Weyerhauser's Lumin board, ready for dispatch.

Buy-sell-hold 2/5

Published:  03 June, 2011

‘Trading margins’ is another hot potato. “Let’s assume, as an academic exercise, that merchants historically tried to achieve a 30% gross margin. Now that timber prices have gone up by 25-30%, some merchants are now selling at lower margins because they feel they can still survive and cover their costs at this level. The gross profit – the difference between buying and selling – is still higher than it was 12 months ago because the wood is worth more than it was a year ago.”

This is a very risky route to take but, says Mr Fryer, “it is indicative of just how weak the market is.

“This high-risk strategy is like seeing everyone heading for the precipice and hoping to be the one to cling on to the edge for the longest,” he says. “This is the stage the industry is at; hoping that some of your competitors will fall over the cliff before you do. There is no growth in the market. The only way you will take it is by winning market share. You can only win market share not by cutting your prices, but by killing off your competitors.”

The best way to do this is by running your business as efficiently as possible. “Have a strong balance sheet and the financial wherewithal to sustain a difficult spell,” he advises.

T Brewer analyses its competitors on a regular basis. “Many do not have the potential to weather a long-term storm. It’s going to be a challenging year.”

Simon Pearson, head of timber and forest products at Travis Perkins, says: “Margin for timber and timber-related products is under pressure this year, as it was last year.

“Competition for private sector projects has increased as a direct result of reduced consumer confidence and cuts in public sector spending which has meant certain projects have been pulled.

“Regardless of the economic climate, Travis Perkins will continue to improve the depth of the range of timber and timber-related products at all branches and the availability, in project quantities, of every item in that range,” Mr Pearson states.

“The issue to consider is that while margins are squeezed, it’s imperative that merchants still provide their customers with the best available product. The prices and resulting margins achieved for timber and timber-related products should reflect the quality of the end product.”

Travis Perkins, he adds, will con-tinue to maintain its commitment to only offering timber products that have been sourced responsibly from sustainable sources. “We will also con-tinue to promote the related advantages timber provides in comparison to other building materials with high embedded carbon levels in meeting all government ecology related legislation,” says Mr Pearson.

SCA Timber Supply is the UK wood products distribution business of the multi-national SCA Group, or Svenska Cellulosa Aktiebolaget, to give its Swedish name. Its timber products mainly serve the RMI sector.

Is there pain through the supply chain? Stephen King, the company’s sales director, says that for the last three years softwood supply has been unusually heavily driven by supply-side changes. The market in 2010 echoed 2008, and 2011 may well resemble 2009.

“In 2008, the supply/demand balance went the wrong way, accompanied by a financial crisis. It was a time when companies down the chain started to de-stock for fear of prices dropping. Order book activity dried up, coinciding with the normal winter cycle.

“2009 began badly. By March, due to the production cut-backs in Scandinavia, in the space of three working weeks we saw customers’ attitudes change. Those relying on getting their orders filled at short notice realised that they couldn’t.

“That led to an upward price pressure on softwood. ‘Panic buying’ is perhaps too strong a term, but it certainly felt like that,” he recollects.

“In Q4 2010, we saw a slowdown – evident by the way our customers were buying very short and often. This has continued into Q1 2011.”

Mr King believes the market has got used to softwood prices being driven by the perception of availability. “Softwood itself isn’t in short supply, though the better specifications are sometimes difficult to find,” he explains.

“Looking ahead, the UK’s Renewable Heat Incentive and other European programmes could create a higher demand for wood biomass. That may affect availability in lower grades and create pressure higher up the scale.”

He believes the echo of 2009 could permeate Q2 of this year. “We are monitoring views here and in at our Swedish sawmills. Recent events in north Africa have not had the anticipated effect on international supply, and big timber markets like Egypt are slowly returning to normal. Inventories, we are told, are not bad, but sales globally – with the exception of the UK and a few other markets – have been ‘reasonable’. The international outlook appears to be slightly better than expected,” Mr King says.

“I believe that post-Easter we’ll see a slightly better market than last year, and that any activity we see will be sustained. Yet we live in ‘interesting times’, and it pays to remember that.”

Dave McElroy, Norbord’s deputy managing director Europe, says that timber products of all descriptions are on an upward price curve. This is akin to the market’s experience of 2007, where there were massive cost escalations.

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