The new reality?

Demand for wood  remains at a low level. The signs are, however, that demand for house-building timber has reached its lowest point and is likely to get stronger from here, even if a discernible recovery is still some months away.

Renovation projects for private individuals in many European markets are continuing at an acceptable  level relative to commercial housebuilding. Elevated interest rates and restrictive lending are strong factors in this scenario, as is lack of confidence to invest in an uncertain geopolitical climate.

The data is more positive from the US, where we are increasingly involved as a supplier, and this is the subject of a separate story in this newsletter.

Despite lacklustre demand in Europe, the supply side continues to keep the market in balance. Felling and growing conditions were good in the summer, which enabled the harvesting of areas which will become difficult to access in autumn. The milder weather also kept the infamous spruce bark beetle at bay.

Yet felling remained considerably lower than during the summer of 2023 and is projected by the Swedish Forest Agency to show a further decline in 2024 than last year. Forest owners, having harvested at a relatively high rate due to bark beetle damage in recent years, are less inclined to harvest, even though prices paid for logs have increased by around 45 percent in the past two years and continue to rise. This of course has a strong negative impact on the profitability of sawmills.

This is unprecedented territory for the timber supply side and relates to factors beyond the willingness or otherwise to fell. There is simply more competition for wood and perhaps it will take time for markets to adapt to wood being a more premium resource. Södra’s share of timber supply in the market remains high, thanks to pricing and continuously evolving member support. Our membership structure and flexibility to divert wood between our sawmills ensures best possible supply, but anyway we expect that we need to curtail production up 10% in Q4.Our inventories going in to 2025 will be low, especially in whitewood(spruce).

One development to note on the back of the spruce bark-beetle effect: an increasing flexibility to use redwood (pine) in construction. Holland, Germany and Scandinavia have historically shown a marked preference for whitewood (spruce), whereas the US and UK successfully use both in certain applications. Redwood might be more sensitive to wet during construction, but in the right application, it stands up well as a construction material. Customers willing to be adaptable to both species will be better placed when supply is tight.