Winners or losers?
These last few years have been somewhat particular as the demand for sawn wood products has reached new heights and the price of the raw material has followed thereafter. We are now in a situation where there is a shortage of raw materials from the forest and the question is, who are the winners and who are the losers in this situation? Vida turned to Johan Freij to shine some light on the matter.
Johan has extensive experience in the forestry industry. Today, he is an independent adviser who works at the intersection between forestry, economics and industry. Prior to this he spent more than 20 years at Danske Bank where he was responsible for forestry matters.
The prices of raw materials have risen over a long period, what is your analysis of this?
At the moment, forest owners are probably seeing the highest “timber values” in fixed monetary terms since the 1950s. This is a unique situation. For quite a long period of time, I thought we were pretty accurate with our analyses of how the situation would develop, but after Covid and Russia’s large-scale invasion of Ukraine, everything has gone much quicker than I could ever have believed. Long-range trends suddenly occurred over the course of a few years. We had expected there to be shortage of energy, timber and fibre in the future, as well as escalating requirements from authorities and interest groups. All this became reality far, far faster though. The bark beetle infestations in Canada and central Europe combined with the restricted supplies from Russia created a severe timber shortage. It went from there being a surplus of pulpwood, for example, to a serious shortfall in just a year or so.
When Covid and the home-building hysteria broke out, prices of wood products soared through the roof. The sawmills earned a lot of money, which irritated the forest owners who they felt did not get a share of the profits being made by the forestry industry. I understood their reaction but thought that the forest owners should take it a bit easy as the sawmills invested in their facilities and the forest owners would be paid well in the long run, which really has been the case now.
Have the price increases in raw materials helped to stimulate supply?
I don’t get the sense that the higher prices have acted as much of a catalyst to felling over the past year. Prices have been high for a long time and many owners have already done their felling. But a lot of people have also been forced to fell due to bark beetle damage and don’t have any more product to sell.
One concerning reason for the lack of felling is the uncertainty about whether felling is permitted or not. People don’t know which restrictions will emerge when they submit a felling application, and they’re afraid it will be a long, drawn-out process. I nevertheless believe that we have had a good system that allows freedom with responsibility, which most people have managed impeccably, and forest owners have taken great responsibility for voluntary allocations in consideration of culture and the environment. The system of voluntary allocations, where the forest owner does not demand any public compensation, is unique to Sweden. It’s tragic that there are forces that want to destroy this. Everybody loses out.
During this period of price increases, those who have waited before felling have been winners, but we know from history that the prices will vary going forward. I don’t see there being a dramatic drop in prices any time soon, but there is also a limit to how much the sawmills can pay, and using limitations in production as a solution must be on the cards instead.
There’s no doubt that forest commodities will remain attractive in the future. But I wouldn’t dare to guess what the price levels will be.
How do you think the saw/pulp mill industry will develop in Sweden?
Many sawmills have expanded their capacity, and this has led to an increased need for felling of about 7 million cubic metres in Sweden. This amount of raw materials is absolutely not available. So I see several different scenarios going forward. It’s not impossible that the least efficient sawmills could be shut down and some companies may go bankrupt. There will probably be more consolidation, and companies will review their organisational structure.
The winners will be those who are most skilled at maximising what they get out of the tree trunks and making the most of the full value of the logs, both in the forest and in the sawmills.
Who are the winners in the market as things look now?
At the moment it’s the forest owners and the pulp mills.
Will it still be profitable to be a forest owner in the future?
It will definitely be profitable, but irrespective of requirements from the EU and other government authorities, we are moving towards a different kind of forestry. Climate change will make forestry more intensive and complex, quite simply more difficult and more expensive, but also more fun for those of us who like forests.
There’s no doubt that forest commodities will remain attractive in the future.