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Log Market - February 2012

Since our last market report, the NZ forestry sector took its annual break from business and endured an unpleasantly wet Christmas/New Year holiday period and China heralded in the Year of the Dragon with the largest modern migration of people's travelling to their home areas for the celebrations.

At the same time, the value of the NZ$ continues its steady appreciation against the green back, and ocean freight rates reduce to levels seen during the crash of 2008.

Domestic log prices have fallen slightly and export log prices have risen.

Export Log Market

Export log prices rose NZ$8-11/JAS m³ from December to February. The drivers were higher CFR prices (the US$ price in the destination port; in this case still being led by China), more favourable ocean freight rates, offset by a less favourable NZ$/US$ exchange rate. However, immediately after setting prices on, or close to, the 1st February, market sentiment deteriorated and the NZ$ rose strongly in the first week of February.

As production resumes in China after their longest annual break - Lunar New Year on 23 January and the week long holiday afterward - total log stocks climbed to over 3.0m m³. This is the same level as prevailed in October when prices crashed dramatically.

This time, however, sawmill log stocks are low, and if off-take from the ports picks up strongly, stocks should drop. As yet (at time of writing) this is not happening, and sawmills are adopting a just-in-time approach to ordering, with a view to benefiting from a price drop.

The main determinant of the state of the market this year is going to be the economic growth rate in China (in general) and the state of the property market (in particular).

Last year it was announced that China became the largest importer of softwood logs and lumber in the world. The rate of increase has been phenomenal. According to Wood Resource Quarterly, the total value was nearly eight billion US dollars last year, an increase of 57 percent from 2010 and up from only US$ 70m 15 years ago. With increases so far ahead of GDP growth, this high rate of import growth is clearly unsustainable. This poses the risk that import growth slows such that the market cannot absorb the large increases in supply of logs and lumber from North America.

As mentioned previously in Wood Matters, the competitive threat has moved from Russian supply to North American supply. The one billion m³ of pine estimated to be killed by the mountain pine beetle is resulting in high volumes of cheap logs and lumber finding its way to China. To stimulate the salvage harvesting prior to the wood deteriorating too much, stumpage is set very low. Shipping is via low-cost Panamax vessels whose daily hire rate for 44,000 tonnage is similar to that of Handysize/Handymax vessels of 28-33,000 tonnes used in the New Zealand to China log trade. So despite the ocean freight journey being 50% longer from North America than from New Zealand, logs and lumber can be landed competitively in China, and this will act as a ceiling for New Zealand log price until this source of wood is exhausted (no-one is picking when this will occur at this stage).

By volume, the importation of softwood log and softwood lumber to China fell 10 percent in the fourth quarter of 2011 (from the third quarter). The fall was mostly from Russia; lumber from New Zealand and logs from Canada actually increased slightly during the fourth quarter.

Gross domestic product growth dropped in China to 8.9% in the fourth quarter of 2011. With a weak USA economy and deteriorating economic conditions in the Euro zone, there is risk of further drops. Economists typically view growth of 7-8% as the bare minimum to generate enough jobs to help China absorb the urban influx of rural migrants and maintain social stability. The Chinese government still has plenty of policy instruments it can use to stimulate economic activity such as lowering interest rates. However, high levels of local government debt and very high levels of unsold housing stock in the large cities will require deft interventions to create sustainable growth without the distortions of an over-heated property market and the spectre of high inflation.

The exchange rate has moved unfavourably for at-wharf-gate prices moving from 0.778 (NZ$/US$) at the start of January to 0.835 by early February (an appreciation of 7.3%). This is equivalent to a movement of around US$9-10/JAS m³ at current CFR log prices (prices at destination port).

The ocean freight market has been very weak since the start of 2012. The Baltic Dry Index (BDI) fell to 702 in late January 2012. All market segments are now at levels close to the lows experienced in 2008 in response to the global financial crisis (see chart below). Whilst this is good news for shippers, providing freight rates in the low NZ$30s per JAS m³ to China/Korea/Japan, it also reflects low demand for commodities. The concern is that it could be a harbinger to a softer log market.

Rates are not expected to fall much further; the relatively old-age of the Handysize fleet and relatively few new-builds in the pipe-line, along with increased scrapping of older vessels (stimulated by the low hire prices) will tend to balance up supply and demand.

Nevertheless, at present, the very low ocean freight rates are providing a useful offset to the appreciating NZ$ and were material in allowing NZ$ at-wharf-gate prices to increase in February.

Chart courtesy of Pacific Forest Products

Domestic Log Market

Positive developments in the NZ economic outlook include GDP continuing to expand at a reasonable rate, unemployment falling to 6.4% and the BNZ business confidence survey showing a net 13% of respondents expecting economic conditions to improve over the next 12 months (up from 3% in December).

Chart courtesy of BNZ

Dwelling consents are still historically low (less than 15,000 per annum) but there is optimism that the Christchurch rebuild will commence in earnest this year. The stuff.co.nz website said recently "barring another big earthquake, insurers say rebuilding and repairing quake-damaged homes will pick up from almost nothing to a multi-million dollar push in the first quarter of this year. But the rebuilding will be uneven, with the area of 'low-risk' – rural Canterbury and Western Christchurch – given priority over hard-hit areas in the east of the city and the Port Hills." An uplift in house construction in Auckland is also being forecast stimulated by a shortage in housing stock.

PF Olsen hosted senior managers from a large North American sawmilling firm, interested in investing in NZ sawmilling. They advised that the drop off in household formation rates and increased housing demand in the USA has resulted in unsold housing inventory lowering from 13 months (its worse level in recent history) to only six months; six months and lower is considered a bull market by the lumber sector. Part of this rebalancing came from the large USA house construction firms switching their attention from new-builds to purchasing bank foreclosures. Many of these houses end up in a poor state of repair and provide meaningful work for the builders to restore. At the same time, the low purchase price of the houses from the banks restores the builder's balance sheets and at the same time reduces the amount of new housing stock coming on the market. Whilst this improvement in the property market is still likely to be slow (meaningful reduction in the unemployment rate is needed), there have been promising price increases in structural lumber and moldings and millwork. This should bode well for NZ lumber exports in the future.

The North American sawmilling managers saw good potential in New Zealand sawmilling with a focus on the high quality product for the North American and European market. They considered FSC (environmental) Certification as an important part of the product offering from New Zealand.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 129  
Structural (S30) 98  
Structural (S20) 94  
Export A   99
Export K   93
Export KI   88
Pulp 49  

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.