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Log Market - November 2012

Export Log Market

The characteristic of the log market this year has been relative stability. Last year the at-wharf-gate price of export A-grade logs fluctuated from a high of $138/JAS m³ (April) to a low of $75/JAS m³ (November). This year prices started relatively strongly, but dropped to a low of $86 in May, but then immediately turned and climbed slowly to the current price of around $100.

The price level of $100 for A-grade appears to be about the threshold that most forest owners who have discretionary volume are prepared to initiate new harvesting jobs, especially if the outlook is positive. However, due to the "hot market" last year, some forest owners are waiting for the market to hit the highs of last year. This is a similar phenomenon to when harvesting was held off after the big 1993 price spike when people waited for the market to "come back". In this case it never reached those highs again and was in a steady decline in real terms for about 15 years thereafter. Using past market highs as a benchmark for future prices can be counter-productive.

China continues to dominate the export log market. Demand has been steady as have inventories. Total supply of logs to China is down this year, but NZ has retained its market share at the expense of Russian and North American supply.

National accounts data for China shows that growth slowed in the September quarter to 7.4% putting annual growth at the lowest level for 13 years. Growth is generally believed to have bottomed out, however, supported by the $1 trillion of accelerated infrastructure projects recently announced and banks being encouraged to loosen up credit availability. It appears that despite a slow down in many parts of its economy, especially the export-exposed sectors, the infrastructure stimulus measures are supporting demand for logs and lumber from NZ. In addition, the lower wood pricing this year is subduing supply of logs and lumber from North America to China, as is the upturn in the USA housing market.

India is recovering from massive over-supply earlier in the year, and weak prices. China, however, still appears to offer the better prospects for traders at present.

Demand and price of logs from Korea and Japan is steady with most of the Fukushima rebuild wood demand apparently being satisfied from North America. The Korean government is loosening restrictions on loans to encourage the housing market.

Better manufacturing data from the USA and China is in contrast to poor data from the Eurozone (see chart below) and downgrades of growth forecasts. Back in May of this year the European Commission forecast Eurozone growth of 1.0%. This has now been trimmed to 0.1%. The relatively stronger economies of Germany and France have also had growth forecasts downgraded to 0.8% and 0.4% respectively. Forecasts of blow-outs in government deficits in Spain and social unrest from austerity continue to plague the beleaguered debt-ridden Eurozone. Essentially there is no growth expected in the Eurozone this year.

(source BNZ)

Ocean freight rates have eased a little since last month based on slightly lower charter rates but more from lower bunker (fuel oil) prices. The NZ$/US$ cross rate was largely unchanged from early October to early November.

Lower-grade export logs (KI and KIS) lost $2/JAS m³ on average and export pruned was slightly weaker. The average price of other export grades remained the same.

Domestic Log Market

Surprisingly poor NZ job data saw 8,000 jobs lost during September (a fall of 0.5%) taking the unemployment rate from 6.8% to 7.3%. This is the highest unemployment rate since 1999. As yet, business employment intentions are not flowing through to actual hiring. When they do, significant skill shortages are expected in the context of demand for building jobs for the Christchurch rebuild and strengthening property market.

Over two years on from the first of Christchurch's earthquakes the rebuild of the city is finally gaining momentum as complex insurance, government assistance and planning issues are being worked through.

The USA continues to post data which shows a slowly growing economy. The ISM index for the manufacturing sector has risen in the past three months and data recently released shows a higher-than-expected 171,000 jobs where added in October. The unemployment rate stands just below 8%. New dwelling consents are now running at an annual rate of over 800,000 which is a three-year high. Many are picking an increase to 1m next year. The combination of improving employment and an improving property market are considered the key harbingers of improved economic growth of this consumer-orientated society. Firmer clear lumber demand and prices are resulting from these economic improvements.

Australia, with its two-tier ("resources" and "the rest") economy is now facing lower activity in mining with deferrals of development projects on the back of weak mineral prices and the high AU$. In an attempt to stimulate the slow property market, the government has stepped in with a range of initiatives. The first home owner grant of AU$7,000 has been more than doubled to AU$15,000. A grant of AU$8,500 is available for the construction of any home up to $400,000.

Domestic pruned log demand continues to be strong with improved sales realisations from clears in the USA market. Structural logs are also selling well; some mills are positioning themselves for stronger demand next year.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 141 149
Structural (S30) 98  
Structural (S20) 90  
Export A   101
Export K   94
Export KI   84
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.

The ability of the new Chinese leadership to establish a framework of sustainable growth will impact global growth in general and NZ's wood products sector in particular.

Outlook

The outcome of the USA presidential elections provided a moment of certainty which will quickly be replaced by the polarised USA political system dealing with the vexatious issue of what is popularly termed the "fiscal cliff"; the USA tackling its massive government debt.

The changing of the Chinese leadership will also have an impact on our wood products trade. The new leadership will have to address dwindling economic growth, socio-economic inequalities and environmental degradation. Part of its challenge is to open China up to more social, political and economic freedoms amidst a background of a privileged Communist Party and corruption in the bureaucracy.

Domestically, the NZ wood products sector should benefit from a stronger housing market in New Zealand and the USA, and hopefully conditions in Australia have bottomed out so will also improve, rather than get worse.

The overall supply-demand balance for softwood logs and lumber in the Asian-Pacific region points to a growing supply short-fall; potentially a very large one. If some key economic and political hurdles can be addressed, the outlook for the NZ wood products sector is bright.