Forest sector forecast – spring 2020

Finnish forest sector will survive corona crisis better than many other industries, but particularly sawmill industry and small businesses may suffer

Please note: This is an English summary of the PTT forest sector forecast. For the full version in Finnish click here (link).

The forest sector is better able to cope with the problems caused by the corona pandemic than many other industries. However, the differences between companies are large. The pulp and paper industry will be hit by the accelerating decline in newsprint and magazine paper consumption, but it is simultaneously supported by the increased use of tissue paper due to anti-virus measures and the increasing popularity of e-commerce. Domestic production and exports of wood-products will decrease this year as the coronavirus and lockdowns add to the already challenging situation in export markets. Problems related to labor, transportation and foreign components may hamper the functioning of the entire forest industry and logging, even though efforts are being made to deal with these difficulties.

Already at the beginning of the year, the starting position in logging operations was poor, as warm weather prevented the harvesting of stands on soft soils in many parts of Finland. Harvesting companies can be in a very difficult situation if felling is suppressed by the corona pandemic. The direct impact of the coronavirus on wood trading is smaller, but uncertain demand of end products will slow down the market. Wood prices will consequently fall this year. The impact of the corona crisis on the forest sector will largely depend on the measures taken to control the pandemic and their duration. The forest industry can be expected to recover relatively quickly if the restrictions to prevent the spread of the disease do not drive smaller companies to bankruptcy.

Corona crisis hits the world economy hard

The global economy will contract sharply in the first and second quarters of the year due to the corona pandemic. The rest of the year will probably see economic recovery, but all depends on the progress of the disease. The magnitude and duration of the effects of the coronavirus depend on the spread of the virus and the success of its containment. The longer the restriction measures must be continued, the greater the financial losses. If the coronavirus is successfully curbed, there will be a very rapid recovery towards the end of the year, fueled by the economic support measures. Whereas the recovery will be slow if the containment proves hard and there is need for restraint in the fall. China and some other Asian countries, where the spread of the virus has been suppressed, at least for the time being, are the first to grow. In Europe, and particularly in the United States, the response has been slower, and the coronavirus has spread more widely. The impact on the economy is therefore likely to be greater and more lasting in Europe and the United States than in Asia.

In Finland restrictions were adopted relatively early. So far restrictions affect services, movement across borders and non-working travel within a country. These restrictions, however, do not directly affect manufacturing nor has the virus affected production substantially due to sick leave. The Finnish government has agreed on extensive economic measures to ease the impact of the coronavirus epidemic. The size of the initial package is 15 billion euros, or 6,3 per cent relative to GDP. It includes measures supporting firms in all sectors. Measures consist of state guarantees, postponing taxes and pension contributions, and lowering pension contributions. It also extends unemployment insurance to entrepreneurs. In addition, capital requirements for Finnish credit institutions’ have been lowered to improve banks’ ability to supply credit.

At the moment, the Finnish service sector is suffering badly from restriction measures to suppress the spread of the coronavirus. Manufacturing is less affected, and the impact on manufacturing is mainly coming from abroad. A sharp decline in demand in world markets, and supply chain disruptions are affecting the production and exports of Finnish manufacturing. At least for now, internal restrictions would not prevent manufacturing production if and when global demand will pick up.  

Forest sector may recover rapidly from corona crisis

Labor disputes during January and February reduced exports in the beginning of the year. Had the year 2020 continued as expected still in January, the impact of industrial actions on the forest industry exports would have leveled off over the year and remained small. The slow-down in harvesting, because of the soft soils in the beginning of the year, would also have been caught up during the year. However, the exceptional situation caused by the coronavirus pandemic is changing the outlook for the forest industry and forestry.

The outlook for the pulp and paper industry and for the wood-products industry are very different. Exports of pulp and paperboard will be moderate this year, as the corona crisis is likely to increase demand for tissue paper and support packaging sales as e-commerce grows. On the other hand, exports of sawn timber and plywood will reduce drastically as construction stops for the duration of the containment measures against the coronavirus.

The coronavirus pandemic will have a negative impact on all sectors of the economy. It has led to a sharp decline in economic activity across Europe and North America during March because of lock downs. Production facilities and shops have been closed and the movement of people is restricted. The corona pandemic reduces consumer income and investment propensity and reduces consumption in key market areas. However, the forest sector as a whole is in a better position than many other sectors, especially as demand remains moderate and may even increase in some forest products. In addition, some lines of productions of the forest sector have been declared as essential for society in this situation in some countries. For example, in Italy paper, packaging and recycling industries are allowed to continue operation during the epidemic. 

