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Log Market - April 2009

Export

The same drivers as last month prevail, with increased intensity of demand from China. Enquiries for log supply to China reached an all-time high at PF Olsen in the last week, averaging two per day. This is usually a good indicator of near-term market strength. A shortage of Russian logs and a large gap between NZ Radiata pine and Russian log prices is helping to push up demand and CFR pricing (CFR pricing is the price of logs at the port of destination). This increase in CFR price is important as ocean freight rates and foreign exchange have both had an adverse change of around 15% over the past month. The net result has been stable to slightly reducing export log prices at-wharf-gate (NZ) in April.

Large volumes of NZ Radiata are now being diverted to China and there is concern that high levels of supply will coincide with typical easing of the China market at this time of year. The difference this year, however, is reducing Russian supply. Reductions in the 20-25 million m3 annual log supply from Russia to China is proportionately very significant compared to the 2 million m3 annual New Zealand log supply to China (2008). Therefore reducing Russian log supply could leave a supply gap that New Zealand log exports couldn't possibly fill even with very large increases in supply.

However, there have been recent reports that the Russian Government is considering the possibility of cancelling export duties on logs for some species for companies that are involved in large investment projects. This concession, if implemented, shows that Russia intends to expand domestic processing by using both a carrot (the concession) and a stick (the log export tax scheduled to increase from 25% to 80% later this year or early next year). This concession may work for companies based in Finland who have been importing logs from Russia. Whether this carrot, if implemented, will result in Chinese companies investing in wood processing in Russia is yet to be seen.

Korean log buyers are still facing tight credit conditions but demand is building. Increased volumes are expected to Korea in the next few months.

Similarly demand is increasing in India but India remains a very challenging market.

Japan log buyers are very pessimistic, weighed down by a very poorly performing economy and weak internal as well as export demand. There is significant downward pressure on log price.

Domestic

Weak manufacturing and construction sectors have contributed to the New Zealand economy experiencing its largest contraction in 16 years. Gross Domestic Product fell 0.9% in the December 2008 quarter. Residential building consent activity continues to be very low. We are seeing more mills reducing operating hours or reducing shifts or even closing. Payments for logs from many mills are becoming delayed and some mills have fallen into receivership. Domestic log processing heavily reliant on export markets are still experiencing weak demand/price as most customer's economies contract. The reversal of the trend of weakening NZ$ is putting further stress on mill's viability.

This is a challenging area for PF Olsen, balancing mill's needs for log supply at affordable prices with trying to maximise forest owner returns but not take on unacceptable credit risk. In some areas we have been able to increase log exports at good prices to balance supply and demand. This often means transporting logs over longer distances.