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Log Market - April 2010

Export

High log inventory in China continues to weigh on the market and price has declined for the past 2-3 weeks. Currently the price of A grade is reported at USD135-140/JAS m3 CFR (cost and freight). This decline is making anyone holding log inventory nervous. In a rising market, holding inventory is advantageous. In a declining market, however, it can quickly produce large losses for traders. So far, there does not appear to be panic-selling and the drop in price is being used to stimulate demand from end-users to clear the stocks. If this happens in an orderly fashion, price should stabilise.

Some diversion of volume to Korea and India will assist with inventory reduction in China.

The drop in CFR price hasn't impacted much on New Zealand at-wharf-gate prices yet, as prices were set at the end of March when CFR prices were higher. If the current situation continues, we expect NZ at-wharf-gate-prices to drop in May.

Domestic

As anticipated, domestic log prices rose for the second quarter (April-June 2010). This is in response to pressure from higher export log prices to secure volume for domestic log processors. Fortunately, most market segments have seen wood product prices increase and some have also benefited from favourable movements in foreign exchange (e.g. lowering NZD/AUD cross rate).

There is strong demand for sawn timber. Sawn timber production for the December 2009 quarter was up 18% on the same time a year earlier.

Increases in US lumber prices have been attributed an improving trend in US housing data and to a response to the Chilean earthquake.

Ocean Freight

New Zealand break-bulk ocean freight rates have continued to firm with spot prices around USD50/JAS m3. This is a continuation of a trend of steady price increases from the beginning of last year when rates troughed at around USD20/JAS m3. This is a similar trend to the Baltic Dry Index which responds to global supply and demand for ocean freight.

There are widely divergent views in the market place of the direction of ocean freight rates for logs from New Zealand. Although the current rates are historically high, the improving outlook for global growth and the declining age of the global Handy-size fleet (the sector that transports NZ logs) will tend to underpin rates.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 130  
Structural (S30) 100  
Structural (S20) 83  
Export A   107
Export K   100
Export KI   94
Pulp 49  

Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only.

Commentary: Why is Volatility Damaging for the Forestry Sector?

Readers may have heard the term (high) volatility to describe the forestry sector. What does this mean, and what are the implications? Firstly, in this instance, we are referring to the harvesting and marketing part of forestry (although forest establishment and silviculture experience similar high volatility in levels of activity).

Take look at the chart of Ministry of Agriculture and Forestry quarterly prices below (adjusted for the inflation per the CPI). These are prices for the two main export log grades (A grade and K grade). From this chart you can see that prices can double or half over periods of three years, and increase/decrease by 150%/50% over periods as short as one year.

Fortunately, domestic log prices tend to be more stable, and dampen the impact of this volatility (more on that later).

These wide swings in prices occur hand in hand with wide swings in volume (i.e. activity levels).

So what is the impact of this volatility?

  1. We go from one extreme of too many harvesting and cartage contractors and not enough work, to acute shortages of contractors. Contractors become reluctant to invest capital in equipment and training. Workers experience redundancy and dislocation. Innovation, productivity improvement and safety suffer.
  2. Infrastructure such as port facilities are either under-utilised, or over-crowded. Planning becomes guess work, and confidence in investment in additional facilities fades.
  3. Similar adverse impacts on all service firms supporting the harvesting and marketing sector, such as professional managers, inventory contractors and port services firms.
  4. Planning and budgeting becomes very difficult. Actual results vary significantly from expectations.
  5. Forest owners/investors become disillusioned when returns are significantly below expectations.

So what causes this high volatility? There at three main drivers, all of which themselves are highly volatile:

  • The foreign exchange rate.
  • Ocean freight rates.
  • Log price at destination market.

Therefore, the volatility for the export log sector is structural and unlikely to change in the near future.

As mentioned above, the domestic log sector exhibits less volatility. And less volatility will result in a stronger forestry sector overall.

Therefore as New Zealand's log harvest increases from the current 23 million m3 level to the forecast 35 million m3 in the next 10 years, it would be highly desirable if most of this increase was taken up by expansion of a competitive and sustainable domestic log processing sector.

It is in the best interest of all forest owners and forestry services firms to share this vision and goal and actively work toward making it a reality.