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Log Market - May 2013

Continued strong demand from China and the strengthening New Zealand and USA housing markets are the main positive features affecting the log market in New Zealand at present. Countering this is the strengthening NZ$ and weak demand from Australia and Europe.

Export Log Market

GDP growth in China fell from 7.9% in the December 2012 quarter to 7.7% in the March 2013 quarter. This is below 2012 full-year growth of 7.8% and the weakest growth rate since the global financial crisis. Other indicators such as industrial output and growth in investment of fixed assets have fallen in the March 2013 quarter and whilst exports are up 10% from a year earlier, this is lower growth than most analysts were expecting. Retailing growth is up marginally (to 12.6%).

Does this signal an end to China's recent stellar growth and strong demand for forest products? Probably not.

The BNZ notes some of the slow down is due to impacts of a crack-down on expensive gift giving by officials and further tightening of housing market rules aimed at curbing excessive inflation in the housing market. It's hard for humble Kiwis to get their head around how a change in gift giving by Chinese officials could have a noticeable impact on the GDP of the world's second largest economy. Must be some gifts!

Whilst some readers may feel NZ and this column is overly China-centric, the following figures may explain this pre-occupation:

  • merchandise trade exports to China have soared by 25% in past year
  • including Hong Kong, China now accounts for 18% of NZ's export , up from 14.3% a year ago (Australia is our largest export market at 21%)
  • China takes 42% of NZ's logs and 29% of our wood pulp
  • there is similar strong growth in Chinese tourism, immigration inflows and education exports (Chinese studying in NZ)

China log imports soared from 2.3million m³ in February to 4.0million m³ in March - levels not seen since March 2012. NZ contributed 1.0million m³ and exceeded supply from Russia. This trend is expected to continue, buoyed by Putin's announcement for a heavy clamp-down on Russia's prolific illegal logging activities.

Contrary to most predictions, North American supply of logs and lumber to China is still strong despite the improvement in the USA housing market (and wood market). This tells us that there is more latent capacity in the forest resource, sawmilling and harvesting than previously expected. We are, however, hearing reports of shortages of trucking and rail capacity which may affect sales of logs and wood products for interior domestic markets more than sales of export logs from Pacific North West supply regions.

The high log volumes to China are causing increasing delays at China ports with some ports having queues of up to 12 vessels. This is despite widespread use of huge shore cranes to unload log vessels as quickly as possible (see photo below). There is considerable investment in port expansions and new ports which is aimed at keeping pace with the increased volumes.

Shore cranes unloading logs in China.

Despite some lower-than-forecast economic figures from China, log inventories are steady and demand strong for unpruned grades. CFR price (US$ price at China ports) is up marginally in some grades. Pruned logs are in lower demand and price has fallen along with supply restrictions in some areas.

Looking forward, the high incoming volumes, slim wholesaler margins and upcoming slowdown associated with the summer "hot season" is making log purchasers cautious.

The Korean economy and construction market continues to be weak with the added destabilising impact of North Korea's "sabre rattling". There is renewed concern that continued declines in the labour market could prolong low growth and stymie the economic recovery. The government recently announced new policies aimed at job creation as well as tax incentives for first home owners to try to stimulate the housing market.

Japan's demand for logs is steady despite the highly depreciative impact of its expansive monetary policy on the Yen. If this policy is successful in stimulating Japan's export sector, this will be positive for demand for Radiata pine logs from NZ which are commonly used in the packaging sector.

The Indian market is largely unchanged from last month. India's GDP growth forecasts for 2013 have decreased from 6.3% to 6.1% reflecting a lack of momentum in economic reforms and a moribund bureaucratic and political structure. As usual, India is providing good options for lower KI and KIS grades which have always been more popular in this market.

Ocean freight rates are fluctuating in a narrow range after lifting in March (see chart below). Rates are expected to remain low for the balance of 2013. Bunker prices (fuel oil for log vessels) are steady.

The main influence on at-wharf-gate price in May was the increase in the NZ$/US$ cross rate which has appreciated some 3%. With strong merchandise trade exports and relatively high interest rates, it would seem ill-advised to be holding out for a lower cross rate in the immediate future.

The consensus view in the market for the next few months is stable export log pricing at best with a bias to easing demand and prices.

Daily dry-bulk vessel charter rates
Source: RS Platou Research

Domestic Log Market

Just as the Christchurch rebuild gains momentum, and Auckland starts to get stuck into more house construction, the government unveils an aggressive plan to stimulate house construction. This is a laudable initiative, as is the launch of a commission of enquiry into why house prices are so high in New Zealand (see Wood Matters Issue 47). One cannot help but reckon, however, that a massive house construction programme is going to lead to massive capacity shortages. The challenge will be achieving such a significant house construction programme without exacerbating already high house prices inflation. Constraints of consenting/permitting and labour are already impacting on house construction in Christchurch and are starting to flow into other areas, particularly Auckland. Some would say this is a good problem to have, except that internationally high house prices in New Zealand and comparatively low savings rates (and no, paying off a mortgage is not considered savings) are not a good platform for sustainably high growth.

House sales and new residential consents are continuing a strong up-trend which is likely to build momentum (see chart below). Numerous factors are supporting this housing growth:

  • rising house prices due to a shortage of housing stock
    • Christchurch rebuild to house quake-affected households
    • Auckland construction to house the increasing demographic of New Zealanders forming households and new immigrants
  • relatively strong employment
  • high business confidence, spurned on by record commodity exports, a break in the drought, and warm autumn weather
  • low interest rates (relative to prior rates in New Zealand)
  • New Zealander's cultural affinity with house ownership

Source: BNZ

The latest BNZ housing survey points to house prices continuing to rise as the shortage of housing stock worsens. In March the number of consents issued for the construction of new dwellings was 17,397, still well below the ten-year average of 22,000 and down on February's 17,481 (albeit February is a short month).

Australia is seeing little respite to its economic woes with the latest news-flow reporting mining development having hit its peak and now tapering off hiring and investment spending. Whilst this has resulted in some easing of the Australian dollar it is still trading above parity with the greenback, making it tough going for the export sector. A 0.25% reduction in interest rates in the first week of May is aimed at re-stimulating lack-lustre economic growth and cushion the slow-down in the mineral resources sector.

Both the USA share market and housing market are gathering strength. The Dow Jones Industrial Index is in record territory, jumping over 15,000 at the beginning of the month.

Much of the USA optimism relates to resurgence in the housing market. New dwelling consents reached 1.036 million units in March on a seasonally adjusted basis, 7% higher than February and 46.7% above March 2012, according to Random Lengths (a USA lumber publication). Single family homes represent two thirds of the units and this segment has the strongest impact on the lumber and panels market. As reported last month, demand and price for lumber and panels has risen significantly.

New Zealand wood processors are looking to strength in the New Zealand and USA markets to provide the best marketing opportunities in the foreseeable future.

Log prices in May fell, on average, $1.00 per unit.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 146 152
Structural (S30) 105  
Structural (S20) 95  
Export A   117
Export K   111
Export KI   105
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.