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The Log Market - February 2010

Strong Start to 2010

January and February saw increases in log prices both from export logs and domestic logs (pruned and structural). There are strong indications that export prices will lift again in March. The A-grade price is currently over 100/JAS m³ at main NZ ports and is forecast lift by 10% in March.

China now comprises some 70% of NZ log export volume so is a critical player in the market. Radiata prices in the Chinese market (US$ CFR prices) now exceed the record levels achieved in Q3/Q4 of 2008. Exporters are expressing some concern from May onwards, based on:

  • - Potential cooling of Chinese demand from government credit restrictions and the onset of the hot season (a seasonal reduction in demand and price is typical around April/May).
  • - High Radiata prices stimulating competing supply of logs from Russia and logs and lumber from the US and Canada.

However, a number of positive factors may more than offset these negative factors:

  • + High level of long-life infrastructure projects on the go.
  • + A pledge by the government to demolish city slums and build more affordable low rent housing.
  • + Increasing cost of getting Russian logs to market and current 25% tariff (and still the prospect of a tariff increase).
  • + A strategic shift in purchasing strategy to more sustainable NZ Radiata log supply.
  • + Increasing economic activity in North America could result in more logs and lumber consumed domestically.

On balance, it is not expected that Chinese demand will collapse although prices could ease. However, increased demand and prices from Korea and India will tend to cushion such downward pressure.

Foreign exchange and ocean freight have stabilised in recent months. The NZ$:US$ cross rate is currently fluctuating in a band just below 0.70 and ocean freight is being fixed in range of early to late US$40s/JAS m³ depending on load and discharge port configurations.

For the first time in a year the NZX Agrifax Combined Log Price Index, which measures returns from the whole forest, has lifted to just above NZ$77/tonne. In January of last year it was 78/tonne (its peak for 2009). The minimum value in 2009 for this index was reached in June when it was at NZ$72/tonne.

Trying to Avoid the Hype

It appears that a number of main-stream media have picked up on Issue 25 of the TimberFed News (December 2009) and are over-sensationalising the strength of the timber and log market.

Yes, the China market has significantly increased importation of New Zealand Radiata but this was in a context of very sluggish demand from Japan and Korea for most of the year. And whilst at-wharf-gate prices have firmed with A-grade moving from around NZ$80/JAS m³ to $90/JAS m³ through last year, this increase was off a low base.

A strong export log market and increased production levels by New Zealand wood processors will put pressure on supply of domestic log grades and we are seeing strengthening prices. But bear in mind that despite much stronger exports of sawn timber to Asian markets, the prices paid in these markets are typically much lower than Australia, USA and Europe. This will constrain the ability of domestic processors to increase log price and stay viable.

Too much hype about the market can lead to irrational actions, such as flooding export markets with too much supply, and starving the important domestic processing sector of much needed logs. If export log markets crash, the relative stability of the domestic log market is very important.

"The last thing we need is a stampede of forest owners for harvesting", notes Peter Weblin, PF Olsen's Marketing Manager (see photo below). "It appears that with some forest owners, there appears to be a switch - either it's "on" or it's "off" - with regard to harvesting intentions. Often it's when A-grade hits $100 that the switch goes on. When large numbers of forest owners rush for harvesting, especially when they are not harvest-ready, they end up with either undesirable harvesting results from too much haste, or going on a waiting list to get capacity. A very frustrating situation for all parties." 

Whilst a strong market provides welcome increased returns for forest owners, it increases volatility and the probability of a strong market correction. High market volatility creates unintended negative consequences which the industry pays for subsequently.

Forest owners who have taken our advice and become harvest-ready are in the best position to make the most of the strong market situation. If you are not harvest-ready, then now is still a good time to do so, but the process may take longer than usual, and there is no guarantee the market will still be strong when you are ready to harvest.