Will the Russia-Ukraine war cause a global lumber supply shock?
Here's how the European and North American lumber markets will be impacted by shifting trade flows and sanctions on Russia
We are now several weeks into the Russian assault on Ukraine. As the conflict continues, the impacts on commodity market disruptions have become more pronounced.
Disruptions to commercial relationships and supply chains have already taken hold as multinational corporations cut ties with Russia in protest of the invasion. The EU has also announced it will likely implement a new round of sanctions that will impact commodities sourced from Russia, including wood.
Russia is a major softwood lumber supplier, accounting for 22% of global trade. It’s clear that the conflict in Ukraine and the resulting sanctions and boycotts is already having a ripple effect on global and regional wood products markets.
Here’s how the global market will likely be impacted:
- Global lumber supply will tighten in the near term
- Lumber supply trade flows will shift, especially to and from Europe
- China will probably import Russian lumber boycotted by other countries
- Russian and Ukrainian softwood production will be impacted by the war and logistical constraints
- European lumber supply to the US will likely pull back as the European market tightens
The Russia-Ukraine war is a negative supply shock to the global lumber market
Russian softwood lumber production has trended close to 40 million cubic meters (m3) in recent years, or around 11-12% of global output. Most of this volume is exported, and shipments totaled 30 mm m3 in 2021. This makes them vulnerable to retaliation from other countries.
However, over half of Russia’s softwood lumber exports are destined for China and are less at risk since they are a friendly trade partner. When you exclude lumber volumes exported to China and other Russia-friendly countries, this leaves about 20% of Russian exports, or 6 million m3, that could be impacted by sanctions and boycotts.
Ukrainian softwood lumber exports, totaling about 3 million m3 in 2021, will almost certainly be disrupted by the ongoing war. Belarus trade will also be impacted by boycotts after sending its own troops into Ukraine in support of Russia’s invasion. Belarus softwood lumber export to Europe were 3 million m3 in 2021.
A 3-4% global lumber supply loss is possible but not guaranteed
In a worst-case scenario, if all this volume cannot be sold on the global market for logistical, political or economic reasons, that is a 12 million m3 of softwood lumber supply loss. That volume equals 3-4% of global lumber consumption, would be a significant supply cut in a short period of time.
This worst-case scenario is possible but seems unlikely. Russia is likely to pivot their exports to other buyers, especially China given their growing economic and political ties and transportation access over land through other friendly countries.
The Chinese government and major corporate entities in the country seem keen to avoid any overt actions that would help Russia work around sanctions by the US, Europe and other NATO-friendly countries that might put China’s own commercial relationships at stake. However, early signs show China could be willing to import boycotted Russian commodities. This also seems plausible as Russia has formerly implemented a log export ban this year, meaning China could opt to buy finished lumber to compensate for some of this lost log supply.
Also, a 3-4% market tightening is less likely because the global economy will be negatively impacted by the war in Ukraine. Europe is already facing a slowdown in economic activity and soaring inflation for critical commodities like energy, grains and steel because Russia and Ukraine are key suppliers.
This surge of inflation will be a major shock to households and manufacturers and will come at the expense of European wood products demand in the near term. The rest of the global economy will feel the pain of inflation as well.
Russia will face production losses as corporations sever trade and commercial relationships
How severely will Russian softwood lumber production be impacted by sanctions and corporate boycotts? We believe that Russian sawmills will at incur some production losses even if sanctioned volumes find refuge in alternative markets like China or Central Asia.
Examples of supply chain and production disruptions Russian sawmills and logging operations will incur include, but are not limited to:
- Global shipping companies are cutting all service to and from Russia, grinding movement of some key inputs to a standstill.
- Equipment suppliers are also severing relationships, meaning Russia’s industrial base will erode rapidly without replacement parts, software updates for control systems, replacement chips, etc.
- Many Western commodity producers, including forest product companies like Stora Enso and Metsä, have also halted production at their Russian operations in response to the invasion of Ukraine.
