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Log Market - September 2011

Renewed strength in the log export market saw prices rise in September whilst the domestic sector continued to struggle with weak product markets, price discounting and a high exchange rate.

Export Log Market

The upward movement in the log export market reported last month has gathered momentum and resulted in a strong lift in at-wharf-gate price in New Zealand in September of between $6-10/JAS m³. The trouble is, the strength of the price increase is in doubt and some commentators see it more as an attempt by customers to lower their average inventory cost rather than the result of a fundamental shift in demand.

Restocking of sawmills' yards has seen some reductions in wholesalers log yards in China, but overall inventory levels remain high.

At this stage there is a continued cautious tone as commentators speculate on how much China's export-oriented economy will be adversely affected by continued (and longer-than-expected) weak USA and European demand. How long will the transition to a more domestic consumption-based economy take and what will be some of the unintended consequences? (e.g. unaffordable housing, inflation threats and growing social unrest).

However, sentiment drives markets, until over-ridden by fact, and the sentiment is that CFR prices in China (price of logs delivered to Chinese ports) have troughed and are now on the increase.

Andres Katz in a recent article in the New Zealand Journal of Forestry (August 2011), notes that the Chinese housing sector is the main driver of growth in China. He observes that although some measures suggest an over-heated property market, lower leverage (a minimum 20% deposit is required for lending), strong demographic trends (massive urbanisation) and income growth per capita growing at 9.8% are all supportive of a strong market continuing.

Large volumes of logs from the Pacific Northwest of the US continue to compete with Radiata pine from New Zealand. To put this in perspective, according to PFP, the volume of logs going into China from the USA in June 2011 was 637,000 m³ versus NZ's 554,000 m³, the first time ever that USA volumes exceeded NZ's. USA log exports to China in 2011 are running at close to 5 million m³ annualised, a huge increase from just 320,000 m³ in 2007. Whilst the competitive threat of Russian logs to NZ Radiata has lessened (but not gone away), the USA is taking significant market share as it aggressively seeks alternatives to its lack-lustre domestic market. Fortunately the USA supply is seasonal although production is expected through October and therefore shipping into November. These are traditionally strong months for NZ Radiata exports as Asian markets come out of their hot seasons. Due to the large volumes of logs from the USA, however, and high log inventory levels in China, this year the seasonal upswing in the market is expected to be more subdued.

The USA has a total annual harvest of close to 50 million m³ in the Pacific Northwest, so there is considerable potential to increase log exports to Asia further. Whether this happens or not will be determined by the relative strength of the USA property and construction markets and the comparative returns from their domestic log market vs. the export log market. Unfortunately the current prognosis for the USA economy doesn't bode well for any lessening of their log supply to China in the short, or even medium-term.

The Indian market has returned to a stronger tone after price dropped strongly in conjunction with the falls in China. Vessel congestion remains an issue with waiting times increasing up to 20 days in the monsoon season. Korea is experiencing lower log inventory levels and firming prices although also taking significantly increased log volumes from USA. The Japan market is steady, with volumes strongly controlled by the big Japanese trading houses.

The NZ$/US$ cross-rate showed the same volatility and trend as last month moving up to the high 0.80s, only to settle back down in the low-mid 0.80s.

Ocean freight rates have marginally risen recently, more in response to short-term pressure around vessel positioning than to any fundamental increase in demand. Fortunately, the market for larger sized Supramax ( 50-63k tonne ) and Panamax ( 63k tonne + ) remains soft and this is placing a ceiling on Handysize and Handymax rates. On balance steady freight costs in the low US$40's range is expected to continue.

Chart courtesy of Pacific Forest Products (PFP)

The overall outlook for NZ at-wharf gate prices is for modest and steady increases through the next three months.

Domestic Log Market

The challenges facing the domestic sawmilling sector were seen in news of more sawmill closures or reduced operating hours, and a new mill receivership in the past month.

The Timber Industry Federation (TIF), in its August 2001 Newsletter, showed figures of drops in sawn timber export earnings from all key markets – Australia, the USA and Asia. Despite exchange rate advantages, export sales to Australia are down 16%, or $33 million, on an annualised basis. The biggest hit, however, has been in the USA market with sales down 26%, or $50 million.

TIF further reports that the NZ domestic market is characterised by flat demand as dwelling consents languish at an annual rate of 13,000 units compared to more than 16,000 units a year ago and more than 21,000 units in the same period in 2008.

The BNZ adds to this sobering data revealing June quarter seasonally adjusted building work falling by 6.6% after also falling during the March quarter. Activity was down 15% from a year earlier. These numbers show a sector, accounting for around 6% of economic activity, in deepening recession.

Chart courtesy of BNZ

The outlook, however, is improving. In the latest BNZ confidence Survey, the net percent of the over 500 respondents, 36% expect economic conditions to improve in the coming year, compared to 22% in August.

The current Rugby World Cup is expected to give the economy a stimulatory boost. Construction is expected to lift in Auckland where rents and prices are lifting and awareness of a property shortage is growing. Growth will be further boosted by the (eventual) reconstruction of Christchurch. Next year is also expected to be boosted by increased spending from farmers as a result of record incomes and a few more businesses and households will be more comfortable with their debt levels and willing to undertake some more hiring, capital expenditure, and retail spending.

Selected structural markets, especially engineered products, remain relatively firm, but non-structural and utility markets have softened with log prices reducing accordingly. Pruned domestic prices are weak with many purchasers sticking to contract volume only, making it difficult to get spot sales.

Australia has an underlying demand for new housing based on demographics (estimated at 174,000 units per year) that exceeds the current rate of construction estimated by the Housing Industry Association to be 146,000 annualised. This unsatisfied demand (which also exists in New Zealand but to a lesser extent) should provide the background to a strong housing sales and construction market. However, Australia is exhibiting a split economy with the resources and commodities sector thriving on the back of high prices (despite the high AU$) and demand from China. On the other hand, the manufacturing exporters, housing and retail sectors are suffering from low demand, low investment and low confidence. ANZ economist Koon Goh attributes a lot of this to political uncertainty with Gillard's popularity rating slumping to record lows in recent polls. TIF point to red tape and compliance costs as major causes of the depressed state of dwelling construction.

Overall domestic log prices fell for the month.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 130  
Structural (S30) 106  
Structural (S20) 99  
Export A   95
Export K   89
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.