LOWER DEMAND AND FIERCE COMPETITION ON EUROPEAN FOREST PRODUCT MARKETS

Autumn 1996: lower demand, fierce competition and continuing low prices affect the European forest product markets, stress the United Nations Economic Commission for Europe Timber Committee (UN/ECE) and the FAO European Forestry Commission in their official review and forecasts for 1996 and 1997. In North America, however, market conditions are satisfactory due to the continuing strength of the housing markets. The countries in transition of eastern Europe are now recovering from the deep recession of the early 1990s, but differences between national situations are becoming more marked. Production in Russia continues to fall, but more slowly than before.

For 1997, a weak recovery is expected for Europe and a continuation of present market conditions for North America and other parts of the region.

The official text adopted at the joint session of the UN/ECE Timber Committee and the FAO European Forest Commission is attached and includes quantitative estimates and forecasts at the regional level. The full version of the session's review, with country forecasts, will be issued very shortly as No. 6 of the current volume of the Timber Bulletin. The discussion was based on the secretariat's Annual Forest Products Market Review (covering 1995 and early 1996), issued in August 1996 (Timber Bulletin volume XLIX (1996), No. 3) and Forest Products Statistics 1991-1995, (No. 2 of same volume, also issued in August).

For any further information please contact:

Mr. C. Prins
United Nations Economic Commission for Europe
Palais des Nations, Room 388
CH-1211 Geneva 10, Switzerland

Telephone:+ 41 22 917 28 74
Fax: + 41 22 917 00 41
E-mail: christopher.prins@unece.org

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ECONOMIC COMMISSION FOR EUROPE
TIMBER COMMITTEE
Fifty-fourth session

FOOD AND AGRICULTURE ORGANIZATION
EUROPEAN FORESTRY COMMISSION
Twenty-eighth session

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EUROPEAN FORESTRY COMMISSION AND TIMBER COMMITTEE MARKET STATEMENT

The official text below was adopted at the joint session of the UN/ECE Timber Committee and the FAO European Forestry Commission on 27 September 1996.

Forest products markets in 1996 and 1997

Overview

In autumn 1996, European markets for roundwood and forest products are marked, with few exceptions, by lower demand, fierce competition between products and suppliers and with non forest products and continuing low prices. In North America, however, the strength of the housing market has contributed to raising consumption levels in satisfactory market conditions. The forest products sector of the countries in transition of eastern Europe is now recovering from the deep recession of the early 1990s, but differences between national situations are becoming ever more marked. Production in Russia continues to fall, but more slowly than in previous years.

For 1997, a weak recovery in demand for forest products is expected for Europe, and a continuation of present market conditions for North America and the countries in transition.

For western Europe, economic growth in 1996 has been sluggish and in the light of results for the first half, it may prove to be difficult to achieve even the 1 1/2% rate for the year foreseen by many forecasters. There has been some improvement in Germany and the United Kingdom, the former a recovery after a severe winter; however GDP has fallen for at least one quarter in France and Italy. The slight loosening of monetary policy does not offset the restrictive fiscal measures adopted in many countries. Unemployment remains a major social and economic problem. Construction activity, in total, is expected (by EUROCONSTRUCT) to fall by 0.3% in 1996 (-3.1% for new residential investment, and +1,7% for repairs and maintenance), with a slight recovery in the total in 1997, but with a further drop of 2.1% in new residential construction.

In the United States on the other hand, the economy is fairly strong, thanks in part to export growth and strong private consumption. Preliminary estimates for the third quarter indicate that the expansion is still under way, and growth of 2.4 to 3.0% for the year as a whole seems possible. New housing construction remained at a relatively high rate through much of 1996: if mortgage rates are not raised, housing starts may total 1.45 million in 1996, and 1.4 million if rates are raised.

In general, most east European transition economies showed satisfactory results in 1996, with rising domestic demand and falling inflation, and budget deficits coming under control. There is however a growing gap in growth rates between the "advanced reformers" and other countries.

In Russia on the other hand, output has continued to fall, although at a slower rate than before and the considerable uncertainty about the outlook is hampering necessary investment. Inflation however has fallen to a record low. There are some signs of improvement in other CIS countries.

Many European forest products markets, and the global pulp market, were affected by destocking, and in some cases, excess capacity, which led, in conditions of weak demand, to downward pressures on prices. This in turn influenced roundwood prices, so that in some parts of Europe, forest owners were not able to cover their costs for some silvicultural operations, notably first thinnings.

In North America, on the other hand, demand was strong, under the influence of the high level of housing starts, and prices rose.

The trend in many market sectors was for strong competition, on grounds of price, performance and public perceptions. There was continuing substitution between forest products, and of forest products by non forest products. Examples include competition between sawnwood and MDF, between plywood and OSB, between temperate and tropical hardwoods and between sawnwood and PVC or aluminium.

There continued to be strong and complex interaction between the pulp and sawmill sectors, notably through the markets for chips and residues. Many sawmills, notably in Nordic countries and North America, which had expanded production in early 1995, partly on the basis of higher income from sales of residues saw their financial position worsen significantly as prices for residues fell.

