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Log Market - August 2008

After hitting a low in November 2007 last year and drifting sideways for several months, export log returns slowly increased to a "peak" in February 2008 and then drifted downwards. There is strong consensus that April/May at-wharf-gate prices are a low point with expectations of firming prices for the balance of the year and beyond.

The domestic market, which has held up much more consistently for some years, is now showing distinct signs of weakness as the fall out from the credit crisis and slowing growth rates in New Zealand, Australia and the US crimp demand and put pressure on prices. The NZ Timber Industry Federation recently reported significant over capacity in the NZ sawmilling sector and pruned log processors are facing very weak conditions in the key US market.

An outcome of the market volatility can be seen in recent MAF production statistics. Total production-forest harvest volume dropped to 4.17million m³ in Quarter 1 2008 compared to 4.67 million m³ for the same quarter a year earlier; an 11% drop. This drop is in direct response to falling log prices as standing inventory of mature timber rose during the same period. What this means, is that when prices rebound, more and more forest owners will be chasing fewer and fewer harvesting crews (see Harvest-Ready story above).

 

Outlook

Rather than spend time lamenting the current market situation, it is more useful to look at some of the drivers that are expected to influence the market going forward.

The general consensus amongst market commentators is that export log prices will strengthen through the remainder of this year and early next year. This is due to several fundamental factors working in our favour:

  • Russian log tariffs are programmed to increase to 80% of log value (from 25% currently) or a minimum of €50/JASm³. Russian log supply as reported by the Japan Lumber Journal has dropped such that Japan is reported to be having an "absolute shortage of supply" of Russian wood.
  • Softwood export volumes from New Zealand and Australia have dropped by an estimated 18% compared to last year.
  • Strong demand and reducing inventories of logs in Asian markets are seeing pressure on US$CFR prices (prices paid by log buyers at the destination port).
  • Stable, albeit high, ocean freight rates with some downside commencing.
  • Increased containerisation to mitigate high break-bulk ocean freight rates.
  • Some (continued) lowering of the NZ$/US$ cross rate.

Just how these factors play out in terms of at-wharf-gate prices is difficult to predict. One of the leading NZ log exporters we supply is forecasting price rises of $15 to $20/JASm³ through the end of this year.

Domestic log market conditions face strong head-winds with continued deterioration in the property market, the threat of stagflation and little room for the Reserve Bank to significantly lower interest rates. To some extent, increasing export log prices may provide a floor for domestic log prices. In addition, major offshore markets for our sawn and processed products face a similar domestic situation. Some relief may come from lowering NZ$/US$. Pulp log pricing should strengthen as high stocks from land conversion projects disappear and lower grade logs are exported.