Arbor Resources Blog Updates
What are the reasons for this?
There are a range of reasons. I have listed them below in no particular order.
The Spruce Bark Beetle in Europe (now has two breeding seasons each year because of climate change) is overwhelming Spruce forests in Europe causing significant losses. As well massive windstorms in Europe have added to the volume of wood that needs to be salvaged. The outcome is a dramatically accelerated harvest and these low-priced salvaged logs are being exported by rail up to 8,000 km to China under the One Belt – One Road Policy, the freight is government subsidised. Apparently up to 30 trains per week arrive in Germany under the Belt and Road initiative, the train trip is 12 days vs shipping 45 days.
Devaluation of the Chinese RMB related to the Trump Trade War.
The Trump Trade war with China (25% tax on Chinese goods into USA) is bringing about a slow down in the Chinese Economy
Wall of Wood supply chain infrastructure issues. The so called “Wall of Wood” is moderated in New Zealand by the lack of harvest and trucking infrastructure plant and labour availability. However, there are also supply chain infrastructure issues in China.
The summer is traditionally the low season in China for construction and therefore demand as the weather is very hot in areas and warm and wet in other areas.
Some sellers of logs in China have noticed under the present premier Mr Xi, there is more state involvement in log purchasing entities.
What is the effect of the log price decrease?
Export log prices are set monthly. On 1st July one large New Zealand exporter dropped prices for A grade logs (The bench mark price –which is then related to all log grades) from NZ $135/mᶾ at Wharf gate (AWG) to $97/mᶾ and $105/mᶾ (different North Island ports). Another exporter has dropped prices to $95/mᶾ and $100/mᶾ. 1 mᶾ approximately = 1 tonne.
As forest owners, we join the world of many other producers, where our profit margin is the money left after all other suppliers of services are paid.
An example of the effect of the price decrease is:
A forest located say 80 km from an export port before the prices dropped might have had an average gross income of NZ $130/tonne with average costs of say $80/tonne (90% plus of this is logging/loading, engineering and cartage). Logging, cartage and engineering costs have risen by almost 30% in the past 18 months due to demand and supply pressures, plus higher local wage costs. Some distant and lower yielding forests could have costs of closer to $100/tonne because of lower yields or much higher freight costs.
What this means is that if your costs were say $80/tonne, then under the June prices you would have had a cash surplus of say $50/tonne. Under the July export prices this could be $18/tonne (based on Napier July AWG prices).
Another way of putting this. Assuming 700 tonnes of logs are sold per ha, last month you would have had a cash surplus of say $35,000 per ha. Under the July pricing schedule, this could be reduced to $12,600 per ha.
This $22,400 per ha reduction in stumpage has drastically reduced the surplus to owners, and in some cases has pushed stumpages into negative territory.
What actions should we take in response to the log price decrease?
Experienced producers and exporters agree we need to immediately shorten log supply to China. As the supply chain is six to eight weeks long, the market will not feel the shortfall for some time.
If we stop harvest, this will quite quickly decimate the viability of many of our harvest operators. This will create significant medium term consequences as the re-establishment of the harvest crews and their plant and equipment will be hampered by the number of crews able to raise the necessary capital or be able to locate experienced staff to man the crews once they have moved on to other jobs.
We have canvassed a large portion of the forest owning industry and it is evident that we, in line with the other foresters we have spoken with, should be taking immediate steps to reduce harvest.
Accordingly, we have instructed our forest managers to reduce the harvest operations of their contractors by approximately 25% overall. This may vary slightly from forest to forest depending on their individual circumstances however, this action should help to shorten up the export supply chain while keeping the contractors alive until the prices recover. We will review the situation in two months.
If a forest takes 24 or more months to harvest, then low log prices for a short period (i.e. three months) makes very little difference to the average stumpage.
Is there any good news?
Fortunately, there is:
Chinese log buyers love New Zealand Radiata pine for its consistency, its evenness in quality and its ability to saw easily.
We have had downturns in price at this time of year before, the last one in 2015 affected one of our forests but the prices quickly recovered.
By shortening the market, our Chinese log salespeople say we could quite quickly bring about a change in the demand/supply ratio that will lift prices. Chinese buyers know that prices can rise quite quickly as well, and they will not want to be caught short of supply.