More than a half of 2022 passed and nearly one month after the full stop of Russian and Belarus wood product export ban became effective. It is time to see into the changes and trends in wood and wood product trade. The worldwide energy crisis leads to decrease in consumption that affecting the production and export-import operations around the globe. It is clear that energy cost brings higher spending for both industrial and public sector and this is the loop that brings us slowdown in nearly each and every sector of economy. I recall the expectations merchants had two months ago. Most common were – as the trade ban becomes effective we would sell our stocks with double price! The logistics costs shall go down as the demand shrinks. Now is clear the expectations are not fulfilled. But what is the situation and what we can expect? As always, I summarized most news and analytics to let you figure your own picture.
Rising fuel prices impact everyone’s pocketbook through increased costs which are driving up prices. This increase in cost is especially true for the trucking industry, which is critical to maintaining the supply chain and is often viewed as a barometer of the economy. As trucks are vital for moving raw forest products from in-woods harvest sites to mill consumers, rising fuel prices significantly impact the cost of those deliveries. Recent news events have highlighted the impacts of increasing fuel costs on the economy.
Global trade of softwood lumber slowed in early 2022, in particular lumber headed to China, the US, and Germany, where import volumes were down in the range of 6-20% from the same period in 2021. Wood trade will likely continue to slide in 2Q22 due to inflation going up in Europe and the US, as this impacts consumer spending.
In addition, China is reducing new housing construction, the ongoing war in Ukraine is causing changes in trade flows and increasing energy costs, and general consumer sentiment in the marketplace is getting more anxious.
The sanctions against trade with Russia by Europe, Japan, South Korea, and a few other countries in Asia will considerably impact the global trade of lumber in the second half of 2022. In 2Q22, lumber was still being shipped from Russia to many European countries, but this trade will end when many contracts expire in early 3Q22.
Lumber prices declined in the first few months of 2022 as demand fell in most major markets worldwide. Despite the reduced prices, current levels are still among the highest in over 15 years.
Lumber and Wood Products Markets – Russia
Russian lumber exports started to decline in March after the country invaded Ukraine, and this trend has continued into 2Q22. It is expected that by early July, shipments to Europe and some countries in Asia will be minimal to non-existent due to the sanctions from the western counties and Russia’s ban on exports to “unfriendly countries.” In 2021, Russia’s exports to countries with trade sanctions or sales embargoes accounted for about 22% of total outbound shipments. Alternative markets for Russian lumber, such as the CIS countries and the MENA region, are not likely to increase imports from Russia in the near term as demand in those markets is not growing.
China is the largest market for Russian lumber, accounting for over 50% of total export volumes in 2021. However, with the economy weakening and the demand for building materials in China decreasing, it is unlikely that Russian sawmills, particularly those located in the Western part of the country, will be able to significantly expand sales much into the far-away markets in Asia due to high freight costs and logistical challenges. Even before the war in Ukraine, lumber shipments from Russia to China declined from 16 million m3 in 2019 to 12 million m3 in 2021. In the 1Q/22, lumber trade between the two countries was at its lowest level in seven years. With the reduction in exports and limited opportunities to increase lumber sales domestically, it is most likely that sawmill production in Russia will decrease for the remainder of the year and beyond.
Despite the Russia-Ukraine war and subsequent tariffs, imports of Russian hardwood plywood grew by 44% in the first four months of this year versus the same period last year, reports the Decorative Hardwoods Association.
Lumber and Wood Products Markets – North America
In 1Q22, lumber production in North America fell about 4% YoY. The only region that saw an increase was the US South, where production was almost 9 million m3, up 3% from 1Q21. Most of the decline in production occurred in BC and the eastern provinces of Canada – resulting in a reduction in lumber exports by 11%.
Lumber prices in the US have fluctuated during 1H22. For example, southern pine prices fell from a high of $700/m3 in March to a low of $325/m3 in early June. However, it is essential to note that even the low end of the price range is higher than prices were at any time before 2020.
Import directly from Russia appeared to have slowed a bit after the U.S. imposed tariffs, but imports of birch plywood from Vietnam grew by 206% to 427 million square feet. Russia is a likely source for a substantial amount of the imports of birch plywood from Vietnam.
