Log Market - July 2012

Relatively steady pricing and demand in most log grades with the exception of pruned logs which are in short supply. The strong lift in price of export pruned logs last month was reflected in price increases in domestic pruned logs in July.

Export Log Market

CFR prices (logs delivered at destination port) have been steady through June in China. Despite the NZD/USD cross rate moving adversely in June by some 5%, at-wharf-gate prices in New Zealand were overall unchanged from June to July (some ports saw small price increases, some small decreases, and some no change at all).

2012 has been a tough year for many owners of hard commodities. The chart below shows the price performance (in USD) of various hard commodities (and ocean freight – RHS) – most are negative. NZ pine logs have fared well, in comparison, having actually risen by 6% in USD terms in the same time period, and by 11% in NZD terms.

(source RS Platou Research)

The Forest Owner's Association (FOA) picked up on our market report last month in which we mentioned pruned radiata pine logs being used to make baby cots in China. Trevor Walton (FOA communications) did some more research and issued a press release.

China posted second quarter GDP growth of 7.6%, a rate lower-than-desirable by the Chinese Government, and one which risks not being able to create enough jobs for those moving from the country-side to the city. Further slowing would be seen as socially destabilising for China and jeopardising global growth. The Chinese Government has already signalled its intention for stimulus. It cut interest rates in June and will invoke additional interventions if required.

The other big area of focus for the Chinese Government is more equally sharing its wealth. That is a noble cause, but according to China's "rich list" in the Hurun Report, the wealthiest 70 members of the national legislature have a net worth near USD90bn. Compare this to the top 660 most powerful officials in all three branches of the US Government with USD7.5bn - there is no shortage of home-work for the Chinese Government on this subject.

As reported last month, there was concern that the market would soften with the on-set of the "hot/wet season" in China. This didn't appear to affect pricing/demand as we moved from June to July, but in the last week there have been reports of A grade slipping from around USD 132 to USD128 (CFR). If this price persists, or goes lower, NZD at-wharf-gate prices next month are likely to fall unless supported by favourable movements in foreign exchange or ocean freight rates.

Construction is subdued in South Korea and expected to remain so for the next 12-18 months. The economy is being buoyed by the big success stories of Samsung and Hyundai, neither of which stimulates much demand for wood products.

The rebuild of quake affected Fukushima is having only minimal impact of wood products markets related to New Zealand.

India's growth rate has fallen to 5.3%; it's lowest in seven years. India's inflation rate is high and it has an over-bearing, inefficient and corrupt bureaucracy and a stalled reform programme. Along with a high current account deficit, its currency is plunging, making it more expensive to import logs. A recent over-supply of radiata pine logs from New Zealand saw CFR prices plummet. Prospects for this market look poor for the time-being.

Ocean freight rates have remained stable during the past month with both Handysize charter rates, and bunkers (vessel fuel oil) moving side-ways in price. The outlook for vessel charter rates remains bearish – read low vessel utilisation rates and low charter rates.

Domestic Log Market

The median NZ house price rose 2.5% in the June quarter (from the prior quarter) and was up 5.3% on the same time last year. Much of the increase is attributed to shortage of supply of dwellings, with Christchurch and Auckland posting particularly strong price increases (see chart below).

Number of sales for the June quarter were up nearly 19% on last year and for the 12 months to June, were up nearly 22% on the prior 12 months at 68,243. This is still well off the peak number of annual sales of 120,000 in early 2004.

(from BNZ)

A shortage of housing stock, rising prices and low interests rates should stimulate house construction activity, once investor confidence improves. However, May dwelling consents actually fell nationally in May to 1,304. Strong consent activity continued in Canterbury, followed by Auckland.

Despite population growth and strong economic performance from the resources sector, Australian housing starts fell for the eighth straight quarter in a row. Across the country, in the first three months of this year, housing starts were down nearly 13% with New South Wales posting its weakest ever recorded figures. Victoria and South Australia are also weak in contrast to the booming Western Australia, driven by mining activity. The domestic wood products market is suffering with many mills running at well-below capacity. Importation of wood products, including NZ and Baltic pine, has reduced considerably in conjunction with reduced demand and the lowering AUD/USD cross-rate.

Both USA housing and non-residential construction activity is showing in increasingly strong positive trend, albeit from a low base (see chart below).

(source: NAB Research)

In addition, house sales and prices are up and unsold inventory down. Sales of new homes in May were 20% higher than May 2011 and reached a seasonally-adjusted annualised rate of 369,000 (compared to 306,000 in calendar 2011). New home prices are reported to have increased 5.6% year-on-year and unsold inventories have fallen to 4.7 months supply. This long-awaited recovery in the USA property market is a welcome contrast to the large number of negative indicators coming out from other countries/sectors.

Domestic pruned log prices rose $5-8/tonne. Supply was tight, especially in the central North Island where harvesting capacity has been temporarily diverted to wind throw recovery, reducing production of pruned logs. Demand for structural logs has been weak in regions more exposed to Australian sales, but stronger in those focused on the domestic lumber market. Other prices changed little.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 138  
Structural (S30) 97  
Structural (S20) 94  
Export A   101
Export K   95
Export KI   88
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.