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Log Market - October 2013

The well-publicised partial US Government shut-down due to stalled talks over lifting the Federal debt ceiling level was having widespread impacts.

The US Forest Service announced that it is shutting down logging operations on the 150 national forests across the country. It is reported that the agency is notifying 450 timber purchasers across the country that timber sales and stewardship contracts will be suspended. In general, loggers will have seven days to finish cutting and hauling out logs on timber sales where they are already working. The shutdown comes as loggers typically look forward to one more month of work before winter weather makes conditions tougher.

This earlier-than-expected reduction in harvest should be positive for exporters of processed wood products from New Zealand to the USA, and also for the export of logs from New Zealand to China. As reported last month in Wood Matters, exports of logs from the Pacific North West of the USA have increased from under one million JAS m³ in 2009 to an annualised rate of nine million JAS m³ in the first half of 2013. A reduction in this supply will provide an opportunity for other suppliers to take market share and should also support price.

We presume the impact will be mitigated if the debt ceiling issue is resolved and a more robust mechanism put in place to avoid a repeat.

Despite a potential US Federal debt default, the NZ$/US$ exchange rate has strengthened. Previously, it was more common to see weakness in the Kiwi in the face of increased concerns of global financial risk. This time there is enough positive NZ economic data to offset this sentiment. The higher NZ$ presents increased challenges for NZ wood products exporters.

Export Log Market

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 was offset by increases in ocean freight rates and a stronger NZ$. During the month the NZ$/US$ cross rate moved from 0.78 at the beginning of September to 0.83 at the beginning of October. By itself, this increase in NZ$ value would result in a decrease of NZ$8/JAS m³ for "A" grade logs (at wharf gate, NZ port). However, such was the increase in CFR price that this unfavourable exchange rate movement (and a smaller unfavourable increase in ocean freight rate) was fully offset to leave the NZ$ at wharf gate price of "A" grade logs unchanged on average across the country. There were some reasonably large increases and decreases in price in other grades and also price movements both up and down depending on port and purchaser. This reflected different competitive pressures at the port and different shipping arrangements and foreign exchange exposure amongst purchasers.

Of the approximate 1.3 million JAS m³ of logs exported currently each month, China takes around 75%, Korea about 15% and India and Japan the remaining 10%. At present demand is steady from Korea and Japan and whilst India is seen as potentially a strong growth market, is it being hampered by a loss of momentum in economic growth and a rapidly depreciating currency.

Ocean Freight

Ocean freight rates are driven by the net growth in shipping capacity (new builds minus scrapping old vessels) versus tonnage demand (the demand to have cargoes shipped). RS Platou's outlook for ocean freight rates for the Handysize sector (vessels which carry NZ logs to Asian markets) is for only moderate increase in rates over the next three years (see chart below). This is good news for forest owners who have logs destined for export.

Domestic Log Market

The new Reserve Bank imposed Loan Value Ratio rules came into effect on the 1st of October 2013. These mean that most house purchasers will require a minimum 20% deposit to secure a mortgage. Some Real Estate agents have a reported spike in purchase interest and house prices in September in response to some buyers wanting to get in prior to the rules taking effect. The NZ Herald reported the average Auckland house price in September at $640,739, up 7.7% on August.

The BNZ-REINZ Residential Market Survey published mid October showed a steep decline in market sentiment; the number of people going through open homes, the proportion of sales going unconditional, auction clearance rates and requests for appraisals are all down on last month. The greatest fall, however, has been in the proportion of first-home buyers. Last month a net 24% of real estate agents said they were seeing more first home buyers in the market compared to this month when a net 41% said they are seeing fewer first home buyers in the market. Whether this is simply a short-term response to the LVR introduction will only become apparent when subsequent market data is published.

It seems likely, however, that the new LVR rules will be effective at making first home purchase more unaffordable for young families, but have little impact on second house and investor purchasers. Consequently, the initiative may have little impact on dampening down the rampant housing market inflation. This could be a good thing for forest products suppliers in the short-term as it will continue to stimulate new house construction and remodeling. However, it will adversely affect what many consider a cornerstone of social equity in New Zealand – home ownership for young families.

Canterbury suffered devastating windthrow last month and will see accelerated harvesting in an attempt to recovery logs prior to deterioration from sapstain and decay. Whilst this is likely to see increased availability of chip/pulp log, sapstain will probably prevent much of this wood being suitable for domestic processing and the diversion of harvesting capacity could actually constrain supply of domestic structural logs. PF Olsen is working with log exporters at the Port of Lyttelton to manage port log storage and infrastructure efficiently to handle the large influx of volume. Longer-term there could be issues with log supply as large areas of various age-classes have been lost.

Demand is growing for structural logs to support the strong growth in construction in Christchurch and Auckland, resulting in higher sawn timber and log prices. Demand for finished goods in the US is supporting higher demand for pruned logs domestically as well.

Unpruned domestic sawlog prices rose some $3-4 as fourth quarter negotiations concluded. Domestic pruned prices were up an average $1 and pulplog remained unchanged. Export log prices where up marginally.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 147 144
Structural (S30) 111  
Structural (S20) 99  
Export A   122
Export K   115
Export KI   106
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.