses
have yet to achieve any real market traction.
Some companies and trade associations, notably in the
UK, are now more regularly flagging up Indonesia¡¯s
FLEGT status. Research by the FLEGT Independent
Market Monitor (IMM), an ITTO project, also suggests
good awareness in the European trade that FLEGT
licenses, which require no further due diligence under the
terms of EUTR, greatly simplify and reduce the costs of
conformance to the regulation
However, there remains a need for more effective market
development efforts for FLEGT licensed products which
are less dependent on ¡°avoiding a negative¡± (i.e. EUTR
sanctions and links to illegal logging) and instead
emphasise positive messages and commercial benefits.
The European Forestry Institute, which manages the EU
FLEGT facility, is contributing to this more positive
approach with the launch of a new online resource to help
timber buyers to communicate the FLEGT scheme to their
own customers at
www.timberbuyers.flegtlicence.org.
This is a start, but traders are advising that policy-led
communication initiatives of this type, in isolation, will be
insufficient to drive any real transformation in the
European market towards FLEGT licensed products, or to
encourage greater engagement with the tropical timber
industry.
A more pressing challenge is to ensure importers and their
customers have strong commercial reasons to purchase the
product on a regular basis. For this, they need assurances
of likely long-term availability, competitive pricing and
potential to achieve good margins, quality and technical
performance, and delivery times, alongside assurances of
legality and sustainability.
In practice this highlights the need for more productspecific
business-to-business market development efforts,
based on solid data on supply and demand, targeting
specific end-uses and niche markets, and ensuring
conformance to customers¡¯ technical requirements.
Messages about FLEGT may be integrated into this
process, but cannot be the only, or even the leading, hook
to drive market demand.
Brexit impacts on hardwood trade
The 29th March, the date scheduled for the UK¡¯s
departure from the EU, is now fast approaching. But there
is considerable uncertainty over the exact form Brexit will
take on that date, or even if it will happen at all.
In early January, for example, JP Morgan concluded there
was only a 45% probability of Brexit in March with a deal
close to the one that has been negotiated between the EU
and UK government. However, so far the negotiated
agreement has fallen well short of a majority in UK
parliament.
JP Morgan also suggested a 25% probability of a second
referendum on EU membership, a 15% probability of a
general election, a 10% probability of an extension of
¡°article 50¡± (the EU procedure by which the UK is leaving
the EU) into the second half of the year, and a 5% chance
of a disorderly no deal Brexit.
JP Morgan¡¯s assessment is a couple of weeks old, and
already by the end of January the equation has shifted. The
UK political process is in stalemate while there is little
sign that the EU will budge to make the negotiated deal
more palatable to UK parliament.
he chances of the deal being agreed have diminished while
the chances are rising both for a disorderly ¡®no deal¡¯ and
for the scenarios leading either to a delay or even a
reversal of Brexit.
The political and economic situation in the UK is balanced
on a knife edge. If there is a lack of progress during
February and it looks like a ¡°no-deal¡± UK exit from the
EU is becoming even more likely, the negative impact on
the economy will be magnified.
Alternatively, if it looks ever more likely that a ¡°no-deal¡±
exit will be averted, some of the uncertainty may ease,
although it is unlikely to disappear completely until it is
absolutely guaranteed there will be a deal.
As in other sectors, the politics of Brexit creates a
significant headache for the hardwood trade. However,
unlike other more fast-moving industries, the hardwood
sector has not been able to do much to mitigate the
commercial risks, only to sit it out and wait and see.
According to the TTJ, the softwood industry in the UK has
been building up landed stock to pre-empt anticipated
customs and port disruption after 29th March. But this has
not happened in the hardwood sector due to lengthy lead
times and concerns about fluctuations in the sterling
exchange rate, which could go either way depending on
the outcome of negotiations.
Brexit uncertainty led sterling to weaken sharply against
other major currencies at the end of last year. Hardwood
importers are reluctant to build stock now as they are
concerned that, if a deal is agreed, sterling could regain
ground, leaving them sitting on a lot of over-valued stock.
