Log Market - March 2012

A sizeable and abrupt price drop in March is being seen by some as an early start of typical seasonal (winter) weakness in the export log market. Let's hope so and look forward to a seasonal uptrend later in the year. Whether this scenario plays out will depend a lot on whether China has a "soft landing" in its efforts to curb inflation and reduce growth to a lower target level of 7.5-8.0%. One New Zealand economist's view of the direction of the domestic economy is significant improvement or deterioration (one or the other) which is not much help for making investment, or, in the case of harvesting, divestment decisions. Setting aside external factors, however, the outlook for New Zealand's economy is now more solidly positive.

While times are very volatile right now, expect the stars to align for wood products in 2 – 5 years. No one is confident about the timing but the combination of a revival of the housing market in the U.S.A. (plus NZ & Australia), lower harvest levels in Canada (79 million m³/annum now, trending to 57 million m³/annum) as a result of the mountain pine beetle-ravaged forests, and sustained demand in China and India should lead to forest products price rises. The ability of Russia to respond is restrained by harvesting and transport costs rather than wood supply despite reductions in the export log tariff. Only the U.S.A. South has the ability to increase its cut, much of which will be needed to supply a resurgent U.S.A. house construction market.

Export Log Market

Log stocks in China remain stubbornly high, reported as between 3-4 million m³ (depending on the source of the information). The market is very cautious at this level, and "A" grade price has fallen to US$ 128/JAS m³ CFR (price landed at China port). This price drop, combined with a firming NZ$/US$ and higher freight rates could have arguably resulted in an even larger drop in New Zealand at-wharf-gate price than the $6-$12/JAS m³ (February to March).

Prices for logs destined to India are holding up better than China and Korea prices although limited ship availability is making it difficult for exporters to manage costs and port space.

As expected, log supply to China reduced significantly in Dec/Jan from both New Zealand (Christmas break) and the Pacific North West of the U.S.A. However, this coincided with an even bigger drop in demand as China stopped production for the Luna New Year; result – high log stocks and a lot of nervous buyers.

Chart courtesy of Pacific Forest Products

The outlook for April/May isn't positive either. High stock levels in China are likely to remain with high levels of supply from New Zealand in Feb/Mar and increased supply from Russia (March-May) and from the Pacific North West of the U.S.A. (from April onwards). The most likely scenario seems to be CFR prices around current levels for the next few months at least, stable ocean freight at current levels (see below) and, for want of a better prediction, US$/NZ$ at around 0.82. If the NZ$/US$ exchange rate falls it will be positive for New Zealand at-wharf-gate log prices, but is likely to also be associated with a worsening outlook for commodities, which could well include logs.

Ocean Freight

A dramatic fall in ocean dry bulk trade, combined with record high deliveries of new ships has resulted in a collapse in freight rates for bulk carries since the beginning of this year. However, in the past month rates have rallied strongly from the early US$30s/JAS m³ in early February to late US$30s/JAS m³ in March. The very low recent freight rates (similar to the lows experienced in wake of the 2008 financial crisis), whilst attractive to exporters had unexpected negative consequences; rates got so low that ship owners were losing money operating their vessels. It became better to slow-steam the vessels, or anchor vessels up with a skeleton crew. Ship owners had little to lose taking supply out of the market, and hoped that lower supply would lead to rally in rates. This, in part, contributed to a severe shortage of vessels late February, early March and has led to very high log stocks at many New Zealand ports. Several ports have had to shut their gates to log deliveries whilst stocks clear.

With the rally in shipping rates, it is hoped that at least availability of vessels will improve, and that rates will stabilise rather than continue rising.

So where to later in the year? Bjorn Bodding from RS Platou Economic Research says that assuming 6-8% growth in real tonnage demand (2011 to 2012) and net yearly fleet growth (new-builds less scrapping [even at elevated levels]) expected at around 12-13%, rates should be much lower in 2012 than 2011. This is good news for exporters, but forest owners should note that this is macro sector view, and the rate of new-builds of the Handy-size vessel class is much lower than the larger Panamax and Capesize classes. Nonetheless, the expectation is for lower than average freight rates for logs this year, unless world trade tonnage picks up dramatically.

Bunker prices, on the other hand, could counter this trend and the rise in oil prices this year will continue to cause bunker prices to have an increasingly large impact on ocean freight rates. Bunkers currently are estimated to represent over 50% of ocean freight rates for logs.

Domestic Log Market

Continued difficult trading conditions were evidenced by the receivership of Bay Lumber Ltd on 14 February 2012. On a more positive note, the Kaituna sawmill near Renwick and owned by Nelson Forests Ltd recently received planning approval allowing it to more than triple its throughput. The new consents will allow expansion to a log input of 500,000 cubic metres per annum (up from 150,000) and provide welcome new jobs and economic benefit for the region. Hiring for the extra jobs is expected to commence next year.

Stephen Toplis, Head of Research at BNZ, is picking that the New Zealand economy is either going to get much better, or much worse; not sure which, but the middle ground is the least likely scenario. It will do better if the global economy starts to improve as the Christchurch rebuild will have a positive impact. It will do worse if we get a collapse of financial markets/banking in Europe or the U.S.A. and /or if China has a "hard landing" as a result of overheated housing speculation. An oil price shock is seen as another risk to the global economic recovery.

Rebuilding momentum in Canterbury can be seen in recent Department of Statistics figures showing January 2012 dwelling consents up 232 (158%) to 379 from January 2011.

Across New Zealand, the unadjusted number of new dwellings approved rose 27% for the same period. After seasonal fluctuations were removed, the number of new dwellings approved, including apartments, showed a rise of 8.3% in January 2012, compared with December 2012. Apartments accounted for almost half of this increase. The trend numbers for new dwelling approvals, both including and excluding apartments, showed a rise for the 10 months to January 2012, but the rate of increase has eased in recent months. Canterbury rebuilding activity is expected to be the main driver of increases going forward.

The BNZ Confidence Survey early this month recorded a rise in business sentiment to a six month high with strength in agriculture and improving conditions in construction and residential real estate. Auckland appears to be leading the revival in real estate with realtors seeing increased attendance at open homes, more first-time buyers and an increase in those that believe house prices will increase in the near-term.

Australia's December quarter growth figures came in at a low 0.4% compared to expectations of 0.8%. Annual growth was only 2.3%. This belies the Reserve Bank of Australia's official cash rate of 8.25% and leaves room for a possible rate drop (against the threat of inflation from the booming mining sector). A drop could provide a needed antidote for the languishing property market.

The U.S.A. housing market is expected to continue to recover, albeit slowly. Wood Markets predicts it won't be until mid-2014 before housing starts crack the 1.0 million level from the current 600,000 level today. It forecasts U.S.A. lumber consumption to increase from 33.5 billion board feet (bf) in 2011 (1.7 billion bf higher than the record low reached in 2009), to just under 50 billion bf in 2016 – a massive 49+% increase. And at that point, it expects prices will soar as will be needed to attract sufficient supply.

Domestic log prices were generally unchanged with most pricing quarterly. Domestic pruned log demand was relatively weak with mills being selective on purchases with plenty of stock around most regions. Structural demand was strong in the Canterbury and Central North Island regions. Export log prices fell on average $9/JAS m³.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 129  
Structural (S30) 98  
Structural (S20) 95  
Export A   91
Export K   85
Export KI   78
Pulp 59  

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.