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Log Market - February 2014

The start of 2014 has seen a continuation of the trends of the second half of last year – strong demand and increasing prices for export logs and strong demand but mixed trading conditions for domestic processors. Last year, Tachikawa Forest Products went into receivership after some 20 years of trading, caught between rising log input prices but a lack-lustre Japanese packaging/crating market. For those domestic processors supplying forest products to the domestic market, trading conditions are improving on the back of the strong housing and house construction markets in Auckland and Christchurch.

The PF Olsen log price index increased by $1.93 to $114.76, close to the high reached back in April and May of 2011 (see chart below). Prior to that date prices hadn't reached such highs since coming down from the big 1993 price spike when A-grade prices peaked at $250/JAS m³ (NZ$ at-wharf-gate).

The strong log market is creating widespread interest in harvesting amongst forest owners and harvesting crews are becoming harder to secure in many regions. There is upward pressure on harvesting rates in response to the high demand, especially in the smaller woodlot market. Whilst this takes some of the shine off otherwise improved stumpage returns for forest owners, it is an inevitable market response and will assist in stimulating the higher harvesting capacity required to meet the increased wood availability over the next 15 years.

Export Log Market

December saw production drop as crews took their Christmas break. Vessel loading and shipping of logs continued during the Christmas period and made a good dent in log stocks at ports around the country. Production resumed strongly with the 2014 harvesting start-up and export levels looking to be back up to the annualised level of around 15-17million JAS m³.

Logs stocks at ports in China are at steady and relatively low levels. Across the 19 Chinese ports monitored by PF Olsen, stocks at the end of January 2014 were reported at 2.3 million m³. With daily sales/offtake reported at just over 46,000 m³ this represents a relatively modest 1.6 month stock-turn. Due to its earlier timing and the strong underlying demand for logs the market didn't weaken through the Chinese Lunar New Year in late January.

Based only on January deliveries to China, NZ is sitting on an annualised supply level of 10.5 million m³, a strong start to the year. North American supply has started the year strongly with January deliveries to China representing a high 6.0 million m³ annualised level. Whilst the resurgent USA housing market is taking increasing volumes of higher quality wood, this is also stimulating increased production of lower grades (of logs and lumber) with much of this is destined for the Chinese market. New Zealand suppliers can expect solid competition from North American logs and lumber in China.

As part of its urbanisation and social policy, the Chinese government is continuing apace with its subsidised affordable housing programme. This programme is not only aimed at providing affordable accommodation for the vast number of people moving to the cities, it is also an attempt to quell rampant house inflation driven by not only by strong housing demand but fuelled by speculation. Construction levels are reported to be ahead of target and resulting in around 5 million new units being constructed each year. Whilst usually built out of concrete, wooden products are used to assist with the construction as well as some of the interior fit-out.

Apartment in China
Residential apartments are a large part of the Chinese government's subsidised affordable housing programme. Whilst usually built out of concrete, wooden products are used to assist with the construction as well as some of the interior fit-out.

The Korean market is strengthening a little. Despite a weak construction market, a rapidly depreciating Korean Won is supporting manufacturing and industrial production.

Sales of logs to the Indian market picked up toward the end of last year, but the market remains small and volatile. The banning of log exports (tropical hardwoods) from Myanmar at the end of March 2014 may stimulate Indian interest in pine from New Zealand although there is limited substitution between these species.

At-wharf-gate (NZ$) export log prices lifted around $7/JAS m³ from December to February based on increasing CFR prices (US$ price in destination port) and a slightly favourable movement in ocean freight costs. The impact of exchange rate, whilst volatile within the period, was neutral based on rates at the beginning of December 2013 and beginning of February 2014 (both around 0.81 NZ$/US$).

Domestic Log Market

The housing market, after a strong run last year, appears to be taking a breather with slowed new listing growth and stable pricing over the past few months. Buoyant house construction markets in Auckland and Christchurch are continuing to underpin strong domestic demand for wood products.

The Australian housing market (mainly in Sydney and Melbourne) is surging with price appreciation running at levels of around 6% per quarter. The Reserve Bank of Australia is forecasting the Australian economy to grow by between 2.25 and 3.25% this year based on a lower exchange rate and increased activity in the housing and retail sectors. Whilst this bodes well for New Zealand wood product exporters, the appreciation of the Kiwi dollar against the Australian dollar has been unfavourable.

Domestic log demand remains strong in most regions with log suppliers making an effort to meet demand. The recent Timber Industry Federation claims that some forest owners favour exporting logs over supplying domestic processors when on-truck prices are more or less the same is simplistic and sensationalist. The only time this is likely to happen is where there are concerns about credit security and the forest owner may favour supply options offering the least risk of payment default.

PF Olsen Log Price Index

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 an approximate mix of 40/60 domestic/export log supply.

Indicative Average Current Log Prices

Log Grade$/tonne at mill$/JAS m³ at wharf gate
Pruned (P40) 148 147
Structural (S30) 113  
Structural (S20) 99  
Export A   132
Export K   126
Export KI   119
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.