Log Markets - February 2008

Export Log Market - at Point of Inflexion?

This market is very much at a possible point of inflexion. November saw some export at-wharf-gate (NZ port) prices rise considerably as high C&F US$-based prices (at Asian ports) coincided with rapidly declining shipping costs and a declining NZ$/US$ exchange rate. The effect was not across the board as some traders were still working off longer-term shipping fixtures and foreign exchange positions.

Agrifax report - "Over the past 14 years, we have never seen such wharf-gate price variances from exporters as we are seeing now, with a standard Korean short log ranging in price from $65 to $105 per metre."

To give a perspective of how much shipping rates have dropped, earlier this year it cost over US$80/JAS m3 to ship logs from NZ to Asian ports. Last week we were told of a $25/JAS m3 fixture (a 68% drop). The NZ$/US$ exchange rate has dropped from a high of 0.82 earlier this year to 0.52 today (a 37% drop).

However, concurrent with these positive changes has been a significant drop in demand and price as a result of the financial crisis and the deferral of the Russian log tariff (final step increase). Our market intelligence is that NZ A-grade prices in China have fallen from C&F US$130/JAS m3 to less than US$100/JAS m3. Despite the price drop, the biggest issue is sluggish demand and building inventory.

The message from the main export traders is clear and consistent. The market is fragile and needs to clear stocks prior to showing any signs of recovery, possibly after Chinese New Year in late January.

Domestic Log Market

Log producers are benefiting from the more favourable exchange rate for their export sales but sluggish demand is capping their ability to fully exploit this advantage. Domestic sales are also weak on the back of the slowing property market and falling residential construction activity, with a small offset from increases in non-residential and infrastructure construction.

In some instances sawmillers are cutting back production, as forest owners are not prepared to reduce prices further, especially with the high export prices on offer.

Overall Log Index and Summary

The following is how Agrifax summarises the situation and outlook. "The NZX Agrifax Log Price Index, which measures returns from the whole forest, rose by $5 per tonne. This is the biggest ever one month rise recorded, and is due to the higher export returns, particularly evident in the North Island. However the whole forestry export scene is going to be very volatile and probably will soften for the next three months, until after the Chinese New Year".