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Report
from Europe
and the UK
European economic confidence severely dented by
banking crisis
Widely reported measures by the UK government to bailout
failing banks have quelled the worst fears of European
investors and depositors of an imminent and disastrous
economic collapse. Steps have been taken to inject a
massive amount of state money into leading retail banks
and significantly reduce interest rates by several central
banks, including the euro area¡¯s European Central Bank.
Nevertheless, economic confidence in Europe has taken a
severe beating over recent weeks, as evidenced by
weakening currencies and forecasts that Europe may be
facing its worst recession since the early 1990s.
In the UK, the scale of the bank rescue plan has been
particularly dramatic, the government having pledged
GBP400 billion to guarantee that no UK bank fails.
However the very need for such drastic measures seems
only to have underlined how bad things have become. By
putting its full weight behind the banks, the government
has signaled its determination to avoid a worst-case
outcome. But confidence has been shaken to the core,
while concerns are now being raised over the severe fiscal
risks associated with such a large input of public money.
The government is now deeply in debt, leaving no room
for increased public sector spending to tide the economy
over the bad times and holding out the prospect of tax
increases which will further dampen private sector
spending.
UK confidence was ebbing even before the real scale of
the banking sector crises became clear in early October
2007. Business surveys of purchasing managers for both
manufacturing and the services sector touched record lows
in September. Construction is wilting as homebuilders put
projects on hold and lay off workers. As much of the UK¡¯s
recent growth had been driven by the City, and based on a
financial model whose defects have now been brutally
exposed, expectations are that the nation¡¯s economy will
be particularly hard hit. The UK economy now seems
certain to have entered a recession during the second half
of 2008. This has led to a rapid fall in the value of sterling
against other currencies.
Economic conditions in other European countries are less
dire, but still the outlook is not good. Due to relatively
tight regulation of the banking sector and relatively strong
retail banking networks, France has had to bail out just one
bank, Dexia, a small Franco-Belgian lender. This was
intended merely as a precautionary, confidence-boosting
measure. Nor have the French been on a huge credit binge.
The household savings rate remains high. Nevertheless
third-quarter GDP figures are likely to show that the
French economy is already in recession and the IMF
forecasts growth of just 0.2% in 2009.
Germany¡¯s bank rescue package is backed by a state
guarantee of EUR400 billion with the aim of ensuring that
no ¡®system-relevant¡¯ bank will fail and no depositor will
lose money. Nevertheless, indications are that Germany
will not avoid a slowdown. The IMF expects no growth at
all next year. Germany has sounder public finances, less
indebted enterprises and more competitive wages than
others. Yet it is more dependent on exports, so will be hit
harder by a global slowdown.
Italy¡¯s banks have not been so exposed to the global crises
as those in other parts of Europe partly because, as the
nation¡¯s Finance Minister recently admitted to parliament,
they are ¡®less advanced and sophisticated¡¯. The
government is still forecasting GDP growth of 0.5% in
2009 but this is now a minority view. The employers¡¯
federation, Confindustria, expects the economy to shrink
by 0.2% this year and 0.5% next.
Spain¡¯s banks lack liquidity but none has needed rescuing
thanks to the Bank of Spain¡¯s tight regulation and the
prudence of Spanish bankers. But Spain is worse off than
many others on the broader economic front. The banking
crises has further undermined confidence already reeling
from the effects of a burst housing bubble. The IMF now
expects the economy to shrink by 0.2% next year and
unemployment is rising.
Tropical hardwood sawnwood markets take a hit
Judging by the comments of European agents and
importers, the effects of the banking crises on demand for
sawn hardwood have been immediate and fairly dramatic.
One major supplier to the UK notes that ¡®our sales of sawn
hardwood were doing reasonably well until the first week
of October 2008 when the panic over the stability of the
banks came to a head. Demand picked up a little the week
following the announcement of the bank bail-outs, but it
has gone quiet again now¡¯.
Overall consumption of hardwood sawn lumber in the UK
has taken a hit from the rapid decline in new residential
construction. This has particularly affected demand in the
mass production joinery and window manufacturing
sector. This in turn has fed through into particularly weak
demand for commodity tropical hardwood species
including sapele and meranti.
