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Report from
Europe
Plywood margins are good, but supply a struggle
The good news from the majority of European hardwood
plywood importers interviewed March 2021 was that they
were making money. They reported demand ranging from
firm to booming across the market, from the construction
and DIY sector to merchants and furniture makers.
Moreover, customers were willing to pay a healthy price.
¡°If you can¡¯t make a good margin in the current climate,
you never will,¡± said one importer.
Another reported their customers ¡®accepting the real value¡¯
of plywood and timber generally. ¡°Traditionally most
view plywood as a stack it high, sell it cheap commodity,
but the market situation is such now that they¡¯re having to
pay more like its true worth¡± they said.
¡°There¡¯s strong demand and less opportunity to play
suppliers off against each other. We¡¯re experiencing less
negotiating from customers and less bad debt. It¡¯s
definitely a seller¡¯s market.¡±
The less good news for importers is the manufacturing and
supply situation. Demand is growing globally, while
output is constrained by a range of factors. Notable among
these is manufacturers either running short of staff due to
Covid-19 and still operating pandemic safe work practices
or taking time to gear up production as lockdown rules are
relaxed.
The result is extended lead times, importers only being
able to obtain a percentage of usual order volumes and
gaps in some specifications.
Manufacturers¡¯ prices also continue to climb and while, to
date, the market seems to have been able to absorb them,
some fear there is increasing danger of the market
overheating.
Soaring freight rates
The other key concern in the sector is soaring freight rates,
notably in containerized trade. With global container
distribution disrupted by the pandemic, shippers out of
Asia have been naming their price. Importers report fiveand
six-fold rises over the last six months, some even
more.
¡°I¡¯ve never known such high container rates in my entire
career,¡± said one trader. ¡°It¡¯s just not realistic or
sustainable, and at some point there has got to be an
adjustment, which could itself create market turmoil. It¡¯s
becoming quite a dangerous situation.¡±
After the first wave of the pandemic last year, European
plywood importers reported business starting to recover
from May onwards.
¡°It was slow to start with, obviously, we did a fraction of
our trade from March through May and, ultimately, we
weren¡¯t able to make up the difference. But from June-
July onwards we¡¯ve seen exponential growth ¨C it just
hasn¡¯t stopped,¡± said a UK-based importer.
¡°A lot of latent energy built up in the market during the
first pandemic lockdown and when it was relaxed that pent
up demand was unleashed. Construction projects that were
paused came back on stream and new ones started up. And
we didn¡¯t see much of a slowdown during the subsequent
lockdowns due to second and third waves of pandemic in
November and January ¨C nothing like March-April 2020.
We think that¡¯s because businesses by this time had
adapted to pandemic work practices, notably in
construction, so were able to maintain higher output
levels.¡±
In some European countries, the building sector was also
reported ¡®barely to have slowed down¡¯ through the entire
course of the pandemic and so was well placed to pick up
the pace as their wider economies emerged from
lockdown.
¡°In Germany and the Netherlands in particular we saw
only a marginal decrease in activity,¡± said one agentimporter.
Upturn in home improvement market
Some importers said they also saw the effect on sales of
the widely reported international upturn in home
improvement and refurbishment.
¡°It¡¯s been a worldwide phenomenon, people staying at
home in lockdown and on furlough have taken the
opportunity to improve their properties. Either that, or
they¡¯ve felt they¡¯ve had to adapt their houses to
living/working spaces, anticipating that, even after the
pandemic, they¡¯ll be spending at least some of the week
working from home,¡± said one importer. ¡°This has meant
more remodeling, loft conversions, extensions and also
garden office building.¡±
Within this sector, and construction more broadly, a UK
company also detected a growing preference for timber as
a natural, low environmental impact material.
¡°Surveys have shown that there¡¯s growing consumer focus
on a healthy indoor environment and the effects of
construction forms and materials on well-being, with
timber and wood structures and products shown to be
more beneficial in these areas,¡± said a spokesperson. ¡°It
makes sense that the pandemic has heightened awareness
and concern around these topics.¡±
The refurbishment market and use of timber in
construction are also expected to be given a further boost
in coming years by the EU¡¯s ¡®Renovation Wave¡¯ initiative,
launched October 2020. Forming part of the EU Green
Deal, its target is to improve housing energy performance,
helping the EU achieve carbon neutrality by 2050, while
also delivering improved home environments.
Spending on infrastructure to jumpstart growth
Another plywood importer reported benefiting from
increased infrastructure spending, notably in Germany. ¡°It
started before the pandemic, but it looks now as though
it¡¯s also being used as a tool to help jumpstart growth as
economies emerges from health crisis,¡± said a
spokesperson. ¡°In addition, the lockdown has also
facilitated projects, such as bridge and road building, as
there¡¯s been less traffic. It seems these have been brought
forward to take advantage.¡±
These comments on the building sector are supported by
latest forecasts from Euroconstruct. After contracting
7.8% in 2020 (less than forecast earlier last year), it
predicts construction in the 18-country Euroconstruct area
will grow by 4.1% this year, 3.4% in 2022 and 2.4% in
2023 to reach an annual market value of €1.73 trillion, €28
billion ahead of the pre-corona 2019 level. Residential
building is forecast to grow 4.7% this year and civil
engineering 5.2%.
