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Report
from Europe
and the UK
Green Procurement initiatives trudge ahead
Formal FLEGT Voluntary Partnership Agreement (VPA)
negotiations are currently underway between the EU and
Malaysia, Indonesia, Cameroon, Ghana and The Congo.
Once finalized, the intent of these agreements would be
for the EU to import only wood products from concessions
in these countries that are licensed as legal. VPA
negotiations are proceeding well in African countries but
are problematic in Asian countries due to worries over the
impact on competitiveness vis-¨¤-vis non VPA countries
(notably China and Brazil). Long term market impacts of
the VPA process remain very uncertain and are heavily
dependent on the success and effectiveness of additional
EU legislation designed to prevent imports of illegal wood
products.
The European Commission recently reported on the status
of their deliberations on additional legislation to prevent
imports of illegal wood into the EU. The EC
Communication on this issue, originally scheduled for
April, is now expected in September. The EC¡¯s favored
option is now to directly impose a requirement for due
diligence on wood trading companies in the EU. Although
no final decision has been taken, the process of formal
public consultation on the legislation is now ended and all
EC Directorate-Generals are believed to be in broad
agreement with the approach proposed. However signs are
they still have much work to do to convince key
stakeholders. Environmental groups are looking for much
more far-reaching measures putting the onus on the trade
to demonstrate that all wood derives from legal sources.
At the same time, many EU timber importing associations
are against the idea of their members being required to
take full responsibility for assessing the legality of their
wood imports. They want governments in timber
supplying countries to play the lead role, for example by
issuing a ¡®declaration of legality¡¯ with each consignment
of timber.
Following delays, a draft version of the much anticipated
EC Communication on Green Public Procurement was
released in July 2008. The Communication sets out a
process with potential to encourage convergence between
public sector procurement policies in the EU. It also
enshrines various principles that could boost prospects for
timber. For example it recommends discrimination in
favor of renewable products and emphasizes full life cycle
impacts. But the Communication and associated
documents have certain weaknesses for timber. For
example, draft procurement guidelines issued with the
Communication propose that verification of legality
should require full supply chain traceability. This could
create problems for timber from small forest owners and
communities and is out of line with green requirements
imposed on alternative non-wood products.
Demand for sawn lumber stable in the UK
TTJ¡¯s latest hardwood sawn lumber market report suggests
that ¡®while no-one in the UK hardwood trade is pretending
that business is anything other than difficult, demand
seems to be proving more durable than in other sectors of
the timber industry¡¯. Some TTJ contacts in the hardwood
importing industry suggest that sales volumes in 2008
have been comparable to last year, although rising costs
and intense competition have meant that profit margins
have been down. Most importers and agents are also
reporting a nervousness among purchasers which is
manifesting itself in a reluctance to buy forward and in
large volumes. TTJ quotes one UK hardwood trader: ¡®If
people can get away with buying little and often, they are
doing that in preference to buying big box loads¡¯. TTJ
suggests that a number of leading hardwood importers
¡®confessed to surprise at how sales had held up, but also to
concern about the robustness of demand going forward¡¯.
On specific species, TTJ reports that prices for UK and
continental landed stocks of sapele have continued to
weaken in the face of subdued consumption and ample
availability. Prices for utile/sipo vary widely and available
volumes are proving to be readily saleable. Framire prices
are soft as supply is relatively abundant and replacement
costs are not being met. Wawa purchasing levels in the
UK are below the same period last year, although this is at
least partly due to the very difficult supply situation in
Ghana. According to TTJ, UK forward buying of dark red
meranti ¡®has been no better than steady¡¯ while
¡®consumption of keruing has been quite low although
prices have remained firm on the back of rising freight
costs¡¯. Trade in hardwoods between Brazil and the UK
remains difficult as recent delays in the issue of transport
permits by the Brazilian authorities has led many UK
buyers to conclude that Brazil is an unreliable supplier.
Mounting economic problems weigh down Europe
A report in The Economist suggests that European
economic prospects are deteriorating. It notes that ¡®Europe
is struggling to stay above water. Figures released on
August 14th showed that the euro-area economy shrank at
an annualized rate of 0.8% in the second quarter, the first
such reverse since 2001. Nor are things likely to improve
soon.¡Meanwhile Spain¡¯s GDP has predictably stuttered
as it endures a painful shock from its burst housing
bubble¡Ireland¡¯s GDP which grew by 6% in 2007 is
likely to shrink this year¡Britain is on the brink of
recession¡¯.
