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Log Market - November 2011

October was a month of two (very different) halves; at the beginning of the month there was mixed sentiment (but some optimism) in the export market, a wide spread of prices and full order books from many buyers. In contrast, the end of the month saw cancelled orders, massive price drops and widespread negative sentiment. The domestic market remained steady and domestic log purchasers will get some benefit from greater volume availability and easing prices from the steep decline in the export market.

Export Log Market

As reported last month, high log stocks in China were becoming an increasing concern. The market needed either increased consumption, or reduced supply. The market got neither and, in fact, New Zealand supplied a record volume into China in September of 920,000 m³ of logs. Log stocks reportedly peaked at over 3 million m³, nearly 3 months supply (see chart of log stocks supplied by Pacific Forest Products, PFP).

Consumption of logs in China is driven by both domestic activity (principally residential, non-residential and infrastructure construction) and export sales of wood products. Whilst domestic activity is still strong the central government is trying to constrain inflation by constraining credit and other policies aimed at reducing property speculation. Hence, the log market is buffeted by policy settings which can be quite unpredictable and volatile in China. Export sales of wood products are being negatively affected by the Eurozone crisis and sluggish growth in the U.S.A.

From mid October, sentiment turned overwhelmingly negative in China and prices plummeted. Chinese wholesalers, who were just recovering from the last down-turn, were again holding higher-priced log inventory. Banks and financiers started to demand either much higher deposits, or stopped issuing Letters of Credit. CFR prices (price of logs landed in China) fell over the period of two weeks by around US$20/m³.

Initially demand also evaporated, as fear of further price drops kept buyers on the side-lines. Fortunately, during the first two weeks of November, the market has stabilised, albeit at the much lower price levels; demand has picked up, and there is a feeling the market has reached a bottom.

Log supply to China is being reduced by diversion of sales to Korea and India where markets are performing better. This option, however, has limited scope as these markets will also soften with excessive supply. India, in particular, has constrained ship unloading capacity, so already large unloading delays are likely to get worse.

Chart courtesy of Pacific Forest Products Ltd

In contrast to last month when the exchange rate supported NZ$ at-wharf-gate prices, this month the impact has been unfavourable as the NZ$/US$ cross rate has been generally climbing from its 0.75 low in September.

Ocean freight rates for log bulkers has been steady but in the last two weeks there has been a welcome softening in rates to the mid US$30/m³. This will support at-wharf-gate prices in December if it continues.

The overall impact on at-wharf-gate prices for PF Olsen clients has been drops of between NZ$8-$25/m³ depending on port and purchaser options. PF Olsen has been able to limit the drops by maintaining flexibility in its sales mix, and commencing supply to a new purchaser as part of its market-direct export programme.

These sorts of price drops are highly undesirable for forest owners and suppliers of harvesting and related services. In particular contractors are hit hard as many have loans to service and crews to pay. Regrettably, some harvesting projects have had to be stopped to protect forest owners from low, or in some cases, negative returns.

The important question, however, is the outlook. Most forest owners will tolerate lower returns if the outlook is more positive as they know re-starting an operation in a rising market can be very difficult. As usual, there are mixed views on the medium-term outlook, which is negatively impacted by the economic malaise in Europe with its sovereign debt crisis (and consequent impact on Asian wood markets as mentioned above).

If the exchange rate doesn't become more unfavourable and ocean freight rates stay at current levels, however, there are a number of factors that support a lift in at-wharf-gate prices for China-export logs over the next few months:

  • Seasonal reduction (now accelerated due to plummeting prices) in log and lumber supply from North America.
  • Lower harvesting levels in New Zealand due to marginal jobs being stopped or suspended.
  • Considerable diversion of logs to Korea and India.
  • Planned extended Christmas break by many harvesting contractors.

In addition, China posted a 5.5% inflation rate for October, down from 6.1% in September. This is the biggest rate change between two months since 2009 and the lowest rate in five months. This leaves China in a position where, if necessary, it can ease monetary policy (mainly easing up on credit restrictions) in order to offset the depressing impact on economic growth of the prior policy tightening and rapidly worsening conditions in export markets.

Domestic Log Market

In the wake of the World Cup, some are wondering what was it's real economic impact. A fall in the manufacturing index is being attributed to the nation taking "its eyes off the economic ball", whilst focussing on the egg-shaped one. Retail spending exceeded forecasts for the September quarter due to World Cup-related spending but is expected to be weak this quarter. There was the suggestion that for all the money invested in the World Cup, the economic impact would have been greater if the money had alternatively been spent offering free air-fares to tourists for a holiday to New Zealand. Nowhere near as much fun though!

The BNZ monthly confidence survey (a good predictor of upcoming economic activity) shows that during the past two months confidence has fallen from a net 36% of respondents expecting the economy to improve (over the next year) to a net 2% expecting it to deteriorate. This is still higher than the 6 year average of net 9% expecting the economy to worsen.

Chart courtesy of the BNZ

In the context of the European debt crisis, however, it is perhaps comforting that business confidence hasn't fallen further.

The residential property market is slowly improving but with little price pressure. The proportion of first home buyers is increasing and investor-purchaser's decreasing, presumably affected by the tax changes on depreciation. Forecasts of a shortage of housing stock (usually supportive of price) are being offset by assertions that New Zealand house prices are still over-valued. With the added possibility of another global financial crisis triggered by the Eurozone sovereign debt crisis, there is little to support a bull property market.

The Australian property market continues to languish with most areas continuing to post price declines. Exceptions are Sydney, Melbourne and Canberra with modest price appreciation in selected sectors.

Political uncertainty, in various manifestations, is (adversely) affecting the Australian, Eurozone and U.S.A. economies. Consequently, consumers are keeping their wallets closed and firms are deferring investment decisions. Result – sluggish growth and continued high unemployment.

The U.S.A. is posting some modest improvements in employment and economic growth but there is as yet no improving trend that looks like it can sustainably lower the unemployment rate.

The domestic log market saw regional shortages of key log grades (e.g. structural and pruned logs) in the early part of October. By the end of the month, however, as export logs sought other sales channels, it became a buyer's market for most domestic log purchasers.

Many mills appear to be scheduling a longer-than-usual Christmas break and will attend to maintenance and give an opportunity for lumber and other wood product inventories to reduce. Hopefully the New Year will see the Christchurch rebuild start to gain momentum.

Average prices fell for structural logs but stayed the same for pruned, supported by the three-month pricing structure of most domestic sales agreements.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 128  
Structural (S30) 100  
Structural (S20) 96  
Export A   75
Export K   68
Export KI   61
Pulp 51  

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.