Market sectors that remain depressed include shopfitting
and the exhibitions and events business. However,
merchants and distributors are reported to have offset loss
of trade here with more sales into housebuilding and
repair, maintenance and improvement markets (RMI).
¡°What have also cushioned the blow has been sales of
wood sheet materials into healthcare and retail markets for
pandemic safe-distancing and protective screening and
partitions,¡± said an importer.
After being hit hard at the start of the pandemic due to the
wider downturn in manufacturing, plywood demand from
packaging manufacturers has also improved, say some
suppliers.
Furniture production seems to be a more mixed picture.
One importer said they were experiencing ¡®robust
recovery¡¯ in demand from the sector. Another however,
reported their customers still on short time or in temporary
shutdown, with workers on furlough, although they
anticipated a robust rebound post lockdown.
¡°Furniture making seems to be less suited to online sales
as customers want to see and feel the product, so
producers have been really affected by shops being
closed,¡± they said. ¡°But they also report high levels of
inquiries, which they anticipate translating into orders
once showrooms reopen. Many consumers have saved
money in lockdown, due to not taking holidays or going
out, and furniture is one product area where they¡¯re
expected to spend it.¡±
While selling into a recovering market has been one thing,
sourcing the material in sufficient volume to meet rising
demand and ensuring prompt delivery has been another.
¡°Buying plywood and shipping it from nearly all sources
has just become very hard work, particularly since the
autumn,¡± said one importer.
SE Asian plywood manufacturers at 50% production
While Chinese hardwood plywood suppliers are reported
to have generally returned to pre-pandemic production
levels, some manufacturers in Indonesia and Malaysia
(despite EU+UK imports from the latter rising in 2020) are
reported to still to be struggling. ¡°One of our leading
Malaysian suppliers is still only at 50% of normal
production due to safe distance work practices and so
many staff being in isolation,¡± said an importer.
Another said that increased competition from US buyers
was adding to supply difficulties out of Asia. ¡°It¡¯s partly
because of the boom conditions in US construction, and
also some American buyers having diversified their supply
base away from China to other Asian producers during the
trade dispute,¡± they said.
Asian manufacturers¡¯ prices overall are reported up around
a further 10% in 2021. This is partly in response to
growing demand, in domestic as well as export markets,
but also to an extent poor weather disrupting log supply.
And, of course, adding to inflationary pressure on sales
prices are the surging freight rates from the region.
In a recent report in the UK Timber Trades Journal, a
hardwood importer reported being quoted as much
US$15,000-US$16,000 on containers out of Indonesia.
European plywood producers don¡¯t seem to have come
across those levels but are now generally facing rates of
US$7000-US$8000 from China and US$8000-9000 from
Malaysia and Indonesia.
¡°That compares with between US$1500-2000 last
October,¡± said an importer. ¡°While the market has been
absorbing price inflation recently we can¡¯t sustain this sort
of increase long term ¨C and if prices go much higher we
could be in a very difficult position.¡±
The situation has prompted many importers to switch
wholly or partly to breakbulk, citing costs out of Asia of
US$90-100/cu.m to EU and US$100-110/cu.m to UK
ports, compared with US$135-150/cu.m for containers.
However, said one, this is not necessarily a
straightforward alternative.
¡°For one thing, breakbulk shippers are now at capacity,
with services heavily booked, and they¡¯re responding to
increased demand by raising their rates,¡± they said. ¡°In
addition, you have to be shipping large volumes to make it
most cost effective, which for us is OK from China, but
more difficult from Malaysia and Indonesia. The
alternative is to piggy-back on other cargoes, which can be
complex.
Shippers also want payment the moment the vessel is
loaded, breakbulk delivery tends to be slower, then you
may find customers don¡¯t want to take this sort of volume
all at once. They wouldn¡¯t want ten containers in one go,
but perhaps ten over six weeks. Similarly, they wouldn¡¯t
want an entire break bulk load. So then you¡¯re into issues
of storage and you could find yourself financing a
shipment for three to four months. That¡¯s a drain on cash
flow you shouldn¡¯t underestimate.¡±
Risk if container rates fall quicly
Importers agree a container rate correction will have to
happen. The critical questions are when and by how much.
¡°We can¡¯t see things changing for two to three months,
then we¡¯ll be into our July/August peak buying season,
exacerbating the situation,¡± said one importer/distributor.
¡°As much a worry as freight rates continuing at current
levels, or rising further, is a sharp and sudden correction¡±
said another trader. ¡°At the moment, due to the tight and
uncertain supply situation, customers are placing forward
orders to July, August, even September.
If rates drop rapidly, some businesses could be looking
down a deep dark hole. Big stockholding importers and
distributors especially could be faced with very painful
depreciation levels. So managing stock right now is
difficult and taking long-term positions very risky.¡±
The birch plywood trade has its own issues. A rising wider
plywood market, plus raw material shortages have
prompted Russian producers to increase prices this year by
20%-25%.
