Downturn Shreds European Forest Products

The forestry industry in Europe, the former Soviet Union and North America last year suffered the biggest decline in demand for wood since the 1970s, and that wasn’t even the worst of the news for this foundation business.

The slump in the global paper and pulp industry is nearly a decade old, and industry insiders say the business is still struggling with chronic overcapacity, shrinking demand, softening prices, production cuts and layoffs as it reels under the collapsing housing markets in developed countries.

Consumption of sawn wood, paper and board in the main markets fell 8.5 percent to 1.26 billion cubic meters, the steepest drop since the 1973 oil crisis, according to the U.N. Economic Commission for Europe. And the outlook remains grim, with many mills churning out pulp and paper regardless of price just to cover their costs.

The slump’s heavy toll

“I cannot say that there is light at the end of the tunnel based on my experience and my discussions with our customers,” Juha Vanhainen, head of Stora Enso’s publication paper unit, told a Reuters paper and packaging summit in Helsinki in late August. “It seems that the decline has more or less stabilized, but the absolute level is still very, very low.”

Days earlier, Stora Enso announced it would close two mills in Finland, slash 1,100 jobs and book an $850 million charge, the latest in a series of cutbacks that have shrunk its payroll by 37 percent since 2006.    

The slump has taken a heavy toll on shipowners, cargo terminals and ports involved in the global forest products supply chain, which stretches from sawmills to newspaper printing plants to products for supermarket shelves.

The specialized forest shipping sector is grappling with overcapacity, softening freight rates and vessel layups. Cargo terminals are working well below capacity.

No shelter from the storm

Until recently, however, many open-hatch vessels operating in the forest trades enjoyed relatively high rates despite lower demand. Some shipowners were shielded from the downturn in the forest sector because their vessels can carry other bulk and breakbulk cargoes such as steel, grain and china clays, so they benefited from the pre-crash run-up in charter rates.

“The bulk market clearly had an impact on time-charter rates for open hatch vessels,” said Bjorn Bodding, an analyst with Oslo ship broker RS Platou.

And some were shielded because they are active in other shipping sectors. For example, at Swedish forest products carrier Transatlantic, “fiscal 2008 was one of the best years ever,” according to CEO Anders Kallstrom, thanks to the company’s icebreaking and offshore units.

Now, however, the global downturn is derailing expansion plans and forcing splits and consolidations in a weakening market.

Transatlantic postponed plans to sell its trans-Atlantic operation because of a lack of buyers, and U.S. paper giant Weyerhaeuser called off the sale of its Westwood Shipping Line unit. Last year, Norway’s Westfal-Larsen and Grieg Shipping terminated their Star Shipping partnership, parceling out a fleet of some 40 open-hatch bulk carriers and 19 conventional Handymax bulk carriers.

Meanwhile, Australia’s troubled Babcock & Brown Infrastructure reported a $170 million loss after agreeing to sell a bigger stake in its Euroports unit for a lower price.

Business is poor across the transport chain. “Our volume is down 17 percent in the first half. The overall market is down 25 to 30 percent,” said Bob de Lange, managing director of Interforest Terminal Rotterdam, one of Europe’s top specialized forest products stevedores.

The trans-Atlantic forest products shipping market is “very, very depressed,” said Marten Carlquist, head of Transatlantic’s industrial shipping business.

Ports that invested heavily in breakbulk facilities because they generate more jobs on the waterfront than other cargoes are reporting even steeper declines. Antwerp’s forest products traffic slumped 40 percent in the first half of 2009 from a year earlier, matching declines in steel shipments.

“We expected the decline in conventional breakbulk to be smaller, but the volumes have stabilized in the past few months,” said Eddy Bruyninckx, CEO of the Antwerp Port Authority.

The Scottish port of Grangemouth said timber, paper and pulp traffic crashed more than 50 percent in the first half, to 52,000 metric tons.

Emerging markets

Shipowners are putting a brave face on the crisis, pointing to new opportunities in emerging markets as production moves from the Northern Hemisphere to the Southern Hemisphere. In Latin America, after all, eucalyptus trees can be harvested after seven to 10 years, compared with 60 years for spruce and birch in Finland.

Western Europe “is not a sustainable base for exports” because it does not have a global cost advantage, said David Hathorn, CEO of South Africa-based paper producer Mondi.

