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Log and Ocean Freight Market

Export Log Market

The strong run in China is taking a breather. Stocks of Radiata, North American and Russian logs are high (more than two months). There are also high inventories of Canadian and Russian lumber.

It appears the Russian log tariffs are having some of the desired effects. There is increasing investment by northern Chinese in saw milling in Russia to avoid the log tax. Even just a basic primary break down of the logs and transporting them to China green-sawn avoids the log tariff. Russia has announced the formation of new special economic zones to encourage investment in value-added processing.

The high volume of lumber from Canada is still being stimulated by a decade-long salvage programme of thousands of hectares of timberland killed by pine beetle. Recently described as one of North America's largest environmental natural disasters, it is expected to lead to long-term shortages of lumber. The pine beetle is expected to kill a billion cubic metres of B.C. timber. An intense salvage program has been underway for 10 years, but the approaching end of sawlog-quality wood means the industry will be hit by supply curtailments at a time when the demand for lumber is climbing. Therefore the high levels of Canadian lumber coming into China are not considered sustainable and that bodes well for New Zealand log exports in the future.

The high China log stocks are partly due to working through the after effects of the Chinese Lunar New Year (mid February) described as the largest mass migration or pilgrimage of the modern world. This involves millions of Chinese working away from home returning home for the celebrations. Production at wood processing and wood using facilities stops for several weeks but deliveries of logs, at least from New Zealand, do not!

Also, unseasonably cold weather in, and north, of Shanghai and wet weather in the South has hampered the recovery of sales.

The Chinese government's efforts to curb growth by tightening credit may also be dampening demand somewhat.

It is too early to say this signals a change in the market and a market down-turn. If sales of logs off the ports pick up as expected, inventories could reduce quickly. Prices have slipped a little, but are still at historically high levels of around USD145/JAS m³ CFR for A grade (price delivered to China, free-on-board ship at China port).

Demand and price from India, Korea and Japan are steady.

Domestic Log Market

New Zealand log processors face increasing pricing pressure as at-wharf-gate prices for export log have continued to rise. Those exposed to the Australian market are faring better as good demand and favourable movements in the NZD/AUD cross rate support returns. Significantly higher volumes of wood products are also being sold by NZ processors to Asia, especially China, but this tends to be high-volume and low-value products, and the NZD/USD cross rate, whilst having fallen from its highs last year, is not providing much relief for exporters.

Some critical regional shortages of logs for domestic processing have resulted in significant increases in log prices this quarter. For the most, however, pricing is set for the whole quarter and sizable domestic log price increases are expected in the second quarter commencing next month.

How Will the Recent Chilean Earthquake and Tsunami Affect the Global Forest Products Market?

The Chilean Association of Export Manufacturers reported that a survey it undertook of its members revealed that 26% of them experienced damage at a medium to high level to their buildings and plants, whilst 43% experienced little damage and 21% were not affected.

In the pulp sector, CMPC, Celulosa Arauco and Constitución, have recently announced the detention of eight pulp manufacturing sites. Arauco is evaluating all the damages; however they suspect that during the month of March there will be no pulp production in Chile.

Whilst Chile exports few logs, it is a significant exporter of processed wood products. Market commentators generally expect that lower supply of wood products from Chile will bolster demand from other suppliers and potentially allow price increases.

Headwinds for the Handy-size Market (Ocean Freight)

Since ocean freight comprises around 50% of costs of sales for export logs (currently), the future direction of the ocean freight market and consequent impact on rates is critically important to the New Zealand forest owner.

The Handy-size vessels are those that ship our logs to Asian markets. They are smaller than the larger Panamax and Cape-size vessels, typically loading about 27,000 JAS m³ of logs. The global Handy-size fleet is a much older aged fleet than the other classes of merchant vessel and has fewer companies investing in new-builds. Bangkok-based Handy-size bulker specialist Precious Shipping is predicting a surge in the scrapping of vessels in the sector since a third of Hand-size vessels will be over 27 years of age by 2011. This is regardless of how the market performs.

The situation is very different in the larger sizes that normally dictate the overall movement of the dry bulk market. In the Cape-size sector 449 new-builds are due to be delivered over the next three years. Scrapping volumes are likely to be much lower than this though as only 100 ships, or 13.1% of the fleet, will be over 22 years of age by 2011 and likely to be scrapped in the next three years should freight rates reach low enough levels.

The chart below shows daily charter rates for a range of vessel sizes. The widely reported Baltic Dry Index (BDI) is a weighted composite index of a combination of these various sizes. The yellow line (the Supras) is the larger of the Handy-size vessels and slightly larger than the usual Handy-size vessels that ply the New Zealand to Asia log trade. Note the very high volatility of the larger vessel sectors but also the steady increase in the Supra's rates (yellow line) probably driven the aging fleet and lower rate of new-builds (discussed above). This would suggest a long-term firming rate influence until rates are high enough to stimulate significant new building of this class of ship.

Current Ocean Freight Rates for New Zealand Log Trade to Asia

The market has been volatile. After rates plummeted to spot rates in the low USD 20s per JAS m³ early last year, they developed a generally firming trend during 2009 to finish at a high for the year in the mid USD40s. Some easing at the start of this year, has been followed by a sudden increase in rates in the last few weeks. Spot rates are now around USD 50, which fortunately, commentators are suggesting could be a peak.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 125  
Structural (S30) 96  
Export A   108
Export K   100
Export KI   95
Pulp 45  

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.