Buy-sell-hold

Published:  03 June, 2011

Is timber the new oil? Will this commodity product find itself top of the building materials list this year? Merchants and distributors give Lisa Arcangeli their views about where the market is heading.

Survival in a tough market means always having full stock on the ground, says John Cavanagh, managing director of Manchester-headquartered independent timber merchant, J Cavanagh.

Being fully stocked is an expensive operation, he admits. “Last year, we were able to look ahead and purchase ahead and with a bit of luck and good management, we did well.

“I have always known that this is a good market to be in and, for those who do it right, it can also be a profitable one. The most important thing is that companies supplying the end-user need to be strong on selling,” he says.

“The only people gaining in this game are the property developers. They are making all the money while merchants seem to be content with selling the products to them for single-figure margins,” Mr Cavanagh comments. In today’s climate, that is not good enough.

In the current economic see-saw, is it realistic for timber merchants to put their prices up? “They don’t need to raise their prices,” he says. “They just need to stop selling at single figure percentages.

“All merchants are doing by selling things at silly margins is to bring prices down. As an industry, we should all be looking to put our prices up. And, if we were all to seek to make higher margins on everything we sell, where would the developers and the low price buyers go?”

There is still a creeping fear within the industry of losing market share. “Market share is of no interest to me,” Mr Cavanagh says. “Profit is.”

Before getting on the bandwagon and lobbying for green issues or cutting carbon emissions, and the associated costs involved, “merchants should look in-house and at ways of making their industry more profitable which would then give us the money to invest in these issues fully”, he states.

A massive increase in demand could make timber the new oil, pushing up prices 300% over the next decade, according to an article in The Financial Times. “Timber prices will soar because production has been cut back so much that most sawmills these days are owned by multi-nationals,” says Keith Fryer, director of T Brewer, independent timber importers, sawmillers and timber merchants, covering London and the South East. “The days of the Ma and Pa-owned mills are long gone.”

Big companies are looking for annual returns for their shareholders. That is why they would rather mothball or close down mills rather than run them at a loss. There is very little spare capacity in the system. “If the demand were to increase – even very modestly – the effect on price would be significant,” he says.

Timber certification is another crippling factor. The UK has the tightest legislation for the proof of legality and sustainability for timber in the world. “If you import timber into North America or into Europe you have to prove your timber is legal and sustainable. That reduces the pool of wood that is available for the merchant to draw from. That, too, will drive prices up,” he states.

“Then, there are biofuels. Timber is seen as great source of energy. The big issue for us as timber sellers is the burning of wood waste for electricity,” Mr Fryer comments.

“There are definite tax subsidies for energy companies to buy wood. A chipboard manufacturer paying £100 for a unit of wood will find that an energy company can pay £110 to the distributor for that same wood and can offer a five or even a 10-year contract to that company. There is no way that the chipboard company could do that. This forces them out of the market for raw materials from which to make their products.”

If UK timber merchants measured how much volume of wood they sold in 2010 compared to 2009, they would probably find that their volumes had declined, Mr Fryer believes. But, because the price of timber climbed in 2010, their turnover has increased. “Inflation has masked the underlying trend,” he says.

In 2011, he anticipates that there will not be a big increase in demand. “Social housing is not likely to increase, nor is domestic newbuild.

So, we’re looking at the maintenance, repair and improvement sector,” he relates.

Instead of building a new school or hospital wing, the existing stock will have to be repaired and maintained at some point. “This gives merchants an advantage and will help us throughout this year,” he says.

It’s not only merchants who are suffering. Timber distributors have had a rough time, too. For the makers of OSB, MDF or chipboard, the cost of energy and oil-based commodities have soared. Distributors are losing money fast, so they will naturally pounce on any opportunity to raise their prices. This scenario also applies to sawmillers.

Across the pond, the average house starts since 1959 were always at a fairly steady 1.2 million a year. In 2010, this figure slumped to 600 000. “If there is even a slight upturn from the US, the demand for timber will be huge,” Mr Fryer observes.

“There is no reason for timber prices to drop. What is keeping prices down is the appalling lack of demand,” he says.

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