Arbor Resources Blog Updates
Buoyant New Zealand activity has pushed up local log prices to new record highs.
The average price for round wood logs used in the horticulture sector rose to $92 a tonne in March, up $2 from February's average price and at the highest level since AgriHQ began collecting the data in early 2002.
Structural log prices also increased, with S3 logs hitting $114 a tonne, also the highest since AgriHQ began collecting the data in early 1995, while S1 logs rose to $122 a tonne, the highest since mid-1994.
Record high net migration and low interest rates are putting pressure on the nation's housing market, boosting prices and stoking construction activity. A booming horticulture industry is also spurring investment activity in that sector, helping push demand for round wood.
"The New Zealand domestic log market has maintained its incredible strength in recent weeks," AgriHQ analyst Reece Brick says.
"Orders are flowing into sawmills at a constant but rapid rate, mainly underpinned by the ever present housing construction sector, especially around Auckland. This procurement competition between mills means the AgriHQ price for the majority of key domestic log grades lifted."
Mr Brick says demand remains firm in the pulp, pruned and round wood markets.
"There's been little sign of any stagnation in the round wood trade," he says.
Mills at maximum
"Reports suggest many mills are running at or near their maximum capacity as orders keep coming in, and log supply is too tight to prevent any prices increases."
Mr Brick says there is some concern about whether structural log prices may soften as inventory levels increased at North Island mills heading into winter when construction demand tended to slow.
Meanwhile, export prices for New Zealand logs softened by about $2 a tonne across the range of logs measured by AgriHQ.
"The key factor behind the weaker wharf-gate markets was the sudden increase in shipping rates," Mr Brick says.
"Unlike other months, it was not oil prices that created this small surge. Instead, an increase in commodity shipments to China, such as iron ore from Australia, has been the key factor. This has engaged a significant amount of previously idle shipping capacity in the Pacific, shifting the market in shipping companies favour."
Mr Brick says exporters are watching the situation closely to see if the change is short-term, or part of a longer-term trend.
"From a domestic mill's perspective, this softening is a step in the right direction, as it may entice more logs to stay within the New Zealand market," he says.
"That said, a number of logs are still making premiums over domestic trading at the wharf-gate, so any change in trading patterns is unlikely to be major for now. Additionally, exported pruned logs tend to be of lower quality than locally traded product, so not all of these logs would be sought after by New Zealand mills."
Shipping rates to China edged up to $US20/JAS from $US19/JAS last month and $US15.50/JAS a year ago, while rates to South Korea advanced to $US19.10/JAS from $US17.80/JAS last month and $US15.20/JAS a year ago, and rates to India lifted to $US26.30/JAS from $US23.60/JAS last month and $US20.90/JAS a year ago.
Log exports have recovered strongly following the improved demand over the past year from China, New Zealand's largest market for logs and sawn timber. The recovery follows a slump caused by excessive inventory in 2015.
The healthier China market was reflected in Port of Tauranga's interim first half results announced this week, which showed log exports from Tauranga had rebounded from the previous corresponding period, increasing 21 per cent in volume to nearly 3 million tonnes.
Tauranga is New Zealand's major log export port, accounting for around one-third of total exports.
According to Ministry of Primary Industry data, New Zealand log exports by value increased in the 2016 year by $568 million to a total of $2.5 billion, a jump of 29 per cent on 2015. China accounted for 77 per cent of this increase, with an additional $440m worth of export log sales. South Korea and India accounted for an additional 10 per cent and 7per cent respectively.
Prices paid by log exporters for logs at ports around New Zealand increased sharply in January with a slight reduction in February, Rotorua-based forestry consultant PF Olsen said in its latest report.
"Export markets are expected to remain steady for the next few months with any price changes for logs at New Zealand ports a reflection of shipping and exchange rate fluctuations," says PF Olsen business development manager Scott Downs.
PF Olsen noted that inventory at the China ports had risen sharply from the reported 2.2 million cubic m in December 2016 to a current estimated 3.5-4.0m cubic m. But the report attributed the buildup to the Chinese New Year as factories across China closed down in late January, and said it was not a major concern.
While market observers were keeping a watching brief on the increase in inventory, they do not hold major concerns for the state of the market, said Mr Downs.
"Whilst there has been an absence of market information over this holiday time in China, several factors should assist with reducing this inventory," he said.
These include the fact that consumption in China is about to start again with the New Year holidays concluding, and demand expected to ramp up.
There are also early reports of a slowing down in supply of North American logs to South Korea and China. China currently imports approximately 700,000 cubic m per month from North America, so any reduction will have a material effect.
As well, the Indian market has started to take more logs again after several months of lower demand. The market has suffered from the effects of the government's demonetisation last November, aimed at curbing India's enormous black economy.
PF Olsen's report quoted Satinder Singh, New Zealand manager for Indian log exporter Aubade NZ, as saying the impact brought economic and business transactions in many sectors to a virtual standstill from November through to January.
Most New Zealand exporters did not ship to India for a couple of months, creating a gap in supply, which in turn increased demand with prices catching up with China this month.
New Zealand Forest Owners Association spokesman Don Carson described the export log market as stable.
"But we're keeping a weather eye on the possible trade impact of the Trump presidency," said Mr Carson.
There has been concern in the forestry sector for some time that Canada's failure to renew its lapsed softwood lumber trade agreement with the US has the potential to impact New Zealand log exports to China.