Norway’s Saga Forest Carriers’ decision to switch some of its capacity from North to South America earlier this decade is paying off, said President Lars Traaseth, as Brazil, Chile and Uruguay become major exporters and China a key importer.

Exports from South America to Asia are still growing, and “China is showing very high figures,” although freight rates are mixed, he said.

Westerlund, a leading Antwerp forest products stevedore, has seen European traffic tumble 25 to 30 percent this year, but “our Chinese terminal is on budget. There’s no recession there,” said Philip de Mulder, commercial director for forest products at the Euroports-owned company.

International Paper expects to double its shipments within the Chinese domestic market this year compared to 2008, Chief Financial Officer Timothy Nicholls told the Paper and Packaging summit in Helsinki.

But even South America isn’t immune to the global downturn, underscored by Stora Enso’s decision in the spring to halt expansion of a mill in Brazil because of falling demand for wood and fine paper.

And the high levels of Chinese imports, spurred by strategic purchases on lower prices to replenish stockpiles, are not sustainable, according to industry watchers. 

In the long run, however, there’s no doubt over China’s key role in the forest products trade. “China alone will account for 89 percent of worldwide demand growth for printing and writing papers for 2009 to 2024,” reported RISI, a Boston-based forest industry consultant, and sister company of The Journal of Commerce.

Back-hauls needed

Right now, the most pressing challenge for owners of open-hatch ships operating in the forest products trades is getting back-haul cargoes from the Far East to loading areas, Traaseth said.

Most of Saga’s outward cargo is carried under long-term contracts, but it has to compete on the open market on the return trip, and has to decide on a case-by-case basis whether to go for a quick ballast voyage or pick up cargoes such as steel pipes and coils.

Saga, the commercial operator for ships in a joint pool between Japan’s NYK Line and a Norwegian owner, has redelivered three old vessels but has not laid up any tonnage. “It would have to get a lot worse to do that,” Traaseth said. “There is overcapacity, but nothing like the huge surplus in container shipping. It is a fairly well balanced small niche bulk market.”

However, open-hatch ships have been losing market share to other vessel types for a decade, Platou analyst Bjorn Bodding said. And freight rates need to return to much higher levels to justify the $60 million to $70 million price tag on a new open-hatch vessel. 

Competition

Another problem is the forest shipping sector is being invaded by container ships, roll-on, roll-off vessels, multipurpose project cargo/heavy-lift tonnage and car carriers whose markets have collapsed and are desperate for any cargo and any price to generate revenue.

“Everybody is chasing everything,” Traaseth said.        

Sweden’s Transatlantic bucked the trend, with Carlquist attributing increased westbound cargoes from Europe to North America in the second quarter – “but from a very lower levelin the first quarter” – to beating container carriers on price and service. Starting calls at Germany’s Port of Lubeck also was more convenient for shippers than other north European loading ports, he said. The carrier’s side-loading ships also have an advantage over open hatch vessels because they can be worked when it’s snowing or raining.

Transatlantic is constantly seeking new markets and is eyeing Russia, just hours away from its one of its main loading bases in Finland’s Port of Kotka. “We are very, very interested in Russia,” said Marten Carlquist. “The market is down drastically, but we are marketing Kotka to the Russians.”

Russia offers potential export trades to shipping lines facing reduced volumes and too much capacity on Baltic routes to northern Europe and North America. However, the short-term outlook has been clouded as Moscow weighs plans to raise export taxes to promote the domestic industry. As a result, 6 million to 10 million cubic meters of rough timber has been stuck at the Russian-Finnish borders since September 2008 as Russian shippers wait for Finnish importers to renew their contracts. 

European forest products carriers have survived the slump because they have built strong ties with producers. Transatlantic, for example, charters out vessels to Stora Enso and SCA and is involved in their logistics planning.

But shipowners and stevedores remain on a knife edge as the paper and pulp industry braces for further restructuring.

“If the crisis continues, we might see smaller (terminal) companies disappear,” Westerlund’s de Mulder warned. And Traaseth fears some of the record number of dry bulk ships under construction will further invade the forest shipping trades.

Nobody in the industry, from paper producer to shipowner, can predict the next few years with any confidence. 

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Issued by:  BreakBulk

Author: Bruce Barnard

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Issue date: October 13, 2009

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