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Log Market and Ocean Freight - June 2010

Log Market

June saw steady export log markets with some positive signs from China. High log inventories in China have fallen from over 1.0 million m³ to less than 700,000 m³, and prices have stabilised.

Fears of a dramatic downturn in China's economic activity were reduced when China reported exports in May 2010 10% higher than April 2010 and 50% higher than the same time last year!

In contrast to the woeful economic news this month from the Euro-zone, demand in Asian economies remains firm. HSBC released its estimates for GDP growth in key markets for 2010; 10% in China, 8.5% in India and 5.2% in Korea, with overall Asian GDP forecast at 5.9%. The one major exception is Japan with forecast of GDP growth of 1.7%. Despite this, the Japanese wood market has been boosted recently by an earthquake-induced import shortage of Chilean lumber.

Demand forecasts for 2011 are at similar levels, with Asian growth forecast at 5.2% - and this is also good news for the medium-term demand for logs and wood products.

Log exports from NZ are expected to ease a little from the record April level of around 1.0 million JAS m³ (per month).

At-wharf-gate prices fell in June around $3/JAS m³ adding to price reductions last month. Since the peak in April 2010, at-wharf-gate prices are down around $10/JAS m³.

The outlook for export logs from here on out is mixed with varying forecasts from different log traders and commentators. If the ocean freight rate and exchange rates have stabilised, as they appear to have done, and Radiata pine can provide a competitive wood option for Asian markets at current (in-market) prices, it would appear that there is limited downside to at-wharf-gate pricing at present.

The domestic log market continues to be strong. Lumber exports to the USA were up 30% in the first quarter of 2010 compared to this time last year. This is due to a combination of increased activity in the housing sector in the USA as well as earthquake-affected reductions in supply from Chile.

In volume terms, China is the biggest single-destination importer of New Zealand-produced lumber (in addition to the largest importer of NZ logs) taking 22% of all lumber exports year-to-date. Due to higher value products, however, Australia and the USA make up the 45% of New Zealand's lumber exports by value, with China trailing at 16%.

Relatively static conditions in the Australian and New Zealand property and construction sectors is seeing continued steady demand for product. Some increasing of the NZD/AUD cross rate this month will ill-effect returns from processed product exported to Australia, but at around 0.80 (currently) it is still well down on the high of 0.90 experienced last year.

Ocean Freight

Handy-size log bulker freight rates for NZ to Asian trade continued a persistent rise early in the month to settle at USD 50-55/JAS m³, but have subsequently stabilised. Latest tentative reports are of some softening in rates which is hopefully a harbinger to coming off a peak.

As reported previously, however, the medium-term outlook for the Handy-size sector is overall firm rates due to the:

  • Higher-than-average age of the fleet (compared to other sectors such as the Cape-size and Panamaxs).
  • Relatively low scraping rates (due to the higher rates making it more economic to continue operating older vessels).
  • Relatively fewer new-builds of Handy-size vessels.
  • High demand for Handys for coal and steel shipments to China.

Recent Ministry of Agriculture and Forestry Bullish on Future Returns from Forestry

The just-released Situation and Outlook for New Zealand Agriculture and Forestry (SONAF) (see link SONAF Report) is decidedly bullish on the outlook for commodity producers in New Zealand, including forestry. With a combination of a forecast increase in timber prices and lowering of the NZD/USD cross rate to 0.51, returns for forest owners are forecast to lift significantly over the next five years. Unsurprisingly, this relies on continued high demand from China for our commodities. Lets hope they are right, even if only partially!

Summary

Overall, modest firming in the higher domestic grades (pruned and structural) and modest weakening in export grades, resulting a slight decrease in over returns on a weighted average basis.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 135  
Structural (S30) 102  
Structural (S20) 86  
Export A   100
Export K   94
Export KI   87
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.