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Log Market - November 2010

The market has continued its firm trend with stable demand and prices in the domestic market and a further increase in export log at-wharf-gate(awg) prices in November.

Export Log Market

The rapid rise in USD CFR price (price at destination port) seen in September and October pulled back in November with a slight easing. Foreign exchange movements have been adverse for NZ$ awg price during the past month, having risen from 0.75 to almost 0.80 (NZ$/US$) and then drifting back to around 0.77. Ocean freight rates (see below) were the stand out, with significant falls in charter rates for Handysize vessels, and falls also for most of the larger bulk vessel sectors.

Supply and demand of logs in China appears to be relatively balanced. Whilst importing volumes of North American logs and lumber have increased dramatically into China in the past 18 months, Radiata logs from New Zealand have also increased their market share with strong pricing. However, US$ CFR prices for Radiata have now reached a level, relative to alternatives (i.e. Russian/Nth American logs/lumber), where substitution could start to occur. This probably won't be too much of an issue so long as strong demand continues in China.

With continued constrained supplies from traditional suppliers of logs such as Russia, and strong economic growth, and urbanisation in particular, China is now New Zealand's largest market for logs taking nearly 60% of the annualised export volume of around 10 million m³.

Demand and prices are firm in the Korea, Japan and India log markets as well, although Korea is continuing the trend of reducing volumes from NZ.

Domestic Log Market

The US lumber market, an important market for NZ clear lumber, has continued to deteriorate as the property market continues to struggle to find a bottom. Bank foreclosures are providing the bulk of sales work for many realtors. Investors and first home buyers, despite high affordability (35 year mortgage rates at 3.5% and low house prices) are still on the side lines, waiting for the market to turn prior to entering.

The graph below shows just how bad the situation has become, especially on contrast to 3-4 years ago. The graph shows over 30% of homeowners with first mortgages owe more on their home than the home is worth. This, in combination with national unemployment just under 10%, is keeping the property market in the doldrums.

Housing starts in the US are currently just under 520,000 units/annum compared to the 10-year average of 1.5 million units/annum.

Figure 1: American homeowners in negative equity. Source: FDIC, Equifax and Moody's Analytics

For NZ lumber exporters to the US, this means sluggish demand and low prices. Add in the high NZ$/US$ exchange rate and many are struggling to make positive margins in this market.

The Australian market has been generally positive through this year although the NZ$ cross rate with the AU$ has strengthened in the past two months. Although dwelling approvals (which includes non-residential dwellings) are continuing to decline, at just over 12,000 units per month, they are at the same level as this time last year, and the same as the five-year average.

Asian markets continue to be firm and take approximately two-thirds of the total lumber and sawn wood exports from NZ (by volume).

Total lumber exports for the calendar year to September 2010 are 11% up on the same period last year.

The domestic market for wood products remains soft and producers have to carefully manage inventories to prevent prices dropping. The positive impact on the construction sector from the Canterbury rebuild has been slower than expected and won't generate meaningful increased activity until later in 2011.

Domestic log prices have remained stable despite the sector's trading conditions becoming more challenging. This is mostly as a result of pressure from export log prices and diversion of supply to export markets.

Ocean Freight Rates

The Baltic Handysize Index (the most appropriate index of NZ log buk carriers) has continued a month-long decline going from 1050 in mid October 2010 to close to 800 in mid November 2010. This is an unusually weak tone for this sector. Shippers are waiting to see whether or not the usual increase in rates and more limited fixture availability typical of this time of year eventuates, or whether the weak tone remains through to Christmas.

Rates have fallen considerably in the past month from around US$ 50/JAS to the early US$ 40s/JAS. This is providing a welcome offset to a generally strong NZ$ and some weakness in the US$ price for logs in destination markets.

The Baltic Dry Index is following a similar trend with China further reducing the quantities of iron/ore imported and the charter market showing signs of a lack of prompt and available cargoes.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 135  
Structural (S30) 100  
Structural (S20) 85  
Export A   115
Export K   104
Export KI   98
Pulp 53  

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.