Supply and demand in balance. How come?
The market for timber in Europe and beyond is acknowledged to be flat. Despite the need for new housing in all domestic markets, the figures for housing starts simply do not match the need. Uncertainty and interest rates are taking their toll. Sweden has been hit particularly hard with house building down 50 percent compared with last year, while up to a 20 percent reduction has been seen in other countries we supply.
New builds are of course only part of the picture. Repair, maintenance and improvement (RMI) are important consumers of timber and have been less severely affected by our economic woes. RMI is nonetheless still well below its peak.
Yet supply and demand are in balance and log prices are on the rise. What is behind this apparent contradiction?
While Södra’s structure ensures our mills can procure the wood they require, there are two main factors behind restricted log supply. The first is the bark beetle. In recent summers, bark beetle activity has necessitated high levels of harvesting, with the result that forest owners are not in a hurry to fell more trees. The second is the dry weather we have experienced in the Nordic region which has restricted harvesting to minimize the risk of fire. You can read more about the log supply situation in the interview article with Södra Skog Timber Manager Kim Gunnarsson in this newsletter.
So log supply is one part of the scenario contributing to the balanced situation. The other is inventory. With very low stock after last summer, we experienced two strong quarters for deliveries, with the result that stocks remained low. The very fact that higher log prices have been offered is a sign that we need to encourage the flow of logs to meet demand, even if demand is relatively weak.
Higher log prices are squeezing already tight margins for the sawmill companies, and as you may have read in Södra’s quarterly report, Södra Wood did not make any profit in Q1 despite of a very favourable currency situation for Swedish suppliers. So even if the market is uncertain, we currently see a balance between demand and supply, with low stocks that should have a positive impact on the market.