Large-scale morbidity, quarantine and isolation measures are reducing industrial production in Europe. Businesses have prepared for the deteriorating disease situation, and, for example, travel restrictions have been longer in place in companies than in the rest of the society. In Finland, special arrangements are made at the mills to secure production, but the risks of disruption increase as the pandemic worsens. Despite preventive measures, it is possible that people will fall ill and be quarantined in some part of the production chain. For example, recruiting workers for production facilities and transport can be difficult. In the worst case this may affect production significantly.

The production of the forest industry may also be hampered by possible delays or disruptions in the supply of imported intermediate products and spare parts for production machinery and equipment. A prolonged pandemic may also affect timber harvesting if maintenance work slows down due to reduced availability of components imported from abroad. Forest machinery manufacturer Ponsse has already announced layoffs of its personnel following the closure of its component suppliers’ factories in Central Europe.

Restrictions on cross-border movement do not apply to freight. Nevertheless, the corona pandemic has severely disrupted world trade. This also affects the availability and price of containers. Under normal circumstances, goods from China are imported to Europe in containers and return containers can be exported to China at reasonable prices. Inland freight transport in Europe has slowed down due to border checks, but on the other hand, rail capacity has been freed up for freight transport as passenger transport has declined. Thus, disruptions in trade can create bottlenecks and increase costs, thus also affecting Finnish exports.

Pulp and paper industries well positioned to overcome the corona crisis

Regardless of the corona pandemic, Finnish paper exports and production will continue to decline visibly this year. This is due to the closure of UPM's uncoated magazine paper machine in Rauma at the end of last year and the closure of Stora Enso’s two fine paper machines in Oulu later this year. In addition, the industrial action in January-February restricted exports and production.

The corona crisis will also be clearly reflected in the demand for paper. Newspapers and magazines are purchased in European countries from newspaper kiosks, which are not currently accessible due to lockdowns This is likely to accelerate the transition to digital publishing. The decline in demand is already evident in newsprint. In recent weeks its price in Europe has fallen much faster than the price of other types of paper. The corona crisis has increased global demand for tissue products. Most of the Finnish tissue production is used domestically, so the growth in demand is not reflected in Finland's export figures. On the other hand, demand for pulp is enhanced by the increased use of tissue paper.

It has been estimated that the corona pandemic and lockdowns will increase demand for packaging materials, as e-commerce has grown and due to the threat of the spreading virus packaged products are preferred. As the crisis worsens, the loss of consumer income will affect purchasing power and thus have a negative impact on board products. The competitiveness of carton products as packaging material is also affected by the collapse in oil prices, which improves the price competitiveness of plastic packaging. All in all, the corona pandemic thus brings along factors that both support and reduce cardboard exports: If the epidemic is effectively contained and the economy grows again towards the end of the year, major negative effects can be avoided. Whereas if the crisis lasts longer and affects private consumption in the export destination countries over a longer period, the situation on the paperboard market may also become more difficult. In Finland, kraftliner board production will increase towards the end of the year if Stora Enso goes ahead with its plan to convert one paper machine to board production in Oulu.

In China, the most important pulp export destination of Finland, the forest industry is beginning to return to normal following the acute crisis, and most companies have resumed operations. The corona pandemic has increased the demand for tissue papers. Tissue paper includes toilet paper, hand towels and handkerchiefs. China usually consumes only two-thirds of the amount of tissue paper consumed in Western Europe, and the gap with North America is even greater. Emphasis on the importance of hand hygiene and problems with air-flow hand dryers as drivers for the spread of pathogens, can permanently increase the use of paper towels. Approximately one third of the long-fiber pulp exported to China is used in the production of tissue paper, so the increased use can clearly affect the demand for pulp. Exports of pulp from Finland will decline slightly or remain at last year's figures, even if the economy will start to recover in the second half of the year. If the global economic situation worsens for a longer period of time, the demand for pulp may decline or production difficulties may also limit exports from Finland.

Pulp producers have sought and partly succeeded in getting price increases in the beginning of the year, but due to the corona epidemic, price increases have been more moderate than previously anticipated. On the other hand, the stoppage of pulp production in Finland due to the industrial action and production difficulties in Canada, the market situation has tightened, which supports rising prices. The trend in pulp prices will be significantly influenced by whether the corona epidemic has a stronger impact on supply or demand. If the pandemic were to reduce demand while supply remained unchanged, prices would fall, despite the current low level of prices. If the supply of pulp decreases due to production difficulties, while demand remains unchanged, prices may clearly rise from the current low level.