If the US imposes a tariff on Canadian imports, squeezing them out of the US market, that could divert production to other markets where New Zealand is active, such as China.
However, said Mr Carson, if Canada cannot export the volumes they used to across the border, then it's likely the cost of timber will go up in the US as a result, which could make it a more competitive market for New Zealand exporters.
Forestry facts - Year ending December 2015
- Total exports of forestry products from New Zealand for 2015 were $4.8 billion.
- Of total forestry exports, 38% went to China.
The Indian market continues to face the after effects of the demonetization (of large value currency notes) in November 2016. This move, done with the salubrious objective of reigning in black money and curbing an enormous parallel economy, affected almost all sectors of the Indian economy. It brought economic and business transactions in many sectors to a virtual standstill from November 2016 to January 2017.
Fearing a dull demand, most NZ exporters did not ship any log vessels to India for a couple of months. The largest affected segment was the Indian tropical hardwood logs trade, while pine demand suffered a decline in this period by 20-30%. However this lack of shipment from NZ created a gap in supply (Editor’s note: Logs exported from NZ to India by value in December 2016 were 62% down on December 2015), increasing sawn timber prices and the Indian NZ Radiata pine logs import market quickly played catchup with the strong China prices in February.
Another significant change in this period was the imposition of a service tax on the ocean freight component of all imports to India. India imposed a 4.5% service tax over freight on cargoes imported on a delivered or CFR basis on January 22nd 2017. This service tax was already being levied since June last year on cargoes that were imported on a FOB basis and ships chartered by importers domiciled in India. The move is significant because it will make cargoes of commodities such as timber, oil and coal costlier since ship owners will pass on the service tax to Indian importers.
The Reserve Bank of India (RBI) cut the economic growth forecast to 6.9% for the current fiscal year from the 7.1% estimated earlier, and predicted that the economy will bounce back to 7.4 per cent rate next fiscal year. The RBI is keeping key interest rates unchanged, saying it wants to assess how the transitory effects of demonetization on inflation and the output gap play out.
For Feb–March 2017 NZ Radiata pine A grade log prices are in the region of US$141-143 and ocean freight from NZ to India depending upon the NZ load port sequence varies from US$28/JAS to US$32/JAS. The freight market is expected to gradually firm up over the next few months.
It is expected that FY2017 annual volumes for NZ Logs for the Indian market will remain around 2 million m3and we may see a 15-20% growth in the following year.
Ocean freight has firmed slightly in the handy-size sector. Exporters are picking freight increases over the next couple of months mainly due to an increase in fuel prices. Current freight rates are in the range USD18-21 per JASm3 to China, and USD28-32 per JASm3 to India. Lloyds List intelligence Baltic Indices chart can be found here.
The greenback strengthened after US President Donald Trump hinted last week that he will soon announce tax cuts in the US, which helped drive US equity benchmarks to new highs. Reports of positive talks between Trump and leaders of China and Japan have also helped underpin the US dollar. But you won’t get any predictions here on where this will end up, as the Trump administration does seem to prefer a lower USD to reduce imports and boost export sales.
China's softwood lumber imports hit a new record of 21.58 million cubic meters in 2016, up 24 percent from a year earlier, a strong rebound after a 1% decline in total imports in 2015 and a 4% increase in total imports in 2014.
The volumes rose by 20% during the Q1/2016 and reached 10.8 million cubic meters of softwood material. The value of the products also went up, by 24%, as compared to the same period of 2015.
Russia exported 12.1 million cubic meters of softwood lumber to China in 2016, surging 44% over the same period last year, becoming China's main supplier of softwood lumber.
Last year, new capacity came on-line to boost its export volumes at the Chinese border, resulting in the export of softwood lumber over logs, while the rugged weakness of the ruble for Russian producers brought higher profits in China.
Russian log exports were affected by tariffs, while softwood weren't. Last year, Europe's market share in China continued to expand, with total exports jumping 43% to 14.2 million cubic meters, accounting for 66% of China's total imports, up 57% year-on-year. Among them, the Scandinavian shipments increased significantly, Austria's shipments doubled, Germany slightly faded and other areas remained relatively stable.
In 2016, North America exported 5.86 million cubic meters of softwood lumber to China, down 5% year-on-year; Canada's exports amounted to 5.22 million cubic meters, down 6% year-on-year.
Although exports in the northern United States increased by 8%, China's market share has been shrinking. Canadian manufacturers are highly concerned about the US last year's softwood lumber market due to tax-free market benefits.
This year, the United States softwood lumber countervailing duty and anti-dumping duties levy on Canada can make China and the domestic market a more and more intense competitor. Last year, the United States exported a large number of low-grade southern pine; South America exported 1.1 million cubic meters of pine, up 23% over the same period last year, of which Chile's exports increased by 10%, accounting for 70% of South American total output, while Brazil's exports doubled.
Last year, China imported 33.7 million cubic meters of softwood logs, up 13% from a year earlier. Among them, imports from New Zealand rose up to 11.6 million cubic meters, a 12% increase, while continued to maintain the largest export status of logs; the United States exports 7.2 million cubic meters, an increase of 23%; European exports of 10.8 million cubic meters, up 4%. Most of the logs exported to China are from Russia, while Ukraine is the most common supplier outside Russia.