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Log Market - May 2012

While financial markets waiver with renewed concerns of Greek and other Euro-members debt, New Zealand log exporters benefit from a falling NZD and brighter prospects in global timber markets.

Export Log Market

Favourable movements in three key drivers of NZ at-wharf-gate (AWG) price saw export log prices increase some $6-$12/JAS m³ in May (depending on load port and grade). This increase was the result of a slight increase in CFR price (USD price in destination port), a small drop in ocean freight rates and a slight easing of the NZD/USD cross rate.

Softwood log inventory in the key market, China, has fallen to under 2.8m m³ which is still high but off-take is reported at around 50,000 m³ per day. This represents less than 60 days of inventory which is considered to be a reasonably well-balanced position. Supply from North America is expected to reduce from 2011 levels in the upcoming quarter, leaving room for possible modest increases in CFR price in the second half of the year.

After prices were set for May, the NZD/USD cross rate has tumbled from 0.82 to 0.77. This change alone (if all other price drivers remain the same) would add NZD 8.00/JAS m³ to the A grade AWG price.

Traditionally, however, CFR prices come off between May-Sep as a result of lower construction activity during the hot season. This year, most market commentators are picking flat CFR pricing for the remainder of the second quarter with possible increases in the second half of the year. If the NZ dollar stays at current levels, this could result in reasonably strong pricing for the remainder of this year.

In summary, at this stage April appears to be the trough in the market following price reductions since the beginning of the year. May's price increase could be boosted by an exchange rate effect in June and in the second half of this year the consensus view is modest increases in AWG price on the back of CFR prices in China.

China log and lumber import data provide some interesting insights (see chart below):

  • Total imports of logs and lumber have increased from 13.6m m³ (2000) to 42.3m m³ (2011) in just 12 years, an average annual growth rate of nearly 10%.
  • Russia is now considered less of a competitive threat to New Zealand. Since Russian imports peaked at 25.3m m³ in 2007, they have dropped to around 14m m³ for the last three years. Even when the log export tariffs currently in place in China reduce, lack of infrastructure and high costs are expected to constrain log exports from Russia.
  • "Rest of world" imports have been relatively stable in absolute volume terms (6-8m m³ per annum) but have gone from 88% of total imports in 2000 to just 24% in 2011. Therefore it appears there are no other supply regions outside of the top five capable of satisfying the big increase in demand from China. Even Chile, a country with large plantation resource, similar to New Zealand, ranks only 27th with only 41,000 m³ of logs/lumber recorded as having been imported by China from Chile; Chile has successfully developed significant domestic processing.
  • Of the five countries that have experienced the big increases in market share, only NZ seems well-positioned to be able to sustainably continue (let alone increase) such supply levels in the future. The Solomon Islands have an annual harvest several times what is sustainable. The high volumes from Papua New Guinea are unlikely to be able to be continued. Canada is developing a big hole in its standing timber inventory as it salvages millions of hectares of forest ravaged by the mountain pine beetle, and United States is expected to consume more than its own annual cut once the housing and property markets rebound sufficiently from their long and deep down-turn.

Seen from this perspective, New Zealand forest owners seem particularly well-positioned to benefit from the China growth story. The big question really is, how sustainable is China's rapid growth rate?

The more mature economies of Korea and Japan continue with their steady demand for Radiata logs at annual demand levels of around 2.4m m³ and 700,000 m³ respectively.

Despite the Indian economy growing at slower than forecast levels, demand for Radiata logs is strong, as is the number of parties wanting to export logs to India in their own name. This trend is similar to what started about two years ago with Chinese buyers (and continues with them). Many, however, do not understand the complex port and shipping logistics which can quickly add cost to shipments.

PF Olsen continues to work with such log purchasers on a selective basis when they are able to provide superior prices for forest owners without exposing forest owners to credit risk.

Ocean Freight

Ocean freight has remained steady in the low USD40s/JAS m³ and bunkers (fuel) also steady. The outlook for ocean freight is generally positive for exporters (read low freight rates) based on forecast low utilisation rates (see chart below). The forecast below is based on modest positive global growth. Despite this, new-builds are forecast to exceed demand growth. However, as we have seen in recent times, the high cost of bunkers is providing an effective floor on freight rates; albeit the recent falls in oil price will help lower rates.

Chart supplied courtesy of RS Platou Economic Research

Domestic Log Market

The latest BNZ-REINZ survey reports a much higher-than-usual number of agents saying NZ dwelling prices are rising (64% in May, compare to just 25% in April). The survey also shows an increase in the net percentage of first home buyers active in the market and an increase in investor numbers. Despite this, the real estate market appears reasonably balanced with modest price growth but no signs of former "boom times", a situation that surely pleases the Reserve Bank. Residential and non-residential consents are modestly increasing but still well below the five-year average; Canterbury activity is increasing as the rebuilding process gains momentum.

US housing activity is increasing with housing approvals up in each month of this year. March figures were 4.5% up on the prior month and 30% on the same time last year. Since early 2011, housing approvals in the US have been trending up. Housing starts have been more subdued but this is seen as a lag effect prior to new projects commencing.

Approvals of Australian new building continue its downward trend which commenced early 2010. Poor economic growth and deleveraging is seeing continued weakness in their real estate market. Since the peak in June 2010 house prices have fallen some 9% in real terms. Some commentators are speculating that the downturn could last as long as it did in the US where the house prices fell for five years to 65% of their peak value.

Signs of financial stress are appearing in some domestic processers. Domestic log prices have remained relatively stable based on quarterly negotiations, but those with supply more closely aligned to export log prices will be under pressure from higher log prices. The big drop in the NZD, however, will be very welcome to domestic processers with exposure to export markets, benefiting those trading with sales in USD.

In April City Forests (owned by the Dunedin City Council) announced the mothballing of its Millburn wood processing plant. This will affect the employment of some 31 employees at the plant. The press release summarises issues facing not only this company, but others in the sector: "The Milburn wood processing plant was established in early 2006 principally to supply high quality clear boards from the company's pruned forests to the American housing market. Since that time there has been a significant and well documented decline in both house building and general economic activity in America, Australia and New Zealand. In addition, returns from exports to Asia, particularly China, have been impacted by competition from North American mills and the high value of the New Zealand dollar."

On average, compared to April, export log prices are up $4-6/m³ and domestic prices are unchanged.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 130  
Structural (S30) 97  
Structural (S20) 94  
Export A   92
Export K   86
Export KI   81
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.