Log Market - October 2012

Big Growth in Wood Pellet Demand and Supply Outlook

This month has seen some big announcements relating to wood biomass for energy. This confirms the increasing role of wood pellets on the global energy market. Drax Group Plc has announced it will spend $1 billion to turn the UK's biggest coal-fired plant into Western Europe's largest clean energy producer. Initially involving the conversion of one of the company's six units to burn wood pellets by June 2013, it intends to switch two more units to wood at a later date. This move follows similar initiatives being adopted by German and Scandinavian utilities as they strive to meet green house gas emission reduction targets. Coal, the most polluting fossil fuel, accounts for an estimated 41% of the world's electricity generation. Nuclear energy, once seen as a viable, low-polluting energy source, has lost favour in many countries after the Fukushima nuclear power station accident and is being phased out. Wood biomass for electricity generation is filling the gap.

Korea has announced a long-term plan to increase the renewable energy share from less than four percent in 2011 to 6.1 percent in 2020, and then to 11.5 percent in 2030. Japan similarly plans to increase renewable energy considerably. Burning wood pellets to generate electricity in lieu of burning coal is part of the strategy to achieve these objectives.

Some wood pellets will come from domestic sources, initially from processing wood residues from sawmilling and other wood processing. Such is the demand, however, that additional fibre will be need to be sourced from logging residue and logs themselves. This will put upward pressure on the price of low-grade logs. This could change the dynamics of plantation forest growing, increasing the feasibility of growing forests specifically for pellet production.

Much of the increased demand will come from pellets imported from Asia and North America. This coincides with massive investment in pellet manufacturing plants in places like the US South. According to the North American Wood Fibre Review wood pellet export volumes from the US South will increase from an estimated 1.5 million tons in 2012 to 5.7 million tons in 2015.

Conversely, New Zealand has seen a reduction in its wood pellet capacity with Solid Energy closing its Rolleston plant in the South Island.

Longer-term, it seems inevitable that wood pellet production in New Zealand will increase, and this would work most efficiently alongside a large (world) scale integrated wood processing plant, especially if it has access to low-cost, renewable geothermal power. Global wood pellet demand is set to increase dramatically, and along with pressure on oil supplies, price is likely to also increase strongly. Whilst this will not drive the business case for processing in NZ it will complement it nicely and should increase the net value realisations of logs from NZ forests.

Closer to the here-and-now, there has been relatively little change in the NZ log market from last month.

Export Log Market

An increase in the NZ$/US$ cross rate was the main driver of a drop in export log prices this month across most grades. The higher grades (pruned and A grade) fared better with an average price reduction of only $1/JAS m³ (depending on port) with steady demand for these products and log inventories at healthy levels. Lower grades such as KI and KIS grade fell more as demand was weaker (down an average of $3/JAS m³).

The strengthening USA housing market is seeing increased wood products prices and increased imports, especially lumber from Canada. Exports to China are looking comparatively less attractive which is constraining what was a burgeoning growth market last year. Chinese softwood log imports from the USA from January through August 2012 were down 31% from the same period last year. This is good news for New Zealand log and lumber suppliers to China.

Chinese softwood log imports from Russia from January through August 2012 were down 21% from the same period last year. On the other hand New Zealand supply to China remains steady and at similar volumes to last year. Overall China demand and supply is well-balanced and expected to remain so. Stocks are down to just over two months demand and slowly reducing.

It is still unclear how much the slowing Chinese economy will affect demand for NZ logs and lumber. It is expected that government stimulus package on infrastructure projects will maintain reasonable demand, and with reduced supply from North America, there is a reasonable outlook for steady demand and pricing. Iron and steel (also feedstock for infrastructure projects), on the other hand, have experienced hefty price reductions based on massive over-investment in capacity and a reluctance to constrain supply.

The Japan and Korean markets are steady with some attractive log sales made on selected grades. India is showing signs of recovering, having cleared stocks after a big price reduction earlier in the year, and less supply from NZ to this market.

Ocean Freight

There is continued weakness in the Handysize shipping sector on the back of weak cargo demand and low utilisation rates. This is despite the Baltic Dry Index increasing on the back of Capesize vessel rates rallying as a correction to the rates plummeting to US$5,000/day late September/early October. Bunker (fuel oil for ships) prices have been dropping slightly from September peaks. In combination, this augurs well for lower freight rates for logs.

Weekly average charter rates (source: RS Platou Economic Research)

Domestic Log Market

The Christchurch rebuild continues to gain momentum as planning and insurance obstacles are overcome. Consents in Canterbury deemed to be earthquake-related were valued at $47 million in August, of which $24 million were residential. This follows a big value month in July also of $59 million.

Across all of New Zealand, consents to build new homes rose for a third straight month in August. It is encouraging that the increase is reasonably broad-based and not just isolated to Canterbury. Consents rose 1.9% in August (seasonally adjusted) from the previous month, and were up 1.8% compared to August 2011.

As reported last month, the US housing market continues to improve to reach 812,000 new building approvals for the past 12 months, the highest level since mid-2008. The median price for all housing types, including single family homes, apartments and town houses is up 9.5% from a year ago and is the strongest year-on-year price increase since January 2006 (albeit from a low base).

The Australian housing market continues to languish. Imports of wood products into Australia continues to decline.

Norske Skog has confirmed it is closing down one of its paper machines due to lower demand for newsprint and increased competition from Asian suppliers. The closure will annually take out an estimated 150,000 m³ of newsprint production. It will also reduce demand for wood fibre (including pulp logs) in the Central North Island.

Domestic log demand has been steady with pricing flat. Good quality pruned logs continue to be sought after. On average, domestic prices remained unchanged from last month and export logs dropped $1-2/JAS m³.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 139 151
Structural (S30) 98  
Structural (S20) 91  
Export A   101
Export K   94
Export KI   86
Pulp 55  

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.