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Log Market - June 2012

The export log market continued to post price increases, predominantly exchange rate driven and, sadly, a major domestic sawmill in the North Island, Ahead Lumber (near Pokeno), goes into receivership.

Export Log Market

Consistently lower log inventory levels in China are improving sentiment for this key market.

Days supply (inventory divided by daily off-take) has been below 60 days since the middle of March. CFR price (price of logs landed at Asian ports) has risen slightly since May. However, in conjunction with an 8% drop in the NZD/USD exchange rate, New Zealand at-wharf-gate prices rose $6-10/JAS m³ from May.

Some market commentators are expressing concern about the upcoming hot season in China. During this period, (July/August), industrial activity reduces as workers divert to agricultural work such as grain harvest. However, if CFR prices stay below USD140/JAS m³ for A grade, it is expected that import volumes from North America will stay subdued and log inventory will not rise too much. It was the relatively high CFR price in the second half of last year that stimulated the massive increase in volumes from North America – but this trade appears to be quite price-sensitive.

Pruned logs have appreciated in price more than other grades, due, in part, to demand for the manufacture of baby cots in China. Being the year of the Dragon, 2012 is an auspicious year to have a child, and a baby boom is expected. Pruned logs in proximity to debarking and anti-sap-stain plants (i.e. Port of Tauranga and Gisborne) are fetching the highest prices - well over $150/JAS m³, a price not seen for many years. Debarking and anti-sap-stain treating pruned logs prevents sap-stain, or blue-stain, from visually downgrading the clearwood. Premium pruned logs (large logs pruned on time) will attract even higher prices.

In addition to its massive low-cost housing construction project (some 35 million units) the Chinese government recently announced acceleration of the approval process for infrastructure projects for road, rail and airports. This could further stimulate demand for wood later in the year.

Chart courtesy of Pacific Forest Products

Japan and South Korea increased log consumption in the first quarter of 2012.

Japanese sawmills have not only increased importation of logs, but are also using more domestic logs. During the first three months of 2012, log consumption by the country's sawmills was up 7% compared to the same period last year. Log consumption is expected to increase gradually in the coming years because demand for lumber and plywood will grow as the country is rebuilt in the aftermath of the devastating earthquake and tsunami last year. However, the main beneficiary is North American Douglas fir. Radiata pine from New Zealand may have a marginal increase from the usual 700,000 JAS m³ exported to Japan each year.

Despite South Korea increasing log consumption initially this year, the lumber markets are under some downward pressure and log import volumes from New Zealand could reduce from the current level of around 2.4m JAS m³. South Korea's economy is relatively mature with only modest infrastructure and house construction programmes.

India is a growth market and volumes from New Zealand have been increasing steadily; to around 2m JAS m³ on an annualised basis. However, logs are only imported into two main areas (Kandla and Tuticorin) and the supply/demand balance is easy to upset. Recently large volumes have been diverted to the Indian market and created market volatility. PF Olsen, along with other industry participants, recently received an email from the Kandla Timber Association asking for a more rational and organised approach to the market. The higher volumes going to India will coincide with the upcoming monsoon season which sees reduced log consumption. This could result in an over-stocked inventory position and more pressure on price. This, along with the depreciation in the Indian rupee, is making this market more fragile at present.

Ocean Freight

Ocean freight has remained steady and bunkers (fuel) has provided some downward movement in rates which sit in a range of late USD30s to early USD 40s per JAS m³ depending on location and number of load ports. Shipping rates to India are considerably higher due to the greater distance and routine delays in unloading (demurrage).

The scenario of low utilisation rates of the global shipping fleet continue to point towards low ocean freight costs for the foreseeable future.

HSBC Shipping Services in one of its May 2012 commentaries reported on the state of impaired loans in the shipping industry based on the peak of ship values in 2007-08 and the subsequent plummeting of ship value and charter rates since then. If you think your house has lost value, check this out. HSBC cited two stark examples; one of large new container vessels fabricated in Korean shipyards, now being available for 36% less than in July 2008; the other of large bulk carriers fabricated in China, now being available for 40% less than in May 2008.

Matters are made worse as improvements in engine technology mean that newer-builds can offer significant operating cost savings through lower fuel use (bunkers being around 60% of total charter costs). This effectively increases the devaluation of ships ordered in the heady market-peak years of 2007-08.