Softwoods

Europe's sawn softwood consumption started to fall in the second half of 1995 and continued to fall into 1996 due chiefly to decreased construction. Sawn softwood consumption in 1996 is forecast to continue to decline since its recent peak in 1994, to 69.6 million m3 and to stay near that level in 1997. Part of the decline may be due to substitution by both non-wood building materials and composite wood products. Similarly, production is forecast to fall by 4.6% in 1996 from its record 1995 level of 74.7 million m3. Production has been greater than consumption since European imports fell below export levels for the first time in 1995.

In 1996 European sawnwood exports are forecast to fall by 2.9% to 30.0 million m3 from their record 1995 level of 30.9 million m3. Sweden however predicts record exports in 1996, partly due to non-European markets like Japan. Other European countries have also successfully entered the Japanese market. European exports are forecast to increase to 30.1 million m3 for 1997. Imports are forecast to drop by 0.7% in 1996, the second year after 1994's record level of 32.4 million m3.

European softwood prices have lost 25% over the past year although prices appeared to have stabilized somewhat in mid 1996. Stock changes have played a major role: stock building by both producers and consumers accelerated price increases in the first half of 1995, while destocking accelerated price declines later and into 1996.

The North American housing strength in 1996 led to an increase in sawn softwood consumption. Consumption is forecast to increase slightly in 1996, to 126.0 million m3, still below 1994's recent high. The new "Softwood Lumber Agreement between the Government of the United States of America and the Government of Canada," limits duty-free Canadian sawnwood exports to the United States (unless a specified price level is reached) at 34.7 million m3. The consequences of this measure for markets and prices are not yet clear, although Canada's sawnwood exports, of which 73% went to the United States in 1995, are forecast to decrease by 3.2% in 1997. Despite the potential downturn in exports to the United States, Canadian exports to Europe were not forecast to increase significantly.

Apparent consumption of sawn softwood is forecast to fall heavily in the Russian Federation in 1996, by 10.8%, to 14.3 million m3, with the hope to rebound by the same percentage in 1997. Production, which has fallen significantly since 1992, is likewise forecast to bottom out in 1996 but to be lower than in 1995 and then to increase by 9.0% in 1997. Exports are also forecast to continue falling in 1996, down to a level of 4.5 million m3. Exports in 1996 are being negatively affected by low European prices, rising production costs and escalating transportation costs.

The drop in Russian exports to Europe has been partly made up by the Baltic Countries, all three of which forecast production increases in 1996, attributable to a combination of rising product quality and low costs for raw materials, transportation and labour. Their total sawnwood exports are forecast to reach 1.9 million m3 in 1996. A levelling off of production and exports is forecast for 1997.

Softwood logs follow the same trends as sawnwood in Europe and the Russian Federation with decreases forecast for 1996 in consumption, production and trade. However, Lithuania forecast heavier harvests in 1996 due to sanitation cutting to control bark beetles. United States production of logs is forecast to increase in 1996 after a long period of decline due to reduction in harvests in the Pacific Northwest for environmental reasons. North American log trade is dominated by United States exports which are forecast to continue to decline in 1996 by 10.4%, to 10.7 million m3: a lesser decline is forecast for 1997 as domestic consumption moves slightly upward.

Hardwoods

Europe's sawn hardwood consumption is forecast to continue to decline to 17.2 million m3 (2.5%) in 1996, and to stay steady in 1997. Hardwood consumption is under pressure from substitution of composite wood and non-wood products, changes in fashion, and declines in construction. Promotion of alternative (lesser-known or lesser-used) species, lower grades, character-marked and value-added products could promote hardwood use in Europe. Production is forecast similarly to decline, by 2.2%, to 13.4 million m3 and to stay at that level in 1997.

In 1996, European sawnwood imports, which are very price sensitive, are forecast to fall, by 2.5% from 1995, to 6.7 million m3, as tropical sawnwood imports continue to their steady decline to Europe, by 1.4% to 2.4 million m3, and temperate imports fall 3.1% to 4.3 million m3. In 1996, exports are forecast to drop by 1%, to 2.9 million m3. Imports, both temperate and tropical, are forecast to move up slightly in 1997 and exports are forecast to move up more, by 4.9%.

While tropical timbers decline in European markets, they still dominate Asian markets, increasingly as value-added products like plywood. The desirability of monitoring trade in further processed products such as furniture, in order to have a comprehensive view of the situation, was mentioned.

In North America sawn hardwood consumption and production are forecast to rise 3.0% and 2.8% respectively in 1996 and to stay steady in 1997. United States exports are forecast to fall 3.8%, to a level of 2.4 million m3 in 1996 and 1997.

European hardwood log consumption, production and exports show no significant changes in 1996 or 1997. However, imports of tropical logs continue to drop, by 5.8% in 1996 and by 2.6% in 1997. Tropical timber producing countries are increasing value-added exports, but in the ECE region, only Portugal cited significant substitution of tropical sawnwood for tropical logs. Temperate and boreal logs are partially substituting for tropical logs in Europe.