Lumber Markets – Sweden
Lumber exports from Sweden were 12.6 million m3 in 2021, down 10% from the previous year. Shipments shifted in 2021 from China and the MENA region to Europe, while exports to the US were unchanged YoY. In early 2022, the trade flows changed again when exporters moved away from the European markets where demand weakened and instead expanded shipments to the US, Egypt, Japan, and China.
Lumber Markets – Japan
Japan’s softwood lumber imports were 13% higher in 1Q22 than in 1Q21. All major supplying countries increased their shipments to Japan except for Canada. Importation from Russia was practically unchanged QoQ in 1Q22 despite Japan’s official trade sanctions policy against Russia because of the invasion of Ukraine. In April, Japan still bought about 60,000 m3 of lumber from Russia (almost 20% of total imports), down from 90,000 m3 in January 2022. However, this trade flow will eventually halt because of the war in Ukraine, and Japan will need to find other supply sources.
Lumber and Wood Products Markets – China
The real estate market, investment and exports, which have been key growth engines for China’s economy, are experiencing turbulence. In Q2 2022, China’s GDP increased by 0.4% year-over-year, according to the National Bureau of Statistics. The second quarter results prompted some investment banks to lower their growth forecasts for China’s economy. Société Générale cut its growth forecast for the full year from 4.1% to 2.7%. Barclays expects China’s economy to grow 3.1% this year, compared to the previous forecast of 3.3%.
Official data show that the fall in China’s new home prices widened in June from May, while sales of land for future development – a major source of income for local governments – fell sharply in June. China’s housing market has been an important economic driver for much of 2020 as the Chinese put their money into real estate as an investment asset.
In June, Chinese exports rose 17.8% year on year. Although Chinese exports have grown faster than expected, economists predict that Western demand, which has kept Chinese factories running, will decline as politicians raise interest rates to contain the runaway inflation that will affect the economy.
In January-May 2022, Chinese softwood lumber imports fell 16.3% YoY, up to 6.5 million m3. In particular, supplies from Russia decreased by 6.4%, to 4.4 million m3. If in January-February the volume of exports of softwood lumber from Russia to China increased by 8.2%, then in March-April exports fell by 13.3%, and the decline grew every month and in May amounted to 22.0%.
In January – May, the volume of imports of softwood logs to China fell by 39.4% YoY, to 12.2 million m3.
In January – May, China reduced pulp imports by 6.7% year-o-year, to 12.4 million tons. Exports from Russia decreased by 10.0% to 591 thousand tons.
Russian forest based industry was cut off from the markets of Europe, Japan and the U.S. because of the Russian invasion of Ukraine. The slowdown in the Chinese economy does not allow Russian companies to redirect supplies from Europe to the East, causing them significant damage. In July, sawmills in the North-West of Russia began to stop production.
China imported only 3.6 million m3 of softwood lumber in 1Q22, the lowest quarterly volume in nine years. Several factors that will likely continue to weaken demand in China for lumber in the coming months include lower new construction activities, continued COVID lockdowns impacting supply chains and financial distress from recent negative updates in China’s expected GDP targets. Although average lumber import prices fell from about $290/m3 in December 2021 to $260/m3 in April 2022, they were still substantially higher than during most of 2005-2020.
The value of China’s furniture exports declined 3% to US$9.468 billion in the first five months of 2022. The USA still is the largest destination but exports fell 3% to US$3.088 billion but still accounted for 33% of total furniture exports.
Chinese furniture exports to Asia, Oceania and African increased 5%, 4% and 2% respectively but to North America, Europe and South America exports declined.
Among the top markets for China’s furniture exports sales to Australia rose 7% to US$634 million, exports to Japan and South Korea grew 2% and 3% respectively. However, furniture exports to USA, UK and Canada fell 3%, 15% and 16% respectively and to Germany and France exports dropped 14% and 5% respectively.
China’s furniture exports to Peru, Brazil and Colombia fell 24%, 28% and 40% respectively.
According to China Customs data the proportion of China’s furniture exports to the USA has increased from 33% in 2014 to 44% in 2018 but declined from 44% in 2018 to 31% in 2020 due to the China-USA trade friction.
The proportion of China’s furniture exports to the USA was 32% in 2021 from 31% in 2020. China’s furniture exports are diversifying to more than 200 countries.
Lumber and Wood Products Markets – Vietnam
According to the General Department of Customs, it is estimated that the export value of wood and wood products in wood products in June 2022 at 1.03 billion USD, down 18.1% compared to June 2021.