This erosion in ship value will have wiped out all the equity and a good chunk of the load value for many banks, although many are reported to be waiving loan covenants in the hope the situation improves. German banks are reported to be particularly exposed. Numbers are big, with the 2008 prices for the giant box-ships (container ships) being around USD170m and for the large bulk carriers around USD135m, and orders of 5-10 units being common. Let's hope this situation doesn't exacerbate the already precarious state of the European debt markets.

This illustrates how volatile the shipping sector has been and how damaging the over-supply of expensive ships and subsequent low utilization rates. It could also mean an aversion to, and reduced capacity, to invest in new-builds which, when demand for ocean freight picks up, could mean charter rates ramp up quickly – few, however, are expecting this to happen in the next few years.

Domestic Log Market

The New Zealand housing market continues to improve with median sales price 4% higher than this time last year and sales volumes improving. However, residential construction activity in the first three months of this year was down a seasonally adjusted 1.5%, offset by an increase in non-residential construction of 1.8% - leaving the total unchanged at $2.5 billion for the three months to March 2008. Building activity in Canterbury is picking up particularly for non-residential work.

The Canterbury rebuild, the improving housing market, low interest rates and a shortage of houses in Auckland point towards improvements in overall building activity over the coming year. This will be a welcome change for the domestic sawmilling industry which has faced several years of weak domestic demand.

Sadly, Ahead Lumber of Pokeno went into Receivership in May, after many years of trading with a focus on the production of structural lumber. Korda Mentha has been appointed to manage the Receivership.

The Reserve Bank of Australia this month cut its cash rate by another 0.25% following a cut of 0.5% a month ago; the rate now sits at 3.5% compared to 4.75% in October last year. Soon after this cut, very strong March quarter growth for the Australian economy of 1.3% was reported, twice the rate expected. This is seen as a reflection of the continued mining and infrastructure boom. Retailing spending rose more than expected (1.8%) from subdued levels. Annual GDP growth is now reported at a very respectable 4.3%. This better-than-expected growth, more accommodating monetary policy and growing housing deficit (new house construction lagging behind new household formation) is expected to stimulate the depressed Australian housing market.

The USA economy which was showing signs of a nascent recovery posted disappointing and unexpectedly poor unemployment and factory order figures recently. Unemployment increased to 8.2% and factory orders fell 0.6% in April and 2.1% in March. A recent announcement of a possible new round of quantitative easing (QE3) has provided some stimulus to the share market although the apparent lack of success of prior QE programmes makes it hard to see how this will really benefit the USA economy.

Gathering sentiment against government austerity measures and the lack of consensus on a solution to Europe's debt crisis points to a worsening economic outlook for the Europe and its trading partners. Whilst the newly appointed President of France, Francoise Hollande, may have a valid point that overly zealous austerity measures may cause too much social and economic harm, his alternative to "spend and tax" France out of the problem and not tackle reforms and entitlements seems naive at best, and reckless at worse.

Wood Matters readers may ask what is the relevance of mentioning these different countries/economies when reporting on the log market in New Zealand. For explanation, the links and drivers are explained below:

  • New Zealand Housing Market – residential construction (and to a lesser extent residential remodeling and non-residential construction) is a big driver of demand for lumber and other wood products which are manufactured from New Zealand logs in New Zealand.
  • Australian Housing Market – Australia is New Zealand's most important market for processed wood products.
  • USA Housing Market – a strong market increases demand for products such as clear pine, sawn and dried in NZ; it increases demand and price for North American softwoods logs and lumber which in turn reduces export of these products to China where they directly compete with NZ logs and lumber.
  • Europe – whilst less important as a direct purchaser of wood products Europe's demand for product such as furniture and panels affects demand for logs and lumber from Asia, and China in particular – in turn affecting demand for NZ logs and lumber. In addition, a faltering export sector in China runs the risk of adversely affecting growth and jeopardising the big infrastructure and urbanization programmes that are driving demand for wood from New Zealand. Fortunately the Chinese government has both the fiscal capacity and strategy to support these programmes.

A summary of average log prices is shown in the table below; little change in domestic prices most of which are negotiated quarterly. Export prices up $6-10/JAS m³ depending on grade.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 131  
Structural (S30) 98  
Structural (S20) 94  
Export A   100
Export K   93
Export KI   87
Pulp 60  

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.