My recent exchange with regional top executives: End of the construction boom - are forestry related industries now collapsing in the Black Forest?
- the haptic investor
- 2. Aug. 2024
- 5 Min. Lesezeit
This week I met influential industry insiders. Our main topic: The decline in the building industry and its catastrophic impact on forestry related industries in Southern Germany & the Black Forest.
The building industry has long been a driving force in economic development, providing employment and growth opportunities for various sectors. In Southern Germany and especially the Black Forest, the forestry industry plays a pivotal role in supplying raw materials to support construction projects.
However, recent conversations with a top manager of the forestry industry in the region have revealed a looming crisis. The decline in the building industry is set to cause massive problems for local saw mills, kitchen builders, roofers, carpenters, and other businesses associated with the forestry sector.
In this week’s edition of THI we will explore the interconnectedness between these industries and elucidate the implications of the building industry's decline on each of them.
Local Saw Mills
Saw mills are a vital component of the forestry industry, converting raw logs into usable lumber. The decline in the building industry directly impacts saw mills as their primary customers, such as construction companies and contractors, experience a decrease in demand for timber products. With reduced orders, saw mills face declining revenues and potential financial strain. They may be forced to downsize their operations, leading to job losses and economic instability in the local communities they serve.
Said top manager meant the following, quote:
Mr. Haptic Investor (that’s not what he calls me obviously), there are two types of sawmills:
1. sawmills that have invested heavily in industry and no longer have a financial cushion, but are technologically well positioned for the future.
2. sawmills that have not invested, are sitting on high cash amounts, but have an investment backlog.
But do you know what both have in common, Mr. Haptic Investor? Empty order books. And let me tell you one thing. The companies that have not invested are at least sitting on enough cash to get by. If you are asking me the future is uncertain. I know as a fact, that many small saw mills went into short-time work (German: Kurzarbeit). I don’t know how many will survive, but I am very sure that there will be bankruptcies. And usually this is the time where these companies gather their wood. When winter comes and the snow prohibits workforce from entering the forests in higher regions the income streams are cut off, for many of them.
Kitchen Builders
Kitchen builders heavily rely on the building industry as they design and install kitchens in newly constructed homes or during renovations. The slowdown in construction projects leads to fewer kitchen installations, resulting in decreased demand for their services. Consequently, kitchen builders face reduced revenues and may struggle to sustain their businesses. Job cuts and diminished opportunities for growth in the industry can have far-reaching consequences, affecting not only the builders themselves but also the suppliers and manufacturers they collaborate with.
I also spoke to one of the top salespersons of a kitchen builder with almost 30% market share. He told me the following:
Due to the increasing prices in construction goods, legal and political uncertainties (heat pumps / photovoltaic panels / property tax reforms / raising costs of capital) the market is standing still. People either don’t want to or simply can’t buy new homes or renovate existing houses at the moment. Usually there were about 400.000 orders per year in the whole region, of which our very company used to get roughly 120.000. Yes, this average includes the boom years of the building industry. And now? I can’t tell you the exact number for obvious reasons, but let me put it this way: we are very concerned and we are a big player in this game. If we are struggling, I don’t want to know, what smaller competitors have to deal with.
Other industries
I don’t think I have to explain, that there are plenty of other industries or crafts that are impacted by this development, such as roofers, carpenters, furniture makers and the forestry industry itself. The forestry industry is very interesting for several reasons as well.
The decline in the building industry directly affects the forestry industry, which serves as its primary source of raw materials for all the industries mentioned above. The reduced demand for timber products leads to a surplus in the market, potentially driving down prices (wood chip prices and pellet prices have been falling drastically, even though wood chip prices are rising again as I’m typing this article) and affecting the profitability of forestry operations. Moreover, a decline in logging activities may have environmental consequences, as sustainable forestry practices may become less economically viable. This, in turn, affects the health of local ecosystems and the long-term sustainability of the forestry industry. But keep in mind that most of our wood is PEFC or FSC certificated, so it is not that bad enviromentally to be clear.
My take
The decline in the building industry presents a severe challenge to the interconnected network of industries supporting construction in Southern Germany and especially the Black Forest.
The repercussions extend beyond the sectors I decided to focus on, impacting suppliers, manufacturers, and the overall economic stability of the region. It will be very interesting to see what happens to the Black Forest forestry industry, which is a very very important part of the economic ecosystem.
I do agree with the top salesperson: increasing prices in construction goods, legal and political uncertainties and the general economic development, such as heat pumps, photovoltaic panels, property tax reforms, rising costs of capital, rising electricity prices and other factors put an immense pressure on home owners, house buyers and the forestry related industries.
Let’s hope that the worst case scenarios - knock on wood (yes this is a very well placed wordplay) - do not become reality. But I am almost certain that hoping and praying are not the solutions the industries want or need.
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