In the United States consumption and production of hardwood logs are forecast to continue to climb steadily, reaching 69.6 and 70.5 million m3 respectively in 1996 and rising less than 1% in 1997. Exports drop to 1.1 million m3 for 1996 and 1997, or by 9.3% from 1995, according to forecasts.

Wood-based panels

In Europe apparent consumption of wood-based panels (particle board, plywood and fibreboard) is expected to drop in 1996 by 1.5% to 40.9 million m3 following the record high of 1995, which nevertheless only partially reflected real consumption as stocks built up to high levels. The markets in 1996 are very competitive with prices under pressure. A slight recovery is expected in 1997 of 1.3% to nearly 41.5 million m3.

In North America the wood-based panels sector has been steadily increasing since 1992 as a consequence of continued demand from the construction sector. Further expansions in consumption are forecast for 1996 and 1997 of 2.5% and 0.7%, respectively, to reach 48.2 million m3.

Consumption of particle board, the leading panel in Europe is also expected to drop by 1.2% in 1996 and slightly recover in 1997. Stocks increased during the second half of 1995 by one-third on average, due to depressed activity in the construction and furniture sectors, and failure to adapt production to real demand.

Consumption of plywood in Europe is also forecast to drop in 1996 by 5.4% to 5.6 million m3, the 1.7% recovery expected for 1997 will maintain consumption below the 1995 level of 5.9 million m3.

Medium Density Fibreboard (MDF) has continued to be the dynamic element in the expansion of the fibreboard industry. European production in 1995 was 3.8 million m3, nearly a 10% increase from 1994, and 49% of fibreboard production. In 1995 and early 1996 prices have been under pressure, as a sign of temporary overcapacity due to the rapid growth of the industry at a moment of slowdown of activity. Japan and other countries in the Far East have eased this situation by continuing to absorb significant volumes. The Committee's forecast for total fibreboard apparent consumption is an increase of 1.6% and 3.6% in the two years to 1997.

United States production of plywood which was in 1995, 12.5% below the peak of 1987 is expected to continue to drop, by 2% in 1996, and a further 4.8% in 1997, thus continuing to lose market share to oriented strand board (OSB). OSB now represents 31% of total United States production of structural panels and 38% of consumption. Canadian production of OSB continues to increase significantly and is forecast to reach 4.5 million m3 in 1996, or + 33% as 4 new plants come on stream. 88% of this volume is exported, mainly to the United States.

Particle board (excluding OSB) consumption in North America is forecast to increase by 2.9% in 1996 to 10.6 million m3. Canadian exports to the United States will drop by 10.9% as a consequence of increased demand of its domestic furniture industry.

Following the important increases in production and consumption of fibreboard as a whole in North America between 1994 and 1995, further expansions of 3.3% and 1.3% are forecast for 1996 and 1997, respectively, as a consequence of new MDF capacity coming on stream.

Roundwood (pulpwood and fuelwood)

The downturn in the world pulp markets, which started in late 1995, continues to affect market conditions for pulpwood. Weak final demand, combined with excess capacity and high stocks, forced prices of market pulp sharply down, despite production cutbacks in many countries. It is uncertain, in autumn 1996, whether stronger demand and lower stock levels are now causing market pulp prices to recover, or at least to fall no further. Waste paper prices are also very low.

As a consequence of reduced pulp production, European pulpwood demand in 1996 is weak: apparent consumption of pulpwood (including round and split and residues and chips) in Europe is expected to be 171 million m3, 15 million m3 (8.1%) lower than in 1995, despite relatively satisfactory demand from the particle board and MDF industries. In both the largest pulpwood consumers, Finland and Sweden, consumption in 1996 is expected to fall by nearly 15%, for a total drop of 11.6 million m3 in these two countries alone (which between them account for nearly half Europe's pulpwood consumption). European pulpwood production however, is expected to drop rather less steeply than consumption, by nearly 8 million m3 (4.8%). In line with the expected reduction in consumption, imports are forecast to drop sharply, by nearly 20% (7 million m3). Finland's pulpwood imports are expected to drop by 2 million m3, to 7.3 million m3 and Sweden's by 2.5 million m3, to 5.0 million m3. The decreases in imports are expected to be less marked for residues and chips than for roundwood. European pulpwood exporters, however expect substantially unchanged exports, at just over 15 million m3.

The situation is expected to change for the better in 1997, with apparent consumption of pulpwood rising by over 6 million m3 (3.6%), and production by 5 million m3 (3.2%) although it would still be below the level of 1995.

In the United States, however, both consumption and production of pulpwood are forecast to rise slightly (by around 0.5%) in both 1996 and 1997. Exports of pulpwood are also forecast to rise steadily in both years.

Overall, European removals are expected to fall quite sharply in 1996, by a total of 13 million m3, to 348 million m3. Removals of both logs and pulpwood are forecast to fall by over 5%. The largest falls in total removals are in Finland (5.6 million m3 or 11.4%) and Sweden (4.5 million m3 or 7.5%). However, European removals are expected to recover in 1997, by 5 million m3, with pulpwood removals growing rather faster than removals of logs.