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Log Market - March 2014

A recent major forestry news story has been the appointment of receivers KordaMentha to Southern Cross Forest Products Ltd. Southern Cross is the owner of Thames Timber in the North Island and four processing plants in Otago/Southland. The company described itself as the largest single supplier of solid lineal Radiata pine mouldings and one of the largest processors of pruned Radiata pine logs, in New Zealand. It is reported that 400 jobs were affected, in addition to a range of creditors, including forest owners supplying logs to the various mills. Annual sales for the company are believed to have been around $100m.

The core business has been described as profitable and the receivers are keen to find a new purchaser and to be able sell as a "going concern". To that end, much work is being done between the receivers and log suppliers to establish arrangements for continued log supply on new terms.

This is a major blow to the workers and creditors (and their families) and is reflective of tough trading conditions in the wood processing sector. Clearly high log prices and a high NZ$ are major challenges but there is also positive sentiment amongst some wood processors. These mills are reporting strong trading conditions and working to expand production.

Political hopeful, New Zealand First Leader Rt Hon Winston Peters is calling for log prices to be set to end what he calls "the regional devastation that is occurring as sawmills close". Whilst the sentiment of improving viability of domestic processing is appreciated, it is difficult to envisage a long-term scenario whereby price control would do anything but weaken and undermine New Zealand's whole forestry sector. Better to look at establishing a more level playing field by addressing key productivity and cost issues in New Zealand, and working on bilateral trade agreements to reduce trade barriers.

These and other issues will be topics covered at the ForestWood conference www.forestwood.org.nz being held in Wellington on the 19 March at Te Papa, Wellington. The conference is convened by the Wood Council of New Zealand Inc. (WoodCo) www.woodco.org.nz in association with the Wood Processors' Association, NZ Forest Owners Association, Farm Forestry Association, Pine Manufacturers Association and Forest Industry Contractors Association. WoodCo's Strategic Action Plan, released at last year's conference, has a vision to more than double export earnings to $12 billion by 2020.

"There are hundreds of thousands of hectares of marginal farmland that would deliver greater long-term returns to the land owners and the New Zealand economy if they were planted in trees. Similarly, New Zealand should be processing more of its logs at home and our nation's public buildings should be exemplars of the wonderful attributes of wood as a construction material," says conference convenor Jon Tanner. "But they are not. And the answers to the "why not" ultimately lie in the policies adopted by successive governments. They create the playing field on which our industry plays a very long-term game."

The conference follows two high-profile NZ Wood events on 18 March at the James Cook Hotel, Wellington: A seminar on the use of engineered wood products in commercial construction, held in conjunction with the NZ Timber Design Society, followed by the annual NZ Wood Resene Timber Design Awards dinner.

The consistently strong log market and increasing wood availability is creating shortages of both trucking and harvesting capacity in some regions. It is also putting upward pressure on harvesting rates, especially in the small-medium woodlot sector. Whilst woodlot owners like to benefit from the strong log market, they must also realise that harvesting capacity is also a market. When demand out-strips supply, rates go up. Whilst forest owners don't like to pay more than they have to for harvesting, the higher rates stimulate more investment in capacity and productivity – an important market response. There's not much point having strong log market, if you can't get your logs to market.

Strong demand
Strong demand and prices for logs means more demand for harvesting capacity. In some areas forest owners have to wait for crews to become available.

Export Log Market

Continued strong demand for logs in China saw the NZ at-wharf-gate price for unpruned Radiata pine export logs lift an average of $4/JAS m³ and pruned logs $3/JAS m³. The price increase was driven by increases in the US$ CFR price (price of logs at the destination port), offset by a slight firming in both the NZ$/US$ cross rate and the ocean freight rate.

Since the start of March, when export log prices were set for the month, the NZ$ has rallied further, buoyed by the near-term prospect of a lift in the official cash rate, and confirmation of the on-going firming bias.

Port of Lyttelton had a record month shipping over 74,000 JAS m³ in February (and it was a short month). This higher-than-usual volume is still being driven by continued clean-up of the windthrow from last year. Harvesting is expected to ease back as this programme comes to a close and log supply is expected to become constrained over the medium term due to the age class "hole" created by the windthrow. Other ports also had strong volumes and South Island export log prices were particularly strong.

Senior ANZ economist, Li Gang Lui, gave a presentation on the Chinese economy in Tauranga last week. He believes the greatest risk of a "hard [economic] landing" in China lies in the over-inflated property market, and a surge in non-performing loans. Restrictions of capital outflows (out of China) have resulted in over-investment in the property market with rapid price rises making the sector look like a speculative bubble. Much of the fiscal stimulus after the global financial crisis came from local government debt extended to property developers and developers of enterprises such as coal mines. Deteriorating coal prices have destroyed the viability of many mine developments, adding to the likely surge in non-performing loans.

However, Mr Li concluded that so long as China adjusts its policy settings to address these issues, it should be able to stay afloat. The relaxation of the single child policy is one such policy change, aimed at stimulating domestic demand.

The global importation of logs and lumber to China reached a new record in 2013 with lumber imports being up 19 percent and log imports increasing 23 percent from 2012, as reported in the Wood Resource Quarterly. New Zealand shipments were up by 32 percent year-over-year, the US increased volumes by 55 percent and interestingly, Ukraine, which just a few years ago did not export any logs to China, shipped 1.4 million m³ in 2013, a tripling from the previous year.

The Handysize ocean freight index reported by RS Platou is pretty much flat-lining (see chart below), suggesting that the firming in rates observed in New Zealand recently is related specifically to the Pacific-logger segment, rather that the whole Handysize sector.

Charter rates
Weekly average charter rates for different vessel classes
Source: RS Platou Research

Domestic Log Market

Domestic log prices were steady for the month as most pricing is quarterly based. Strong construction activity in Auckland and Christchurch continues to underwrite strong demand for wood products, as does more modest improvements in economic activity across New Zealand.

In some regions wood processors can't get enough log supply and are looking further afield to get the right logs, prepared to pay for the higher trucking costs to bring logs in from outside the region. Often these longer runs can be married in with back-loads to lower average trucking costs and make sure the mill gets exactly the logs it needs.

Whilst Australia is still struggling to create enough new jobs as the economy adjusts to receding mineral resources activity, housing prices remain strong and new house construction is continuing an upward trend. Data recently released by the Australian Bureau of Statistics shows total new dwelling approvals up 1.3% December 2013 to January 2014 and up 28.4% from January 2013 to January 2014.

After three years of work by Forest and Wood Products Australia (FWPA), a revised building code allowing timber in taller buildings is expected to expand the market for timber framing. The revised code for Class three buildings includes a range of accommodation including hotels, motels, hostels and staff accommodation associated with health facilities. Whilst this will not automatically result in more demand for wood products it removes a major current restriction. New Zealand exports of wood products should be a beneficiary of this new opportunity. The revised code will apply from May 2014.

Wood mouldings manufacturer, Tenon Ltd, is signaling either payment of a dividend or a share buy-back, in the second half of its financial year, based on stronger trading conditions in its key USA market (90% of Tenon's earnings come from sales in the USA). This will be the first cash return in a decade. The company also announced an upgrade in its forecast for earnings before interest, tax, depreciation and amortisation at the mid-point of an average United States housing market recovery, from US$35 million to US$45 million. The forecast assumes 1.7 million US housing starts a year and a USA-New Zealand dollar exchange rate of 70 US cents.

PF Olsen's log price index rose $2 to $117. This is now one dollar higher than the highs reached in April and May of 2011.

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 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) 113  
Structural (S20) 99  
Export A   136
Export K   131
Export KI   123
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.