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Log Market - February 2011

The ANZ Commodity Price Index surged another 3.8 percent over the first month of 2011, to hit yet another new high. Thirteen commodity prices registered a rise in January, three were unchanged and one declined. Since August last year the Index has raked up gains of 18%. For the month of January, the ANZ data showed lumber prices increasing a more modest two percent and wood pulp one percent.

The New Zealand dollar, however, strengthened against all our major trading partners over the first month of the new year dampening the lift in export commodity prices when measured in local currency terms. This more than offset the modest increases in wood products prices, although logs have still managed at-wharf-gate price increases on the back of decreasing freight rates (see below).

Export Log Market

Late last year there were concerns that the Chinese New Year might result in market weakness due to a build up of log stocks as log processors closed shop for China's longest annual holiday period. However, both demand and in-market price have remained strong.

Log prices have actually increased at-wharf-gate in New Zealand in both January and February mainly due to decreases in ocean freight and intense competition for volume at the wharf gate.

As repetitive as it is starting to sound, the export log market continues to be dominated by China. Export of Radiata logs to China increased to 5.9 million m³ in 2010 up from 4.4 million m³ in 2009. This increase of 34% was dwarfed by the 260% increase in USA log exports to China to 2.8mn m³ in 2010 (albeit from a lower base). Russia's log exports to China dropped marginally in 2010 (from 2009) to 14 million m³. However, Russia (the largest lumber exporter to China) increased lumber exports by 40% to 4.4mn m³ in 2010. Canada (4.0mn m³, up 65%) and the USA (1.4mn m³, up 54%) are the next two largest exporters of lumber to China.

In total, China imported 49mn m³ of logs and lumber in 2010, a 29% increase on 2009.

As discussed in December 2010 issue of Wood Matters, the Chinese government has continued to increase interest rates in response to inflation concerns (three successive increases in the past four months). This is a continuation of the balancing act which aims to ultimately achieve long-term sustainable growth for China by taking the steam out of a potential property bubble. Opinions are still divided on whether this outcome will be achieved.

The Korean and Japanese markets are steady taking approximately 2.4mn m³ and 0.8mn m³ of logs (respectively) from New Zealand.

The Indian market is growing strongly for New Zealand Radiata pine with just over 1mn m³ exported in 2010. PF Olsen has just commenced supply to a large Indian log purchaser with a strong position in the Indian market and favourable logistics. This is resulting in strong at-wharf-gate pricing.

Jared Lee (PF Olsen, right), Nick Cornwall (Port of Napier, mid left), Mohammed Farouk (Farlin Group, mid right) and Naarayan Raaghavan (Farlin, left) inspect logs at Port of Napier destined for India. Farlin's excellent market position and favourable supply logistics is resulting in strong at-wharf-gate pricing. The first full vessel, with supply managed by PF Olsen, will be loaded at Port of Napier and Tauranga 23-27 February.

Ocean Freight Rates

Despite strong commodity prices break bulk shipping rates continue to be soft in the mid USD30s/JAS m³. The last bull run of shipping rates stimulated a large number of new-builds. Whilst some of these were cancelled and abandoned as a function of the global financial crisis, new commissions are currently higher than the growth in demand for shipping dry bulk products. Two highly respected commentators are predicting that fleet growth in 2011 could be more than twice as high as growth in demand for dry bulk shipping. This news must, however, be tempered by the fact that Handysize new-build rates are significantly lower than the new-build rates of the larger vessel sectors. It is the Handysize/Handymax that are used to ship New Zealand logs to Asia.

More information on the global dry bulk shipping capacity can be found in N. Cotzias Shipping Report, available free online at
http://www.cotzias.gr/reports/overcapacity/NCSCOCREP2010_(JAN-DEC2010COMP).pdf

Domestic Log Market

As reported in December, late last year there were three mill closures/capacity reductions and lay-offs and there have been "crisis" meetings with the Forestry Minister (the Hon David Carter) and industry sector groups and leaders. The calls for intervention by the government with specific support for domestic wood processors is being met with a reaffirmation that the government's approach is to assist getting the policy and regulatory settings right to allow efficient processors to compete in a global market-place. This may result in further rationalisation in the sector whilst trading conditions are so tough.

Whilst there clearly have been few greenfield wood processing site developments in the past few years in New Zealand, some companies have spent millions on upgrading equipment and timber treatment plants to put out a high-quality product. Last year sawn timber production increased some 15% to 1.1mn m³ and sawn timber export earnings climbed 21% despite little change in volumes (i.e. the increase was mostly price related).

Producers with exposure to the US mouldings and millwork market (an important Radiata clearwood market) are finding business particularly tough and are diversifying their markets. Australia is starting to see increased imports of wood products from low-cost European producers, lowering demand and price of New Zealand product.

Domestic mills increasingly have to play catch-up with export pricing to attract the grades and volumes they need. This will put additional strains on many mills with already unsustainable margins. As the duration of this strong export log bull run extends, forest owners are going to struggle to supply domestic processors unless there is close price parity, particularly if they have a one-off harvesting job and have waited 25-30 years for revenue from their forest investment.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 138  
Structural (S30) 104  
Structural (S20) 88  
Export A   124
Export K   115
Export KI   109
Pulp 54  

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.