Situation and Outlook for NZ Agriculture and Forestry (SONAF) , June 2011

Now that we are several months into a very sharp export log market downturn, it might be timely to reflect on the "bigger picture" as presented by the Ministry of Agriculture and Forestry (MAF) in its annual review and outlook.

Here are some bullet-point highlights from the report:

  • The total demand for log exports is expected to grow.
  • Demand from China is expected to be maintained as 2011 progresses, owing mainly to strong economic growth, continued urbanization, and the effect of the Russian log export tax [the impact of which may lessen if reduced or removed to enable entry into the World Trade Organisation – Ed.].
  • The markets of India and Japan have the potential to grow because of strong economic growth in India and earthquake re-building in Japan.
  • Log prices in overseas markets are projected to increase slightly, with an improving domestic demand for sawlogs also serving to push up prices.
  • Log export prices, in New Zealand dollar terms, are expected to rise in 2012.
  • Total production of roundwood in 2010 was 24.8 million cubic metres, which was above all scenarios in the New Zealand wood availability forecasts.
  • There is potential to increase total harvesting from the current level to around 26 million cubic metres after 2015.
  • The Chinese economy is expected to grow at over 9 percent and the Indian economy at around 8 percent in 2011 and 2012.
  • Other significant Asian markets such as Taiwan, South Korea, Indonesia, Vietnam and the Philippines are all expected to grow faster than 5 percent in 2011 and 2012.
  • The United States (US) economy is recovering, with consumer spending accelerating. While there has been some job creation in the US, unemployment is still at high levels.
  • The European Union (EU) has the most subdued economic outlook of New Zealand's major trading partners [but is not a major wood trading partner for NZ – Ed.].
  • The New Zealand dollar is forecast to remain at historically high levels until the middle of 2012 and then to depreciate to around the historic averages.

The SONAF report then goes on to translate the above outlook into forecast volumes and values of broad forest product categories (see Table 10.1 below).

It should be noted that just as the SONAF report was released, the export log market went into a steep decline. Whilst we don't know the exact make up of the FOB price in the above table, we suspect that current July prices are below the 2010 average price of $115. Clearly this information may have affected the forecast figures, but setting that aside, and again focussing on the bigger picture, if the outlook of SONAF is fundamentally sound, we could expect to see a very strong upswing in price some time later this year. This would also match typical seasonal fluctuations which support a strengthening market around October onwards.