Halt in construction and oil price war will reduce timber exports

As a result of the restrictive measures taken in response to the coronavirus pandemic, construction has almost come to a halt in Finland's major European exporting countries (UK, Germany, France and Estonia). The same is inevitable in Finland and important exporting countries of North Africa (Egypt, Algeria, Morocco) and the Middle East (Saudi Arabia and Israel). Currently the planning of construction projects, investment decisions and construction start-ups are frozen. Building activity in the coming months and the rest of the year will depend on the duration of the containment measures and whether they will have to be reintroduced later this year.

When it is possible to relax the containment measures, the continuing of work on construction sites will depend on the availability of labor and building components. In many European countries, a significant proportion of construction workers are migrant workers. For example, in the southern Uusimaa region of Finland, one third of construction sector workers are Estonian, whose mobility between Estonia and Finland has ceased. Some of them stayed in Finland, but some returned to their homeland. When construction resumes, labor shortages can plague the industry for some time, as the pandemic is progressing at different rates in different countries and it is uncertain at what point each country dares to open its borders.

According to the corona statistics, the pandemic is just beginning in earnest in North Africa. It will have a major impact on the construction industry there too. It remains to be seen whether the impending summer drought and high temperatures will affect the spread of the coronavirus.

In addition to the coronavirus, the oil price war between Saudi Arabia and Russia creates uncertainty in oil producing countries. This is especially significant for North-African and the Middle eastern countries that rely on oil export earnings. Oil exports are for many of them the most important source of foreign currency. The share of oil products in exports is approximately 30 percent in Egypt and 90 percent in Saudi-Arabia. The fall in oil prices will reduce export earnings and foreign exchange reserves. This reduces the ability of these countries to import products such as sawnwood. Exports of sawn timber to these countries will probably decline this year and possibly next year, depending on how long the oil price war continues.

Difficulties ahead for the wood-products industry

Due to the coronavirus pandemic and the industrial struggle early in the year, exports and production of sawn timber and plywood will fall sharply this year. However, it is impossible to estimate the exact magnitude of the decline with the current knowledge. The effects depend on the length of the coronavirus pandemic and the restrictions required to combat it.

The export prospects of sawn timber to Europe in April-June are weak after construction nearly stopped in March. There will still be some shipments to Europe in early April, but then exports will stop. In contrast, export prospects to China and Japan are moderate. In China and Japan, the pandemic has been moderately contained. However, exports to them are limited by a shortage of containers. The shortage of containers is expected to ease by early summer at the latest. The coronavirus spread to the major sawn timber exporting countries of North Africa and the Middle East a few weeks behind Europe, but there will inevitably be a halt or at least a slowdown in exports to the area.

Europe and North Africa continue to suffer from oversupply of sawnwood. However, it seems like a small worry in comparison to the coronavirus pandemic. If severe storms are avoided in the spring, especially in Central Europe, and the summer will not favor bark beetle reproduction, the oversupply situation may slowly start easing. However, there is no immediate relief in sight.

The export price of lumber will fall this year. The depth of the fall is mainly influenced by the length of the slow-down of exports to Europe. Europe plays an important role in determining Finland’s average export price of sawn timber. The average export price is strongly dependent on the export weightings. When timber exports to Europe are at a standstill, lower-priced markets gain greater weight, which reduces the average export price of Finland.

The stagnation of production in the construction, automotive and furniture industries of Europe is very strongly reflected in the exports of plywood, which will stop at least for April. This is significant for Finnish exports, as most plywood is exported to Europe. Exports of plywood will decline sharply throughout the year, even if the tightening measures could be relaxed during the second quarter of this year. The lost time cannot be fully caught up in construction, the automotive industry and the furniture industry. Finland’s average export price of plywood will fall this year. The magnitude of the decline depends on the length of the containment measures required to combat the coronavirus in Europe.2

Despite the dire outlook for this year, the wood-products industry forms an elementary part of the bioeconomy in Finland. Production volumes are expected to rise after the corona crisis. Additional increase to the volume is in the horizon as in the end of March Metsä Group announced that it has decided to build a new sawmill in Rauma, where the company has a pulp mill. The value of the investment is 200 million euros and the capacity of the sawmill will be approximately 750 000 cubic meters per year. The sawmill is set to be complete by the third quarter of 2022.

