A View on Pricing

by Matt Korny, General Manager

Many times throughout history, individuals have pondered how things may have been different had they had a ‘crystal ball’ to predict the future.  Going back to the first century AD, fortune tellers used their ‘crystallum orbis’ to supposedly give insights into what was to come…

Many of us would have paid good money to a reputable soothsayer in January 2020 had one existed, to discuss the forthcoming pandemic, its impact on family, friends and colleagues as well as its effect on our industry in terms of supply and demand, and of course the resulting influence on material cost prices. 

We would of course have visited the same person again over the last few weeks to talk about the situation in Eastern Europe, and the ongoing impact first and foremost on a humanitarian level and what we could do to help… and secondly about how we could minimise the consequences on the supply chain and our much-valued partnerships.

Alas, these are things of fiction, and so cannot be utilised as we might like!  However, we do have the next best thing – data and science. 

So, with ‘2022 [construction] set to see a return to pre-COVID levels, with underlying project starts up 3% on 2019 levels’ [i], let’s look at the impact on our industry, and what effect the geo-political situation in Eastern Europe will potentially have on material cost prices, as we step further away from two years of a global pandemic, but closer to the unknown…

If we look at a global summary first of all, based on recent forecasts by industry specialists. –    ‘…Material prices will not fall this year, as supply chain problems and high production costs continue to hit the industry.’ [ii] 

A solid, if not welcome, starting point, but what does it actually mean?  It is suggested that supply chain problems including but not limited to, ‘distribution problems and high demand’ will unfortunately result in price issues not softening.  In terms of high production costs, energy and haulage are set to ‘stop steel prices going down, despite a slight dampening in demand.’ [iii]

This slight ‘dampening’ is reflected in the Government ONS indices data, as can be seen below. 

Timber prices will continue to jump, with ‘demand remaining high and rising gas prices hitting the production of lumber. [They] are not expected to fall significantly from recent highs, but improved supply chains and more stable growth in residential construction are likely to contain inflationary pressures.’ [iv]

This said, the Timber Trade Federation suggest that energy prices do not have a major impact on the cost of timber anyway, but instead comment that increasing labour and logistical costs will have the biggest effect, whilst also predicting that supply will tighten in Q2 2022 as the industry looks to use low carbon products such as timber. All this prior to the events currently unfolding in Eastern Europe.

Dave Huddlestone of Tygnum Ltd comments that supply is also shorter than originally predicted – ‘The expectancy at the very start of 2022 was that stability would continue through Q1 and price rises would follow in Q2 and Q3.  This has not been the case, the excess stock positions have depleted much faster than expected (partly due to a mild winter) but underlyingly due to continued high demand in UK and global demand for construction timber has once again proved strong, particularly in USA.’  Dave continues, ‘UK prices for construction timber have risen from 1st January by around 10% during Q1 and this rise will now start to accelerate with prices being quoted at plus 12-15% for Q2 supplies.’

Sheet materials do use more energy in their production process than sawn timber, with ‘prices… forecast[ed] to move upwards, in the early months of 2022.  A resumption of purchasing is anticipated at this time [with] Mills… keen to recoup their rising outlay on electricity and gas.’  [vi]

Government indices (below) show imported timber and plywood rising to 129 and 74 points above the base rate, respectively over the course of 2021, before dropping slightly early 2022, although still significantly above normal levels.  2022 Q2 early indications are that the price of TR26 timber and CLS may rise by 5 – 10%, but not currently to the levels of August 2021.

The above data is also somewhat reflected in the Timber Price Indices from the Government Forest Research Department for homegrown timbers, which states ‘the average price for softwood sawlog sales was £79.39 per cubic metre overbark in nominal terms in the 6-month period to September 2021, an increase from £67.70 in the 6 months to March 2021 and £49.76 in the 6 months to September 2020.  [vi]

As well as raw material cost, energy and haulage increasing, ‘Costs for shipping goods by container will be higher in 2022 than ever before… [due to] forecast that container lines’ strong position in negotiations for long term rates and shippers’ desire to secure capacity will lead to fixing higher long-term rates.  [vii]  Russian sanctions are also biting the shipping industry as Russian vessels are being refused entry to British ports, which is reducing the availability of cargo vessels for timber supplies.

To summarise, there are definitely rises on the way, and in actual fact some upon us imminently.  Much like 2021, the UK timber market appears to be facing sustained increases for the first half of the year.  In terms of percentages, it looks to be around 10% – 15% for Q2, and could rise again significantly in Q3, as it did last year.  We believe that security of supply and robust supply chains will be more important than ever against a rising price and look forward to supporting in that respect in the months to come.

[i] Construction Forecast – Output to return to pre-COVID levels by 2022 (glenigan.com)

[ii] Material prices to stay high in 2022, consultants forecast | Construction News

[iii] Material prices to stay high in 2022, consultants forecast | Construction News

[iv] Material prices to stay high in 2022, consultants forecast | Construction News

[v] 2022 lumber markets outlook – Wood Business

[vi] Timber Price Indices – Forest Research

[vii] 2022 shipping costs ‘will be higher than ever before’ | Seatrade Maritime (seatrade-maritime.com)

 

If you have a development project you’d like to talk to our timber frame team about, email sales@rmuk.co.uk or call us on 01933 279597.