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Log Market - April 2013

Harvesting levels continued at a high level in March/early April with (largely) favourable weather and markets. Demand remained strong for all log grades apart from pulp/chip logs in some regions, particularly Southland/Otago.

There is an increasing view that the steady uptrend in log prices that started in April of last year may be coming to an end. This also includes a view that prices shouldn't fall dramatically, short of some global financial shock. The trouble is there's no shortage of prospects for a global financial shock; the on-going saga of the Eurozone's debt woes, an increasingly belligerent North Korea and the failure of prolonged very low interest rates (globally) to stimulate any broad-based growth-igniting investment. Hopefully none of these will transpire, but they must be recognised as risks facing the log market and considered when making any decisions about marketing forests and woodlots.

Export Log Market

A combination of dry summer weather, low volatility in log pricing and a continuation of an uptrend in export log pricing has seen record harvesting and shipping volumes this year. Port of Tauranga is reporting export log volumes of 530,000 JAS m³ per month which is roughly a fully loaded log vessel every second day. Total log export volume from New Zealand is running over 1.2m JAS m³ per month which is an annualised rate of over 14m JAS m³ – another record level.

According to a major NZ exporter, the Pacific North West volumes are also continuing at a strong level, despite a greatly improved North American domestic market. TPT is forecasting Pacific North West volumes to China at 576,000 JAS m³ in 2013, 18% higher than 2012. Australian log exports to China (mainly Radiata pine) are also forecast to increase to 923,000 JAS m³ in 2013, an increase of 17% on last year. This increase is in response to higher export log prices and a sluggish Australian housing/construction market.

All this increase in supply is reliant on continued rising demand from Asia, principally China. So far this year China has not disappointed but there is an increasing nervousness that prices may have reached a peak and could fall. This is related to:

  • Higher CFR prices stimulating more supply from North America (despite the improvements in the US housing market and economy).
  • Concern about the China property market over-heating and causing inflation that the government addresses with increasingly draconian policies to discourage property investment.
  • Rampant wage inflation reducing the competitiveness of Chinese exports and slowing down the rate of urbanisation and demand for new apartment blocks.
  • Higher ocean freight rates and unfavourable NZ$/US$ cross-rate.

In regard to the improving USA housing market, a sustained improvement in housing starts is resulting in very strong demand for wood products. The Random Length Lumber Price Index is reported to having increased by over 60% from late 2011 to March 2013. According to the Wall Street Journal, plywood producers in the USA are scrambling to return plywood production to pre-recession levels as prices reach levels 45% higher than a year ago. The nation's largest plywood producer, Atlanta-based Georgia-Pacific, announced on March 22 that it plans to invest around US$400 million over the next three years to increase its softwood plywood and lumber capacity by 20%. Similarly, manufacturers of orientated strand board (OSB) – a product which often substitutes for plywood - are enjoying significant price increases based on higher demand and reduced supply capacity as a result of plant closures during the prolonged downturn in the property market.

The relevance of these developments to the New Zealand export log market is that during the USA housing downturn, North American logs and lumber increasingly found their way into the Chinese market, directly displacing Radiata pine logs from New Zealand. Conversely, increased domestic demand may decrease North American supply into the China market (depending on CFR price, as noted above).

Ocean freight rates have steadily firmed in the past month as shown in the chart below. This small unfavourable impact has been more that offset by increasing US$ CFR log prices (price of logs landed in Asia).

This chart shows a rise in the Handysize index in the last month.
Source RS Platou Research

 

Domestic Log Market

New dwelling consents in New Zealand are running at 17,432 for the past 12 months, up from a multi-decade low of 13,269 in July 2011. However, this is still below the 10-year average of 22,200. The housing shortage in New Zealand is progressively getting worse despite a ramp up in house prices. The Auckland market is particularly affected, with prices up 13% in the past year; the median house price jumped from $604,000 in February to $646,000 in March.

There are signs that increasing house prices are starting to stimulate house construction in Auckland but many feel it is far less than the market needs. Therefore it is likely that house prices will increase further and lead to another period of unbalanced housing-market-fuelled economic growth. This will, in turn exacerbate the inequities of a resultant high exchange rate and unaffordability of housing for first-time buyers.

Canterbury house prices are reported to be up 9% in the year to February 2013. However the housing shortage there is much more explainable due to the destruction of houses by the earthquake and the need to accommodate all the extra people involved in the reconstruction.

Until nation-wide new dwelling construction gets up to the 22,000 annualised levels, there is a strong risk that house inflation will be a damaging asset bubble and there will only be a modest, and likely a short-lived, improvement in wood products markets in New Zealand.

The Australian wood products market continues to be lack-lustre based on continued low building activity and over-supply of product. This is stimulating higher-than-usual log exports.

The strengthening USA housing market is increasing the demand and price of NZ-sourced Radiata pine clears and mouldings products. This is benefiting pruned and part-pruned log processors although there is increasing competition from Chilean producers.

April saw the start of the second quarter of 2013 with newly negotiated prices for most domestic log purchasers. Domestic pruned prices increased around $4/tonne and unpruned structural log prices increased up to $8/tonne. Export prices were, on average, up $4/JAS m³.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 148 154
Structural (S30) 105  
Structural (S20) 95  
Export A   117
Export K   111
Export KI   105
Pulp 54  

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.