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Log Market - March 2009

Whilst many of New Zealand's primary producers are suffering from weak demand and poor prices, overall the NZ log market is experiencing somewhat of a counter-cyclical situation. However, this is very much a "game of two (distinctively different) halves".

"One Half" - The Domestic Log Market

Domestic market conditions remain difficult with a number of mills announcing layoffs, and some mills struggling to meet payment commitments for logs.

The lowering NZ$ provides no beneficial offset to those log processors supplying the domestic market. Those supplying Australia are enjoying only a small exchange rate improvement, but are facing a very weak Australian housing and construction market.

In areas close to ports, more attractive export log prices are soaking up volume and in most cases this is balancing the lower domestic demand. In some areas however, domestic log market shortages have developed. PF Olsen is committed to supporting domestic log buyers as they provide an important and stable log purchasing base with significantly lower volatility than the export market.

Pruned log pricing is steady around New Zealand with logs continuing to sell for $120-125/tonne (delivered to NZ mills). Those sawmills supplying the US Mouldings and Better markets have seen a continuing erosion in end-product price with the benchmark 5/4 inch flitch price moving down from US$1030 last July to US$750 (per thousand board feet) this month according to Crows market report. Supply is being diverted to the US clear board market (Selects and Commons) where 1x6 boards have maintained a price of US$2000 (per thousand board feet) from July last year to this month. Whilst this latter segment has held up better due to supplying the renovation and DIY market, it is not immune to the prolonged economic weakness in the US.

A much more favourable NZ$/US$ exchange rate is providing some relief from this woeful market.

"The Other Half" - The Export Log Market

The export log market has firmed considerably since the beginning of the year. Prices in March rose $5-$10/JAS m³ from February. The characteristic of this market is the dominance of China which is experiencing three strong market drivers:

  1. The Radiata pine price has become very competitive against Russian logs with Russian logs selling for around US$50/JAS/m³ more than Radiata pine (the premium of Russian logs over Radiata logs last year was usually US$10/JAS/m³).
  2. The Chinese are still very nervous about the imposition of higher Russian log tariffs and are looking for alternative sustainable supply sources. They see New Zealand as a very attractive and long-term supply source.
  3. The Chinese fiscal stimulus package and rebuilding of the earthquake affected areas in Szechuan Province, is buoying construction activity and wood demand.

China softwood log supply is dominated by domestic (within China) log supply of around 100 million m³ per year. Imports of softwood logs comprise some 40 million m³ per year. The domestic logs are relatively low quality but with the much lower price of NZ Radiata pine in China there is substitution away from domestic logs to Radiata pine. This substitution is occurring in addition to that of the Russian softwood logs as mentioned above.

In summary, our favourable exchange rate, and low ocean freight costs are making Radiata pine very competitive in China and supporting strong demand. This is a great situation to be in, although quite vulnerable, as it is based on only one albeit very large economy/market.

In keeping with world commodity markets, demand is mostly weak in other Asian log markets. Korea (which annually purchases some 3.4 million m³ of New Zealand logs; 55% of our total log export supply), is very weak, and despite low C&F prices, sales are also low.

The Japan economy (the world's second largest economy) contracted 3.4% in the fourth quarter of 2008. Demand for logs is low with one exporter predicting that sales of New Zealand logs to Japan this year could be half the volume of last year. India has relatively strong demand but this is a chaotic market with very limited infrastructure to receive, unload and transport logs internally.

Ocean freight has moved up slightly but fixtures are still being made that result in freight rates in the early US$20s/JAS m³. Unless world commodity trade volumes pick up dramatically in the next year or two, the number of new-built break-bulk vessels will keep freight rates low for some time.

In summary, we are experiencing historically good overall harvesting returns. The overall Agrifax Log Index stands at $76/t, $4 above the 10-year average. The concern is that the market strength is all concentrated on China. On one hand this means returns are vulnerable to weakness in China. On the other hand, diminishing supply of Russian logs to China leaves a big supply gap; one New Zealand couldn't get near to filling even with all our export log supply!

People with near-to-harvest woodlots and forests should watch the markets closely. Getting harvest-ready is, as always, critically important to make sure you can respond to market conditions quickly. With returns from harvesting historically high at present, consideration should be given to commencing harvesting mature blocks, or at least getting an up-to-date stumpage estimate. In some areas we have been able to negotiate above-market prices for secured supply and guaranteed payment terms.

If you wish to discuss possible harvesting options, please call you local PF Olsen representative, or FREEPHONE 0800 PF Olsen (0508 736 5736) or e-mail Peter Weblin on peter.weblin@pfolsen.com.