Log Market - May 2011

Harvesting levels remain generally high across the country with increased activity in areas such as the central north island where large areas of wind-blown trees from the storms in April are quickly being salvaged to recover as much value prior to fungal deterioration in the wet conditions. In contrast, the pronounced bout of wet weather has lowered volumes coming out of forests without all-weather harvesting capability.

Export Log Market

High demand and prices are seeing markedly increased volumes entering the China market in the form of logs and lumber. March saw the largest volume of logs and lumber delivered to China in any one month at close to 6 million m³, 50% higher than the average monthly volumes in 2010. There are big increases in log volume from NZ, Russia, the USA and Canada. The big increases in lumber are coming from Canada, Russia and the USA. The weak housing market and weak USD in North America are continuing to drive higher volumes to the export sector.

CFR (USD prices in China ports) have stabilised at record highs with some exporters having to accept small price decreases. The high log price environment, high import volumes, increasing log stocks and moving into the hot season (with its associated lull in building activity) are all creating market nervousness. The key issue is whether demand keeps ahead of supply and therefore sentiment remains bullish. Right now, this sentiment is divided with views on the market going forward becoming more polarised as the market seeks direction.

NZ export log prices have been relatively unaffected by the global sell-off in commodities in the past month which saw across-the-board price reductions (many significant) in oil, construction, base and precious metals. However, the price discount for NZ Radiata pine logs compared to North American logs (and lumber) has closed and this makes NZ logs more vulnerable to substitution if volumes of North American logs (and lumber) continue to increase at current rates.

In continued attempts to curb inflation and cool the property market, China authorities have been increasing interest rates and tightening credit facilities. Ironically, whenever data shows reducing activity levels and industrial output the financial markets take fright and stock markets sell down. But this is exactly the point of the interventions – i.e. a soft landing and sustainable growth rates; at this stage, it would appear that such an outcome is possible, but not assured.

The Korean market is steady, needing to pay prices competitive with China to maintain required supply volumes. The economic outlook for Korea has become slightly more positive and total log demand in 2011 is expected to exceed 2010.

Port congestion has eased over the past month in India as we head towards the monsoon season in June. Log demand remains firm but the combined costs of higher freight and vessel delays are still challenging. However, this market, from a much lower base, is expected to be a very important growing market for NZ logs.

The Japanese earthquake has only impacted moderately on the market at present but is expected to be more significant in the medium-term. Prices for logs from NZ, Russia and the South Seas have lifted, as have lumber prices. However, as we have experienced in the Christchurch earthquake, there is a considerable time lag between the event and reconstruction activities. This lag can actually result in weaker demand in many products in the meantime as current and near-term projects are disrupted by the earthquake. Reduced construction and growth in the rest of Japan could also be a partial offset to the reconstruction activities in the earthquake-ravaged areas. Whilst reconstruction is expected to be positive in terms of the overall market, it is unclear whether this is going to significantly improve the supply/demand position in the dominant China market; economic conditions within China are expected to be a bigger driver.

The exchange rate has been volatile but, on average, adverse for exporters over the past month, with the NZD generally strengthening against the USD.

Ocean freight rates for logs to China/Korea have stabilised, albeit at the relatively high mid-late USD 40s/JAS m³.

At-wharf-gate (NZ) prices in May had the full spectrum of changes across buyers. Some held flat, some decreased and some increased depending upon buyer' market positions (e.g. log price, freight exchange and freight contracts) and their own demand profiles. This resulted in some juggling of log supply to seek out the best opportunities for forest owners.

Stumpage prices are also seeing more volatility with wider spreads between top and bottom bids, a function if the increased polarisation of market outlook.

Forest owners need to be cautious about the outlook for the rest of the year. There is a general consensus of flat at-wharf-gate prices for the next few months, at best, and slight decreases likely. For the balance of the year, (3rd and 4th quarters) most commentators and market participants are still cautiously optimistic, picking a likely return to stronger market sentiment.

Domestic Log Market

Despite a protracted downturn in the property market and building consents coming in at the lowest level since records were kept, the outlook is more positive. BNZ believe it's just a matter of time before building consents surge off extreme lows, based on:

  • The underlying need for a higher building rate across New Zealand.
  • The eventual multi-billion dollar impact of the reconstruction and repair work after the Christchurch earthquakes.
  • Remedial work for leaky-homes.

The BNZ is predicting the "construction industry will be busy for years, to the point of being extremely stretched." This outlook can be readily seen in forecasts for both unemployment and building consents below.

Courtesy BNZ Research

Courtesy BNZ Research

As yet, despite GST and commodity-driven (e.g. fuel/food) inflation, wage and capacity-based inflation is not a threat and the Reserve Bank has maintained a stimulatory Official Cash Rate setting. This low-interest rate environment will be highly supportive to the housing and construction market when the cycle starts its uptrend.

The long-expected upswing in the market will be welcomed by the NZ wood processing sector having weathered a relatively short-lived recovery after the deep 2008/09 downturn.

Domestic log demand and pricing has been relatively flat for the past month. Pruned and structural grades are in strong demand in several regions with export log demand continuing to provide both volume and pricing tension.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 144  
Structural (S30) 117  
Structural (S20) 105  
Export A   132
Export K   125
Export KI   119
Pulp 56  

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.