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Log Market - October 2011

October is characterised by a faltering nascent recovery in the export log market and continued difficult trading conditions for domestic log purchasers.

Export Log Market

In previous issues of Wood Matters we have noted that price cycles seem to be getting shorter – read more volatility. This is certainly the case in October where there is a mix of price increases and price decreases, but an overwhelmingly more bearish tone than last month. Remember last month was the second month of a recovery in prices after steep falls through the winter. The sentiment last month was steadily firming prices through to the end of the year.

CFR prices in China have fallen from their recovery peak of US$141/JAS m³ and we understand most sales are around US$135 but with a distinctly negative bias. Commentators and market participants are widely divided between holding price, and falls of up to US$20/JAS m³. Log stocks have built to an estimated 2.9m m³ or 70 days supply.

The offset to the lower CFR price was a steep fall in the NZ$/US$ exchange rate from 0.85 to 0.75, a fall of 12%. This drop has now started to reverse and the Kiwi $ strengthen but the timing was such that it supported at-wharf-gate prices set at the start of the month.

The US and Canada have been exporting record volumes of logs and lumber to China in 2011. The Wood Resource Quarterly predicts that exports in 2011 will double from those in 2010 to reach an estimated value of US$2.6 billion. Lumber shipments from Canada alone could reach US$1.2 billion this year (from just US$55 million in 2005). The North American share of log and lumber import volumes to China has increased from four percent in 2005 to 18 percent in 2010.

The biggest increase in shipments the past year has been that of softwood lumber from the Canadian province of British Columbia. Much of this lumber comes from the massive supply of timber that has been killed by the pine beetle over the past 15 years. While Canada has drastically raised lumber shipments to China in recent years, the US has instead expanded the export of logs to Chinese lumber manufacturers. This year, US west coast log exporters are projected to ship logs valued at over US$900 million, up from only US$42 million just four years ago.

The US is showing no signs of slowing down but hopefully will hit a seasonal slow down in November. The danger period is Chinese New Year in late January 2012. If stocks don't come down by then the market could remain weak or weaken further.

Too many logs in China – local log processing is not keeping pace with record import volumes resulting in high stocks and a weakening log market.

Korea is faring better in price and attracting more volume and a welcome alternative to over-stocked China. However, Korea hasn't been a price leader for years, and will generally follow any weakness in the China market. India has reasonable demand and price but debilitating ship delays due to congestion at the two ports that take NZ logs – Kandla and Tuticorin. Japan is steady, with the majority of business via its trading house-controlled FOB business, but still little visible stimulatory effect from the earthquake rebuild.

On another note, despite weak economic performance in the USA and Eurozone, the wood fibre costs for the global pulp and paper industry reached new highs in 2011. Weak domestic demand for lumber means lower production of sawmill chip, a major feedstock for pulp mills. The higher volumes of logs being exported to China (see above) also means less sawmill chips as the fibre gets exported along with the logs. This, in combination with increasing use of fibre for pellets (fuel) and the weakening US$, resulted in the softwood fibre index reaching US$109.52 per ODMT (oven-dry metric ton) in the second quarter of 2011. This is 24% higher than two years ago. In local currencies, wood chip and pulp log prices have increased the most in the US Northwest, Western Canada, Russia and Finland.

Not only have wood fibre costs gone up for pulp producers in real terms, they have also increased as a percentage of total costs (meaning wood costs have escalated more quickly than other costs). According to Fisher International, the global average wood cost share of total cost has increased from 52% in 2005 to just under 61% in 2011. This percentage varies by country, being lower in New Zealand and Canada at 50% and higher in China, Indonesia and Brazil at over 70%. These figures illustrate the relatively low price paid for domestic pulp logs in NZ and the otherwise relatively higher costs of production. There is also a lot less volatility in the price of domestic pulp log in NZ. According to the Ministry of Agriculture figures, pulp log prices have increased only 7% over the past two years.

Ocean freight rates have marginally risen again this month with North Island in the low USD$40s and South Island in the mid to late USD40s/JAS m³.

Domestic Log Market

The Wednesday 12th market announcement by Fletcher Building is a reflection of the state of the property and construction sectors as they affect NZ domestic wood processing.

"Conditions in New Zealand have remained challenging with continued low levels of activity in the residential and commercial construction sectors. While there has been a modest uplift in residential housing consents in recent months, this has yet to flow through to activity levels. Even after factoring in the improved trend in consents, the number of new housing starts remains at historically low levels. Consequently, group businesses exposed to the residential and commercial markets in New Zealand have recorded lower earnings than for the corresponding period in the prior year.

"Infrastructure activity has remained steady and this has underpinned earnings in businesses exposed to this part of the market.

"In Australia, the significant downturn in residential consents and continued weak approval levels in commercial construction have impacted the earnings performance of businesses in those sectors.

"The pace of reconstruction efforts in Canterbury was expected to accelerate in the second half of the 2012 financial year [first half of calendar 2012], assuming a continuing reduction in seismic activity. However, the region experienced a further magnitude 5.5 earthquake on Sunday 9 October which the government believes could further delay rebuilding efforts. New Zealand Treasury expectations are that the rebuilding in Canterbury will not "begin in earnest" until the second half of the 2012 calendar year.

"In New Zealand, no material improvement in trading conditions is expected in the first half of the 2012 financial year, and the timing of a sustained and meaningful recovery beyond that is uncertain.

"In Australia, there is a clear risk that residential and commercial construction activity will remain around the current low level for the balance of the 2012 financial year.

"Markets in North America and Europe are expected to remain flat while Asia is expected to continue growth."

This announcement resulted in Fletcher Building's share price dropping 10% in morning trading (on the NZX).

Perhaps with the exception of pulp and paper and a handful of niche manufacturers, not only is the current status of the sector weak, but the outlook is for continued weakness through the first half of next year.

The BNZ_REINZ Market Survey recently reported a modestly improving real estate market, but a loss of momentum in the strength shown by some indicators in prior months. First home buyers remain keen to buy, investors are sitting on their hands; it appears to be neither a buyer's or seller's market, and there are signs of more potential vendors coming forward. This is interpreted as indicating a generally improving market but showing some signs of a mild pause, perhaps influenced by the debt worries in the Euro zone and the distraction of the Rugby World Cup.

Residential dwelling consents increased 12.5% in August (seasonally adjusted) and in the three months to August, there was a strong 16.2% increase (see chart below). This should translate into a notable increase in construction activity from mid 2012 onwards.

Chart courtesy of BNZ

The value of consents issued for the construction of non-residential buildings is flat.

Processed wood exporters gained some benefit through the marked depreciation in the NZ$/US$ cross rate in late September/early October but this is now reversing.

In terms of logs prices, there were modest changes in October with domestic prices and export prices on average down $1 (although some exporters raised price, and some lowered price for the month).

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 127  
Structural (S30) 103  
Structural (S20) 98  
Export A   94
Export K   88
Export KI   80
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.