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Log Market and Ocean Freight - July 2010

Export Log Market

Radiata log inventories in China have remained steady at around 750,000 m³. With consumption estimated at around 500,000 m³, this makes stocks 1½ months of consumption. This situation, whilst not necessarily serious in terms of the health of the log market generally, suggests further weakness in price is likely. This will be offset to some extent by reductions in ocean freight (see below).

Increased supply of lumber from Canada and logs from the USA are contributing to weak market sentiment for NZ Radiata, along with a slight slowing in the Chinese economic growth rate. The supply of North American logs and lumber is expected to ease in the medium-term as the salvage of the pine-beetle-affected forests comes to an end (along with reduced harvest volume in the future) and demand picks up (albeit slowly) from recovery in the US economy.

The overall consensus is that CFR prices will drift for the next few months and then begin firming from October onwards.

July saw a more dramatic decrease in export log prices than expected with most grades falling around NZ$8/JAS m³ at-wharf-gate. To put this in perspective, US$ CFR prices (prices of logs delivered to the destination port) have fallen from a peak of US$153/JAS m³ for A grade in March 2010 to US$125. The fall in NZ$ at-wharf gate prices has been partially cushioned by small improvements in ocean freight rates and the NZ$/US$ cross rate. NZ$ at wharf gate prices have fallen about NZ$20/JAS m³ from their recent peak in March/April 2010.

In conjunction with the weaker market in China, the Indian market has also softened, partly due to dramatic increase in shipments from New Zealand in the past few months as logs were diverted away from China.

The Korean market remains steady but is following price declines in the China market.

Longer-term demand and prices are expected to resume a bullish trend. Despite the reduction in price of Radiata logs in China, the level of enquiry for supply has not changed. There is still a major concern that the traditional Russian log supplies will become increasingly scarce and expensive, not only due to the Russian export log tariff, but also because subsidies applied to log transport in Russia are being reduced.

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

The domestic market is taking increased log volume as export log prices decline. This pattern of lower volatility in the domestic market is not uncommon and a timely reminder of the importance of a strong domestic log processing sector.

Both domestic and export demand for processed forest products appears to be in reasonable shape over most product classes with some engineered products in the Australasian market particularly strong.

Prices have remained stable with a roll over of 2nd Quarter prices into the 3rd Quarter for most grades. Prices for lower grade saw logs have reduced a little in conjunction with the reduction in export log prices.

Ocean Freight

A welcome and significant lowering in ocean freight has occurred recently. The US$55/JAS m³ seen in June has become a peak with rates falling to late US$40s currently and an expectation of rates in early to mid US$40s toward late July/early August 2010.

The Baltic Dry Index (BDI) has fallen to below 2000 points for the first time since May 2009 (see chart below - the BSI [yellow line] is the most relevant to the Handy-size vessels that carry NZ logs).

Daily Chart For Cape/Panamax/Handy 4 TC AVERAGE Values
Source: Dryships.com

The impact of the falling ocean freight rates may off-set any further softness in CFR price and allow NZ$ at wharf gate prices to stabilise.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 136  
Structural (S30) 102  
Structural (S20) 86  
Export A   91
Export K   85
Export KI   80
Pulp 50  

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.