Peter Sjöström, Chief Purchasing Officer at Beijer Byggmaterial shares his views on the general market situation for building materials, the challenges we are facing, and how we view the future.

Juli, 2022

Dear customer,

We are now in the middle of the high season with the holiday season approaching. A much-needed time for rest and recovery for many, after a particularly challenging period for our entire industry.

Reflection and retrospective on the spring of 2022

In the spring, we experienced challenges with both price increases and availability, due to the war in Ukraine. Just as we thought we had emerged from the effects of the pandemic and began to look forward to a more normalised existence, this horrible and incomprehensible war broke out and we were forced to think again.

After the war started, we saw prices of raw materials rise very rapidly, which meant that some suppliers sought to implement prices and delivery terms outside current practices and joint agreements. Something that we have taken from this is not only the importance of agreed rules within the industry and respect for agreements but also that as a large purchaser of building materials, we must improve how we ensure availability via reliable suppliers and diversified supply chains.

During the latter part of the spring, we noticed that, for most categories, the market found alternative solutions to the problem areas that had arisen due to the war. Availability gradually improved, although in many cases it meant higher production and distribution costs. We also experienced a slowdown in the market primarily linked to consumer sales. This slowdown is probably due to a general concern about the weakening economy, but also a shift in how households spend their money after a period of isolation due to the pandemic.

In late spring, we saw some stabilisation in logistics for shipping distribution, despite shutdowns in China causing major delays for global shipping. The availability of containers has improved somewhat, and prices have stabilised, albeit at a high level. In contrast, we have seen escalating problems with land transport. This is due to the shortage of drivers as a result of the war in Ukraine, but also to the fact that the EU has introduced a new regulatory framework that reduces capacity throughout Europe.

Current situation

Our SME customers (local builders) still have a lot to do, and they expect the same demand during the autumn and winter.
For the consumer market, we see a clear slowdown, which for Beijer is mainly linked to home projects such as decking, improving the outdoor environment, facade replacement, etc. For the larger B2B customers (such as regional contractors), accessibility problems and rapidly rising prices have caused great uncertainty due to projects being postponed.

Based on the aforementioned, it is pleasing that availability has, for the most part, been restored to levels seen pre-pandemic and the Ukraine war. We are also expecting significant price reductions from 1 July on a number of more commodity-driven categories. More about that below.
For Beijer and specifically for the purchasing department, this means that the focus shifts from availability to price. As always, we strive for the best conditions for our customers in terms of price and availability.

Despite some uncertainties, we are relatively positive about the coming autumn and winter. We expect a slight decline in new production but continued growth among SME customers, which is the largest customer segment for Beijer Byggmaterial. We also believe that the decline we expect regarding price levels will have a positive effect on demand and hopefully get projects started that have been paused due to uncertainty and skyrocketing prices.

Development by category

Steel - steel joists/rainwater system
The historically high steel prices during March and April pushed up the price of steel profiles. Due to that, we see further price increases during June and July on the finished product. We now see a decline in raw materials. The car industry has moved more slowly and is trying to keep down con-tract periods for prices and challenge with a lower price picture in the future. At the same time, however, energy prices have acted as a brake on lower prices for the finished product. Availability has been good in the spring, despite events in Ukraine. Our expectation is that prices will stabilise during end of summer, to possibly fall during quarter four. However, this is uncertain.

Reinforcement
Quarter two has been challenging for this product area. In connection with the outbreak of war, availability deteriorated sharply due to the embargo on Russian scrap. This created a deficit in the market, which quickly caused prices to rise sharply. Beijer succeeded in maintaining relatively good availability, largely thanks to our international network in the Stark Group and good supplier contacts. However, "erratic" project prices have been a problem. Looking forward, we see that availability is gradually improving and there is currently no deficit. Instead, we see a surplus and slightly falling prices from 1 July, which we predict to continue to fall. Production is very energy-intensive and a continued increase in energy prices or a shortage can have negative consequences on price development.

Insulation - mineral wool
During the spring, we saw very sharp price increases for mineral wool and at the same time a strained delivery situation with extended lead times and limitations in delivery capacity due to quotas. We now see a stabilised situation and shortened lead times. The assessment is that the delivery situation will improve further this autumn and that we will see a more normalised situation.

The sharp rise in energy prices has hit the energy-intensive production of mineral wool hard. The continued volatile energy situation is an uncertainty factor, but our evaluation is that we will see falling prices for mineral wool during the autumn and winter.

EPS/XPS (cellular plastic/polystyrene)
Styrene (EPS, XPS, drainage boards) prices rose sharply during the spring, largely due to rising oil prices. Market players have increased their prices on finished products. Price levels and implementation time have varied, with disparate market prices as a result.
Our assessment is that price levels between the producers will be evened out and create a clearer price picture during quarter three.

Plasterboard
Plasterboard is a product group where we have had major availability and price challenges during the spring. Price levels and the practical handling of price increases have caused problems.
Measures have been taken to handle this type of situation in a better way in the future. We now see a more balanced situation, almost without availability problems. Although some suppliers raise their prices during the summer months, we believe we have seen the peak and that there will be a balancing during the autumn where we should also be able to expect falling prices.

Concrete products
We have not seen any major availability problems, but have, like other heavy categories, seen price increases, albeit lower than for other categories. These increases are primarily driven by higher energy and logistics costs, as well as the price increases Cementa has implemented for cement.
There is continued uncertainty about the future supply of cement due to the situation in Slite, Gotland. In the short term, we see no immediate risks and it is reasonable that the government, regardless of political views, sees the benefit and importance of domestic production of such an important basic commodity for construction.
Going forward, we believe there will be good availability in this category and that prices will be relatively stable for the rest of the year.

Bitumen (underlay felt/roofing underlay)
We have seen drastic price increases for bitumen products and a periodic lack of availability. Price development is largely, but not exclusively, linked to rising oil prices. Going forward, we expect a more balanced market situation with good availability and stabilised prices. However, development is strongly linked to oil price developments.

Joinery

Windows, doors & kitchens
After initially doing relatively well with both availability and price, we experienced challenges in these categories during the spring. This is because previous commodity-driven price increases, which affected other categories at an earlier stage, have now affected more refined products and the war has had effects on components, such as aluminium and glass.

All producers have raised prices and also struggled with longer delivery times. The extended lead times are due to disruptions in production, component shortages and strong demand, which together have generated long delivery times. Looking ahead, we believe that the long lead times will continue during the autumn and then normalise during the winter and spring. Price development is difficult to predict, but it seems likely that the price reductions we now see in more commodity-driven categories will also have an impact in these more refined categories. A forecast for down-ward price adjustments is likely to come at a later stage.

Parquet flooring
We have seen a huge shortage of parquet flooring, primarily for oak parquet, which has resulted in rising prices. This is because a large proportion of the raw material (oak used for parquet flooring) comes from Ukraine. There are also a number of factories that have produced parquet intended for Europe in Russia, which can no longer deliver to Europe due to the embargo.
Going forward, we believe the shortage situation will persist despite now seeing oak raw materials starting to come out of Ukraine and production volumes slowly starting to increase. Production capacity is not meeting demand, which means that prices are likely to continue to increase. Throughout the period, Beijer has had stocks and distributed them to the needs of our priority customers, which we will continue to do.

Retail goods
The availability of the in-store range has generally been good during the spring. Problems that have existed have largely been linked to Asia and primarily China. The logistics problem is partly linked to port closures, and partly to the general shortage situation in the global logistics network. In most cases, we have countered the shortage with goods from alternative suppliers or substitute products. Prices have also increased for the product group. Going forward, we believe in continued good availability but also in some cases prices will continue to rise. This is because raw material price increases have not yet fully taken effect. However, we believe in price reductions for products more closely tied to raw materials, such as fasteners, fittings, etc.

Timber
The year began with falling prices. The war in Ukraine then caused traders and end users to react with great concern and hedge stocks for the coming high season, which generated rising prices for the second quarter. Now we can see that demand did not correspond to the "COVID laden" 2021. There are several reasons for this.

