Log Market - February 2009

The demand in NZ, Australia and US for structural and pruned lumber remains very weak and we can expect little improvement in pruned and structural log prices until confidence returns to the construction sector in those markets. There is weakness in pulp log prices and demand following softness in the pulp and paper and Australasian wood chip market.

Since the beginning of the fourth quarter last year C&F log prices (prices paid in destination ports) for export logs have dropped by US$50/JAS in China and Korea and up to US$70/JAS in India. Much of this has been offset by a rapid decline in ocean freight costs (down by around US$40/JAS from US$65/JAS to US$25/JAS) - see Ocean Freight below - and a more favourable NZ$/US$ exchange rate (declining). Some freight fixtures are reported to be sub-US$20/JAS (1 port to 1 port) but generally vessels are doing more multi-port deliveries as traders try to find regional strength in market demand.

A huge challenge for the log export trade has been trying to read the prospective demand situation in China and establishing satisfactory payment terms as banks closed up credit and Letters of Credit became difficult to establish.

However, PF Olsen is fielding strong enquiry from both direct end-users and traders active in China and India. Prices are likely to remain flat in the medium term as Russian supply is still active, but Chinese buyers at least are now nervous about the future of Russian log supply with punitive export log taxes deferred but not dismissed. Some are seeking to switch now to what they see as a more reliable and sustainable supply from NZ. The Chinese infrastructure stimulus package and rebuild of the earthquake damaged buildings in Sichuan will also help.

The NZX Agrifax Combined Log Price index stayed very stable compared to last month at $78/tonne. Interestingly, this is $7/tonne higher than the same time last year and $6/tonne ahead of the five year average.

Ocean Freight

The collapse in the break-bulk ocean freight market has lead to a new phenomenon whereby brand new break-bulk vessels are manned with a skeleton crew and cast adrift on the ocean. This is a result of the vessel not having an immediate commission, and it being too costly to be moored along-side port facilities.

A massive drop off in demand for break-bulk shipping has combined with a high number of new vessels rolling out of ship yards (stimulated by the very high ocean freight price 6-18 months ago). In addition, the price of scrap steel has dropped so much that scraping older vessels is unattractive at the current time.

The chart below shows the widely monitored Baltic Dry Index. Note that the index has reversed its rapid decline in recent weeks and started a small climb as demand for steel and coal to China increases after the Chinese New Year.