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Log Market and Ocean Freight - August 2010

Export Log Market

August has seen continued reductions in wharf-gate prices around New Zealand. Export log prices fell some $2-6/JAS m³ as ocean freight costs rose and CFR prices continued to drop (CFR prices are the US$ denominated prices in destination ports).

The good news is that around mid August there was a strong signal that CFR prices had stabilised (at USD120/JAS m³ in China) and stocks were moving off the ports well in China. PF Olsen has had consistent messages from a range of end-users in China and log traders that prices have reached a trough and were expected to slowly improve from September. At the current price in the market, New Zealand Radiata pine is very competitively priced against alternatives such as Russian logs, US logs and lumber and domestic logs.

The state interventions to tighten credit and dampen property inflation in a bid to make China's economic growth more sustainable appear to be working as intended. Economic growth in China for the second quarter of 2010 is forecast at 9.2%, down from 11.9% and 10.7% growth in Q1 and Q2 respectively. Whilst this may dampen demand slightly (and has contributed to the weakness in the log market in the past four months) it bodes well for future demand and strength in this market in the future.

Whilst the tariff on log exports from Russia has reduced Chinese log imports from Russia, this has been partially offset by increases in lumber imports which have doubled from 2008 levels. This was very much the intention of the tariff; an increase in value-added processing in Russia, although reports suggest that the degree of processing is very minimal in some cases – just enough to be able to classify the product as lumber rather than logs and hence avoid the tariff.

India continues to be an important developing market. For the 12 months to June, over 1.0 million cubic metres of logs were exported from New Zealand to India, twice the volume from the prior 12 months.

Wharf-gate prices in New Zealand will be particularly affected by the NZ$/US$ exchange rate and ocean freight rates in September as CFR prices are expected to only firm slightly.

It appears that the recent upward movement in the NZ$/US$ has been affected by the newly announced quantitative easing (monetary policy) announced by the US Federal Reserve. This will tend to limit any falling the NZ$/US$ in the immediate future.

Longer-term, demand and prices are expected to continue their bullish trend. The level of enquiry for supply has not changed. Looking to New Zealand for sustainable and reliable supply of Radiata pine logs is being adopted as a long-term strategy for many Chinese log processors.

Domestic Log Market

Prices for domestic logs have remained stable with most price reviews occurring quarterly. Major export markets for New Zealand processed forest products have been largely stable with some weakness in US and Asian markets.

Both residential and non-residential sectors of the New Zealand construction market remain weak and whilst well above 2009 activity levels, are well below 2008 and five-year average levels. However, reduced capacity in production of staples such as framing lumber has meant most producers are able to sell current capacity without damaging price discounting.

Continued strong demand for pulp logs has seen a slight increase in average pulp log prices.

Ocean Freight

The drop in freight rates reported last month has reversed and risen just as rapidly.

At mid August the Baltic Dry Index (BDI) was just below 2,500, up from just below 2,000 as reported in last month's Wood Matters – an increase of 25%! As well as being influenced by increasing orders of steel and coal by China, the massive forecast reduction in Russian grain exports due to drought is also adding to upward speculation on freight rates. The expected lower Russian grain exports are pushing up grain prices which are expected to stimulate supply from sources that will result in greater freight-miles per tonne of grain.

As usual the Handy-size sector (used to freight NZ logs) has been less volatile.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 135  
Structural (S30) 101  
Structural (S20) 86  
Export A   87
Export K   81
Export KI   76
Pulp 52  

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.