In the first 6 months of 2022, the export value of wood and wood products is estimated at 8.5 billion USD, up 2.8% over the same period in 2021. In which, the export of wood products is estimated at 6.14 billion USD, down 4.6% over the same period in 2021.
Due to the impact of the epidemic situation, the “Zero Covid” policy in China as well as the high input costs due to the impact of the conflict between Russia and Ukraine, many countries face rising inflation, so consumers have to tighten their spending, the demand for non-essential goods decreases, including wood products and wood products.
Therefore, the export value of Vietnam’s wood and wood products in the first half of 2022 decelerated.
Global trade is recovering slowly due to the impact of the conflict between Russia and Ukraine, along with the outbreak of the disease and the “Zero Covid” policy in China. Notably, while the main export items decreased slightly, the export of items such as wood chips; wood, planks and flooring. Wooden door; fine art furniture saw positive growth in the first 5 months of 2022.
Nevertheless, there is a common factor among wood industry businesses, that is whether their revenue increases or decreases, the gross profit margin of most companies declined in 2022 due to higher input materials and logistics costs. Prices of imported sawn pine and round pine rose 52% and 38% respectively due to the impact of the Russia-Ukraine conflict and high logistics costs.
Market research and consulting firm Grand View Research forecast that the US wooden furniture market value would grow by around 7.9% in the five years from 2022 to 2027. Analysts expect that high demand for housing in the US would boost the purchase of wooden furniture products in 2022-2023. The timber industry is also said to benefit from China’s reduction in production capacity.
Lumber and Wood Products Markets – UK
The import value of tropical wood and wood furniture into the UK in the opening months of this year were at an unprecedented level of US$565 million. That is 36% more than the same period in 2021 when imports were also high following a strong rebound after the downturn during the first COVID lockdown in 2020. In fact, this was by far the strongest start to the year in terms of UK import value of tropical wood and wood furniture products since at least before the 2008 financial crises.
Significant weakening of the value of the GBP on foreign exchange markets since the end of April, combined with the wider geo-political situation, implies that price inflation will remain a key issue for UK importers in the months of ahead. It also indicates that the current boom in UK imports may well be short-lived.
Availability of hardwood and furniture products from the UK’s traditionally largest suppliers in Europe has become even more challenging since Russia’s invasion of Ukraine encouraging importers to look more to tropical products.
COVID lockdowns have also seriously disrupted availability of manufactured wood products from China.
Freight rates also declined from the heights reached in the third quarter of last year but are still at a historically very high level. For example, the cost of a 40ft container from China into the UK was US$11,000 at the start of this month, less than its peak of US$14,700 in October, but a huge rise from US$1,500 in summer 2020.
The war in Ukraine has seriously disrupted all supplies of European and Russian hardwood products, partly because of the direct effects of sanctions against Russia, partly the immediate effects of the war on Ukrainian supply, and partly because of the large numbers of Ukrainians, who contribute a disproportionately large number of truck drivers operating in Europe, who returned home during the conflict. The war has also driven up energy costs, filtering through into rising prices for all European manufactured products, including for wood and furniture.
While higher import prices were the major driver of increased UK import value in the opening months of this year, the trend was partly due to continuing high consumption in the UK, supported by post-COVID government stimulus. Demand during this period was particularly strong in housing repair, maintenance, and improvement, a major source of hardwood demand and the fastest growing part of the UK construction sector following the initial COVID lockdown.
However, prospects for the UK economy for the rest of this year are far from promising.
Lumber and Wood Products Markets – Germany
A high demand paired with high production costs caused the price for pellets to rise further in Germany in June 2022. The nationwide average price was €431.56/t. That is 9.7% more than in the previous month and 95% more than in June 2021.
Germany’s construction industry has recently recorded an unusually high number of project cancellations. While in June 11.5% of companies affected by building construction were reported, in May it was even 13.4%. In civil engineering it was 9% after 8.8% in May.
In many places there is still a lack of material. In June, 47.1% of building construction companies reported delivery bottlenecks – after 56.6% in the previous month. In civil engineering, the share fell to 39.7% from 44.8% in May. It is comparable to the corona shock in spring 2020. This time we are seeing cancellations in residential construction particularly frequently.