Last year saw the third highest percentage rise (46.2%) in UK timber prices recorded during the last 35 years, leading to understandable nervousness over the short term direction the markets will take. But commodity price fluctuations are not new and market volatility will continue – the reality is that the price of timber will be entirely influenced by supply and demand and the efficiencies or otherwise of the production chain. The domestic market is complicated by the degree to which the UK is reliant on imports. In 2018 and early 2019, this was compounded by the uncertainty around future UK trade relationships with most other exporting countries.

In forecasting commodities it is important to look at underlying fundamentals, not past pricing cycles or short term risks. There are a number of factors influencing this, but the latent demand for wood is undoubtedly key. Both global and UK timber supply should be considered relatively finite as replenishing global timber resources is unlikely to keep pace with fellings, and indeed pressure to limit climate change will provide strong friction against expanding the global harvest further into the natural forest resource. Domestic forward supply is shown below, and the ability to upscale domestic production is limited, so from a supply standpoint timber deliveries are relatively unresponsive to increasing demand and, therefore, open to demand led price inflation.

Latent demand may fluctuate, but we consider that over the medium term it will not diminish. Construction demand is underpinned by house building targets in the UK, and this is replicated in China and the USA, as well as the potential from developing economies. Biomass currently offers strong demand for small diameter timber in the UK and elsewhere. This is not a sustainable use of wood fibre and, although it is clearly impacting on markets, there is the prospect of price or regulatory intervention impacting the further expansion of this sector. The key to timber prices over the longer term is likely to come from construction demand and in a buoyant economy there is no reason for prices to fall. If they do, as seen in past cycles they will recover again, and we do not believe the market has reached a ceiling price.

TIMBER MARKETS

Price

According to the Coniferous Standing Sales Price Index for Great Britain, the average value of timber increased significantly (46.2%) during the year to September 2018. This follows a 21.4% increase in the previous harvest year. This 2018 price rise is substantial but not unique and the graph below shows this is the third increase of this magnitude in annual growth in just over a decade; other significant rises occurred in 2010 (48.7%) and 2007 (50.2%). Since 2000 timber prices have increased by 235% compared with -26% in the 15 years preceding 2015.

Demand

It is well reported that the UK is very reliant on timber imports, but recent inward investment in the UK wood processing industry and pricing trends highlight the buoyant and world class nature of this sector. Current conditions favour UK producers but our potential harvest is limited by availability of the resource and the practicality of harvesting more timber than we are currently producing. Current felling rates can be considered as sustainable for the next 30 plus years, which means that, subject to external shocks disrupting demand, there is little on the horizon to suggest a change to current pricing structures.

Although woodfuel has provided a new market over the last decade, it is clear that sawn wood still remains the most important product type. Production of quality sawn timber remains the key determinant of overall price, but there is a degree of dilution occurring, and the differentiation of product types is not as clear as it used to be.

Prices for all product categories rose strongly in 2018. While it’s easy to point to a weak pound making imports uncompetitive, the reality is much of that benefit had already been priced in during 2017, and 2018 was more about demand from domestic processors and a degree of competition to secure supply. This was coupled with improving demand for product from a hungry construction sector. There is now some risk that imports could pick-up to push back on some of the current domestic demand, but the uncertainty prevailing over future trading arrangements is likely to influence this.

Supply

UK softwood supply is forecast by the Forestry Commission, shown opposite. Based on current projections the data on the chart averages about 15 million m3 against a current harvest of 11.4 million m3, meaning we are currently running at just below maximum capacity. This is for a number of reasons, including industry capacity and the ability to work in upland locations in winter. Even if we could capture the extra 3 million m3 per annum, this only represents 5% of current UK wood usage so it would have limited potential to adversely affect timber prices. Although there is a risk that imports win back market share post Brexit, factors such as tighter bio-security controls on imported wood or increasing demand in the country of origin may limit this.

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