Log Market - April 2014

It was just over a month ago that Southern Cross Forest Products went into receivership. Thames Timber is still operating and taking a steady supply of logs from a variety of suppliers. As mentioned by the receiver, KordaMentha, the objective is to present the assets of the company as a going concern. An information memorandum has been released for prospective purchasers. Whilst many creditors face an uncertain future regarding their debt with Southern Cross, some log suppliers, including PF Olsen, are supporting the mill on mutually agreed payment terms to provide a good domestic outlet for their logs. The outcome of the sales process will be observed closely by the sector and be a "litmus" test for interest in investing in wood processing in New Zealand; Southern Cross has a good spread of mill locations and types of processing (e.g. a range of saw milling, finishing and remanufacturing operations).

Sound harvesting

April was characterised by some sizeable falls in the export log market and a mix of falls and rises in the domestic log market.

Export Log Market

Many will see April's price drops as a healthy correction, or breather, in an otherwise two-year bull market. Export log prices have posted month-on-month gains, without interruption, since April of 2012. The drop in at-wharf-gate price was driven primarily by increases in ocean freight costs and an increase in the NZ$:US$ cross rate. The latter rose from 0.8384 on 1 March to 0.8672 on the first of April; an increase of 3.3%. This move alone takes about NZ$4/JAS m³ off the at-wharf-gate price. In addition, ocean freight has moved up some US$4/JAS m³, potentially taking another NZ$4-5 off the at-wharf-gate price, depending on the exporter's immediate exposure to the spot ocean freight market. Most exporters have been able to hold CFR price steady (price of the logs at the port of destination), although the overall pressure is reported to be downwards. Overall, export log prices fell NZ$6/JAS m³ from March to April.

Log inventories in China have risen for the past two months as log consumption falls short of supply. There is a wide range of views on whether this constitutes the beginning of a more protracted trend in falling prices, or a small blip in an otherwise strong market.

Certainly the spectre of a shakeout in China's property market looms as large as ever. Bloomberg recently reported the collapse of a large real estate developer (Zhejiang Xingrun) leaving clusters of part-finished town houses. The company was reported to owe the equivalent of NZ$600 million to creditors.

China started to allow private home ownership in 1998. It is reported there are now up to 90,000 real estate companies, many of which have become very wealthy on easy credit, solid demand for housing, and rapid inflation of house prices. In 2008 the Chinese government injected the equivalent of NZ$750 billion into the property market to counter the effects of the global financial crisis; house prices in China have increased 60 percent since then.

The difference now is that, unless there are systematic regional risks, the government won't intervene. Rather it will allow market forces to operate and reinforce the inevitable risk/return outcomes of private enterprise. So whilst this might appear a more serious situation in the short-term, it will improve the overall competitiveness of the sector in the long-term – the prosaic "creative destruction". The same pattern is expected to occur in the banking sector.

Those optimistic that the Chinese housing market won't burst (like a bubble) point out that Chinese urban incomes have grown faster than the rise in house prices. Also, demand is likely to continue with the massive process of continued Chinese urbanisation. Whilst many of the developers and real estate companies may have high debt, most houses are purchased [for use by households] with cash or with a significant down payment, making the market more resilient.

The Korean and Japanese log markets are reported as steady. Japan's increase in sales tax from 5% to 8% is expected to result in reduced aggregate demand after the large pre- April 1 buy-up to avoid the sales tax hike. This, however, is unlikely to have a significant impact on wood products demand.

This month India prepares for its 16th parliamentary elections since independence, the outcome of which may see a reversal of India's recent slide into economic stagnation. PF Olsen continues to see a steady stream of enquiry for log purchase from Indian and Singaporean traders. This may be more related to the ban on log exports from Myanmar which also came into effect 1 April 2014. This was an important source of hardwood logs for India.

Domestic Log Market

Solid demand continued for most domestic grades in most regions. There was a general firming of log prices especially where new prices were set for the second quarter of 2014.

Although the restrictions in home lending appear to be subduing house prices generally, building consents are continuing to rise in Auckland driven by demographics and more buoyant economic conditions. Christchurch's rebuild is still well off its peak, underpinning a positive outlook for demand for building products.

Surging house prices in Australia, especially the big cities, are leading to increased speculation of a market bubble ready to burst. The trend estimate for total dwellings approved for construction rose 0.7% in February and has risen for 26 months. Traditionally, Australia has been a very important market for New Zealand wood products. However, despite the strong housing market, export lumber volumes to Australia are in a declining trend. This is largely due to the rapidly appreciating NZ$:AU$ cross rate and increased competitiveness of locally sourced wood products.

The USA housing market continues to strengthen. The US Census Bureau announced privately-owned housing units building authorisations in February were at a seasonally adjusted annual rate of 1,018,000. This is 7.7 percent above the revised January rate of 945,00 units. Privately-owned housing completions in February were at a seasonally annualised rate of 886,000. This is 4.4 percent above the revised January estimate of 849,000 and 21.96% above the February 2013 rate of 727,000. The USA continues to be an important market for New Zealand lumber exporters, especially pruned log processors.

PF Olsen's log price index fell $3 to $114, the first decline since April 2012.

PF Olsen Log Price Index
Basis of Index: This Index is based on prices in the table below weighted in proportions that represent a broad average of log grades produced from a typical pruned forest with a mix of domestic/export log supply.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 149 148
Structural (S30) 114  
Structural (S20) 100  
Export A   132
Export K   124
Export KI   116
Pulp 49  

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.