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Report
from
Europe, the UK
and
Russia
Economic indicators show deteriorating trend
Economic problems continue to mount in Europe. The
UK, Spain and Ireland were hit hard early on by the
collapse of their respective property markets. The UK¡¯s
economy, with its heavy dependence on financial services,
has also suffered more profoundly than other economies
from the crises in the banking sector. Now contagion has
set in and conditions are deteriorating rapidly throughout
the EU.
Germany, France and Italy, the euro area¡¯s three biggest
economies, have experienced a rapid decline in industrial
production in recent months as the strong euro and
weakening global demand has hit exports hard. Germany¡¯s
industrial output fell at annualized rate of 15.1% in the
three months to November compared with the previous
three months; in France it fell by 14.5% and in Italy by
19.5%. Domestic consumption is also being squeezed
throughout the euro zone. Although the area¡¯s consumers
have relatively high savings and low debt by rich-world
standards, they are becoming more nervous as
unemployment is rising. Consumer confidence in the eurozone
has sunk to a record low ¨C falling particularly
dramatically in Spain and Ireland.
Policy makers are trying desperately to avert the crises, so
far with little success. The Bank of England has reduced
interest rates to 0.5%, their lowest ever. The European
Central Bank (ECB) cut its key rate by 50 basis points to
2% on January 15th. Fiscal policy is being loosened
aggressively in a few countries, leaving the UK in
particular with a huge budget deficit.
Signs are that the European economy will remain
depressed for at least the rest of 2009, with tentative hopes
of a recovery in 2010. In January 2009, the Economist
Intelligence Unit forecast that euro area GDP would
contract by 2% in 2009 - a substantial downgrade from
December¡¯s forecast of minus 1.2%. Much of this is due to
the deteriorating outlook for Germany, which is likely to
contract by more than 2% in 2009. Prospects in the UK
may be even worse, the IMF forecasting that the nation¡¯s
economy might contract by 2.9% in 2009.
Until only a few months ago, reports indicated that Eastern
Europe might escape the worst impacts of the global
downturn. But economic conditions in the Baltic States
have a taken a serious turn for the worse. This has raised
concerns that the downturn might spread into other parts
of Eastern Europe. Industrial production in November
2008 in Latvia, Estonia and Lithuania fell respectively by
14%, 17.5% and 7%. In mid January, the IMF and other
foreign lenders had to step in to bail-out Latvia¡¯s economy
imposing tough austerity measures as a condition of the
rescue package. Attention is now focusing on Poland, the
biggest regional economy, which until recently seemed
fairly safe. Industrial production in the country has nosedived
in recent weeks. The central bank has cut interest
rates sharply in response but it is too early to say whether
this will halt the slide.
Sawn lumber market in the doldrums
Overall the European market for tropical hardwood sawn
lumber remains extremely depressed. There is very little
forward purchasing as importers focus on offloading
existing landed stock at a time when consumption has
slumped and prices are weakening. Agents report only a
slight pick-up in orders during the week immediately
following the end of the Christmas vacation, but these
tailed away very quickly in the following weeks.
Due to the extremely low level of forward sales, it remains
very difficult to obtain consistent and accurate price
information. There are a lot of very cheap offers around
but still buyers are not being tempted. Overall the feeling
is that landed stocks have been whittled down over recent
months with so little forward buying. But the serious lack
of confidence in levels of consumption this year -
combined with the widely held perception that prices will
remain weak and availability relatively prompt - is
deterring any move to build stocks.
This situation seems to apply across the board to the full
range of species, although the problems are most obvious
in the larger volume species. The market for African
sapele is particularly depressed as some large European
importers are selling on to manufacturers and other buyers
at well below replacement prices in their efforts to offload
excess stocks. Similarly USD CIF Northern Europe prices
for white oak ¨C such a staple of the European furniture and
joinery sectors ¨C are reported to have fallen by 30% in the
last eight weeks. Malaysian meranti USD CIF Northern
Europe prices have plummeted due to weak consumption
and efforts by Malaysian shippers to generate cash flow in
advance of the Chinese New Year.
Freight rates from the Far East into Europe have also
fallen by around 50% since early December ¨C a
particularly visible sign of the abrupt decline in European
trade volumes over the last three months.
Plywood trade stagnates
European plywood importers have greatly reduced
forward purchases and remain focused on stock
consolidation. There is much inter-importer trade,
particularly in the UK due to the weakness of GBP
sterling. With the currency so weak it makes sense for UK
importers to buy existing landed stock that was bought
forward by other importers in the middle of last year when
GBP sterling was stronger. There is very unlikely to be
any significant upturn in forward buying until sterling
recovers some of the ground it has lost to other currencies,
particularly the US dollar.
One large UK plywood importer interviewed in late
January notes ¡®our sales levels in the UK are around a
third less than the same time last year. Plywood is being
consumed and there will come a time when we need to
restock and buy more on a forward basis. However we are
not in that position yet, nor are we likely to be for several
months¡¯. This same importer noted that his company may
be performing better than many competitors due to its
ability to supply more specialist products such as large
panels and marine plywood which are in relatively short
supply. It is those importers that rely more heavily on
large volume commodity products that are really
struggling.