¡°The mild winter impacted the harvest resulting in mills
running short of particular qualities, and now we¡¯re into
spring, the situation is expected to become even more
difficult,¡± said an importer. ¡°In addition, due to demand
for construction lumber, we¡¯ve seen some shift of harvest
from birch to pine.¡±
Underlining the stress in supply, one Ukrainian mill was
reported to be asking customers to submit orders and
specifications, then pitching one bidder against another.
Also hanging over Russian plywood is the prospect of EU
anti-dumping duty. ¡°It¡¯s creating a lot of uncertainty as we
don¡¯t know yet whether it will happen, when or how much
it might be,¡± said an importer. ¡°We¡¯ve warned customers
that we may have to put any retroactive duty on their
account and, obviously, the further ahead you buy, the
greater the risk. The result has been a rush on birch
plywood for delivery by May or June and added price
pressure.¡±
There are stresses too in the softwood plywood market.
Prices on French, Russian, Scandinavian and Chilean are
all up and delivery times are now stretching into
September/October. More recently Finnish has risen 8%
and Eastern European 20%+. Some suppliers are also
reported to be adopting hard-nosed sales tactics.
¡°One Belarusian producer has cancelled all outstanding
orders twice in the last three months and told clients they
have to pay a new price or lose their shipment,¡± said an
importer. ¡°This is previously unseen behaviour and puts a
lot of importers in a very difficult situation because they,
of course, have commitments to their customers.¡±
The sharpest price rises have come in Brazilian Elliotis,
fueled partly by curbs on production due to the pandemic,
but mainly by surging US demand. ¡°Prices have doubled
since October to US$400/cu.m. Effectively US buyers
have priced it off the European market,¡± said one importer.
¡°And the trend is still upward. Recently we heard
US$450/cu.m being quoted.¡±
In response to the intense demand for softwood plywood
from their regular sources, some European companies
have started opting for Chinese product instead. ¡°It¡¯s not
the same quality, but it¡¯s available and cheaper,¡± said an
agent/importer.
UK plywood trade having to deal with Brexit
In the UK, of course, the plywood trade has also had to
deal with Brexit. New customs procedures, plus having to
put all timber and wood products from the EU through
illegality risk due diligence under the new UK Timber
Regulation, were reported to have caused delivery hold
ups in January and February. However, as new processes
have bedded in, log jams seem to have eased.
Another concern for EU suppliers to the UK and UK
suppliers to the EU was the prospect of having to pay duty
twice on plywood imported from elsewhere.
Where UK companies have sales operations in EU
countries and vice versa, the solution has been to ship in
direct to the destination market. One UK company has
also been using its Northern Irish operation to supply the
EU. ¡°As Northern Ireland remains part of the EU single
market for goods, it circumvents the problem,¡± said a
company spokesperson.
Significant loss of market share for tropical hardwood
plywood
The general view is that the impact of the pandemic on
overall EU+UK plywood imports in 2020 was less than
anticipated at the start of the health crisis. The total
volume was 4.28 million cu.m, down 6%. This followed a
5% fall in 2019, but the contraction still left levels at a
historic high, with 2020 the fourth strongest year for
plywood imports into the region in the last two decades
(see Chart below).
There was, however, a significant loss of market share for
tropical hardwood plywood products, which declined 22%
to 441,000 cu.m reducing its proportion of sales from 12%
to 10%. Although imports increased 24% from Malaysia
to 72,000 cu.m, they declined from other leading supply
countries including Indonesia, down 27% to 104,000 cu.m
and China, down 31% to 187,000 cu.m.
Tropical hardwood product primarily lost share to nontropical
hardwood plywood from China, including both
mixed light hardwood (comprising mainly eucalyptus and
poplar) and birch products.
Total EU27+UK imports of non-tropical hardwood
plywood increased 1% to 2.49 million cu.m in 2020. A 6%
increase in imports from China to 998,000 cu.m offset a
5% decline in imports from Russia to 1.12 million cu.m.
EU27+UK imports of softwood plywood fell 10% to 1.35
million cu.m, mainly due to a 17% decline in imports from
Brazil to 842,000 cu.m.
Plywood supply likely a challenge throughout this year
Looking forward, the general consensus in the European
trade is that for some months, some believe right up to Q4,
the supply situation will remain challenging and, as one
importer said, ¡®selling plywood will remain easier than
sourcing it¡¯. But, they added, at some point the situation
must change.
¡°Currently everyone is buying everything they can get
hold of and price is seemingly not a consideration,¡± they
said. ¡°But what goes up must come down and we will see
a market adjustment; when the heat comes off US demand
for Elliotis, or the Brazilians face more competition in the
American market, or when plywood prices more widely
reach a point where customers start to resist, and Asian
freight rates fall, as they eventually must.
We can only hope that the correction, when it comes, is
gradual, so businesses can manage the transition to more
normal market conditions and are not left holding an
excess of overpriced stock.¡±
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