As the year has progressed, the European plywood sector has become increasingly depressed. That’s the consensus among a number of leading importers and distributors. In the words of one company, the market faced a ‘perfect storm of negative factors’.
There has been a steady draining away of end-user and consumer confidence, buying, as a result, has become increasingly piecemeal, with forward ordering evaporating and prices have fallen across the board, in the case of certain products up to 40%.
Many European buyers are heavily stocked and bad debt is reported on the rise. Reflecting dwindling demand, supply is plentiful and orders available on relatively short lead times.
However, with manufacturers now trimming output in the face of deteriorating market conditions and plant closures and production line mothballing anticipated, importer nervousness about prepaying for orders has increased.
“We expected some market adjustment after having a robust three years of business from 2016 to 2018, with global plywood output hitting a record 161 million cu.m in 2017 and Chinese production reaching 117 million cu.m,” said one continental European importer. “But we didn’t think it would be as difficult as this.
EU domestic production of around 5 million cu.m is taken into account, the total volume of plywood supplied to the EU market in 2018 increased 4.6% to 9.50 million cu.m, that is a level which exceeds the previous high-water mark in 2007 before the global financial crises.
This begs the question of exactly where the large new plywood supplies arriving in the EU market in the last few years (mainly from Russia, China, Belarus, and Ukraine) are able to find an outlet - given that construction and furniture sector activity in the EU are still down, respectively, around 6% and 14% on the 2007 level.
There's also been much well-publicised substitution of plywood by other products, such as OSB, since then. Part of the answer to that question appears to be that a significant proportion of the most recent surge in supply has gone into stock which can't now find a buyer.
Plywood companies themselves attribute market difficulties to several factors, the most significant being declining confidence in the global economy generally.
This is the result itself of several developments, including slowing of Chinese economic output, US-China trade tensions and uncertainty surrounding Brexit and its potential impact on European economic stability.
“We are seeing the effects of international market caution in European manufacturing and exports, notably in Germany, which is, of course, a bellwether for the wider European market,” said an importer. “Latest figures show German industrial output falling 1.5% in June, taking the downturn to 1.8% for the second quarter, with predictions of a further 1.5% decline in July. According to some reports this leaves the country on the brink of recession.”
These comments are in line with reports from market analysts Bloomberg, which reports an 8% fall in German exports in the year to June, the worst performance for four years. It describes Germany as being caught in the middle of the trade dispute between the US and China, its two main trade partners, with the former hiking trade tariffs and the latter ‘responding by allowing its currency to tumble to its lowest value in more than a decade’.
Leading German manufacturers, including Daimler and BASF, have consequently cut their outlooks and Bloomberg predicts German overall growth this year of just 0.5%.
The manufacturing contagion is also reported to be spreading. French industrial production in June fell 2.3%, the most since early 2018, and Netherlands manufacturing has registered its fourth consecutive annual decline.
With the added burden of Brexit nerves and the related fall in the value of the pound pushing up its import costs, UK manufacturing in May reported its worst downturn for 2.5 years, with car and textile production suffering particularly badly.
The one bright spot, say plywood importers, has been European construction, which, to date, has been relatively resilient. “Historically, there’s a delayed reaction in construction to wider economic stagnation and slowdown,” said one continental-based company. “It is among the last sectors both to enter and emerge from a downturn.”
This is borne out by latest analysis from Euroconstruct. In June it stated that in its coverage area, comprising 19 European countries, construction output in 2018 grew by 3.1%, slightly better than expected, to reach €1,600 billion.
This took seven countries above pre-economic crisis levels of building activity, while six are now at 2007 levels, and the remaining six, including three of the big five construction markets, still performing less well than 12 years ago.
“We are still experiencing good demand from the German construction sector and particularly the Netherlands,” said another plywood importer. “And companies still report solid order books.”
Looking ahead, however, Euroconstruct says that 2018 construction performance will be viewed as a peak for a number of years, with European output predicted to grow by just 2% in 2019 and less than 1.5% for the next two years. Infrastructure sector activity will be strongest, with 3% growth forecast this year, but general building, including housing is expected to increase just 1%.
The best performing individual construction markets from 2019 to 2021 are expected to be in Eastern Europe, with growth rates up to 6%, followed by the Netherlands, Portugal and Spain, up 4%. But construction in France and Germany is forecast to stagnate, while Italy and UK are expected to grow at under 2%.
Latest figures from the UK Construction Products Association suggest that UK growth may actually have to be downgraded further, once more due to the general market unpredictability and caution caused by uncertainty surrounding Brexit. It had forecast UK construction to grow 2% in 2019, but has now cut that to just 0.3%. Its latest analysis in August stated that, with the added problem of unseasonably bad weather in June, UK building actually contracted 1.3% in the second quarter.
That said, a leading UK importer maintained in early August that demand, while lower, was not ‘disastrous’. “Business has been pretty steady, albeit not very profitable,” they said.
While construction has to date offered some relief to the plywood sector, the same can’t be said of packaging.
“Packaging manufacturers are definitely being hit by the downturn in industrial manufacturing in lead European economies,” said an importer. “Particularly hard hit are those producers supplying the wider engineering, machine tools and automotive sectors, which have seen export demand tightening.”
One plywood business said that the Brexit issue was also affecting packaging sector confidence. “The prospect of all solid wood packaging for goods exported from the rest of the EU to the UK having to have ISPM 15 (phytosanitary) certification post-Brexit is an issue for manufacturers,” said one company. “Plywood, as a processed wood packaging material, may not be directly affected, but it is causing uncertainty in the market generally.”