A year of major fluctuations
The year was characterised by sharp fluctuations. Growth in Sweden’s GDP was robust while many countries where Södra has its markets experienced significantly weaker growth.
The forest industry is sensitive to economic cycles and reacts promptly to economic changes. Profitability is affected mainly by demand, which is currency-related, as well as by costs, particularly for wood and energy. Södra’s business comprises the processing chain from forest to industry.
Strong demand for properties and raw materials
The price of forest land is driven by supply, location, land quality and the market for wood. The price rose sharply and has increased more than 160 per cent in the past decade. The turnover of forest properties is low and ownership changes take place primarily because of generation changes. More than 70 per cent of the transactions were complementary acquisitions by neighbours and active forest farmers. The trend in properties being sold outside the family is increasing, because the desire and possibility of taking over operations decline in the second and third generation.
The price of forest raw materials is normally set when a harvesting contract is signed or upon the purchase of standing inventory. The harvesting time varies, thus reducing the sawmills’ margins if the raw material price remains stable at the same time as the price of sawn timber drops, which was the case at the end of the year.
As a result of a strong market combined with the emptied storm-felled inventory, the price of saw logs turned upwards until mid-year. It increased by nearly 50 per cent between autumn 2009 up to mid-year 2010. At the same time, clearing registrations for planned harvesting increased by 60 per cent. However, the timber market cycle turned downwards early in the autumn and the price of saw logs dropped.
Good supply of cellulose chips
The raw materials of pulp mills are pulpwood from harvesting and cellulose chips from sawmills. A healthy supply of cellulose chips meant that the pulpwood market was in balance, despite relatively low pulpwood inventories. Pulpwood price increased gradually during the year.
Uncertainty regarding the market for sawn timber
The trend for sawn timber is affected by factors such as raw material supply, exchange rates, new construction, renovations, the business cycle and the national finances of various countries, as well as seasonal variations in construction.
Sweden, Finland, Germany and Austria account for most of the supply in Europe. Sweden had a competitive advantage that waned in pace with the appreciation of the SEK against the EUR. The Swedish sawmill industry remains very fragmented and has a low degree of consolidation.
The construction market is the driver of demand for Södra Timber’s sawn timber, of which 80 per cent is whitewood for construction. The renovation sector in Scandinavia was strong and construction in Europe slowly increased from an extremely low level. Demand remained robust in the Middle East and North Africa, which led to more competition from other producer countries.
Short advance planning of the transactions means that inventories quickly increase if demand drops. The balance is then maintained through reduced production. Several producers announced production shutdowns during the 2010/2011 winter season.
Confidence in the long-term development of the timber market remains very strong. It is supported by the fact that new construction in Europe and the United States is still below average while the use of timber in building designs is increasing.
Interior wood holding ground in competitive market
Södra Interior is primarily active on the Scandinavian market with its largest sales in Sweden. Competition from producers in Scandinavia and the Baltic States is substantial. Despite little new construction, the market was satisfactory, driven mainly by the government renovation grant (ROT) in Sweden.
The building trade is the largest customer category. Södra Interiör motivates a somewhat higher price level with high product quality, new product innovations and a high level of service with short delivery times that minimise the customers’ inventory.
Pulp remains main input
Södra Cell’s business is predominantly based on long-fibre chemical pulp suitable for applications such as high-quality graphic paper. Demand for pulp is directly related to consumption of paper and other pulp-based products. Pulp is broadly divided into four application areas: printing paper, packaging paper, tissue for hygiene applications and speciality paper such as different types of filters.
Pulp prices are set on a transparent basis globally. In 2010, the fluctuations were noted in price and inventory levels, as well as in exchange rates between USD and SEK. Prices increased strongly until mid-year to then drop marginally. The price depends on demand and supply, which is sometimes affected by the forces of nature: Chile was struck by an earthquake at the beginning of the year and some of the country’s pulp mills stood still for a protracted period of time.
China built large inventories of purchased pulp, resulting in the producers’ inventory levels dropping to extremely low levels in the spring. Rising pulp prices normally lead to inventory growth at the producers. The second half of the year witnessed a return to more normal inventory levels.
The consumption of printing and writing paper is dropping in Europe, Japan and North America, a decline that is structural and largely determined by the digital advances, where North America has made the most progress.
Excess capacity among paper producers in the industrialised countries is leading to intense competition and difficulty in compensating for pulp price increases. This is resulting in continued, lasting capacity cutbacks in Europe.
Global economic growth has boosted the consumption of packaging paper and tissue paper. For example, the use of hygiene paper increases in pace with a higher standard of living.
Demand for pulp is also growing for special paper, covering a broad spectrum ranging from coffee filters to air filters for engines. As a result of the economic advantages of wood fibre, it is often used in preference to or in combination with synthetic fibres.
Bioenergy shows steady growth
The expansion of power and heating plants run on biofuel is driving Södra Skogsenergi’s business. Market growth is steady at just over 3 per cent annually. Biofuel consumption in Södra Skogsenergi’s market area is approximately 17 TWh. In autumn 2010, deliveries began at a significantly higher pace than previously due to colder-than-normal weather, but mainly to a high price of electricity, which stimulated high power generation and thereby a greater need for fuel.
Long term, more co-generation capacity will be added in the region. Some stakeholders have invested in waste incineration, a trend also observed in Norway and Germany. This is expected to lead to a fuel shortage in Sweden for this kind of boiler, in which case a good deal of this fuel will be imported.
The supply of biofuel is gradually improving as branches and tops from harvesting are increasingly utilised. By- products from the industry are also increasing; for example, Södra Cell Värö has begun the drying and delivery of bark.