This importer also notes that they are now buying little or
no Chinese plywood with a poplar core. This is due both
to continuing quality concerns and the fact that prices for
Chinese hardwood-throughout plywood have come down
to such an extent that the price of lower-quality poplar
core product is much less attractive.
Another significant impact of the downturn has been to
narrow the price differential between FSC and PEFC
certified and uncertified plywood products on offer to
European importers. As the overall market has contracted,
the relative availability of certified material has increased
and shippers have responded by reducing their certified
prices in an effort to maintain their market share. Those
shippers with access to material from certified forests are
aggressively marketing their products emphasizing that
they can provide environmentally certified product at little
or no price premium.
Although end user demand for FSC and PEFC labeled
plywood remains restricted in the UK, importers suggest
that more enquiries for these products are coming in,
particularly from the public sector. The UK authorities
seem now to be imposing more effectively the central
government procurement policy favoring ¡®verified legal
and sustainable¡¯ timber. At the same time, the public
sector is becoming a relatively more important market as
private sector construction has declined. For this reason,
together with other factors such as ease of stock control,
brand protection and rising availability of certified product
at little or no premium, more UK plywood importers are
taking a strategic decision to shift over to sourcing 100%
FSC or PEFC labeled product.
EU garden furniture sector provides opportunities for
tropical timber suppliers
The garden furniture sector remains a major source of
demand for tropical hardwood products in the EU. Data on
the size of the sector in the various European countries is
not readily available, but anecdotal reports indicate that
Germany, France, Italy and the UK and the four largest
consumers of garden furniture products roughly in order of
importance. The market picture is complicated by the fact
that a significant proportion of the Top Quality Grade A
Teak imported into the Italian market is not used for
garden furniture but rather as decking for the luxury boat
building industry.
The European garden furniture sector is unusual for its
relatively high level of interest in environmental
certification. High profile environmental campaigns,
combined with the sector¡¯s obvious dependence on
environmentally sensitive tropical hardwoods and the
relatively large volume of product sold through big name
retailers, have meant a very strong emphasis on certified
product. Many retail buyers in the EU will no longer
directly or indirectly purchase or offer uncertified timber
or wood products. With very few exceptions, FSC is
essentially the only brand of certification recognized in the
sector.
While big-name retailers have become more dominant in
the sector in recent years, there is still quite a high degree
of fragmentation. Huge volumes are sold through
companies like Metro in Germany, Carrefour in France,
B&Q, Homebase, and Tesco in the UK. But significant
volumes also find their way to final consumers through
smaller garden centers and internet firms.
Large retailing companies often buy a significant
proportion of finished products direct from the Far East.
Direct buying normally generates a much higher margin
for a retailer. However there are also risks associated with
buying direct and paying for goods well in advance of
delivery. Therefore a proportion may also be bought from
EU branded companies who can offer stock support in the
EU with a quick repeat order delivery time.
There are a large number of European ¡®pseudo
manufacturers¡¯ who are now in effect importers and
wholesalers supplementing the large retailers¡¯ supplies and
also acting as a major source of goods supplied to the
smaller garden centers and retailers. Pseudo manufacturers
usually operate by supplying a design to a Chinese or SE
Asian producer who then makes the furniture under the
brand name of the pseudo manufacturer. Occasionally the
factory design is used. Quite often a pseudo manufacturer
acts on behalf of a retail buyer.
There are only a very few garden furniture companies
actually manufacturing products in the EU and most use
materials other than wood. For example Kettler still
produces steel garden furniture in the EU while importing
their wooden furniture from SE Asia.
Teak is generally the preferred species in the garden
furniture sector, although lack of availability of this
species combined with the strong emphasis on ensuring
products are FSC certified has meant the sector now
utilises a wide range of alternatives. Of tropical species
these include iroko, eucalyptus, acacia, balau, meranti,
keruing, shorea, sindana, and couboril. Lack of availability
of FSC certified teak from Myanmar and Indonesia has
contributed in recent times to a shift in sourcing of wood
raw material to other regions, for example from teak
plantations in Central America, Eucalyptus plantations in
South Africa, Acacia plantations from Vietnam and other
SE Asian countries, and couboril from Brazil. In addition a
lot of FSC certified pine from Russia, Northern Europe,
North America and New Zealand is now pressure treated
to extend its life for outdoor use.
Until the start of last year, the EU garden furniture sector
was generally expanding. However in 2008 the wet
summer in north-west Europe undermined demand. The
worldwide economic downturn then severely dented
confidence. Many retailers continue to hold excess stocks
over from the 2008 season and, lacking confidence in a
significant recovery this year, have drastically reduced
forward ordering for the 2009 season.
Another effect of the economic downturn has been to
contribute to growing interest in lower priced products
especially lower grade plantation teak, Acacia and
Eucalyptus. With cost becoming an even bigger driver of
demand in difficult trading times, there is growing concern
amongst manufacturers over the continuing price
differential that exists between FSC certified and
uncertified raw material suitable for garden furniture
manufacture. Concern is particularly pronounced as the
downturn also seems to be encouraging more interest in
relatively cheap non-wood products including no or low
maintenance aluminum, steel and mixed material furniture
mainly from China.
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