FOB prices for sapele quoted to UK importers have
remained soft in recent weeks. However agents suggest
that these prices may have hit a floor as margins amongst
African exporters are already extremely tight and
production levels have been sharply curtailed. Much
reduced forward purchasing of sapele during 2008 also
means that UK grounded stocks are now low and there are
gaps in some areas. In the credit crunch, the pressure to
buy little and often has intensified.
Meanwhile weakening of sterling against the dollar has
meant that sterling prices for meranti have been rising and
are now less competitive against sapele. Demand for iroko
in the UK has held up reasonably well, however the
market for framire/idigbo is described by one agent as
¡®dire¡¯.
To some extent the decline in UK demand from new
residential construction has been offset this year by
continuing consumption in the renovation sector. With
house prices falling and credit tightening, less people are
moving house but they have been spending money on
improvements. The concern now is that increased
nervousness over the banking crises will undermine even
this source of demand while tightening public finances
will reduce demand from public sector projects. For
example, due to budget cuts in the wake of the credit
crunch, the Olympic Delivery Authority for the London
2012 Olympics has already been forced to cut the number
of housing units in the Athletes Olympic Village from
3,500 to 2,800.
Demand in the Benelux countries also remains very
subdued. One agent in the region suggested that importers
are still carrying very high stocks of standard items. For
example, sales of tropical hardwood decking fell well
short of expectations this year and stocks remain very high
at a time of year when they should be low. This will
inevitably feed through into much reduced orders for the
spring 2009 season. Given the current stock position and
the obvious desire in the current market situation to avoid
holding excess stock, this agent was told by one of his
leading buyers not to expect any new orders for at least
three months.
Reports are coming through of slow sales of hardwood to
the Italian furniture and flooring sectors. Many Italian
furniture and flooring factories are now only operating
three or four days per week and several have closed
permanently. This reflects both declining domestic
consumption and intense competition in export markets as
manufacturers from all regions are now chasing declining
orders. Hardwood orders from Spanish and Portuguese
manufacturers have also been declining, with the signs of
particular stress in the Spanish door industry.
European plywood importers fail to step up
purchasing
The credit crunch and economic slowdown has meant that
European plywood importers are very reluctant to commit
to purchasing in any volume while stock holdings are seen
more and more as a liability. However there may be a few
opportunities to find buyers before the year is out.
According to a plywood trader quoted in the UK¡¯s TTJ
¡®the biggest factor in the UK and European markets at the
moment is fear¡.Stock reduction is running ahead of
demand reduction and, as we run into autumn and winter,
we will see some shortages. The trade has still got some
buying to do before the New Year¡¯.
European imports of Chinese plywood have been
declining due to recent consolidation of the Chinese
plywood sector, combined with rising costs of raw
material, labor and energy, and the downturn in European
consumption. The same TTJ article notes that despite
recent consolidation in the Chinese plywood
manufacturing sector, UK buyers continue to receive huge
numbers of offers of plywood from mills in China. This
suggests that there is still excess supply in the pipeline, a
fact also reflected in a slight softening in prices for
poplar/bintangor plywood from China. In addition to slow
consumption, reluctance amongst many European
importers to buy Chinese plywood reflects continuing
concerns over variable quality of product.
Meanwhile, there are signs that the price differential
between Malaysian and Indonesian tropical hardwood
plywood on offer to EU importers is narrowing. A
relatively high price for Indonesian plywood in recent
times has meant that Malaysia has been the main
beneficiary of partial shift away from Chinese plywood in
the EU market. However, according to the German trade
journal EUWID, prices for 4X8ft BB/CC grade Indonesian
plywood for shipment in October/November 2008 stand at
Indo96 +32% to +34%, a decline from Indo96 +37% at the
end of August. Meanwhile, over the same period
Malaysian prices have risen from Indo96 +19% to +20%
to Indo96 +24% to 25%. The price gap for European
importers is expected to narrow further next year when EU
import duties on Indonesian plywood are due to be
lowered from 7% to 3.5%, equivalent to the duty currently
imposed on Malaysian plywood.
EU releases its proposed illegal logging legislation
On 17 October the European Commission finally
published its long anticipated proposal to introduce new
legislation designed to minimize the risk of illegal wood
entering the EU market. As noted in the previous ITTO
Tropical Timber Market Report (TTMR 13:19), the
proposal is that individual operators engaged in the trade
and production of wood products in the EU would be
required to implement a ¡®due diligence¡¯ management
system to reduce the risk of any illegal wood entering their
supply chains.
