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Report
from the UK
European housing market shows growing signs for
concern
The optimist¡¯s view of economic conditions in the EU can
be summed up in a few sentences. Banks in the EU have
avoided America's subprime follies and are in better shape
than their US counterparts. Average euro-area
unemployment stands at 7.1%, the lowest level in almost
20 years. The euro is resurgent and there is no sign of a
recession. Manufacturers in some European countries ¨C
especially Germany ¨C have responded to the high euro by
increasing efficiency and, as a result, have managed to
maintain healthy levels of exports. The European
Commission plans to trim its economic forecasts later this
month, but euro-area growth is likely to stay close to 2%
this year.
Unfortunately, these positive sentiments are beginning to
be overshadowed by more negative reports. There are
increasing concerns over inflation, which has picked up to
3.5% in the euro-zone, the highest in the euro's nine-year
existence. Economic problems in the euro-zone¡¯s two
biggest export markets - recession in the US and
slowdown in Britain - are starting to bite. Although the
impact of the strong euro has been moderate so far, it is a
delusion to suppose that euro-area exports can continue to
barrel on regardless of their cost.
Meanwhile the housing market is becoming more of a
worry. While Europe might have avoided the American
subprime mess, in several countries house prices have
been even bubblier than in America. They are already
falling in Spain and Ireland and are starting to do so in
Britain. This will have a strong impact on the construction
sector and on the wider economies of countries heavily
dependent on this sector (which accounts for 15% or more
of Spanish and Irish GDP, for example).
Spain has been particularly vulnerable to problems in the
housing market. An expected soft landing has suddenly
become more hard and painful. Underlying economic
weaknesses that were hidden by the construction boom are
being exposed, among them low productivity growth. The
IMF estimates that last year's growth of 3.8% will fall to
1.8% this year and get worse in 2009. These would be the
slowest growth levels in Spain since 1993. House prices
are predicted to fall by up to 15% over three years.
Completed house sales in Spain dropped by 27% in
January compared with a year earlier. The most recent
data show building permits for housing falling even more
sharply. The Spanish government recently announced a
EUR22 billion (USD35 billion) fiscal-stimulus package.
House prices have yet to plunge in the UK, but the signs
look ominous. Some of Britain's biggest house builders
say that over the past six weeks deposits for homes have
fallen by 50% compared with a year ago. A big problem is
that banks have become very conservative in their lending
policies, particularly on newly built homes. Banks now
demand down payments of as much as 40% on newly built
flats, freezing many out of the market and deterring firsttime
buyers in particular. Realization has at last dawned in
the UK construction sector that a serious bubble has been
created in the buy-to-let market as too many apartments
have been constructed with an eye to selling to investors
rather than to home-buyers. Many of the UK¡¯s largest
builders are now stuck with huge inventories of unsold
houses. They are also stuck with significant land banks, in
some cases the equivalent of ten years-worth of building.
These were accumulated during the boom years but are
now a depreciating asset. Market observers warn that UK
house building may fall by at least 50% unless house
prices and credit markets recover faster than most expect.
Germany is another country where the construction sector
is struggling, although in this case it is hardly news.
German construction has been in the doldrums for a
decade. German house prices declined 4.7% in the year to
the end March 2008. Planning permits for new
construction were down 4.6% in January 2008 compared
to the same month in 2007. A poll of member companies
of the Central Association of the German building trade
held in March 2008 indicated that demand for building
services remains static at low levels.
Cautious operators bring sluggishness to hardwood market
With the economy so uncertain, reports from across the
European continent suggest that hardwood buying is
almost universally slow. Spanish importers are struggling
with high stocks of sapele and are not interested in the
forward market. Portugal is slow, but some reports suggest
it is holding up better than Spain. The Italian market is
very slow, with wood products manufacturers struggling
against the high euro and intense competition from East
Asian producers in export markets. Ayous stocks in the
country are reported to be quite high. The Greek market is
cautious as construction activity is reckoned to have
slowed 20% this year on the back of an increase in the
Value Added Tax rate on construction materials together
with the global credit crunch. North West European buyers
are also cautious and holding sufficient stocks to meet
current levels of demand and few are now looking to buy
significant volumes in advance of the summer holiday
season.
