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Log Market - December 2013

As we approach the end of 2013 the improved trading conditions and prospects in many wood products markets provides a basis for optimism in 2014 for forest owners. The optimism seems robust as it is more broad-based than usual comprising a strong export log market and some strong sectors of the domestic log market (pruned, structural and some engineered wood products). This, in turn, is supported by a backdrop of stronger forecast global growth as many economies finally start to shake off the long-lingering effects of the global financial crisis.

Export Log Market

Demand for wood remains strong in China and log inventories are at relatively low levels. There are mixed signals on price, but most report an increase in CFR price this month. New Zealand now has a clear lead on market share at 35% (last six months) compared to Russia at 33% and North America at 24%. This share is expected to continue to increase.

Chinese New Year will be in late January 2014. This timing is considered to better match the export log volume from New Zealand. Most exporters try to clean out stocks as much as possible by the end of December. New production commencing from 6th of January 2014 will initially build stock for shipping in late January. Vessels will predominantly arrive in China around the time Chinese New Year finishes and people return to work.

The Japanese market remains steady at relatively low levels of demand for logs from New Zealand. Housing starts are up in 2013, partially in response to getting ahead of an increase in consumption tax from 5% currently to 8% in April 2014. Also, Japan is targeting increased self-sufficiency in satisfying its wood demand; currently at close to 30%. The government is targeting 50% of wood demand to be supplied from Japanese forests. Whilst an extensively forested country, expensive and heavily subsidised harvesting and issues with land tenure will make this goal challenging to achieve.

Korea has steady, albeit static demand for NZ logs and has the advantage of accepting NZ logs without fumigation. This not only reduces cost for NZ shippers but also allows South Island log cargoes to go straight to Korea without the need of a fumigated deck cargo. At present the only ports at which logs can be MeBr fumigated for loading onto the deck of log vessels is Port of Tauranga, Marsden Point and Napier.

The Indian market continues to be subdued with the economy suffering from low growth and high inflation. Most exporters selling into the Indian market are focusing on limited selected grades (e.g. KI and KIS) and maintaining a presence as part of a market diversification strategy.

Continued firming of ocean freight rates is offsetting increases in CFR price. Handysize rates have been firming for the last three months and are at a two-year high (see chart below). One-port-load to two-port-discharge rates are in the mid to late USD 30s/JAS m³. The price for bunkers (fuel for log vessels) is steady, limiting the impact of firming charter rates on overall ocean freight rates.

Domestic Log Market

Main-stream press media has been hammering the housing shortage in New Zealand and the dozens of new apartments and 10s of thousands of new houses Auckland needs each year to accommodate its people. Add to this the Christchurch re-build which is gathering strong momentum. Result - strong demand for domestic structural logs.

The Reserve Bank recently clarified that new house building would be exempt from the low equity loan restrictions introduced earlier this year. This is a sensible move as such restrictions ran the risk of constraining the supply of new housing stock, one of the drivers of the inflation in the housing market. This will further strengthen demand for structural logs.

Log and lumber prices in the USA have risen recently on the back of stronger economic growth and a lift in housing starts – these are expected to hit over 1 million early next year (annualised basis).

Listed wood products manufacturer Tenon provides some public visibility of domestic wood processing with exposure to the US housing market. A mainstay of Tenon's business is the conversion of domestically-sourced pruned Radiata pine logs into high-value, seasoned moudlings and better flitch and finished mouldings for the USA market. In a recent update to shareholders Tenon's chairman, Luke Moriaty said: "Barring any unforeseen events, our EBITDA (earnings before interest, tax, depreciation and amortisation) for the first six months of our 2014 fiscal year (six months to 31 December 2013) should equal that which we reported for the entire 12 months of our previous financial year (the 12 months to 30 June 2013)." Tenon's share price has doubled over the past year, as the positive impetus of a recovering USA housing market has begun to flow through into its earnings performance.

There is strong demand for domestic pruned and structural logs but little impact on price this month as prices are generally set on a quarterly basis. Export log prices rose $1-4 dollars with some strong demand and prices reported for pruned grades at some ports.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 147 145
Structural (S30) 112  
Structural (S20) 98  
Export A   125
Export K   120
Export KI   114
Pulp 50  

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.