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Log Market - March 2011

Log prices have risen in again in March in almost all categories. Again this is driven by a combination of a strong export market and increased at-wharf-gate purchasing competition as new purchasers enter the market. Ports, however, are becoming increasingly congested and often the "overflow" option at many ports is expensive off-port log storage. Port authorities face a difficult challenge balancing the needs of a wide range of exporters, and by and large do it very well. However, much of the increased volume forecast to be harvested in the next decade or two will have to be exported since there is little investment in additional domestic processing capacity at present. If this increased log volume combines with even a moderately strong export market (e.g. even at prices lower than they are today), demand for log exporting infrastructure will continue to increase rapidly. The additional $5-$10/JAS m³ for off-port storage or inefficient port operations becomes a very prohibitive cost for forest owners and is money down the drain. Better for part of this money to go towards well-planned and equitably allocated expansions of on-port, or near-port log storage areas with off-highway transfer capability.

Export Log Market

Japan has just suffered a devastating natural disaster for which the world, including New Zealand, is responding with assistance.

Ironically, the disaster occurred as Japan was starting to show strong signs of recovery in the housing sector. After a terrible 2009, the Japanese housing industry posted 813,126 housing starts (up 3.1%) for 2010. This is the first increase in two years. As expected, the greater Tokyo area was the engine of growth. Kanto saw starts jump 7.4% in 2010. The greater Osaka area also showed strength with an increase of 3.3%.

Importantly, the total wood housing starts came to 460,127 for a market share of 56.6%, the highest in a quarter century.

Japan is New Zealand's fourth largest log market and fifth largest lumber market. The eventual reconstruction of the quake and tsunami affected areas will increase demand for building materials including wood products.

China continues to drive demand and price of logs from New Zealand. The Russian log tariff imposed on its log exports of some 25% (min. €15/m³) on 1 April 2008 seems to have had its desired affect; Russian log exports have decreased dramatically. Russian log exports decreased from a peak of 51 million m³ in 2006 to about 20 million m³ in 2009 and 2010 (-59%). Major Russian log importers such as Finland, the Baltics, Germany, South Korea and Japan have almost halted Russian log imports during the last four years (from about 30 million m³ in 2005 to only five to six million m³ in both 2009 and 2010).

China has also lowered log volumes from Russia but has become a proportionally more important buyer. Chinese imports of Russian logs peaked in 2007 at 25.5 million m³ and have dropped to just over 14 million m³ in 2010 (-45%). Even with this large drop, Russian log exports to China made up 70% of Russia's log exports in 2010 compared to only 46% of in 2006. With falling log exports, Russian log exporters have become more dependent on the Chinese market.

The Russian government's surprise announcement in November 2010 to reduce current log export taxes as part of its requirement to be admitted into the World Trade Organization (WTO) caught many industry players and traders off-guard. However, the impact on the market has been minimal. Why is it that the factor that seemed to be so influential in driving the Chinese log market up, has had such a "ho-hum" reaction to the prospect of its removal?

  • Russia's former log purchasers have made significant arrangements to reduce or eliminate the need for Russian logs.
  • There has been little detail of the timing or nature of the tariff reductions, or who they may apply to.
  • There has been a depletion in harvesting infrastructure in Russian that would take years to restore.
  • The remaining Russian forests are getting more remote and costly to harvest and transport to export markets.

The important question is to what extent will a tariff reduction bring former customers back to Russian logs. China is the one country that would benefit from the lower tax given that the country is struggling to replace former Russian log exports with new softwood log and lumber suppliers. However, due to the points made above, it is felt that if China continues its growth path, even some increase in Russian log imports will not fundamentally change demand patterns for NZ logs.

The objective of the Russian log export tax to stimulate development of the domestic log processing industry has been successful. The last four years has seen the building of numerous additions to existing log processing plants and new green-field sawmills, plywood mills, veneer mills, engineered board plants and pulp mills. Interestingly many of the major new projects in Eastern Russia involve Russian capital rather than foreign investment. The two major exceptions are China, which has been a large investor in new Chinese-type sawmills along the Russian/China border, and Japan, which is participating in a few large joint-venture projects with Russian firms to produce larch veneer and/or plywood in the Russian Far East for the Japanese market.

Ocean Freight Rates

The ocean freight market appears to have bottomed after the Baltic Dry Index shed more than two thirds of its value in the past 6 months from a high of just over 3,000 to just over 1,000 in February 2011. Despite some favourable NZ-China/Korea fixtures in the mid $35/JAS m³ in the past few weeks, shippers are now reporting a scarce tonnage and rates have jumped up quickly. The other factor driving rates is the high bunker costs (ship fuel oil). In the past bunkers represented around 20% of a vessel's total freight cost. Now with the lower charter rates and much higher oil cost, bunkers are more like 50% of total costs. This makes ocean freight rates much more vulnerable to any further increases in the oil price. This market is proving very difficult to forecast, with the depth of the downturn in rates surprising many market participants. Now, the rapid increase seen in recent days is catching people off-guard, (See chart below, but note recent increases in rates not shown yet.)

Daily Chart For Cape/Panamax/Handy

4 TC AVERAGE Values

Chart courtesy Dry Ships Inc

Domestic Log Market

The 0.5pb decrease in the Official Cash Rate (OCR) early in March will be a welcome relief to borrowers and should assist the property market to recover. However, it will take some time for Christchurch reconstruction to gain momentum and the property development sector is still shaking out excess stock and prior over-investment. The receivership of Signature Homes is evidence of the slow market. Having said that, dwelling shortages in Auckland are causing rents to soar and this should eventually flow through to new construction.

Australia is NZ's biggest importer of wood products. The Australian property and domestic construction sectors remain sluggish and imports from other countries (such as the US and Baltic countries) continue to be strong competition for NZ-sourced wood products. The lowering NZD/AUD exchange rate is assisting returns to NZ exporters, but the high AUD is also assisting competing wood imports.

The US property and wood markets (an importer of NZ wood products) are showing tentative signs of recovery. Whilst this is early days, forecasters are predicting that as the recovery builds momentum the impact on North American wood markets will be dramatic and prices will rise rapidly. Russ Taylor, president of the International Wood Markets Group, points out that after the prior steep downturn in the property market (1991-1992) US housing starts dropped from 1.2 million to 900,000 a year. As the sector rebounded, lumber prices rebounded from an average of US$185 per thousand board feet during the downturn to an average of US$340 for the next two years.

This time, he said, housing starts have fallen from two million in 2006 to 900,000 today, a 1.1 million drop that is more than three times the severity of 1991. The recovery, he forecasts, will bring starts back to 1.3 million a year. Because so much processing capacity has been shed from the sector (e.g. unviable mills closing), he expects this to result in a doubling of prices from the current average of US$240 when housing comes back. This is also likely to affect the current buoyant and rapidly growing North American wood export market to China. As higher local prices make their domestic markets more attractive North American logs and wood product exports to China could be curtailed. This will tend to support NZ's Radiata pine position in China.

High export log prices are continuing to challenge local processors. Some mills can exploit their location advantage and achieve lower at-mill-gate prices due to being closer to the forests. Others, close to ports, are having to pay much closer to export parity to get the logs they want, and this continues to challenge some mills' viability.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 139  
Structural (S30) 107  
Structural (S20) 93  
Export A   127
Export K   119
Export KI   111
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.