Of course, events might go the other way, and a short-term
effect of a no deal Brexit could be a further fall in the
value of sterling. But how far and how fast sterling might
fall is unknown as the extent to which markets have
already factored in the likelihood of a no deal is not clear.
The immediate effect of all this uncertainty is to increase
the tendency for UK hardwood importers to buy little and
often. While trade remains quite steady, there is no sign of
growth in the UK market at present.
And as the chances of a ¡®no deal¡¯ Brexit have risen, there¡¯s
increasing interest in, and speculation about, what the
effects of this outcome would be on the hardwood trade.
From a policy perspective, in theory a ¡®no deal¡¯ Brexit
would "level the playing field" for UK direct imports of
hardwoods from the tropics and other non-EU countries
relative to imports from the EU.
Last year, as part of efforts to limit the potential fallout,
the UK government issued a series of guidance notes on
the implications of a possible no-deal outcome for
business. The guidance states that a no deal Brexit would
result in "businesses having to apply the same customs and
excise rules to goods moving between the UK and the EU
as currently apply in cases where goods move between the
UK and a country outside of the EU".
A ¡®no deal¡¯ Brexit would have little or no immediate
impact on UK tariffs imposed on imports from EU
countries of mouldings (HS 4409) and rough sawn
products since these are already duty free for all EU
imports regardless of their species or source.
However, in a ¡®no-deal¡¯ scenario, UK imports of some
planed and sanded hardwood products from the EU would
become subject to a 2.5% import tariff. Depending on
species and degree of working, a variety of tariffs would
also be imposed on UK imports from the EU of veneers
(3% to 6%), plywood (7% to 10%), MDF and
particleboard (7%-10%), and joinery products (3% to 6%).
While the EUTR would cease to apply in the UK in a¡¯ nodeal¡¯
scenario, the law will be replaced with a UK law
imposing equivalent due diligence requirements to
demonstrate wood is legally harvested. This will apply to
all timber placed on the UK market. This means imports of
hardwood from the EU into the UK would, like imports
from the tropics, be subject to due diligence requirements.
Similarly, in the event of a¡¯ no deal¡¯, all wood packing
material moving between the EU and the UK would need
to be ISPM15 compliant (treated and marked), as is
currently required for imports from non-EU countries.
Imports of timber into the UK from the EU would also be
subject to phytosanitary regulation in the same way as
imports from non-EU countries.
However, UK government guidance states that "to deliver
a smooth transition when we leave the EU, in a ¡®no deal¡¯
scenario the Government has decided that the majority of
plants and plant products are low-risk and should continue
to enter the UK from the EU freely, as they do now".
Of course, in the event of a no-deal scenario, these
changes in the tariff and regulatory environment which
might benefit non-EU suppliers of hardwood products into
the UK, may well be overshadowed and offset by the
wider economic impacts.
According to an analysis by the Bank of England last year,
in the event of a no deal, UK GDP in five-year¡¯s time may
be up to 8% smaller compared to forecasts in which a deal
is assumed.
Similarly, the IMF estimates that Britain could lose about
5% of GDP in 5 years in the event of ¡®no deal¡¯, while the
Netherlands, Denmark and Belgium, which have strong
trade links with the UK, could see GDP losses of 1% or
more, and Ireland¡¯s economy would stand to lose 4% over
the same period.
These are worst-case scenarios for a so-called ¡°disorderly
no deal¡± and still seem unlikely, although the chances are
rising with every day that the UK parliament resists
accepting the deal on the table. It's possible that there will
be a Brexit deal, or a delay, or a referendum, or an
election, all with unknown outcomes.
As things stand, it is simply impossible to predict how the
UK, or indeed the wider EU hardwood market, will evolve
this year.
More US hardwood likely to be diverted to Europe
While Brexit is a preoccupation in the EU, the impact of
events in other regions may be just as profound for the
hardwood trade in Europe this year.
Particularly significant is the on-going trade dispute
between the US and China which may well lead to an
increase in tariffs on US hardwood imports into China
(which currently accounts of over 50% of all US
hardwood exports) from the current 10% to 25% from
March onwards.
