Wood Matters

Another month of steady pricing in both export and domestic markets for unpruned grades and continued increases in pruned log price and demand.

Export Log Market

CFR pricing (price of logs in destination ports) has been steadier-than-usual in most markets this year with the exception of India. Over-supply of NZ radiata logs in India in May/June resulted in significant price falls and market disruption. Hopefully as stocks clear, the market will get back to normal. Total China log demand is about 9% lower year-to-date than this time last year on the back of a lower economic growth rate. GDP growth is forecast around 8% for 2012 (with a lift in the second half of the year) versus growth of 9.1% in 2011.

The volume of logs delivered from NZ to China exceeded supply from Russian in June for the first time ever.

Log off-take/consumption in China has been steady with inventory estimated at a comfortable level just below 50 days supply.

The consensus view is that China will avoid a "hard landing" (one where gross domestic product (GDP) growth falls below 7%). China has considerable capacity to stimulate growth via monetary policy easing fiscal spending stimulus, but sill faces weak demand for its export products from all-important markets like Europe.

Europe remains a major source of volatility. Spain's 10-year bond yield temporarily spiked above 7.5% last month but has retreated since. More progress has been made towards a banking union although initiatives have fallen short of a Euro-bond purchasing programme, generally regarded as the best mechanism to restore confidence. Nevertheless, problems in the region are a long way from being resolved and will remain a source of volatility in commodity markets for the long-term.

Bulk commodity demand and prices have continued to fall this month. Prices for iron ore and coal have fallen to their lowest level since 2009. Reduced demand for these bulk commodities has resulted in lower freight demand and has seen the dry bulk freight market decline again this month. Rates for the handy-size sector have fallen along with the Baltic Dry Index. In the past four weeks handy-size rates as presented by RS Platou have dropped 20% (see chart below). Average shipping costs are in the late US$30/JAS m³.

(chart courtesy of RS Platou Research)

Export pruned prices continue to increase, driven by strong demand from China (see dragon babies piece in last month's Wood Matters). This is increasing the pruned log premium (the price difference between pruned logs and equivalent size unpruned logs) which ranged from $80-$120/m³ in the 10 years to 2005, and subsequently reduced to $20-$30/m³ in the past two years. Today the premium is $40-$50/m³. This premium also varies between logs that can be debarked and anti-sap stain sprayed (DASS) and those that cannot. The former fetch a $10-$15/m³ premium (even after accounting for the extra cost of the DASS treatment). Sap stain (sometimes called blue stain) is endemic in radiata pine logs. It doesn't affect the structural quality of the wood, but does affect the visual appearance. This can be masked by finishing wood products made from sap stained wood with a dark stain. However, for end-uses that require the clear, white look of pine, the logs processed must be free of sap stain. So long as pruned trees are felled and delivered to the treatment plant in a timely manner, the DASS treatment ensures that the pruned logs arrive in China free of sap stain. For pruned logs delivered to China with bark on, it's more of a lottery. Depending on the season (weather) and time in storage, the logs are likely to have some incidence of sap stain (although the degree of incidence will vary considerably and unpredictably) – hence the at-wharf-gate price of such logs is lower. Unfortunately, only Port of Tauranga and Eastland Port – Gisborne have DASS treatment facilities, restricting the ability to tap into the higher-priced debarked log segment. However, should the price premium for pruned logs persist, the business case for investing in DASS facilities at other ports will become compelling.

Sap stain-free lumber cut at Lanshan, China from sap stain-free logs supplied by PF Olsen.

With log inventories at manageable levels, demand for logs is expected to increase as we move into the seasonally strong September-December period. Unless there is a sudden surge in supply of logs from other countries (and this is not expected unless CFR prices increase dramatically), most commentators are expecting log prices to firm for the remainder of the year.

Domestic Log Market

The housing market continues a slow recovery, lead by Auckland and Christchurch. The BNZ REINZ Residential Market Survey has found continued strong interest in the market from buyers including investors and first home purchasers, but with no indication of a rise in listings to alleviate worsening shortages of housing stock. The situation varies amongst regions with Northland in stark contrast with prices perceived as falling with little new interest from first home buyers or investors.

New Zealand's economic recovery progresses at snail's-pace. The unemployment rate, at 6.8%, is only marginally below its 6.9% peak. Job numbers are up only 0.6% in the past year. Last year dwelling consents were at a four decade low and retail spending per capital is 5% below its 2007 peak. Whilst continued improvement is expected, deleveraging (private households reducing debt), the high NZ$ and chronic uncertainty around Europe is expected to result in modest GDP growth for the foreseeable future (more likely around 2% than the average of 3.5% from 1992 to 2007).

Momentum from the Christchurch rebuild and a shortage of housing stock (in both NZ and Australia) is expected to provide support for the construction and wood products sectors.

Economic indicators from the US have been soft in recent months; industrial production has slowed, retail sales are declining and labour force data has weakened. The housing sector continues to show solid signs of recovery boding well for demand of construction materials, including wood products.

Good quality pruned logs have strong demand, especially in the central north island.

Domestic pruned log prices increased one dollar on average. We have added a price for export pruned logs based on the strong demand and prices. It should be noted, however, that there is a big premium for export pruned log prices at ports where the logs can be debarked and anti-sapstain treated (only possible at Port of Tauranga and Eastland Port, Gisborne – see commentary above).

Indicative Average Current Log Prices

Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only.