Weakened world economy has repercussions
The world economy and structural transformations in the paper and sawmill industry are the most important factors affecting the market trend in the forestry industry. This past year was no exception, with a downward trend mainly on the mature markets.
Most mature economies are burdened by the public debt crisis and are having difficulty countering the recession with additional interest rate reductions and/or currency adjustments. Public debt is leading to austerity measures and, in many cases, tax increases, which is also dampening the outlook for 2012, according to the Swedish Institute of Economic Research. The considerable turmoil is not only limited to Europe and the euro zone. The US also has a substantial national debt, which market analysts feel can no longer be ignored.
Sweden is an exception to this as the only EU country with an anticipated budget surplus over the next two years, according to the European Commission’s autumn 2011 forecast. The low SEK exchange rate has benefited the Swedish export industry, but the SEK exchange rate strengthened during the year.
In Brazil, Russia, India and China (the BRIC countries), the situation is different, with China serving as the largest engine of growth. However, there is a risk of a bubble economy and the Chinese government is therefore slowing the strong growth down to high, single-digit percentages.
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.
The property market has matured
The forest property market has matured following a decade of rising demand. The supply has never been greater than in 2011, with a greater differentiation of offering and price as a result. The price is mainly affected by the acreage, where large holdings are more attractive. The price level is held up by the financial unrest combined with a relatively low rate of interest and favourable wood prices.
Investment has increased in fixed investment projects such as forest, which are deemed to have a low risk. In southern Sweden, average prices have risen by just over 3 per cent during the year, which is more than the rest of the country.
The higher supply is due to the generational change, and more properties are remaining unsold. Younger generations often do not want to take over and the trend is for properties to increasingly be sold outside the family. More than 70 per cent of transactions were complementary acquisitions by neighbours and active forest farmers.
Weaker market lowered demand
The price of forest raw materials is normally set when a harvesting contract is signed. The harvesting time varies, which contributes to decreasing the sawmills’ margins if the raw material price is fixed at the same time that the price of sawn timber drops, as was the case in the final months of the year.
The higher saw log prices in 2011 were due to this delay. The contracts were signed during the very positive trend for the sawmill industry in 2010, while harvesting took place in 2011. The timber products market began to weaken at the end of the preceding year, which led to lower saw log prices. This was repeated another two times in autumn 2011. At the same time, the supply of standing forest decreased in pace with the lower demand.
The raw materials of pulp mills are pulpwood from harvesting and cellulose chips from sawmills. The pulpwood prices have remained at a relatively high level, with a balance between supply and demand for wood. At the end of the year, a falling trend could be discerned on softwood at the same time as the price level for mainly FSC-certified hardwood remained high.
Hard year for timber products
The weak demand for sawn timber products in the mature economies is mainly due to very low new construction. In the US, which has been by far the largest consumer, imports are half of what they were in 2006, or 20 million cubic metres compared with 38 million cubic metres. Consumption is also at a historically low level in Europe. Sweden is no exception, but the government renovation grant (ROT) partially offset the decline. However, renovations decreased in strength in the latter part of the year, in part as a result of lower sales of existing homes.
The largest European timber product producers Sweden, Finland, Austria and Germany account for one-third of world production and have found new markets in North Africa, with an increase in exports of 70 per cent since 2006. Exports to North Africa were slowed sharply by the political unrest in the area.
Large parts of Canada have been struck by bark beetle infestation, but have found markets for their low-quality wood mainly in China, the rising imports of which are concurrently putting pressure on prices.
Profitability for timber products was strong at the end of 2010, but prices began to weaken. At the same time, production continued unabated, which led to very large levels of inventory. In the latter part of 2011, Europe implemented production restrictions to bring the market into balance. Meanwhile, the sawmills have been put under pressure by the higher prices of saw logs.
The industry is in the midst of a restructuring phase that means that smaller, unprofitable sawmills are being closed or going bankrupt. The trend towards larger mills is continuing: Södra and Holmen have opened new sawmills each with a capacity of 750,000 cubic metres. At the same time, Södra has closed sawmills with a combined capacity of 250,000 cubic metres.
However, the earlier assessment remains that the market situation is significantly brighter in the long term, with a shortage of timber products forecast.
Interior wood products face competition
Södra Interiör’s domestic market of Scandinavia has not had an equally negative development for interior wood products as the sawmills have had for timber products. The customer categories of the building materials trade, industry and house factories have experienced differing development. The building materials trade, which accounts for the absolutely largest share, has changed its purchasing patterns following the summer and placed smaller orders. As a result of the low level of new construction, house factories have cut their orders sharply.
Competition from abroad is growing. Besides the production in the Baltic States, low-price products from China and South America have grown.
Highly refined products still have markets in export countries, such as Japan, South Korea, the UK and in Eastern Europe.
Long-fibre pulp doing well
Södra Cell’s business is predominantly based on long-fibre chemical pulp suitable for applications such as tissue, speciality paper and high-quality graphic paper. Demand for pulp is directly related to consumption of paper and other pulp-based products. Pulp can broadly be 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 2011, the price and stock levels as well as the exchange rate between USD and SEK have fluctuated less. The USD prices increased somewhat until mid-year to then decrease.
China followed its pattern of irregularly purchasing large stocks for short periods, which happened in the first quarter and in the autumn of 2011.
The capacity for short-fibre pulp has increased, with modern mills located around the world. The closure of old long-fibre mills has led to a higher price difference between long and short-fibre pulp. The long-fibre market continues to have a positive outlook due to small capacity additions.
Consumption of printing and writing paper continued to decline in Europe, Japan and North America. This decline is structural and largely influenced by the digital development, which means that consumption is not forecast to increase even in the long term.
Excess capacity of the paper producers in the industrialised countries is leading to intense competition and difficulty in raising paper prices to offset pulp price increases. This is resulting in continued, lasting capacity cutbacks in Europe.
Global economic growth has led to greater 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 speciality paper. This covers 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. The development of new pulps increases the possibilities of manufacturing speciality products with completely new characteristics that may, in the long term, replace lower volumes in the printing and writing paper sector.
Weather, electricity certificates and phasing-out of fossil fuels influencing
The co-generation market is mainly driven by weather and temperature. A one degree change in the average annual temperature entails a 5 per cent change in consumption. The electricity certificate system, which is time-dependent, has an economic influence. This means that when electricity certificate compensation ends, plants are phased out or closed. However, the forest companies generally continue running such plants even after the compensation ends.
The strong expansion of wind power has entailed pressure on the compensation level, which was nearly cut in half for electricity certificates. The new regional division of Sweden into electricity areas also entails incentives for new co-generation installations in southern Sweden where producers can increase their margins. Lastly, the phasing out of fossil co-generation heating and power influences this expansion.
Market growth has steadily remained at just over 3 per cent per year, but is expected to level out in 2012 and 2013. It is then judged to increase again until 2016 when planned facilities are scheduled to be commissioned. The net increase of co-generation production is estimated at a total of around 4.5 TWh up to 2016, an increase of slightly more than 30 per cent.
For Södra Skogsenergi, operations have been substantially influenced by the weather. A very cold winter and spring with higher production was followed by an abnormally warm autumn, which reduced deliveries by slightly more than 10 per cent.
There is considerable uncertainty regarding the trend in the euro zone. Austerity measures and raised taxes are dampening the outlook for 2012.