Log Market - June 2011

A nine-month uptrend in export log prices took a sudden and large fall in June. Domestic prices, mostly negotiated quarterly, are also expected to ease next month as third-quarter negotiations commence, although domestic price falls should be much less dramatic as domestic processors position themselves to secure more log supply in the face of less attractive log export opportunities.

Export Log Market

Market nervousness reported in last month's Wood Matters has turned decidedly bearish. Increasing log supply and stocks in China, coupled with a seasonal drop in demand in the hot season have been the catalysts for a large drop in CFR price (of around USD 10/JAS m³) and an even larger drop in NZD at-wharf-gate price which adjusted to the higher NZD/USD exchange rate. Prices are down NZD15-20/JAS m³, wiping out the last five months of price increases. Prices are back to levels similar to December 2010.

There has been a distinct divergence in approach to the market by major NZ exporters. Usually negotiators keep solid pressure on price and let the market-factors drive price upwards and downwards. This month, a major trader has offered a sizeable price discount, hopefully with the view to managing a "soft landing". The risk, however, is that this encourages Chinese purchasers to hold off placing large orders, believing that logs will be even cheaper in the future. With the security of good log inventory levels, their behaviour is entirely sentiment-driven.

There will be close scrutiny of log inventory levels in China over the next few months to provide an indication of how well-matched Chinese log demand is to supply. An estimated inventory level of 2 million m³ last month is forecast to build to 3 million m³ by the end of June. At expected consumption rates this is about 3 months supply, giving plenty of scope for "wait-and-see" ordering behaviour.

Logs are not are not being consumed as fast as they are being supplied to the China market, resulting in a build-up of log inventory and softening prices.

Seasonal reductions in NZ log harvest (winter) and possibly diversion of more logs to domestic markets, should provide some supply-volume relief to the China market. However, the continued malaise in the US housing market and higher North American (summer) harvest levels could see a continuation of the rapid increase in supply of logs and lumber from this source. The continued weakening trend of the USD is making their wood exports more attractive, although this is somewhat masked by the Chinese government's management of the value of the Renminbi (RMB).

The US and Canada are huge producers of logs and lumber. It doesn't take much of a reduction in domestic demand to make large volumes available for export, and China has been the focus of much of this wood supply. Year-to-date log volumes from NZ to China are up 49% (on last year) but the US and Canada are both up 202%! Interestingly, year-to-date exports of logs from Russia to China have not changed since last year, but exports of lumber are up 55%, a result of increasing investment in log processing in Russia in response to the log export tariff. This tariff is now expected to be reduced, or removed, in the future as Russia prepares for entry into the World Trade Organisation. Lumber exports from the US and Canada to China are up 116% and 80% respectively, with NZ up only 11% (year-to-date and compared to the same time last year).

The Korean market has a reasonable log inventory position but has experienced a large drop in CFR price due to price discounting. This will set a benchmark for subsequent prices.

India continues to have steady demand but has also been affected by aggressive selling and price reductions. Due to this market still being relatively small, price will be influenced by leads from the China market.

Japan is showing some strength in processed wood products due to earthquake-induced demand, but this is not expected to underpin price in China over the June-August period.

Ocean freight rates for logs to Asia continue a steady side-ways trend with rates in the mid USD 40s/JAS m³. Supply and demand of Handy-size vessels is reasonably well balanced with most impact on rates expected to come from changes in bunker (shipping fuel/oil) costs, which now comprise around 50% of total shipping costs.

The appreciating NZD is accentuating export log market weakness. The ongoing strength in commodity markets and forecast increases in interest rates continue to drive support for the Kiwi $ in conjunction with continued bearish sentiment for the USD with its heavily indebted and sluggish US economy. Short of a major world-wide economic risk event or reversal of the commodity market bull run, the NZD could well have further scope to appreciate during this cycle.

Regrettably the likelihood of a slight correction in the market forecast last month has developed into a deep price drop and markedly more negative sentiment. Forest owners need to be cautious about the outlook for the rest of the year and be prepared for continued price drops. Hopefully by September/October we will see a reversal of what is expected to be a several months of down-trend.

Domestic Log Market

The recent severe after-shocks with its injuries to people and additional damage wrought on Christchurch will have various emotional and economic impacts on the rebuild of the city. And until reconstruction commences with some momentum, the impact on the NZ timber market will continue to be speculative, with few other positive factors expected to have much impact on the subdued market in the medium-term. Timber price rises are being achieved, however, and this is required to counter the higher log prices and price inflation of other inputs such as electricity and fuel.

The domestic timber market is important to the domestic processing sector since traditionally it has always been the most profitable, followed by Australia and the US.

The Australian market has been lack-lustre this year although not a disaster. The (favourable) lowering NZD/AUD cross rate has been helpful (up until about a month ago), but has now turned decidedly adverse with the NZD/AUD cross rate appreciating to 0.77 in mid June. In addition, the strong AUD has made the import of wood products from Europe and Chile super-competitive against NZ options.

The third traditionally strong market, the US market, continues its long, slow process of shaking out the excesses of over-stimulation of the housing market from over-innovation in financial debt instruments. NZ wood products exporters are being forced to diversify their markets elsewhere.

This is being achieved with some success and there is encouraging market development in the Middle-East, Asia and Europe. As with any exporter in NZ at present, however, wood product exports have to be able to increase in price at least as fast as the appreciating NZD for suppliers to just "tread water". And this isn't always possible in a competitively priced global market.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 143  
Structural (S30) 116  
Structural (S20) 105  
Export A   111
Export K   105
Export KI   98
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.