Log Market - August 2011

It's been a tumultuous few weeks in global financial markets with the theatrics of US politics displaying to the world that US leaders are prepared to play chicken with their sovereign debt risk for self-serving political gain. In conjunction with increasing concerns over the debt of an increasing number of European countries, the background was set for a significant correction in global stock markets.

The US has released revised data which shows lower than previously reported growth. The initial estimate for their annualised rate of economic growth during the March quarter was 1.9%. That has now been revised down to only 0.4%, and that's during a period which included Federal stimulus programmes. The concerning thing for the US is that the lifting of their debt ceiling has come with a (needed) commitment to reign in spending. The risk is that a wobbly economy with marginal growth could easily tip into recession due to the impact of lower government spending and/or other unforeseen shocks. The Economist recently suggested the US now has an even odds chance of experiencing a double-dip recession.

These developments will undoubtedly have medium to long-term impacts on the market for wood products from New Zealand, but fortunately, in the short-term, the export log market has brighter prospects (see below) and the silver lining for New Zealand exporters generally is that the NZ dollar has dropped considerably from its alarming highs, as speculators (ironically) flee to the "safety" of the US$.

Export Log Market

Despite the deteriorating global context, the situation regarding the export log market has improved since last month. Whilst prices, dropped between NZ$1-5/JAS m³ in August, there has been a distinct change in sentiment. Market participants are cautiously calling a bottoming of the market and the CFR price in China (logs delivered to Chinese port) has stabilised at US$130/JAS m³ for A grade. At this price Radiata pine logs from New Zealand are competitively priced against wood from other sources.

In addition, most are expecting CFR prices to firm in September.

Whilst log inventories are still at high levels in China (PFP reports 2.6m m³ in its August report) and log and lumber supply from North American still growing at fast levels, volume is starting to flow more strongly from yards; sawmilling and other log processing activity is steadily increasing after the seasonally slower hot season in China.

The lowered growth prospects for the US, however, suggest that North American log and lumber volumes available for export to China will continue to be high for the foreseeable future, at least until the US property market recovers.

Longer-term the prospects for China are still strong with huge infrastructure and housing projects in the pipe-line. Efforts by the Chinese government to tame the spectre of inflation, particularly in the property market, appear to be working, which augers well for sustained GDP growth at around 9%.

Demand from Japan and Korean is steady as usual, with price being led by China. India has experienced significant log price falls and has high inventories.

Since last month's report, the NZ$/US$ exchange rate moved from the (then) 0.83 up to a peak of just over 0.88, only to drop back to just over 0.84 in the last three days (at the time of writing this report). With this level of volatility the exchange rate will have the biggest impact on export log prices in the near-term. And although the Kiwi $ has weakened in recent days, the down-grading of US debt and the US's continued weak economic performance suggests more future upside in the NZ$/US$ cross-rate.

Ocean freight rates for logs to Asia have softened marginally again with rates around US$ 40/JAS m³. This reflects the low level of demand in global dry bulk markets relative to vessel supply. Softening rates will also be assisted by lowering oil prices if the recent oil price trend continues.

In summary, despite the global financial ructions, the previously forecast improvement in the export log market in the latter part of 2011 appears more likely now, with September pointing to a lift in NZ$ at-wharf-gate prices unless negated by adverse exchange rate movements.

Domestic Log Market

If we look at the Australasian and US markets and their respective exchange rates as drivers of prospects for domestic solid wood processors, the situation has deteriorated.

A weak Australian economy and property market has lead to reducing lumber prices in New Zealand's most valuable lumber market. The decline was led by poor demand in Queensland in the early part of the quarter which was slightly offset by steady demand in the New South Wales and Victorian markets.

In addition the NZ$/AU$ cross rate has reversed its downward trend and moved up from 0.74 to over 0.80, significantly eating into New Zealand exporter competitiveness/revenues. However, since a major part of this movement is due to a depreciating AU$ against the US$, this will also reduce the competiveness of other wood products imported into Australia.

Dwelling approvals in Australia in May were down over 3% from April to the level of the five-year average. For the first five months of the year, Australian dwelling approvals were 13% lower than the same period in 2010.

House prices in Australia fell on average by 0.1% in the June quarter after falling 1.1% in the March quarter. They are now on average down by 1.9% from a year ago, although there is considerable variation amongst states.

New Zealand is fairing little better. Dwelling and non-residential consents, vehicle registrations and the labour market are either flat or negative.

In June the value of consents issued for the construction of non-residential buildings amounted to $237m, just 4% more than June last year. This is poor considering cost increases. In the (full) year to June consent values fell by 4.1% and in the first half of the year values were down 3.5% from a year earlier.

Dwelling consents are even weaker as shown on the chart below, with no improvement in trend in recent statistics.

Chart Courtesy of BNZ Weekly Overview

The unemployment rate in New Zealand stayed unchanged at 6.5% during the June quarter with job growth lower than expected, although this is likely still negatively impacted by quake-affected Christchurch.

The economic stimulus expected from the Christchurch re-build is being delayed by the continued after shocks and administrative process of dealing with insurance, compensation and planning matters.

Overall domestic prices fell slightly for the month on an aggregated basis.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 135  
Structural (S30) 110  
Structural (S20) 106  
Export A   87
Export K   80
Export KI   71
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.