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Log Market - November 2013

Improving demand for Australasian construction materials is supporting demand for structural logs by domestic log processors. Tachikawa hit the headlines late last month (for the wrong reasons) as its business went into receivership leaving around 120 staff facing an uncertain future. Pruned log demand has remained steady from domestic processors but the export pruned log market is relatively weak. Prices for unpruned export logs rose again in November, driven by continued strong demand from China.

Export Log Market

Unpruned export log prices lifted in November. A-grade logs are currently selling for $124/JAS m³ (at-wharf-gate NZ average) compared to the 20-year high of $131/JAS m³ reached in April of 2011. Conditions are highly stimulatory for harvesting but we are starting to see capacity constraints (see later in article). Continued strong demand from China has seen a lift in CFR log prices (the price of logs in US$ at the destination port) but this is tending to be partially offset by increases in ocean freight rates and a stronger NZ$.

The slowdown being seen in the Chinese economy late last year appears to have been reversed and the government's GDP target this year of 7.5% now looks to be achievable. Trends in figures released for industrial output, fixed asset investment, retail sales and general trade are demonstrating that a recovery is underway. The Chinese government continues to provide stimulus for construction, helping to keep demand for wood products high. About 25% of the wood consumption in China is estimated to be attributable to the building/construction sector.

Strong demand and low inventories across most Chinese ports is reported by Pacific Forest Products NZ Ltd, just back from a visit to China. Inventories have fallen in the North China area which has strong growing demand for New Zealand Radiata pine (see chart below).

 
Chart courtesy of Pacific Forest Products NZ Ltd

Japan and Korea continue to take steady volumes. Japan, which is experiencing better than usual economic prospects and housing and construction activity, is a mature market and whilst important for market diversification, follows the lead of the Chinese market for log pricing.

India's loss in momentum of economic growth and political and bureaucratic inertia is being felt in the wood markets. Whilst there is still buying interest, this market continues to struggle to provide attractive returns at present.

South Island ports such as Port Chalmers and Southport are showing particularly strong pricing in relation to the North Island. In the past it wasn't unusual to see South Island prices up to $15/JAS m³ lower than prices at the main North Island ports. This differential was primarily driven by higher ocean freight rates caused by two factors –

  1. A greater distance from the market in the northern hemisphere (the vessel takes more time and more fuel).
  2. South Island logs typically have a lower JAS m³/tonne conversion factor. This means that fewer logs can be loaded on a log vessel (this is also known as the stow factor) and consequently the freight rate per JAS m³ is higher.

However, more recently, increased competition from new exporters has seen the log price differential with the North Island close to as little as $4/JAS m³ at times. This increased competition for at-wharf-gate volume is good news for the forest owner so long as log purchaser's are viable and pay their bills. Regrettably there are too many instances where they do not. The largest example in the last two years was Matrex' receivership in 2011 which left suppliers owed 10s of millions of dollars in Australia and New Zealand. Prior to this occurring Matrex had been trading successfully for many years in New Zealand.

Forest owners need to be constantly vigilant and demand secure credit terms when dealing with any log purchasers that present potential default risk.

Whilst ocean freight rates have had an unusually long period of stability at relatively low levels, the past two months has seen Handysize charter rates firm on the back of low China iron ore inventories and heightened chartering activity prior to the Golden Week holiday period in China. The outlook, however, is still for relatively low rates as supply and demand for freight tonnage looks relatively balanced, albeit with "slow-steaming" being used by ship owners to keep the supply side tight.


As harvestable volumes increase availability of harvesting and trucking contractors and log storage space at ports will constrain production.

The outlook for the log export market is positive for the foreseeable future but as usual is contingent on China maintaining its momentum of economic growth. New Zealand is expected to ship over 15m JAS m³ of logs to export markets in 2013 and is starting to hit capacity constraints in internal infrastructure (e.g. logging and trucking capacity) and port infrastructure (the ability to store and load logs efficiency). These constraints will abate with investment and development but if at a slower rate than demand for logs from New Zealand, the market will stay strong. The other major source of supply of softwoods to China is North America. It has improved domestic demand into the stronger USA economy and is still to face the supply deficit from the millions of hectares of forests affected by the mountain pine beetle epidemic in British Columbia. This bodes well for continued strong demand for NZ softwood logs and sawn timber.

Domestic Log Market

The NZ housing market has been grabbing headlines with Auckland doer-uppers selling for millions of dollars and median selling prices growing in double digits per annum. The BNZ reports housing stock (sales listings) at a low of 24.2 weeks. This measure has fallen for three years: from 53.4 weeks three years ago to 41.1 weeks two years ago and 33.1 weeks one year ago. Asking prices for listings are up between 2-18% over the past three months in all regions except Northland, West Coast, Southland and Wairarapa (actual selling prices tend to follow asking prices eventually in a rising market). These metrics suggest continued price escalation in the housing market.

Some house builders have experienced a fall-off in demand for the construction of more affordable new homes and reported this being due to the more stringent Loan Value Ratios introduced recently. This could be evidence of the unintended (but not unexpected) consequence of this initiative; namely making it harder for young families to get into their first home and home ownership.

The government's attempts to lower the cost of construction seems a bit flat-footed with its focus on more imports of building materials and more disclosure of builder's purchasing policies. Making sure New Zealand has enough skilled and trained builders and available land for subdivision and stream-line consenting and permitting processes by local authorities would seem a much more fertile space for making improvements.

Australia's house construction market is showing increasing strength. Seasonally adjusted number of approvals for new dwellings rose in September by 14.4% buoyed by 32% jump in approvals for apartments. For the 12-months to September, total approvals were up 4.5% with apartments up 15% and housing down 1.8%. Retail spending in Australia rose by 0.8% in September, twice the expected level and the strongest pace of growth in seven months following a 0.5% rise in August and 0.1% rise in July. This is increasing evidence of the Australian economy weaning itself off over-reliance on mineral resource development.

Australia's improved fortunes, along with a similar trend in the USA are providing reasonable opportunities for sales of New Zealand wood products, albeit tempered by an increasing NZ$/AU$ and NZ$/US$ exchange rate.

Tachikawa Forest Products receivership last month was the end of an enterprise that has been a substantial part of Rotorua's forestry business community for over 20 years. This Japanese-owned company (owned by Tachikawa Forest Products and Sojitz Corp) originally built the mill to supply kiln-dried, precision-sawn thin boards to the Japanese packaging market. More recently it diversified into also cutting pruned logs for the production of kiln-dried clear boards.

The mill was one of the few mills in New Zealand that purchased export-equivalent grades and due to its location, had a competitive advantage related to log transport costs. It cost $15/tonne less to transport logs from forests south of Rotorua to Tachikawa's mill than the extra 80km to Port of Tauranga. This saving in transport costs translated into lower mill-door prices for the logs. Unfortunately this advantage was not enough to keep the business viable. The mill got caught between not being able to recover enough from sales of sawn timber (mainly to the Japanese market) to pay its cost of production which, amongst other things, was heavily influenced by increasing log prices driven by the strong Chinese demand for logs. Tachikawa was caught between diverging market dynamics. The land and mill are currently being offered for sale by the receiver KordaMentha.

Pruned and unpruned domestic sawlog prices were steady after rises in unpruned logs last month representing fourth quarter negotiations. Pruned export prices reflected slack demand and were down $2 on last month at some ports. Unpruned export prices were up $2-$4 depending on grade.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 147 141
Structural (S30) 111  
Structural (S20) 99  
Export A   124
Export K   118
Export KI   110
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.