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Log Market - November 2014

Introduction

After three months of export log price rises off the deep July low point, November saw a very mixed bag in terms of sentiment and outlook. Market commentators are more polarised than usual with the pessimists pointing to a deteriorating Chinese housing market and upcoming Chinese New Year to forecast easing demand and lower prices. In contrast others emphasise lower log inventory levels in China and government support/stimulus as reasons that the market will be steady for the next few months.

November saw domestic and unpruned export log prices stay flat. Export pruned log prices rose a few dollars.

Export Log Market

CFR prices (the US$ price of logs landed at the destination port) fell slightly in China, but were offset by a small favourable change in exchange rate, and a slight fall in ocean freight rates. This allowed the NZ$ at-wharf –gate price to remain steady. Price of pruned logs, especially those debarked and anti-sapstained, rose a little on strong demand.

The housing market in China continues to deteriorate. In September 2014, 69 of the 70 major cities monitored experienced declines in house prices, one had flat pricing. This level of price decline is more unfavourable than the worst month of the late 2011 cycle when 66 cities had house price declines, one increased, and three were flat. This is leading to considerable financial stress with developers and the increased potential for a string of large failures, triggering a flow on effect and hitting not only more developers, but also suppliers and lenders. The immediate impact has been a marked reduction in trade credit, reducing the ability for log buyers in China to make and receive orders. This is having a marked negative impact on market sentiment.

On the other hand, October saw a continuation of the reduction in log stocks in China. During October, log stocks fell from 3.8 million m³ to 3.4 million m³, a drop of 13,500 m³ per day. Offtake, or sales, of logs was still a healthy 58,000 m³ per day through October. Log stocks peaked at nearly 4.4 million m³ in July 2014. This reduction in log inventory supports a more stable market.

China log stocks
Chart showing reducing log stocks across the 25 ports monitored. Note that whilst most of the reduction is in NZ Radiata pine logs, stocks of USA (US), Canadian (CAN), Australian (AUS) and Russian (RU) logs have also come back off July peaks.

The other positive development for the China log market was the 30 September government support package. This package included easing mortgage restrictions and loan ratios for owner-occupiers, more lenient credit for developers and extra funding for social housing/urban renewal. Just what impact this will have on the housing market will need to observed over the coming months.

The Korean log market is lack-lustre reflecting low GDP growth (just above 3%) and a weak building and construction market. Log prices tend to follow prices set in China.

Steady, but small volumes of logs continue to be supplied to India. The excitement of the appointment of Prime Minister Modi is waning, and as yet, there is little tangible impact on demand for pine logs from New Zealand. As mentioned previously, India needs considerable investment in port and internal transport infrastructure before it can import greater volumes of logs without incurring expensive demurrage and internal shipping costs.

The outlook for the next few months will, as usual, be impacted by the exchange rate and ocean freight rates. Neither are expected to move much in the short-term. Chinese New Year, however, is a little later than usual (the 19 February 2015 will herald in the year of the sheep). During the festivities demand for logs plummets, but it is proceeded by New Zealand's prolonged Christmas shut down which dramatically reduces log supply. How these events impact the market will be largely determined by the health or otherwise of the Chinese housing market and the level of activity of house construction.

Domestic Log Market

Seasonally adjusted new dwelling consents, including apartments, dropped by 12% in September. New dwelling consent growth, however, is still 91% higher than the trough reached in March 2011 in the aftermath of the global financial crisis. Based on the past three months (Jul-Sep) new dwelling consents are running at an annualised rate of 25,156.

Dwelling consents

This drop, however, should be seen in the context of a second bullish report on forecast construction published by the Building and Construction Productivity Partnership. This National Construction Pipeline Report was published last month and updates the inaugural November 2013 report. Whilst the value of building and construction work nationally from 2014 to 2018 is forecast to be 2.2% lower than in the 2013 report, it is still forecast to reach unprecedented levels and peak at $35b in the year ended March 2017. Such a sustained growth rate has not been seen in New Zealand in the past 40 years.

National Construction
Source: The National Construction Pipeline Report, October 2014

As expected, almost all the growth comes from Canterbury (as the Christchurch rebuild gains momentum) and Auckland (driven by demographics and immigration). Building and construction activity is expected to peak in Canterbury in the years 2015/16 and then in Auckland in 2017.

So despite the small pull-back in dwelling consents recently, the strong upward trend in building and construction is expected to continue on a national basis for the next four years. This will flow into continued strong demand for wood products and opportunities for domestic wood processors.

Diversion of processing capacity has led to an over-supply of construction grade sawn timber in New Zealand, just as demand eased off. This, however, is considered to be a temporary minor adjustment to an otherwise strong trend of significantly stronger demand.

The Australian housing market is showing some positive signs and providing some opportunities for New Zealand wood products exporters. This market, however, has shrunken considerably from its former strength. Improving economic growth and an improving house market in the USA continues to provide opportunities for domestic pruned log processors.

The continued weaker NZ$ is continuing to support wood products exporter returns.

Domestic log prices were steady with little change from last month.

The PF Olsen log price index flat-lined this month to remain at 103. It is now 18 points above the cyclical low of 85 in November 2011 and 16 points above the last low of 87 in July of this year. The index is still 14 points below the March 2014 peak of 117 and just one point higher than the four year average of 102.

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) 147 147
Structural (S30) 113  
Structural (S20) 97  
Export A   105
Export K   99
Export KI   89
Pulp 48  

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.

 

China Trip Report – additional photographs

As reported last month, Peter Weblin, Marketing Manager at PF Olsen, was on a visit in China in mid October (see October 2014 Issue). Following are some additional photos and commentary from this trip.


We were told that about 90% of the Radiata pine logs imported into China go into temporary construction support. Whilst it was difficult to get access to construction sites, we got this glimpse in Chongqing. The photo shows both the use of plywood as boxing for concrete and the common 40mm x 70mm rough sawn, air dried, sawn timber as spacers between the bracing from the scaffolding. We were also told that quite a lot of the wood gets broken after its first use, needing new replacement material each time.


LiChen (at Lanshan, Shandong province) is highly innovative with its use of New Zealand Radiata pine. This panel is made from offcuts of low quality wood, finger-jointed and edge-glued. This piece was photographed in the LiChen's showroom alongside a range of species including other sofwoods and south sea hardwoods.


This attractive panel Radiata pine door and frame was also found in LiChen's showroom. The list price of 4,420 Chinese Yuan is equivalent to NZ$926. 


LiChen also manufactures a range of ornate baked paint-coated machined lineal mouldings for mirror and picture frames. These start from Radiata pine from New Zealand and are mostly exported to the USA.