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Log Market - July 2013

Export Log Market

In a report released early in June, the Ministry for Primary Industries estimated that log export volumes from New Zealand would be 7 per cent higher in the year ending June 30 than the same period in 2012. It also predicted log exports to rise to $4.29 billion in the year, from $4.27 billion in 2012.

The China market is driving export log sales with the exception, now, of export pruned. Lower demand has translated to the pruned log price to China coming back between $5 and $8 NZD per JAS at wharf gate (AWG) in July. This has been driven by a decrease in the ability of the wholesalers to obtain a premium.

Prices for utility and industrial log grades has remained relatively flat with some buyers dropping price between $1 and $2 NZD per JAS AWG. Purchase prices in China (CFR) are softening more significantly – but this has been tempered by the more favourable USD/NZD foreign exchange rate. Port stocks and wholesaler inventory levels are currently in balance.

According to China's government data, there has been a 50% rise in investment in onshore wood processing since the start of 2012 which is fuelling demand for raw material.

Also in recent news from China is the nation's interbank funding crisis. Investor sentiment with Chinese banks reflects concern that a crackdown aimed at directing new credit away from repaying old loans and toward boosting economic productivity will trigger a surge of bad loans. President Xi Jinping also signalled last week that China's new leaders will tolerate slower growth. All of this may lead to some smaller log traders having difficulty obtaining credit which would curb their buying ability. Focus will be on supporting larger businesses with more integrated structure.

NZ forest owners are also seeing stronger prices being posted for export pulp grades driven primarily by the Korean market.

Shipping rates increased through June – as paralleled by the Baltic Dry Index – reflecting the cost of vessels that export logs from New Zealand. This is possibly on the back of the major shipping company, STX going in to bankruptcy – which temporarily affected some NZ traders. Shipping rates are now showing signs of flattening through the beginning weeks of July.

Domestic Log Market

The New Zealand housing market continues its inexorable climb. Compared with December of 2008 Auckland house prices have risen by 39%, Christchurch 26%, and Wellington 10%. Auckland and Christchurch regions accounted for 99.6% of the $22,000 increase in the national median in the year to June 2013. Price gains in most other regions have been minimal, with the median price for the rest of New Zealand $2,300 lower than November 2007.

The number of houses actually for sale in Auckland has hit an all time low. There is a reluctance from homeowners to sell which is keeping supply constrained. As prices have increased over the past year, many homeowners have held out, anticipating receiving a higher price in the future. The market factors driving the recent increase in home prices will not persist forever. Eventually, rising prices will reduce demand and attract supply to the market and reduce the rate of price growth.

Supporting this economic fundamental, NZ housing starts in the first three months of this year grew at the fastest quarterly pace seen in more than a decade. This sort of positive news is also evident across the Tasman with the total number of dwellings approved up over 9 per cent in April and more than 27 per cent higher than this time last year. Australia's recent Timber Market Survey also shows an increase in price for machine stress graded lumber for framing - of between 2 and 5 per cent.

Whilst higher housing prices are a problem for New Zealand (socially an economically), it is providing wood products manufacturers more favorable trading conditions in the meantime. The problem bit is that in New Zealand, housing is some of the least affordable in the world. This means that low income people can't get into home ownership and mobile Kiwis will look elsewhere to live. It also means that the Reserve Bank will be tempted to increase interest rates to subdue the market, resulting in a higher exchange rate hitting the export sector. Whilst New Zealand avoided a bust cycle after the last strong run of house price appreciation up to 2006, this continuing bull run means a much greater risk of a collapsing housing bubble and all the social and economic pain it would bring – including pain for the forestry and forest products sector. Setting aside the wider perspective, however, the current housing market is favorable for the forestry and forest products markets.

Another interesting indicator of NZ business confidence has been illustrated by the sales of new Audi's. Audi New Zealand chalked up 195 vehicles sales in June, making quarter one and two it's strongest first financial half year in history. The luxury car market is outpacing the mainstream market, and it signals a trend for economic growth. Audi buyers have been classified as early adopters of new technology and innovation. Many own businesses or are senior managers in larger companies and are the first people to see shifts in the New Zealand economy. Luxury sales go up when businesses see financial return and this is usually six months ahead of mainstream market sales.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 146 144
Structural (S30) 108  
Structural (S20) 96  
Export A   116
Export K   110
Export KI   103
Pulp 51  

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.

Domestic pruned sawmillers have recently confirmed strengthening demand for their premium products into the US. House prices in the US rose in April by the most in 7 years and the US Census Bureau confirms that housing starts in May 2013 were 28.6 per cent above starts in May 2012. However, these positive trends are also incentivising increased supply of competing radiata moldings from Chile – which is putting a ceiling on price.