What’s happening in timber market: problems and solutions

A tendency for an upsurge of the price for timber Realnoe Vremya registered as early as January has just increased by summer. In the last six months, prices in the timber market for construction have doubled. Now timber is definitely in first place in terms of price rise among non-food products. Particle boards became expensive by 16%, edge boards did by 10% in May alone. A deficit in the domestic and foreign markets due to lower wood production in 2020, higher demand around the world, seasonal activation of construction works are the reason. The Russian government is preparing to limit timber exports in the short term. Realnoe Vremya’s columnist, economist with long-term banking experience Artur Safiulin offers to examine prerequisites for higher prices and the current situation in the market in detail.

There has been a persistent deficit of timber in domestic and foreign markets in the last eight months, and prices have kept growing and following export prices. A timber construction boom in the USA, limited supplies from Canada (for reasons that are similar to those seen in Russia) became a catalyst of the growth of world prices. Prices abroad exceed domestic Russian prices by 10-30% depending on the type of product. After the crisis in 2020, the world economy has stabilised, and pent-up demand for construction is gaining momentum because people have become more confident about their future (when it comes to income) and are ready to finance a construction project. The sector’s experts estimate that there is already stabilisation of demand in the world market, and a correction to prices to the level of 2019 awaits us. This cannot help but please an ordinary consumer.

What’s happening in Russia?

We have a mirror image of the world situation. Large Russian material producers haven’t received orders since as early as late 2020, since all volumes were designed for orders, there was a shortage of feedstock to increase capacities, and its price was astronomical. This led to an explosive growth of prices. For instance, in late 2020, when a cubic metre of a 12-metre board (grade 1) cost 28,000 rubles, by May 2021, it already totalled 45-50,000 rubles. Glued laminated timber (CLT) rose from 33-35,000 rubles to 65,000 rubles. Oriented strand board went up in price by 250%. Plywood soared by 50-60%.

Due to high world prices, exports of the Russian timber industry suddenly increased. For instance, in 2020, worked timber exports (parquet timber, fillet and others) added 25%, to 235,000 tonnes. In glued laminated timber, Russia went up to second place in exports in the world following China. In absolute terms, it is 2,8 million cubic metres of products for $1,2 billion. A ramp-up in exports was also registered in fibreboard, wooden doors and thresholds. Demand for Russian timber is stimulated by the world’s general trend for wooden panelling (CLT) as an eco-friendly construction material that replaces traditional concrete. As a result, timber prices for the production of such panelling dramatically jumped up.

For instance, if a thousand board feet (about 2,63 cubic metres) was $358 in 2020, in April 2021, it already fetched $1,260. It is no surprise that our timber producers and simple wood manufacturers export everything and brought our domestic market to chaos — any construction now costs huge money. Because even though you build something from foam concrete, autoclaved aerated concrete, brick, you use wood in formwork, rafter.

The world’s exchange speculators also tilted the market balance: wood futures prices are three times higher than current market prices. This means that investors’ a lot of money was injected into the market, and they aren’t going to lower their expectations amid growing demand for products.

Gigantic demand for timber housing development became a driver of the growth of prices for timber in the domestic market. Prices for finished houses constantly grow. Due to the pandemic, many decided to have their own home of any type. Particularly, 9,3 out of 39 million square metres of individual housing in Russia in 2020 were wooden, with a rise of 0,52 million square metres a year. Moscow Oblast (1,65 million square metres), Leningrad Oblast (749,000 square metres), Bashkortostan (641,000 square metres) were leaders among the regions. The government intends to include wooden housing development into the Countryside Mortgage programme.

As a consequence, the hike in prices for materials led to the growth of prices for prefabricated houses — now expenses on materials account for 65% of the budget in the prime cost pattern. Prefabricated houses have already augmented by 25% since the beginning of the year, and the growth will go on. In the last year, the price for a standard prefabricated house with a total area of up to 200 square metres rose from about 3 million rubles to 5,5-6 million rubles. The total house installation (with the foundation) has also become expensive, by 51% than in 2020. Also, the price for thermal envelope (foundation, walls, roofing, windows) has increased by some 30% because construction materials had gone up in price unequally — wood and metal have doubled, concrete has increased by 10%, roofing materials have by 2%, windows — by 10-15%.

What’s next?

In fact, there must be enough feedstock for everybody, wood production has decreased by 10% in the last three years alone, which is millions of cubic metres of timber feedstock for end products. It is a question how fast our government will ban feedstock exports and start balancing the market, which as well as the food market is in a terrible state for the consumer, while suppliers are skimming the cream in the form of surplus incomes. Besides the ban, it is necessary to urgently take measures to restrain the growth of domestic prices for conifer (the most accessible and popular) to build houses, make scaffolding and other products of this kind.

Following wood, there is a rise in price for both insulation (by 81%) and expanded polystyrene (by 77%). The increase in the prime cost of construction materials has reached 95% since January. At such a pace, we won’t be able to build anything at all soon. To compare: earlier, the average annual rise in the prime cost of construction materials was 10-15%. Only constructors’ services remain at the same price level. But contractors have announced a rise in prices by 10-15% since July. Judging by the experience of entrepreneurs in this sphere, now they focus on rising prices for materials in the offer and cannot fix a price if the client delays payment. This somehow resembles the 90s we all escape from and fail to escape in the end. The example of Canada that introduced a limit on exports a long time ago is at hand. We immediately should repeat their experience. Otherwise, we run the risk of ending the year with two-digit inflation. Absolutely everything is becoming expensive.

Artur Safiulin

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The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial