EU tropical wood imports slow despite improving economic conditions

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The decline in tropical wood imports into eurozone countries is surprising given evidence of improving economic conditions in the region. Growth in the eurozone picked up to its fastest pace since 2011 in the second quarter of this year, with GDP in the past 12 months rising by 2.2%.

In the three months to June the eurozone economy grew by 0.6%, matching the same healthy number from the first quarter of the year. German GDP grew by 0.6% in the quarter, Spain’s by 0.9%, France’s by 0.5% and the Netherlands by an unexpectedly strong 1.5%.

This positive trend has contributed to a sharp increase in the euro-dollar rate, from 1.05 in early January 2017 to nearly 1.20 by the end of August. It’s possible that this rise in rates is acting temporarily to discourage imports. EU buyers are often unwilling to build stock at a time when euro import prices are falling and they anticipate further price decreases in the future.

It is significant that the UK is the only major EU market where tropical wood imports held up well in the first half of 2017. UK imports increased 21% to 90,000 MT during the period.

Again, this seems to conflict with underlying economic trends. The UK grew by 0.3% in the second quarter of 2017, a significantly slower rate of increase than the major eurozone economies. Much of this growth was driven by the service sector. Industrial output shrank by 0.4% and construction contracted by 0.9% during the same period as uncertainty has mounted since the Brexit vote.

This uncertainty is also reflected in exchange rates. The British pound has weakened sharply against the euro and stayed quite flat against the dollar this year. In contrast to eurozone importers, those in the UK had an incentive to build stock in the first half of 2017 in expectation of a further weakening in the exchange rate and rising import prices later in the year.

If the divergent trend in UK and eurozone imports of tropical timber in the first half of 2017 is driven mainly by short-term changes in exchange rates, then a reversal may be expected in the second half of the year - UK imports are likely to slow and eurozone imports to rebound again.

However, if the downward trend in the EU tropical timber trade continues, even as economic activity recovers in the eurozone, then it will be necessary to look to more fundamental causes.

It is possible, for example, that the combined effect of increased EUTR enforcement, limited availability of independently certified or legally verified tropical timber, the difficulty of demonstrating negligible legality risk in the absence of such certification, the existence of large alternative markets where there is still little demand for such assurances, and the further development of wood and non-wood substitutes, will be a long-term and ever deepening slump in the EU market for tropical timber products.

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