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Log Market - April

Introduction

The log market diverged considerably in April as the domestic market continued its strong run and the export market softened with the Chinese New Year hang-over. Domestic pruned prices strengthened, export pruned and domestic unpruned prices flat-lined and export unpruned log prices plunged $10-$17. The export price drop has smothered harvesting confidence with comparisons being made to last year's massive $60 (14%) price drop over four months. At this stage, however, it's premature to make such comparisons and, besides, the situation is quite different this time round (see more detail below).

Export Log Market

The widely anticipated and later-than-usual Chinese Spring Holiday resulted in log stocks in China ballooning up to levels similar to those seen early last year, just prior to the dramatic price decline. This "recent memory" has led to a marked increase in market uncertainty and a price drop in unpruned grades of $10-$17/JAS m³.

As reported last month, log stocks, at the 25 Chinese sea ports monitored, increased to 4.00 million m³ by the end of February. During the first week of March stocks increased to 4.20 million m³ and stayed at about that level until the last week in March when stocks crept up to 4.27m³. This has unsettled the market and CFR price (the US$ price of logs delivered to the destination port) dropped to US$110/JAS m³ for A-grade Radiata pine logs. Sales/offtake is relatively strong at around 65,000 JAS m³ per day, but at such high stock levels, Chinese buyers can sit on their hands and wait for prices to drop.

Log Stocks at China Sea Ports (cubic metres)

Log stocks in China

Log stocks continued to build in March with higher-than-usual deliveries from Russia and Australia, buoyed by weak currencies. Deliveries from North America have reduced considerably with the lower US$ CFR price (and no exchange rate offset). New Zealand deliveries were steady but lower sales/offtake resulted in an increase in stock levels.

China policy makers are trying to steer a delicate balance between a property bubble and deflation. A housing slump, erratic growth in exports and a state-led slowdown in investment to help restructure the China's economy dragged growth to 7.4% last year – a level not seen since 1990. Whilst the housing sector is reported to contribute about 15 percent of China's economy, the multiplier effect is probably much larger. To arrest a widespread slide in prices and sales, the government has recently cut interest rates and the reserve requirement of major banks (the minimum amount of cash banks need to hold back from lending). It is muted that other contingency measures are being prepared should the market remain insufficiently responsive. But with years of unsold developer inventory, it will be some time before confidence is restored in this sector.

Korea is shaping up for a better year, but is expected to remain a price-follower to China. However, strong non-China sales options will broaden log sellers options and strengthen their negotiating position:

  • South Korea's economy is expected to grow 3.3% in 2015, slightly higher than the 3.2% in 2014.
  • Housing starts in 2014 were up 9.7% at 91,854 buildings compared to 2013.
  • Housing permits in 2014 were up 8.9% at 101,894 buildings compared to 2013.
  • The number of wood building permits and wood building starts in 2014 were up 11.5% and 11.2% compared to 2013 respectively.
  • Total floor areas of wood building permits in 2014 dramatically increased 20.6% to 1.2 million m² compared to 2013.

Ocean freight rates started to rally in the second half of March, but have weakened again in early April. This factor, in conjunction with a lower NZ$/US$ exchange rate, means that despite CFR price being lower than the lowest point of last year, NZ$ at-wharf-gate prices are faring much better. For example, A-grade (average price) troughed at $76/JAS m³ in July of last year when CFR price was US$115. Currently the NZ$ at-wharf-gate price of A-grade is $92/JAS m³ with a CFR price of US$110. This makes Radiata pine in China more competitive than North American logs.

Readers, especially those with an interest in harvesting, will be eager to understand the outlook for the rest of the year. As usual the sentiment is highly varied, ranging from the most positive being a weak May and then steady rises, to pessimistic – weak for the remainder of the year. The following three factors, if borne out, point to a more positive leaning:

  1. The increased competitive position of Radiata pine logs at current in-market CFR pricing.
  2. Significant reduction in North American supply due to uneconomic CFR pricing and better domestic options.
  3. Recent significant unwinding/reversing of policies previously implemented to constrain the Chinese housing market. For example, loan/value ratios on house lending are reported to have been eased from 30-40% to 60%. These should reinvigorate the housing market.

Russian log and lumber supply is still a bit of a wildcard, and we saw a large increase in supply in March stimulated by the heavily depreciated ruble. However, just as we didn't see much of a supply response to the removal of tariffs in 2011, there is doubt that Russia has much capacity to significantly increase its wood exports.

Domestic Log Market

Pruned logs have been in strong demand in most areas, especially in the Bay of Plenty where prices increased $7-$12/tonne in April as a part of the quarterly price setting round. Structural log demand remains strong but with little change in price from the prior month. Continued tight supply of structural logs in the Canterbury region is keeping prices strong.

A long-standing business, Mamaku sawmill, announced closure last month citing a high exchange rate and log price and inadequate availability of pruned logs as causing it to lose money and prevent it from investing in much needed new plant and equipment. Regrettably twenty five jobs will be lost to the local community.

Winston Peter's, during his recent Northland by-election, seized an opportunity to make a call for a price control on logs. Whilst most in the industry support domestic processing in preference to exporting logs, the problem with price control is that the current average estimated rate of return on capital from forest growing of about 5-7% would be driven even lower. This would increase the rate of deforestation and eventually there wouldn't be enough forests to supply logs for the domestic processing industry. So apart from having dubious economic rationale and major equity and fairness implications, controlling log prices would eventually be self-defeating.

Other mills appear to be experiencing buoyant trading conditions in the domestic and export wood products markets, although the high NZ$/AU$ exchange rate will be having significant adverse impact on many since Australia is still New Zealand's largest trading partner.

The PF Olsen log price index fell seven points from $107 last month to $100 this month. It is now $15 higher than its cyclical low of $85 in November 2011 and $6 below the two-year average and $1 below the five-year average.

PF Olsen Log Price Index

PF Olsen Log Price Index - April 2015

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) 162 167
Structural (S30) 108  
Structural (S20) 95  
Export A   92
Export K   85
Export KI   80
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.