The Economist reports that even the Eastern European
economy, which has been a source of significant growth
following the EU¡¯s recent expansion to absorb 10 eastern
neighbors, is now experiencing a slowdown. In this region
in recent years, economic and political stability has
boosted investor¡¯s confidence and cut borrowing costs. A
big pool of cheap and diligent workers along with the
unleashing of entrepreneurial talents has produced thriving
new private businesses. This produced stellar growth rates
across the region until 2007. But now wage costs are
creeping up, labor shortages are biting, out-dated infrastructure
is clogging trade, export markets are looking
tougher, and some countries are struggling under the
weight of large current account deficits built up during the
period of rapid growth. The bubble has already popped in
the Baltic States and the Hungarian economy also looks
very wobbly due to a near disastrous government spending
and borrowing splurge in the early years of this decade.
One source of comfort is that Poland, Easter Europe¡¯s
biggest economy and an important market for hardwoods
due to its large export-oriented furniture and flooring
sectors, looks more stable. Polish GDP growth in the first
quarter was a healthy 6.1% and unemployment which was
20% in 2003 has all but vanished. But Poland¡¯s growth is
now likely to slow as rising interest rates and slowing
export markets begin to bite.
Heat-treated frake to be sold in the UK
According to the TTJ, Ecochoice Ltd. will now market
certified frake from West Africa, which is the first new
type of thermally treated hardwood to be sold in the UK.
The Plato hydrothermal process has made it possible to
offer new species as an alternative to rare or over explored
cladding species. The Plato technology uses a process to
treat timber at a lower temperature and under higher
pressure to provide greater durability and stability of the
product. The market certified frake will be available
through Howarth Timber and Palgrave Brown in the UK.
Plywood shortages may be seen if demand rises
A recent report in the UK¡¯s TTJ notes that while a few UK
plywood importers were buying in decent volumes at the
start of the third quarter, many others had reined in
purchases in a bid to control costs and cash flow and due
to uncertainty over market prospects in the second half of
the year. As a result some plywood suppliers believe that
shortages could arise if demand were to increase
unexpectedly. TTJ suggests that without a significant
increase in forward buying, shortages of Malaysian and
Brazilian hardwood plywood, as well as good quality
Chinese ply could emerge in September after the summer
holiday lull. TTJ notes that supply problems may be
particularly pronounced for Chinese plywood where many
manufacturers have closed in recent months in response to
rising costs and where some manufacturers are now
focusing more on supplying the domestic furniture
industry. TTJ also suggests that many UK buyers that
switched to Malaysian product at the turn of the year due
to uncertainty created by the European Commission¡¯s antidumping
investigation have not returned to Chinese
products despite the Commission¡¯s decision not to impose
duties on tropical hardwood faced plywood from China.
TTJ also notes that while Indonesian mills are keen to
supply the UK market, their asking prices are currently
well above those of their Malaysian counterparts.
Meanwhile, UK importers report that supply of hardwood
plywood out of Brazil is still extremely difficult.
Hardwood flooring market in EU more positive than expected
A recent Asian Timbers article on the international wood
flooring market provides some interesting insights into the
European flooring sector. The article is by Michael
Buckley, a former European Director of the American
Hardwood Export Council and now an independent
industry consultant. Buckley comments that as a ¡®finishing
trade¡¯ the European flooring sector has been slower to
respond than other timber industry sectors to the recent
dramatic downturn in European residential markets. He
also notes that the sector may be partially insulated from
this downturn because there is often an increase in
renovation and restoration by people who cannot afford to
move home or are unable to sell the one they have. He
suggests that ¡®hopefully, when the backlog of current new
housing completions are worked through, then the
inevitable downturn for hardwood flooring will be a softer
landing than it has been for bricks, cement, concrete and
roof tiles¡¯. In support of this argument he quotes a Spanish
kitchen manufacturer at Interzum Guangzhou who said
that the first quarter of 2008 in Spain, where the housing
bubble has really burst, was the best the company had
enjoyed. But this manufacturer added that they were
bracing themselves for the downturn to come based on the
new housing starts data emerging in Spain.
Buckley goes on to note that the key to future market
success in the European and North American hardwood
flooring markets will be specialization. ¡®No longer will it
be possible to make money by just offering basic
hardwood flooring. A perceptive understanding of species,
colors, finishes and trends will be all the more important
for individual manufacturers ¨C for one reason only. That is
the word ¡®choice¡¯.¡Finally there is the whole issue of
sustainable and legal sourcing which is increasingly on the
agenda¡¯.
Buckley comments that Europe is much more into
engineered flooring than North America which tends to
much prefer solid wood. Oak is by far the dominant
species in both regions accounting for 50% in Europe and
perhaps two-thirds of production in the USA and Canada.
He notes that ¡®both continents have huge flooring
manufacturing capacity but also growing demand for
imports, especially at the cheaper end of the market¡¯. He
suggests that there is potential for further growth in
European consumption, despite the economic downturn.
Cheap imports from China may, in fact, have helped to
stimulate demand. Buckley is optimistic about longer term
prospects, quoting the National Wood Flooring
Association of America: ¡®the facts are clear, wood flooring
is the only flooring option that is completely sustainable,
and with new guidelines promoting responsible
management, it has become the flooring option of choice
among many eco-friendly builders, architects, specifiers,
designers and consumers¡¯.
