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Log Market - July 2009

Domestic Market

The pruned log market has started to show some strength with the rather over-used "green shoots" metaphor seeming (reluctantly) an apt description:

  • Whilst the US housing market is still very weak, there are signs of improvement. Single-family housing starts are expected to fall to an average-annualised rate of only 370,000 in the first half of 2009 (the lowest level in 59 years), however RISI is forecasting an annualised rate of 700,000 by the end of the year (Note: single-family housing starts are a more relevant lead indicator for timber consumption as they consume a lot more wood than multi-family housing starts).
  • NZ Radiata Mldgs&Btr was described as "firm and tight on the supply side" recently in the Crows Market Report.
  • Remodelling and home improvement work is supporting the market.
  • The Crows Lumber Composite Index has risen from lows of 180 earlier this year to 226 currently.
  • Whilst Radiata pine has made healthy gains in price in the past few months, Ponderosa pine has made even larger gains and 5/4 Mldgs&Btr currently trades at a premium of over US$100/mbf (historically both species trade at similar prices).
  • New Zealand producers are finding attractive alternative markets for clears e.g. Europe.

A large detractor from recent gains in price, however, has been the appreciation in the NZ$. The chart below shows this trend.

During the second half of last year, the $US price of Mldgs&Btr tracked down but was offset by a downward trend in the $NZ so on balance $NZ prices rose. However, a trough in $US prices earlier this year coincided with an appreciating trend in the $NZ. As a result $NZ prices fell away significantly, adversely impacting NZ sawmiller's returns. Fortunately this adverse trend is showing tentative signs of abating.

Specific regional shortages have led PF Olsen to actively support selected domestic processors even if export prices are higher. This support for the domestic sector is important as inevitably there will be times in the future when the volatile export market is unattractive for certain grades of log.

Structural log demand continues to be weak with many of the larger buyers restricting uptake to long-term wood supply agreement volumes only.

Export Market and Ocean Freight Rates

China continues to dominate the market and has been surprisingly resilient to a significant increase in New Zealand Radiata pine volumes, despite some serious port congestion in the smaller Chinese ports such as Lanshan. In addition to the significant government stimulus programmes and the massive earthquake re-build programmes, Russian log supply is down about 25% compared to last year. This has been sufficient to support a continued commitment to increase volumes of NZ Radiata pine to China with volumes supplied so far this year already exceeding total supply for the whole of last year.

Despite steady increases in log price in China, NZ at wharf gate prices have fallen over the past three months as a function of the appreciating NZ$ and a big increase in ocean freight rates. For Handysize vessels (the vessels used to ship logs from NZ to Asia), the ocean freight rate has risen from the low US$20s/JAS m³ earlier this year to spot prices as high as US$38/JAS m³ currently. Vessel availability has tightened up as China has embarked on a big buy-up of iron ore and base metals such as copper. In fact, purchasing of copper by China hit an all-time record high earlier this year, with much of the metal going into stock. This demand is now abating.

In recent months the Baltic Dry Index (a global reflection of ocean freight rate across all major vessel classes) has come off recent highs as shown in the graph below.

The BSI T/C average (most relevant to carriers of NZ logs to Asia), however, has shown more resilience, although there are current signs that rates are starting to fall now.

Agrifax reports that total NZ log export volumes for the three months to May were 51% higher than the same period in 2008 and 34% higher than 2007.

The overall view is that NZ wharf gate prices will be firm to increasing for the balance of the year.