Log Market - June 2013

Strong export and domestic demand has underpinned harvesting programmes as we head into more difficult winter harvesting conditions in New Zealand. Sapstain issues with export pruned logs and weaker demand has reduced the export pruned log price. Price and demand for other domestic and export logs grades remain steady.

Export Log Market

Export demand continues to be strong, underpinned by China. New Zealand continues to gain market share in the Chinese log market. In 2012, when total China log imports fell by 15%, New Zealand was the only country to expand its market share. According to the Wood Resource Quarterly, in the first quarter of 2013, New Zealand and Russia each had about one-third market share. This was the result of New Zealand increasing year-on-year shipments by 50% whilst Russia was down 18%. Shipments of logs and lumber from North America continue at strong levels. According to the Wood Resources Quarterly, the value of softwood logs and lumber from North America into China was US$940 million, up 30% from the same period last year.

During the first four months of 2013, China import volumes of both logs and lumber were up 12% and 19% respectively on the same period last year. This demand has been driven by a strong housing sector rather than strength in the manufacturing, trade or personal consumption sectors. Some reported statistics show house prices in 70 cities rising on average over 4% in April, following a 3.1% increase in March. Whilst positive for demand for imported logs and lumber, this kind of inflation risks attracting stronger intervention from the government to try to avoid a "property bubble" developing.

Strong demand from China is expected to ease over the next few months due to the hot season when many Chinese workers head back to the farms for harvesting.

The Korean log market is steady with low inventory levels. The government is promising to increase spending to try to boost growth. Demand is expected to be steady in the foreseeable future and some suppliers have achieved small price increases due to tight inventories.

Sentiment about Japan's economy has improved on the back of successful regime of reflation, government spending and a growth strategy designed to jolt the economy out of the suspended animation that has gripped it for two decades. The stock market has rallied strongly and the first quarter of 2013 posted annualised growth of 3.5%. However, despite the rebuild of quake-affected Fukushima, imports of wood products into Japan for 2012 were down 2.8%, 4.1% and 4.6% for logs, lumber and plywood respectively compared to 2011. This reinforces the fact that Japan is a mature economy and even if renewed growth continues (and this is by no means assured) it is likely to have only a minor impact on log imports.

The Indian log market remains a good home for lower grade logs in limited quantities but cannot compete for "A" grade, let alone pruned logs. Suppliers to India maintain this market for diversification and to be able to capitalise on any market upturn, if and when it occurs.

Ocean freight rates firmed a little during the month and US$ CFR price (price at which logs are sold at destination ports) remained steady. The largest favourable impact on the NZ$ at-wharf-gate log price was the significant reduction in the NZ$/US$ cross rate as detailed below.

With the wet autumn weather in New Zealand, and warming spring weather in China, increased sapstain in export pruned logs and weaker demand has resulted in NZ$ at-wharf-gate prices falling around $3/JAS m³ for this grade.

Domestic Log Market

There are improved prospects for the domestic wood products market driven by increased building activity in New Zealand.

Approvals for 1,755 new houses and apartments were issued last month in New Zealand, the highest monthly number for five years and 43 per cent higher than a year ago. Again, most of the increase in approvals is due to growth in Auckland and Canterbury. For the rest of New Zealand, the figures are pretty much flat.

For export-orientated processors, Australia is still hard going with a continuation of a subdued property market and unfavourable exchange rate movements; the NZ$ has strengthened by 6% from 0.77 to 0.83 in the past 12 months. However, the longer-term outlook for Australia is more positive.

The consumption and import of major wood products in Australia is forecast to increase solidly out to 2050, according to the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES). Much of the demand will be satisfied by domestic supply depending on the competitiveness of the Australian forest products sector versus imports of wood products. Therefore, growing market demand will provide more opportunities for both the Australian domestic and New Zealand wood products sectors. In aggregate, the report forecasts sawnwood and wood-based panel consumption to increase from 7.0m m³ in the 2010/11 year to 10.8m m³ in 2049/50, an increase of 54%. This increase is driven by forecast increases in dwelling commencements as a function of increasing population, as well as increases in renovations and new multi-unit dwellings.

The fall in the NZ$ against the US$ will improve returns for wood products exporters

For US$ denominated trade, conditions are becoming more favourable, as sentiment for the green back improves. Less quantitative easing by the Federal Reserve and improved economic conditions in the USA have strengthened the US$ and seen the NZ$/US$ cross rate fall by 5% from 0.83 to 0.79.

Wood products trading conditions continue their up-trend in the USA. New house construction has increased from a cyclical low of 500,000 units to over 1 million building permits issued in April (annualised). Over the past 12 months house prices have increased 11% on average which is the largest annual gain since April 2006. This has added US$1.6 trillion to homeowner's equity in the past 12 months. House price increases not only stimulate investment in new house construction, but also give home-owners the confidence and financial capability to take on renovation projects. Such was the depth and length of the downturn experienced in this market, there is considerable optimism of a long and significant housing up-cycle in the USA.

The Wood Resource Quarterly reports the Random Lengths Lumber Price Index increasing by almost 85% from late 2011 to April 2013. Since then the Index has declined although this is regarded more of a correction of a remarkable run rather than a reversal of a cyclical up-trend.

Tenon, a wood-products processing, marketing and distribution business based in Taupo and focused on high-value markets in North America, has reported revenue from its pro-dealer segment (most exposed to the housing market) up 25% year-on-year.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 146 149
Structural (S30) 106  
Structural (S20) 95  
Export A   117
Export K   111
Export KI   104
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.