Log Market and Ocean Freight - December 2009

It's hard to ignore the stark contrast between the log market now and this time last year.

Domestically, last December we were facing the unknown, but daunting, repercussions of a major global financial crisis.

In terms of the export log market, this time last year, the main pillar of market strength, China, was cancelling orders and battening down the hatches. Log suppliers faced the prospect of having to reduce production in the New Year.

Fortunately the malaise that hit the China market reversed as rapidly as it occurred and by the end of the first quarter of 2009 demand and prices picked up considerably. The market continued to strengthen (with some minor blips) through the year. Even a concerning China log inventory build in August failed de-rail the strengthening trend.

To put it in perspective, it was hard to sell Radiata A grade for USD80/JAS (CFR) m3 in China in December 2008; now prices are around USD125/JAS m3. However, much of that price increase has been offset by the strengthening NZ$ and increasing ocean freight rates. Such was this offset that NZ at-wharf-gate prices have only increased from around NZ$78/JAS m3 to $92/JAS (Port of Tauranga) through the year. Ocean freight rates have moved from a low of USD25/JAS m3 earlier this year to a high of around US$50/JAS m3 for spot rates currently.

As the year comes to an end, China has become New Zealand's largest consumer of logs, with volume exported to China this year expected to be about double that of 2008. Fortunately demand and shipments to Korea and India are buoyant, providing valuable pricing and volume tension in the market.

Whilst the domestic market is still relatively weak, there are definite signs of increasing demand for wood products in New Zealand and Australia and some large processors are reporting low inventories of product. One large processor recently commented to PF Olsen that they have been caught out by the swiftness in the turn-around, and are playing catch up with production. We understand that a number of mills are planning increased production next year.

So, "touch wood" 2010 may see a strong log market and raising fortunes for forest and woodlot owners harvesting their long-held forest assets.