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Log Market - September 2008

PF Olsen has been receiving an unprecedented level of direct log supply enquiry from Chinese log purchasers recently. "It is not unusual to receive a flurry of enquiry from offshore buyers from time to time", says Peter Weblin, PF Olsen's marketing manger, "However, I have not seen such a high a level of enquiry before." This is consistent with reports of Chinese log buyer enquiry being reported from big log suppliers such as British Columbia. B.C. forest company TimberWest Forest is reporting that Chinese delegations are sending out feelers to B.C. in their search for supply to replace Russian exports, should the tax go into effect as proposed.

PF Olsen has commenced supplying three new log purchasers in the past 6 months resulting in better prices especially from the smaller export ports. The container trade, in particular has opened up some supply opportunities that were previously unavailable and provided attractive export options for PF Olsen client logs.

North America

An interesting statistic from a recent Crows market report (in the US) suggests that the malaise in the U.S. housing sector may be drawing to a cyclical bottom. Unsold home inventory has been dropping by 10,000 units per month for the past 12 months, and dropped a huge 25,000 units in June. However, lumber consumption in the U.S (which dropped 15% in the first half of this year) is not expected to start growing until the second quarter of 2009. So on this basis, it will still be some time before improvement is felt in terms of NZ log business.

One interesting dynamic of the timber market is that supply of logs and production of lumber and processed timber products has reduced rapidly and helped to underpin prices. For example, lumber and panel production in the US, British Columbia and the rest of Canada is down between 20 and 30% this year compared to production levels last year. Prices are holding as inventories remain tight.

Asia

Despite the Korean economy close to recession and construction activity well down, a fragile balance continues between subdued demand and low volumes being shipped from NZ. In contrast Chinese demand is strong and prices are up accordingly, particularly for industrial grade logs. Russian logs remain very expensive and volumes are well down. This scarcity of Russian product has opened up markets in northern China for NZ Radiata, although it is too early to tell if this new business will be ongoing. Japan remains steady and India is recovering rapidly - post monsoon activity is picking up and the once high inventories have shrunk dramatically.

Turning to NZ, the NZX Agrifax Log Price Index, which measures returns from the whole forest, improved by almost $2 to $73 a tonne in its August report, thanks almost entirely to higher export returns. This is the fourth successive month that the index has risen and it is at its highest level in over a year.

New Zealand

Demand has been steady but the difficult U.S. trading conditions are hitting pruned sawmillers, such as Tenon, hard. The unpruned market is just holding its own with lower logs supply levels matching lower production levels and a weaker market-place. Consequently prices are holding, just. Pulp/chip log prices are set to firm as the sustained period of reduced logging and sawmill activity has cut supplies of logs and chip substantially. Also the export recovery is reclaiming some industrial grade logs that until now were ending up as chip.

Will the proposed Russian export log tariffs trigger a 1993-like price spike?

With the huge increase in the levy on export logs pending early next year, there is considerable speculation on both whether it will actually happen (to the extent announced), and what impact it could have.

Russ Taylor, a Vancouver consultant, in a recent report forecasts that the looming Russian tax on log exports could push markets for North American wood products into the most dramatic supply-side shock since the northern spotted owl crisis of the 1990s. Because Russia is such a huge exporter of logs, a restriction in the amount of logs coming out of Russia will create demand elsewhere. That can only mean increased demand for imported timber and be positive for New Zealand forest owners.

The Russians are on track to raise the export tax on raw logs from its current rate of 25 per cent to 80 per cent effective Jan. 1, 2009. That's going to squeeze European, Chinese and Japanese log supplies, sending a ripple effect into other log suppliers currently depressed log and lumber markets.

Russia is the world's largest exporter of raw logs, supplying 40 per cent of the world's softwood logs. The shock of such a price increase on Russian logs is not well understood because most Russian sales are to China, Finland and Japan.

But in today's global economy, a disruption in one supply chain has worldwide repercussions. "The major question on many peoples' minds is how large the ripple effect will be beyond the main impacted markets," says Taylor

Measures taken to save the northern spotted owl by withdrawing timberlands from logging resulted in a log shortage in 1993 that pushed lumber prices to a record high of $495 U.S. per thousand board feet, almost double the current price of $282 US.

The impact on prices in NZ was even more dramatic (see chart of A grade prices). The peak A grade price, as recorded by this Ministry of Agriculture and Forestry series, occurred in September 1993 at NZ$332/m³.

That supply squeeze, however, was during a period of high lumber demand. With more subdued demand currently, supply-side changes are not likely to affect timber prices as much, although there is a strong consensus that prices will rise strongly. The unusually high level of log supply enquiry from China (see article above) at present is testament to tightening supply and growing concern about the impact of the Russian log tariff.

China continues to grow its role in global timber market

According to China's customs agencies, the total trade value of forest products n China (exports and imports) increased 14% (from the same period last year) to about USD31 billion in the first half of 2008. The total import value was USD14.1 billion, rising 21% from last year, and the export value was USD16.9 billion, up 8.8% from the previous year.

Nearly 16.36 million m³ of logs valued at about USD2.8 billion were imported in China during the first half of 2008, a downward trend of 18.2% by volume. This is broadly consistent with the lower harvesting activity levels experienced in New Zealand during the first half of this year (see last issue of Wood Matter).

With China importing over 10 million m³ of logs from Russia (64% of its total log imports) in the first half of 2008, you can see how important Russia is to the China timber industry (see accompanying table). This explains why the Chinese are so concerned about the impending increased Russian log export tariffs.

It's interesting to see in contrast that China only imported 960,000 m³ of sawn lumber from Russia in the first half of 2008. It is this imbalance, reflecting relatively low value-added processing in Russia that has motivated Russia to introduce the big increases in log export tariffs.

Forest Products Annual Market Review Available

The UN Economic Commission for Europe (UNECE) and the Food and Agriculture Organization of the UN (FAO) has released the UNECE/FAO Forest Products Annual Market Review 2007, 2008. This is an excellent publication for those that wish to learn more about the drivers and trends affecting the global forest products sector. The following link will take you to their website where you have a choice of downloading the full report or selected highlights and executive summaries: www.climate-l.org