Harvesting and timber trade at the mercy of weather, insect damages and forest industries’ product markets

The corona pandemic and its containment measures are reflected in logging and timber trading in Finland, where over 80 per cent of timber originates from non-industrial private forests.  The outcome depends on the demand for forest industries’ products, the functioning of transportation and the availability of labor. The magnitude of the effects depends on the duration of the situation and it is impossible to make accurate predictions.
There is still a large oversupply of damaged spruce logs due to storm, snow and insect damages in Europe. Some of the stands were not even harvested last year. In some European countries, the corona pandemic may cause a shortage of labor in harvesting during the spring and summer. A major part of workers in some countries are from Eastern Europe and border closures reduce the availability of labor. The equation is very bad for the forests if next summer’s weather is favorable for bark beetles.

In many parts of Finland roundwood removals already suffered from poor logging and transportation conditions caused by the very warm start of the year, and now the spring further softens the soils and roads. Harvesting volumes will decrease this year, particularly in regeneration fellings, as sawn timber production will decline at least during the first half of the year. Stora Enso has already halted its logging operations in eastern Finland on the basis of reports received from sawmills. The situation varies from company to company depending on whether logging was stopped during the strike in the beginning of the year. Stora Enso continued harvesting and is now lowering accumulated timber storages. However, storage levels vary regionally. Demand for thinning stands is accelerated by the demand of pulpwood as a raw material for pulp production. The corona pandemic would not necessarily have a direct impact on harvesting and roundwood trade, since much of the work is carried out in fairly isolated conditions. The uncertain outlook for forest industry products will nevertheless keep industry alert not to accumulate roundwood storages. After a bad start to the spring, logging companies may have trouble coping with the prolonged downturn, especially if they have recently invested in machinery. Repair and maintenance of equipment can also be slowed down if the necessary parts are not found in the country and imports are in short supply.

During the first months of the year, roundwood trades were boosted by poor harvesting conditions, which pushed demand prematurely to summer-harvesting stands. However, industrial actions and weak demand for forest industry products alleviated the pressure on wood supply in the early months of the year. Technology also enables remote interaction in timber trading, so that the trade volume should not be greatly affected by containment measures for corona. However, according to research results, forest owners still prefer face-to-face meetings in wood trade negotiations. Thus, the trade volume will be somewhat diminished during lockdowns. However, the exceptional situation is creating a digital leap in the way of remote roundwood trading. The popularity of, an electronic roundwood trading place, has grown significantly.

Monthly average log prices rose in January-February this year compared to the end of last year. The rise was mainly driven by the trend towards summer-harvested stands due to poor harvesting and transportation conditions and can hardly be interpreted as an indication of rising log prices in the longer term. The average prices of softwood logs were ten percent lower in January-February than in the first two months of last year. Trade volumes of logs in January-February were almost 50 percent lower than last year and demand is down due to the difficulties of the sawmill industry. Prices are falling and will fall further in the first half of the year, driven by the downturn in export prices of sawn timber and slowing market demand.

The increase in demand for pulp caused by the corona virus will support pulpwood trade. This will enhance the demand for thinning stands. The average monthly prices of coniferous pulpwood rose slightly in February from the January reading, whereas the average price of birch pulpwood has been rising since November last year. The price of pulpwood will not be subject to strong downward pressure towards the end of the year as demand remains moderately strong. Gross stumpage earnings from forests will fall this year as a consequence of falling prices and the slow-down in logging and trade activities.

In harvesting operations and roundwood trading, the effects of the coronavirus are less severe than in many other sectors in Finland. The trading and price trends for pulpwood and logs would have diverged this year even without the coronavirus. Next year, the situation in the forest industry is expected to normalize and demand to recover. In trade figures, the recovery is more rapid than in the production or export figures of the forest industry. Roundwood removals will resume next year if logging and transportation companies survive the crisis.

PTT-forecast – Forest sector, Spring 2020. ISSN 1799-9340. Helsinki 2020.
Authors: Matti Valonen, Emmi Haltia, Paula Horne, Janne Huovari, Marjo Maidell and Maurizio Sajeva

Additional information:

Paper and pulp industry: Senior Researcher Emmi Haltia, tel. +358 40 164 8169
Wood-product industry: Forest Economist Matti Valonen, tel. +358 40 164 8151
Harvesting and timber trade: Research Director Paula Horne, tel. +358 40 592 6820
Finnish containment measures for corona and impact on economy: Head of Forecasting Janne Huovari, tel. +358 40 164 8141