• The "Staycation" effect has worn off and to some extent, consumption is directed away from building and renovating.
• The embargo on Russia and Belarus, which theoretically meant a loss of 8-10% of Western Europe's total need for construction timber, has not had any dramatic effects. This is partly due to the fact that the embargo allowed deliveries of transactions made before the war and because production in Western Europe was scaled up.
• The prices of wood products (and many other construction products) have risen in a way that means customers are choosing not to carry out planned projects.
• General economic conditions have deteriorated with a falling stock market, rising interest rates and inflation. This is visible in large parts of the world and the impact on the Swedish sawmill industry is large as about 80% of all production is exported.

This means that we have seen substantial purchase price reductions on wood products for deliveries in quarter three (after July 1). This applies in principle worldwide. For Beijer, we are looking at reductions of

• Structural timber 10-20%
• Pressure impregnated 15–20% (incl. Adjustments made in May)
• Exterior cladding 7-12%

For the autumn and winter, our assessment is that prices will continue to fall, but not as much as this quarter-turn. It is an uncertain situation with arguments both for and against falling prices.

Arguments for continued falling prices.

• Production in the industry (not just Sweden) is high.
• General activity in the global economy is decreasing and thus also the demand for wood.
• The general uncertainty in the market increases, which normally reduces the demand for non-durable goods.
• Interest rates are rising, which increases housing costs and reduces room for investment.
• The end consumers' focus and consumption after COVID is on something other than renovation.

Arguments for stable or rising prices

• Wood is an increasingly sought-after material. This is partly for climate-smart and environmentally friendly construction, but also because the wood raw material is used in more and more contexts. For example, CLT, fibre for textiles or for fuel.
• Large parts of the forested areas of Canada and southern Europe have been affected by insect infestations and the spruce bark beetle has caused great damage also in Sweden. This has a major impact on the supply of high-quality spruce and pine.
• The effects of the embargo on Russia and Belarus may have a greater impact and create a deficit.
• Price reductions with respect to building materials and especially on wood products creates increased demand.

Processed wood products
We have seen major price increases and poorer availability of processed wood products, although it has varied somewhat within the category. The availability is now basically restored for glulam, LVL, mouldings, and special decking. Problem areas still exist in certain wood species such as European oak and aspen.
We do not yet see any price reductions regarding processed wood products, and we expect continued improved availability and perhaps even falling prices during the autumn/winter.

Wood-based board materials
The spring has been challenging for this category and this continue. Initially, this category, like wood products, experienced a bunkering of supplies and rapidly rising prices after the war started in Ukraine. One of the main problems is that approx. 30% of all plywood in the world is made in Russia and Belarus. Although the main problem is birch plywood, the supply of our construction plywood of spruce and pine has also been affected.

After April, we saw a slowdown in demand for wood-based boards similar to wood products. This decline has not been offset by the reduced supply in the case of plywood but definitely in the case of OSB, where we have no supply problems. The situation has led to prices of construction plywood rising at the same time as OSB is falling. This in itself has happened before as OSB has a more volatile price structure, but the current difference between these, in many cases substitute products, is rarely seen.

Going forward, our assessment is that accessibility problems for plywood will continue and thus we have begun work to find products in other parts of the world. We hope to see the effects of these efforts already during the current calendar year. We would like to point out that this type of launch must take place with full documentation and considering the environmental consequences of longer transport times.

In terms of price, our view is that plywood will be balanced during the autumn and possibly fall slightly. As the supply is so limited, we do not anticipate any major price falls. Regarding OSB, we already see double-digit price falls and it is not unreasonable to assume that the decrease in price will continue, however, it is difficult to assess exact levels.

With regard to other wood-based boards, these have generally worked relatively well, but during the spring we have had major availability problems regarding chipboard for flooring and melamine-coated chipboards. In both cases, we have also seen major price increases. We now see more balanced availability and our assessment is that these prices will also start to fall in the second half of 2022.


Feel free to contact me or your local contact person at Beijer if you have questions or comments on the content.

Sincerely

Peter Sjöström
Chief Procurement Officer
070-541 69 66
peter.sjostrom@starksourcing.com.
Stark Sourcing Sweden / Beijer Byggmaterial AB