Veneer sector undergoes another restructuring
The German trade journal EUWID reports that the central
European veneer sector is undergoing a second phase of
consolidation and restructuring. The first phase occurred
in 2002 when a significant number of slicing machines
were shifted from Western Europe (mainly Germany) into
Eastern Europe as a cost cutting measure. The second
phase now underway is due to a combination of factors.
These include: weakening domestic demand in the current
economic climate; a slowdown in export sales due to the
strength of the euro; continuing substitution of real wood
veneer by artificial surfaces; and intensifying competition
in international markets from Chinese and North American
producers.
EUWID reports that at least six slicing machines and two
Staylog machines have been shut down in the central
European veneer industry in the last 18 months, reducing
the number of plants operating in the region by 20%.
When combined with the 20 slicing and Staylog machines
closed in 2002, this means that total veneer capacity in
central Europe has fallen by almost 50% in only six years.
EUWID notes that the decline in demand and capacity has
been particularly pronounced for veneer products
manufactured in bulk. Demand for these products from the
door and furniture industries has weakened dramatically in
recent months, notably in Germany, Spain, Portugal, Italy
and the UK. However demand from flooring
manufacturers in Scandinavia and Eastern Europe has
been more robust in the face of the downturn. Veneer
consumption in oil-exporting economies of the Middle
East and Russia has also remained brisk, but the strong
euro rate has meant that European exporters are losing out
to US and Chinese competitors in these markets.
Demand for custom veneers for interior finishing, yacht
building, the aircraft and car industries has also been
holding up reasonably well, although the recent insolvency
of one German firm engaged in this business suggests that
the high value sector has not completely escaped the
slowing pace of business activity. In any case, the high
value sector accounts for a relatively small proportion of
overall production and cannot adequately compensate for
declining sales in the bulk door and furniture sectors.
EUWID suggests that prospects for the second half of the
year do not look promising. Despite recent cut-backs in
production, manufacturers report that consumption is so
slow that production and stock levels remain well in
excess of demand. Veneer prices remain under pressure
especially for standard products. Longer term,
manufacturers expect veneer¡¯s share of the surfaces
market to continue to slide.
The decline in veneer capacity in central Europe will of
course have a major impact on market demand for veneer
quality logs in the region. According to EUWID, less than
100,000 m³ of logs are expected to be converted into
veneer in Germany during 2008, down from 120,000 m³
last year. To put this into long term perspective, 30 years
ago the German veneer industry was processing in excess
of 800,000 m³ of logs into veneer every year.
The German Timber Trade Federation¡¯s annual poll of the
German veneer trade reveals that in 2007, 56% of total
veneer output comprised European hardwoods (down from
60% in 2006), 23% comprised North American hardwood
(up from 19% in 2006), 16% comprised tropical hardwood
(down from 17% in 2006), while specialties such as burl
veneer and flamed maple accounted for 4% (up from 3.5%
in 2006). Leading tropical wood species used by the
German veneer industry are mahogany, wenge, sipo,
sapele, zebrano and makassar.
UNECE/FAO publication discusses effects of US
housing slump
According to press releases from the UN Economic
Commission for Europe (UNECE) on the UNECE/FAO
Forest Products Annual Market Review 2007-2008, the
US¡¯s declining housing construction has had a major
impact on the UNECE region¡¯s forest products markets as
well as world markets. Regarding trends for tropical
hardwood markets, the publication highlights the
uncertainties green building initiatives may create for
tropical timber suppliers; recent measures taken to extend
anti-dumping duties on Chinese okoume plywood; and
declining log production of tropical countries since 2004.
The full report will be discussed at the upcoming UNECE
Timber Committee and FAO European Forestry
Commission Market Discussions from 21-22 October
2008. The full report can be found at www.unece.org.
French construction sector shows weakness
Until recently the French market for hardwoods seemed to
be holding up rather better than other western European
countries. However, prospects for the second half of the
year appear gloomy with emerging reports of a sharp
downturn in French construction activity during the first
half of 2008. According to EUWID, the French authorities
have reported that the number of residential planning
permits issued during the first six months of the year
reached only 234,866, 16% lower than the same period in
2007. The number of housing starts during the first six
months of 2008 reached 171,006, down 20% down on the
same period in 2007. The slowdown is reflected in a
decline in trading activity by members of CAPEB, the
French builders¡¯ merchant association. According to
CAPEB, the total value of members sales during the
second quarter of 2008 were only 0.5% higher than the
same period in 2007. This compares with a 2% increase in
sales value in the first quarter of 2008 compared to the
same period in 2007. According to CAPEB the slowing
rate of sales growth is particularly worrying because it
seems to have affected all regions of France. Furthermore,
while sales growth to the new build residential sector has
slowed particularly dramatically, there has also been a
slowdown in the renovation sector.
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