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Log Market - October 2010

As mentioned earlier in Clarky's Comment, presentations by Gerry Van Leeuwan and Russ Taylor on both Russia and China wood markets were a highlight of the recent ForestWood conference in Wellington in October. The value of these presentations is that they provide additional insights into "why" and for "how long" China will impact so profoundly the global trade of commodities generally, and the market for NZ logs in particular.

Key points from Gerry and Russ's presentations are:

  1. Although the Russian log tax (currently at 25%) may not be increased as originally planned, it is not likely to be withdrawn either.
  2. Due to the above tax and global recession, Russian log production has plummeted -
    1. Currently annualised harvest is down by 35% and log exports down by 60%. Many smaller logging companies have disappeared or been bought up by large companies.
    2. Supply into China has declined from a peak of 25 million m³ in 2007 to 15 million m³ in 2009. There is no expectation that supply from Russia will grow again much beyond the current levels.
    3. The import of lumber to China has only increased from 6.5 million m³ to 10 million m³ from 2007 to 2009 (mainly from Russia and Canada).
  3. Pacific Rim countries (including NZ) will be major beneficiaries of the increasing demand for wood from China and the decreasing supply from Russia.
  4. Two thirds of China's log imports are from Russia. Radiata pine from NZ is now the 2nd largest source.
  5. In the past 10 years the value of China's furniture production has increased from USD15 billion to USD105 billion.
  6. China's total wood demand is forecast to increase from 250 million m³ in 2010 to over 350 million m³ in 2015.
  7. The additional 100+ million m³ demand will have to come principally from imports of logs and lumber. Pacific Rim countries (including NZ) will be major beneficiaries of the increasing demand for wood from China and the decreasing supply from Russia.

For copies of these presentations, click on these links.

Export Log Market

October pricing was surprisingly strong with log prices in China lifting USD15-20/JAS m³. In combination with still relatively strong ocean freight rates (around USD50/JAS m³) and appreciation of the NZD against the USD, this has resulted in export prices lifting some NZD10-15/JAS m³ at-wharf-gate in NZ.

During September the China timber market was faced with depletion of log inventory, less seasonal supply from Russia and more demand as Asia exits the hot season. This is one of the biggest ever single-month increases in log price!

Export log prices are now very close to their 15 year highs.

Japanese and Korean demand remains flat with pricing responding to the increases driven by the China market. Indian demand is still strong but the market is struggling to attract volume as it has to play catch-up with China pricing.

Domestic Log Market

Wood product demand for reconstruction efforts in Canterbury are expected to provide a positive impact on the domestic log market. Otherwise the construction and property market continues to be weak. New building permits for residential and non-residential construction are tracking similar levels to last year.

Wood products export volumes to Australia, on the other hand, are 42% higher year to date in 2010 compared to the same period last year. The increase in volumes to Australia is due to a combination of a strong property market and the devaluation of the NZD/AUD cross rate, currently at around 0.76 (8% below the five-year average). [Remember that the NZD almost reached parity with the AUD in early 2006].

The US wood products markets remain weak in demand and price and the strengthening NZD further decreases the attractiveness of this market at present. As mentioned in previous issues of Wood Matters, the weak US housing and construction market is seeing significantly increased volumes of logs and forest products being exported from Canada and the US to China.

October saw the setting of prices for the final quarter of 2010 (October to December). On average prices across all grades remained relatively unchanged for domestic logs.

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   111
Export K   100
Export KI   94
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.

Outlook

Whilst the increase in export prices was dramatic in October and there is optimism of continued strength, as Wood Matters was going to "press" the Chinese government had just announced a 25 basis points increase in interest rates. This is a well above the usual 9 point adjustments. On the positive side this signals that the government sees capacity/inflation pressure from strong economic growth. Lets hope that the brakes are not applied too vigorously to tip the log market downward again.

The counter response to the above increase in Chinese interest rates was a drop in the NZD/USD cross rate from mid 0.75 to mid 0.74, a positive for export logs prices in NZ.

The consensus view is an expectation of firming NZD price at-wharf-gate in NZ through to early 2011 when Chinese New Year typically results in some market weakness.