The trade dispute combined with signs of slowing
economic growth in China, has contributed to a sharp
decline in the value of the Chinese renminbi against the
US dollar. This coupled with a desire by traders to ensure
shipments do not arrive in China either over the New Year
holiday period or after the new higher tariffs become due
on 1st March, led to a sharp fall in US hardwood exports
to China in the last quarter of 2018.
Against this background, US hardwood importers are once
again turning their attention to the opportunities presented
by the European market. The full impact has yet to be felt,
since heavy rain reduced US hardwood production last
year and thereby helped underpin prices even as Chinese
demand waned.
However, felling has picked up again in the US this
winter. European buyers now expect that availability of
US hardwood will rise significantly during 2019, while
prices are expected to soften. So far, the most affected
species has been red oak, the US¡¯ most abundant
commercial hardwood species and also the largest
exported hardwood to China.
Europe has never been a strong market for red oak, always
much preferring white oak. However, prices for red oak
are now 40% below those for white oak (and at a similar
level to those for meranti), and red oak¡¯s price
competitiveness may increase even further if there is no
change in the China tariff situation.
The American hardwood industry is now gearing up for a
major market push in Europe, particularly focusing on the
technical, logistical and environmental benefits of using
red oak.
There have been several attempts to encourage greater use
of American red oak in the European market in the past,
with only limited impact. But there¡¯s a feeling that this
time round it may be different.
This is due not only to the exceptional situation with
respect to price and availability of red oak, but also by
recent interest in the species shown by high profile
developers and designers in Europe, notably in the new
Bloomberg headquarters in London last year.
The US hardwood sector is also looking to expand
applications for red oak in Europe, for example it is
identified by the American Hardwood Export Council as a
species which responds well to thermal treatment which
would allow it to be used more widely in external
applications.
Nevertheless, these efforts by the US hardwood industry to
promote red oak in Europe may not yield immediate
results, and European traders are likely to remain hesitant
until there are clearer signs of the long-term situation in
relation to price, availability and end-user demand.
In the meantime, there is also likely to be more availability
of the other temperate hardwoods which are already
popular in Europe with the decline in Chinese demand,
such as American white oak, tulipwood, walnut and ash.
Although not subject to the same tariff situation, there are
signs that the very tight supply situation for European oak
has also eased slightly this year in response to slowing
Chinese demand.
Until last year, rising demand from China and other Asian
markets and a strong fashion for oak in Europe, combined
with limited production volume and tightening export
controls in Croatia and Ukraine, led to record prices for
European oak logs and lumber.
However, first reports in 2019 suggest that availability of
European oak has improved and prices are stable at the
higher level.
Wood flooring sales slow
Based on information obtained from its member
companies and national associations, FEP ¨C the European
Federation of the Parquet Industry - estimates that overall
European consumption of parquet flooring (i.e. with a real
wood face) fell by around 2% in 2018.
This is a preliminary forecast based on best estimates
provided by member country representatives at the recent
FEP Board meeting held at the BAU fair in Munich and
may be subject to change following analysis of complete
market data to be published at FEP¡¯s annual General
Assembly, due to be held in June in Lisbon, Portugal.
FEP note that the fall in consumption in 2018 came after
three years of moderate growth or stabilisation and despite
a generally good start to the year.
FEP also highlight that there was some variation from
country to country, with the market contraction occurring
in Germany, Switzerland, the Nordic countries (Denmark,
Finland and Norway), France and Belgium. In contrast,
consumption improved in Austria, Italy and Poland during
2018, and was stable in Spain and Sweden.
The FEP Board of Directors fear the overall negative trend
will continue in the first half of 2019, particularly
highlighting the intense competition from ¡°wood like¡±
flooring solutions, especially Luxury Vinyl Tiles (LVT).
On the other hand, FEP welcomed the increasing
recognition by the EU authorities of the positive
contribution of wood products, including parquet, to fight
climate change and to support the ¡°circular economy¡± and
sustainable development.
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