Log Market - July 2011

Export log prices dropped a further NZ$20-25 in July after similar price falls in June. Domestic log prices were slightly down with some increases and some decreases depending on grade and location.

Export Log Market

Each day seems to bring more news of deteriorating market conditions in China, Korea and India.

Export log prices have pared back almost all of the nine month uptrend that took an abrupt halt in May/June 2011. At-wharf-gate prices are now just a few dollars higher than the low point of the last cycle in August 2010.

The big difference this year is the NZD/USD exchange rate which is currently around $0.84, whereas it was around $0.70 in August 2010. At $0.70 the July (current) NZD at-wharf-gate price would be $15 higher (everything else equal).

The market drivers are similar to last month with high log inventory in China and high volumes of log and lumber from North America. We note also that China again hiked official interest rates during the month to dampen the property market and inflation (see article below Easing Activity in China Augurs Well for Sustainable Growth).

One of the consequences of high volumes of logs being exported from North America to China is very high North American pulp wood prices. With the export of whole logs and a depressed domestic sawmilling sector, the availability of sawmill chips for pulp mill feedstock has been depleted. This, in conjunction with high pulp mill wood demand due to strong product prices, is resulting in pulp logs at 16 year highs. Quarter 2 2011 pulp log prices are up 42% year-on-year in the US Northwest according to Wood Resources International LLC.

The chart below (courtesy of Pacific Forest Products NZ Ltd) shows the situation in China; a divergence in daily off-take of volume (log demand – blue line) from daily supply of volume (red line). This is adding to already high log stock inventory.

The prevailing sentiment in the market by purchasers is that prices in the immediate future will be lower than today, leading to deferral of placing orders and making the price falls inevitable.

Ocean freight rates for logs to Asia have softened marginally with rates in the early to mid USD 40s/JAS m³. There is speculation that rates may soften a little more, but total freight costs will remain relatively high due to the high bunker (fuel oil) costs.

The outlook for the export log market later in the year is still generally positive, with most commentators forecasting a strengthening market from around October 2011.

Domestic Log Market

The BNZ reported a marked increase in business confidence this month. A net 20% of respondents expect higher domestic trading in the coming quarter which is the second best result since 2005 and well above the average reading of a net 10% positive. However, they also noted that whilst there is an increase in those that have a positive view of where the economy is heading (and that is valid according to the economic indicators), there is a distinct disconnect between confidence and action with relatively low rates of those intending to increase hiring or investment in the near-term.

This also appears to be reflective of those parts of the New Zealand wood processing sector directly exposed to the property market. There is an expectation of significantly increased demand for materials for reconstruction of flood/storm/earthquake affected areas, but it isn't yet translating into strong orders.

July saw the negotiation of quarter 3 domestic log prices. Domestic grades with the same quality as export grades fell sharply in recognition of the fall in export log prices.

Structural grades for lumber, LVL and ply wood, however, fared better with a mix of small increases and decreases across various regions. On average price fell marginally.

Domestic pruned log prices fell overall, more so in export sales than domestic.

With the pull back in the export log market, the key domestic grades are expected to be more available during the quarter.

Despite the strength in the pulp market, pulp log prices were flat to slightly up on last month.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 139  
Structural (S30) 113  
Structural (S20) 106  
Export A   90
Export K   81
Export KI   76
Pulp 55  

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.