Many corporations are cutting ties with them, including manufacturers, shippers, equipment suppliers and more. Western commodity producers, including forest product companies like Stora Enso and Metsä, have halted production at their Russian operations in response to the invasion of Ukraine.
Europe currently supplies over 3% of US lumber consumption and has grown substantially
Though the most extreme supply loss scenario is unlikely as both demand and trade flow adjustments will balance out the supply impacts, there will still be a significant disruption and reshuffling of global trade.
In the short to medium term, all else remaining equal, the market will tighten as countries who once sourced Russian lumber will be forced to look elsewhere for lumber supply. The US market will be impacted as well, given the domestic supply situation within North America. The US imports only a small fraction of Russian lumber. The volume totals only 46 million board feet (MMBF) out of 16.0 billion board feet (BBF) of total imports in 2021.
While direct imports from Russia will be a nonfactor in US lumber supply, the US market will be more critically impacted by the pullback of other European volumes currently targeting the US market. European softwood lumber shipments totaled over 1.6 BBF in 2021, or about 3.2% of US lumber consumption for the year.
European spruce and pine demand in the US has grown rapidly in the past decade. While still modest, its presence is growing in the Gulf and Mid-Atlantic coast areas to support growing regional construction markets. The North American market faces supply challenges of framing lumber due to fiber constraints in British Columbia and the Pacific Northwest as well, so as structural lumber demand has grown, Europe has become an increasingly important source of incremental supply to fill the void.
Trade flows will be reshuffled to fill Europe’s need for lumber, tightening North American supply
Now that many companies are banning Russian lumber, more supply is needed in Europe from other sources.
Between the boycotts on Russian and Belarussian production and the disruptions to Ukrainian lumber production, we estimate Europe will need about 9 million m3 from other sources (or about three-quarters of the total supply impacted by sanctions in the global marketplace). European net exports of lumber to the rest of the global market, at well over 20 million m3 excluding Russia, are more than sufficient to cover this deficit, but it will require pulling shipments to other markets, possibly even the US. The US accounts for roughly 20% of EU softwood lumber exports.
It’s difficult to say what will happen next with so many global factors at play today. That said, if we assume the reduction in European lumber exports is proportional to the share of lumber exports across its trade partners, that would imply a 1.2-BBF decline in supply to the US market alone on an annualized basis.
Given that the US market remains strong from a pricing perspective, we have our doubts that the pullback will be this aggressive, especially in the context of the European economic slowdown. European suppliers will also need to retool their operations for the pivot to the European market, which will take time.
For now, in our latest Fastmarkets Lumber Commentary, we are making a more conservative call that the boycotts and impact of the war will drive a 600-MMBF pullback in European supply to the US, which we assume will be fully realized by 2023.
Rather than seeing European imports grow from 1.7 BBF to nearly 2.0 BBF by 2023, which was our pre-war baseline, we now expect that volume to drop to 1.4 BBF by 2023. While much remains uncertain – and our outlook for offshore imports will undoubtedly change as the total impact of the war and related disruptions become even more clear – European lumber supply cuts to the US could be prolonged as severed commercial ties with Russia will likely not be repaired quickly even if we see a rapid resolution to the Russia-Ukraine war in the coming weeks.
The Ukraine conflict will tighten global softwood lumber supply
To say the least, the current war is tragic and has already taken a horrific toll on the people of Ukraine. We hope to see a swift conclusion, but it is increasingly clear now that the devastation to Ukraine is substantial and negotiations could stretch for months.
As the conflict continues, it’s clear that the global supply of softwood lumber will be impacted by the ongoing war and its associated boycotts.
Many questions remain regarding how global trade changes will play out, including how much US and Canadian exports to China could be displaced by Russian supplies. Over the medium term, the loss of the European softwood supply will further tighten a North American lumber market already facing fiber constraints.
Ultimately, tighter supply conditions paired with growing lumber demand over the coming years will contribute to what has already been a historically volatile lumber market.
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