International wood markets volatility

Wednesday 28 Apr 2021

Over the last six months we have witnessed one of the most volatile periods in forest product markets we've seen in recent times - Log export prices started increasing from the second half of 2020, as did freight rates. This seemed contradictory given the world suffered a major shock to its economic system, not unlike the financial crisis of 2009 to which it is often compared. The response to the Coronavirus pandemic interrupted production, forced businesses to close and workers were laid off.

Once the threat was established, China quickly took action to control the spread of the virus, then pressured industry to start up their factories. At the same time, in order to support the recovery, the government introduced a number of measures such as supporting loans to smaller businesses, lower interest rates, reduced taxes, reduced utility prices and additional employment support. Industrial production quickly recovered to pre pandemic levels and by February 2021 was already ahead by 9.2%.

There was a surge in exports, supported by soaring demand for Coronavirus related medical equipment. Fixed asset investment also bounced back, surpassing pre pandemic levels. As a result, the production and investment side of the economy did well. Households, however, were more cautious, preferring to save rather than spend. So, despite household incomes increasing in 2020, spending declined.

The demand for wood was also swept up in the recovery. While total residential construction started 2020 on a weak note, it picked up in the second half with building starts running higher than in the previous year. Several other indicators also pointed to a higher demand for wood – concrete production was up 6.3%, crude steel up 7.7% and manufactured steel products up 12.8%. This reflected the boom in all types of construction and with it came higher demand for logs, sawn timber, and plywood.

The question remains how this will play out in forest product markets. Fueled by the Chinese government’s stimulus programmes, China’s GDP is expected to expand by 8.2% in 2021. In recent months however, the government has started to unwind these programmes as the recovery gained momentum. GDP growth is now forecast to slow below 6% in 2022 and 2023, which is expected to moderate the demand for construction materials and hence logs and wood products.

Source: Andres Katz, Alphametrik



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