Clarky's Comment - July 2014

I've been thinking about how we can re-organise our log sales in New Zealand to avoid the violent log price swings that we have at the moment. I have not come up with a solution. I don't think any individual forest owner, nor can the major growers collectively, fix this for the log trade. The reality is:

  1. Despite becoming the largest exporter of logs to China (over-taking Russia which is now the second largest), we are still only about 25% of China's total imports (35% of softwood log imports). We are not in a strong position to start dictating log price or volume – other exporters will "back-fill" any opportunities they see.
  2. Forest owners, large and small, will always want the best price they can get on the day – meaning that supply will continue while prices are steady or rising, regardless of strong evidence of rising inventory or weak demand and an impending price collapse in the near-term future.
  3. Under the multiple-trader model (at both New Zealand and China ends), there will always be guesswork as to when and by how much prices are likely to move up or down, with even those best-informed players getting dragged along with the more bullish traders to maintain supply sufficient to support minimum shipping parcels.
  4. The biggest expansion of future New Zealand supply is with the smaller growers, making a single desk selling model even more problematic.

My own view is that even with a single desk selling model, if ever that could be achieved (which I doubt) we would still get quite big log price movements in response to the behaviour of suppliers from other countries. The quite large movements in the milk powder price are a case in point.

To me the only partial solution is selling more processed wood products, preferably direct to customers. This is how many pulp mills operate and is a model that appears to bring some pricing stability.

The best products from the NZ pine forest owner perspective are the high value, high volume engineered structural lumber: LVL, glulam, CLT, OEL, and possibly high grade flooring ply and HDF / MDF.

To sell these in bulk there really needs to be a market pull-through for wood structures in preference to concrete and steel. Only then can we expect investment in international scale wood processing within New Zealand.

To achieve a break from concrete and steel both in New Zealand and in China would require a catalyst. Specifiers need a reason to change from the mentality of "It worked yesterday so why would we not do the same today?" Despite a good push from energetic promoters of wood structures the evidence from the Christchurch earthquake rebuild is that wood structures for commercial buildings remain few and far between. This is despite the technology being well-proven and of similar or only marginally higher cost than concrete/steel. In the absence of a meaningful price on greenhouse gas pollution we cannot rely on the marketplace to translate what is good for the planet to what happens in the construction industry. The alternative is regulation.

The Labour Party has endorsed this approach with its recently published Pro Wood policy that would require government funded buildings, up to four stories, to be designed and costed in wood as the default option. This is an important catalyst to upskill the knowledge of specifiers and engineers. With our high NZ dollar a buoyant New Zealand and Australian market becomes important to de-risk large investments in wood processing that will also require much of the product to go to Asia. The Labour Party has also announced accelerated depreciation on wood processing plant and equipment.

In China there is increasing concern about the environment and air pollution in particular. With coal still dominating the expansion of energy supplies, and the construction sector accounting for about 25% of all energy consumed in China, it is only a matter of time before the Chinese National Development and Reform Commission (NDRC) gets more active in implementing its already announced targets to improve energy efficiency. Wooden structures offer a partial solution.