A significant change from earlier drafts of the proposal is
that it would apply only to operators who place timber and
timber products ¡®for the first time on the Community
market¡¯. There has been some confusion amongst
European trade organizations of precisely which operators
would be captured by this definition (some interpreting it
to include European forest owners). However, an EC
official made clear the intent of this definition at the
International Timber Trade Federation meeting hosted by
the EC-funded Timber Trade Action Plan in Geneva on 27
October. The EC official noted that the measure was
directed specifically at EU-based importers and primary
processors (e.g. sawmills, plywood mills, panel products
mills, pulp mills).
The scope of the products covered by the proposed
legislation is extremely wide, covering all products
included in the existing FLEGT Action Plan (logs, sawn,
plywood, and veneers) together with:
• Pulp and paper of Chapters 47 and 48 of the
Combined Nomenclature, with the exception of
bamboo-based and recovered (waste and scrap)
products;
• Wooden furniture of CN code 9403 30, 9403 40,
9403 50 00, 9403 60 and 9403 90 30;
• Prefabricated buildings of CN code 9406 00 20;
• Fuel wood, in logs, in billets, in twigs, in faggots
or in similar forms; wood in chips or particles;
sawdust and wood waste and scrap, whether or
not agglomerated in logs, briquettes, pellets or
similar forms of CN code 4401;
• Builders¡¯ joinery and carpentry of wood,
including cellular wood panels, assembled
flooring panels, shingles and shakes, wood
(including strips and friezes for parquet flooring,
not assembled) continuously shaped (tongued,
grooved, rebated, chamfered, V-jointed, beaded,
moulded, rounded or the like) along any of its
edges, ends or faces, whether or not planed,
sanded or end-jointed of CN code 4418;
• Particle board, oriented strand board (OSB) and
similar board of wood whether or not
agglomerated with resins or other organic binding
substances of CN code 4410;
• Fiberboard of wood or other ligneous materials,
whether or not bonded with resins or other
organic substances of CN code 4411;
• Densified wood, in blocks, plates, strips or profile
shapes of CN code 4413 00 00;
• Wooden frames for paintings, photographs,
mirrors or similar objects of CN code 4414 00;
• Packing cases, boxes, crates, drums and similar
packings, of wood; cable-drums of wood; pallets,
box pallets and other load boards, of wood; pallet
collars of wood; coffins of CN code 4415;
• Casks, barrels, vats, tubs and other coopers¡¯
products and parts thereof, of wood, including
staves of CN code 4416 00 00.
Green groups have already been critical of the proposals
on the grounds that they do not go far enough in defining
procedures for legality verification and in setting out
specific penalties for operators that might be found to be
trading in illegal wood.
On the other hand, the EC has been conscious of the need
to avoid imposing excessive new bureaucratic
requirements on the trade in timber from areas where there
is little risk of illegal logging. After all, even the most
pessimistic assessments suggest that only perhaps 20% of
existing EU wood imports derive from illegal sources
while the level of domestic supply from illegal sources is
likely to be significantly lower. So it makes absolutely no
sense to subsume the existing 80% of legal wood supply in
new systems and procedures ¨C particularly as this would
only increase the costs of legal operation, providing an
additional perverse incentive to operate illegally and
undermining competitiveness of wood against other less
environmentally beneficial materials.
Hence the new legislative proposal is carefully targeted
focusing specifically on the risk assessment systems of
companies operating at that point in the trading chain
where there is most leverage to take proactive measures.
No new requirements would be imposed on those
suppliers where there is high confidence that there is low
risk of illegal logging. The proposal also has the strong
benefit of building on and integrating with existing
systems of due diligence that have been developed by
trade associations and NGOs in several countries.
The proposal must now be considered by both the
European Parliament and European Council of Ministers.
The earliest conceivable date on which it could come into
force is April 2009. The proposal includes a provision for
the ¡®due diligence¡¯ requirements to be phased in over a
period of 2 years, so individual operators would have to
demonstrate compliance from April 2011 onwards.
However, there are still many obstacles to full
implementation and it is possible that a European
Parliament vote on the issue cannot be scheduled until
well after the June 2009 parliamentary elections.
A full copy of the proposal is available at:
http://www.illegallogging.info/uploads/flegttimberproposaloct08.pdf
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