Log Market - September 2013

The relative stability in the market as reported last month continues, with solid demand and some firming of prices. Harvesting levels around New Zealand are hitting record levels.

Export Log Market

Log inventory in China has increased over the past three months as was expected during the slower hot season in China. At the same time log exports from New Zealand were strong through our relatively mild winter. Port of Tauranga reported record log export volume for July/August of 1.2 million JAS m³.

Market observers consider the market relatively well-balanced at present with high inflows being matched by strong off-take (sales) from ports in China.

China recently reported some stronger-than-expected economic figures; exports in August were 7.2% higher than a year ago and the pace of growth in industrial production lifted to 10.4% in August from 9.7% in July. The growth in retail sales has been just over 13% for the past two months.

Russia has continued its declining trend in China log import market share whilst both New Zealand and the Pacific Northwest continue a strong growth trend (see chart below). New Zealand is now the largest supplier of logs to China, a dramatic change from five years ago.

Source: Pacific Forest Products Ltd

The Indian log market is struggling to produce viable options for exporters due to continued rapid depreciation in the rupee and hard-to-get trade credit. Volumes to this market have dropped for the time being. Demand and volumes of logs to Korea and Japan are steady.

The NZ$:US$ cross rate dipped to a low of 0.77 on 30 August and has been rising steadily through September; it hit 0.82 mid month. August at-wharf-gate log prices were set when the exchange was in a short-term trough. With this current uptrend, exchange rate is likely to have the biggest impact on at-wharf-gate log price in October and also subsequently if the trend continues.

Ocean freight rates for logs have been stable driven by both steady charter rates in the Handy-size sector and steady bunker prices (fuel oil for ships). Rates are sitting in the low to mid US$ 30s/JAS m³. This is in stark contrast to the much larger Cape-size sector (used for shipping other bulk commodities such as coal and iron ore), which is seeing a strong rally in charter rates. (Note that Cape-size rates peaked at over US$ 100,000 per day in 2007, so they are still well off that peak even with this rally.)

Source: RS Platou Research

NZ at-wharf-gate log prices lifted a few dollars over most grades reflecting slightly higher CFR prices (US$ prices in the destination market) and a more favourable exchange rate at the beginning of September when monthly prices were set.

The outlook for the market is continued strength with prices holding at current levels.

Domestic Log Market

Manufacturing activity (seasonally and price adjusted) fell 0.9% and 3.4% in the March and June quarters respectively. This was heavily influenced by the drought earlier in the year since one third of manufacturing activity comes from the processing of primary products (mainly dairy and meat). Excluding these two sectors, core manufacturing activity has flat-lined since 2009 with no apparent uptrend. The BNZ suggests this should not be surprising, nor necessarily something that can be addressed by either government intervention or private sector intention. Its suggests our competitive advantage lies in better processing and marketing of our primary products and whilst other manufacturing will always be important, it will not be a primary driver of NZ economic growth.

Consumer spending, on the other hand, is growing steadily, with credit and debit card spending based on the past three months growing at an annualised pace of 5.2%. Consumer spending is important as it is responsible for about 65% of the growth of modern economies.

The New Zealand housing market took a breather in August with number of sales down 3.4% to 6,548 for the month. However, median price continued its up-trend and rose $5,000 to $390,000, up 5.5% on August 2012. Auckland and Christchurch continue to be the main hot spots. Rather than necessarily dampen the housing market, the government's limits on high value-to-loan ratio lending could rather increase the proportion of investor purchasers and reduce the proportion of first-home buyers. If the initiative doesn't dampen house prices, first home buyers will get a double whammy – reduced access to loans, and higher house prices as they try to save more for an increased deposit.

The Australian housing market is showing signs of responding to two years of interest rate cuts by the central bank. House prices across Australia's eight major cities jumped 2.4 % in the three months to June 2013, the biggest price rise in three years. It will be some time, however, before his nascent recovery flows into meaningful improvements in demand for key wood products from New Zealand.

Whilst the housing market in the USA continues to improve, the rate of improvement has slowed. After a decline in housing starts in June, seasonally adjusted annual housing starts increased 5.9% in August to an annual rate of just under 900,000 units. This was below expectations and was attributed to an increase in interest rates driven by indications that the Federal Reserve will curtail its quantitative easing programme. This balancing act of easing back on economic stimulus fast enough to avoid excessive inflation but not too fast to derail fragile economic growth is a delicate process for the USA and it's success, or otherwise, will impact on New Zealand wood processors exposed to this market.

Analysts are forecasting strong growth for Taupo-based wood moulding manufacturer, Tenon. 87% of Tenon's sales are to North America and they are heavily reliant on the housing market.

Export log prices were up $2-3/JAS m³ on last month and domestic prices were steady.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 146 143
Structural (S30) 108  
Structural (S20) 96  
Export A   121
Export K   114
Export KI   104
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.