According to one West African shipper quoted in a recent
TTJ report, the UK market is currently ¡®a disaster¡¯ - very
little sawn lumber is being bought forward with those
importers needing to fill holes in stocks now turning to the
large yards on the continent. Belgium is one of the steadier
markets, with importers there benefiting from the trend
towards just in time ordering in other parts of the
continent. France is reported to be well stocked with
sapele, makore, and movingui. Some reports suggest that
hardwood buying has been holding up reasonably well in
Scandinavia.
Weak sales and narrow margins continue to impact veneer industry
According to the German trade journal EUWID, the
European sliced veneer sector continues to suffer from
weak sales and narrowing margins. Sales prices have come
under pressure at a time when operating costs are rising
and log prices have remained largely stable. Problems in
the housing market in several European countries are
feeding through into weak sales to door manufacturers.
While sales to the interior remodeling sector are holding
up reasonably well, there has been a major loss of sales to
high volume manufacturers selling product into the newbuild
sector. The high euro is also affecting sales of
veneers to the European furniture sector, which has been
struggling in export markets.
In some markets, wood veneer producers continue to lose
market share to other surfaces including glass and plastic.
German veneer producers suggest that some customers
that previously used up to 60% wood veneer have now
reduced this share to below 20%.
With the main west and central European market
saturated, European veneer manufacturers are seeking to
expand sales in other regions, notably the Eastern
Mediterranean and Middle East. However, these markets
are becoming increasingly competitive, particularly with
the recent expansion of processing capacity in Romania
and Turkey.
Central European manufacturers are responding to the
tough market conditions by curtailing output. Inventories
of standard veneers remain very high and prices for these
grades have been falling. However there are reports of
supply bottlenecks for some exclusive higher quality
products. Economic uncertainty is encouraging buyers to
delay purchasing until the last minute. But veneer quality
logs of higher value species such as hard walnut and some
tropical woods can be difficult to obtain at short notice,
particularly with strong competition for raw material now
coming from China.
Joinery sector hints at more positive trends
Despite the gloomy economic news, there are some
positive signs for tropical hardwood emerging from
sections of the European joinery industry. A recent TTJ
market report on the UK joinery sector noted that while
orders from the large house-builders have been falling in
recent weeks, demand from the bespoke domestic
replacement and contractor-led project sector has
remained reasonably good. There is also good activity at
the top end of the market, for example legal/financial
office fit-outs and high-end retail projects. Furthermore, in
this sector, clients are showing a marked preference for
darker timbers. Although black walnut is most frequently
mentioned as a fashionable species, the trend is also
helping boost sales of certain tropical species.
Wood windows are also making something of a comeback,
helped along by a new concern for energy efficiency and
greenery and backed by solid marketing campaigns. One
mass producer of joinery products in the UK interviewed
by the TTJ reported that sales of wood windows were up
20% on last year, an improvement attributed to the social
housing sector, among others, opting increasingly for
timber over PVC on environmental grounds. The TTJ also
suggested that the recent launch of a range of timber and
aluminum composite windows by the steel windows giant
Crittal Windows is a sign of a current fashion for wood
windows in the country.
Elsewhere in Europe, German window manufacturers
report that demand for energy efficient window frame
systems is rising rapidly. To date, this has not led to any
significant change in the overall market share of wood and
composite wood/aluminum window frames compared to
plastic alternatives. The real change has been to increase
demand for new triple glazed units. However longer term,
wood window manufacturers are hoping that greater
interest in energy efficiency will help boost demand for
wood windows, particularly for renovation and
refurbishment work.
Economic slowdown likely to impact appeal of
environmental initiatives
The economic slowdown is likely to have broader
repercussions for the forest sector than just a temporary
drop in timber demand. It is, for example, likely to become
harder for the continent¡¯s politicians to sell ambitious
plans to tackle environmental problems such as climate
change and illegal logging. Demands that industry cut CO²
emissions are less likely to be heeded in a faltering
economy. House builders suffering from declining sales
and tightening margins may be less inclined to pursue
energy efficiency programs. Timber industry operators
seeing their markets shrink may become more determined
to resist laws requiring greater ¡®due diligence¡¯ as a
measure to prevent illegal wood imports, particularly if
they perceive these laws as discriminating unfairly against
timber products in relation to competing non-wood
products. Advocates of such measures will need to focus
heavily on highlighting their potential benefits to the
European private sector as a way to expand share in a
declining market.
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