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Log Market - December 2012

The world holds its breath as the Eurozone attempts to restore confidence by addressing its debt crisis, and then contemplates just how bad the economic situation could get if it fails. The export log market rallies with an impressive December price increase that matches the heavy fall in November. And the domestic market bears another announcement of a mill closure and continued challenging trading conditions.

Export Log Market

The large drop in log price in November was offset by a similarly large increase in price in December. The increase was a result of modest favourable moves in the three main drivers of NZ$ at-wharf-gate (AWG) price: namely NZ$/US$ cross rate, ocean freight rate and the US$ price of logs in destination markets (CFR price). In addition, sentiment is much improved on the beginning of November.

South Island NZ$ AWG prices are particularly strong with some selective sales into better performing market segments and more attractive shipping fixtures. Despite this, South Island export volumes (along with Wellington) are reportedly down some 25% in the past two months. In contrast, Napier, Tauranga and Northport volumes are continuing at record, or near-record, levels.

North American log supply has reduced dramatically as CFR price fell below a level that most suppliers are prepared to sell. Supply from this source is also more "elastic" whereby the supply chain can readily increase and decrease production depending on log price levels. This is in contrast to our NZ situation where the industry structure is such that volatile harvesting levels are highly damaging to the contracting sector.

With reduced shipping fixtures from the northern Pacific routes, more Handy-class vessels became available and ocean freight rates eased.

Favourable inflation figures in China and perhaps concerns about the negative impact of the Eurozone crisis saw credit conditions ease in China after the rapid tightening that precipitated the log market crashing in mid October. This has supported the improved sentiment.

As we approach the end of 2011, it's interesting to reflect on some China forest product statistics (the figures were sourced from China Forest Products Market Information, N0 21, November 2011, ITTO):

Total Imports of Softwood Logs and Market Share of Softwood Logs Up

  • Total imports of softwood logs in China expected to be a record in 2011 at around 30 million m³ (up 30% on 2010).
  • Share of softwood log imports have increased from 61% in 2006 to 74% currently [taking share from hardwood log imports].
  • Total imports of softwood lumber expected to be a record in 2011 at around 14 million m³ (up 49% on 2010).
  • Share of softwood lumber imports have doubled from 35% in 2006 to 70% currently [taking ground from hardwood lumber imports].

Russian Log Supply Declines But NZ, USA and Canada Up

  • Russia's supply of logs to China peaked in 2007 at 25 million m³ compared to an estimated supply of 14 million m³ in 2011. The imposition of the 25% log import tariff appears to have had its desired effect.
  • New Zealand supply of logs to China increased from 1.3 million m³ in 2007 to 5.9 million m³ in 2010 (up 368%).
  • USA supply of logs to China increased from 1.1 million m³ in 2007 to 2.8 million m³ in 2010 (up 160%).
  • Canadian supply of logs to China increased from 0.7 million m³ in 2007 to 1.2 million m³ in 2010 (up 76%).
  • In the first three quarters of 2011, USA and Canadian logs (combined) volume to China reached 5.4 million m³ compared to 6.2 million m³ from NZ. Growth from the North American sources is faster than that of NZ.

Supply of Sawn Lumber Up from All Sources and Canada Overtakes Russia as Biggest Supplier of Sawn Lumber to China

  • Russian supply of sawn lumber to China increased from 1.6 million m³ in 2007 to 4.4 million m³ in 2010 (up 177%).
  • Canadian supply of sawn lumber to China increased from 0.7 million m³ in 2007 to 4.0 million m³ in 2010 (up 500%).
  • In the first three quarters of 2011, Canadian sawn lumber volume to China reached 5.1 million m³, an increase of 98% on the same period last year, and volume exceeds that from Russia.
  • In the first three quarters of 2011, USA sawn lumber volume to China reached 2.0 million m³, an increase of 104% on the same period last year.

The continued strong growth in China has lead to a rapid increase in demand for forest products. However, as price climbs, so to does the attractiveness of this market to other suppliers. North America's weak property and construction markets make exports of forest products more attractive than usual. The continued salvage of Mountain Pine Beetle-killed forests in British Columbia continues to add supply volume (but must come to an end eventually and open up a supply gap).

So as we look to next year, it is conceivable that continued growth in China and some recovery in the North American property and construction markets could provide enough demand and pricing tension for 2012 to be a reasonably good year for log exports.

Continuation of China's rapid urbanisation and urban renewal is required to maintain recent growth rates in demand and price of forest products.

 

Domestic Log Market

The Timber Industry Federation (TIF) describes the NZ timber industry as in a "crisis of confidence" and being "absolutely hammered" by the combined impacts of a weak domestic market and "virtually every significant export market going backwards" (you can find more on this in the November edition of the TimberFed News).

Lumber exports fell 16% to $264 million in the four months ended 30 September 2011, according to figures from TIF. Exports to China fell 19% to $44.7 million and shipments to the USA fell 23% to $40.2 million.

As can be seen in the sawn lumber statistics in the Export section above, North American lumber is gaining considerably more share of the China (and other Asia) lumber market.

Meanwhile, the USA (an important market for New Zealand processed wood products) is still wallowing in a prolonged weak property and construction market (since 2006). Annual household formation has fallen in the USA from around 1.3 million in the three years to 2006 to only 0.51 million per year in the past three years. There have been some recent positive signs of increased activity in the multi-unit construction sector as displaced home-owners opt for less costly apartment dwelling. However, a broad-based improvement is still expected to be years away as the housing market still has a high level of inventory to work through.

The Australian market continues to also be weak. Residential building consents in the year to 30 September 2011 were 9.3% down on the same time last year. The recent reduction in the cash rate by 25 basis points may help to support the market, although this will depend on how much the reduction flows into mortgage rates as offshore borrowing costs increase.

The Eurocell timber mill in Upper Hutt recently announced it would be closing its doors with the loss of up to 40 jobs. The closure is expected to be over a period of time with operations completely finishing by March next year. Tough trading conditions due to the weak NZ and Australian property market and delays in the Christchurch rebuild, along with difficulty sourcing affordable logs, were given as reasons contributing to the closure.

Meanwhile the NZ Institute of Economic Research reports that "New Zealand's fledgling recovery will be severely hampered by the rapidly worsening global economy". The details are in NZIER's latest Quarterly Predictions – a comprehensive and independent commentary on the New Zealand economy and forecasts covering the next five years. It forecasts that the fall-out from the European sovereign debt mess will depress export growth. It will weigh on exports and tourism, which had been a buffer. Investment will remain depressed because banks will find it harder to raise capital overseas. The uncertainty around the global outlook is also weighing heavy on business and consumer confidence and thus spending.

In the institute's central scenario – where we assume a political solution is found that prevents the Euro area from breaking up – economic growth will be just 1.5% in 2012, gradually rising to 2.5% by 2014. There is little domestic demand growth. Households are saving, the housing market is struggling, businesses are cautious about investing and the government is in a period of fiscal consolidation. The Canterbury rebuild will provide a much-needed injection of building activity from mid-2012, but the speed of the recovery programme is not yet clear.

In that context, domestic log prices were steady for the month and export log prices rose, erasing most of the losses of the prior month.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 129  
Structural (S30) 101  
Structural (S20) 95  
Export A   90
Export K   84
Export KI   77
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.