We published a Coranavirus update to let you know we had stood down the crews in our forests from the 4th of February.

As the Chinese New Year is now officially over there has been some increased activity on the Chinese ports and we have, for now, resumed the crews on a reduced production level (around 60%). We have been in discussions with most of the New Zealand Forestry owners right through from the 189,000ha Kaingaroa Timber forest owners, Earnslaw, Forest Enterprises, China Forestry Group and several other forest owners. At this stage they are all in a similar position to us where the immediate objective is to minimise harvesting but maintain a small amount of work to retain the harvest infrastructure. Ongoing harvest decisions are being considered and made daily.

​It is still too early to determine what level the Chinese activity will reach - this will guide our decisions.

Our priority as always is to maximise returns for investors and it is a fine balancing act between protecting the crew infrastructure that we have built up over the years and maximising investor returns.

We are monitoring the situation on a daily basis and if we find there is no improvement in China, and the expectation is that the situation will take a long time to rectify, we will at some point make the decision to completely stand down our crews. This is not a decision to be taken lightly as we expect some harvest crews will go out of business and once the China situation improves, we anticipate long delays in attracting harvest crews again – they just won’t be around. We have already had some crews go out of business during the previous imposed reduced production periods.

The exporters are still negotiating the February log prices but we expect the average A grade log price could be around the $100-$105 range. This is a drop from last month’s average price of $122 This negotiation is longer than usual as the banks in China have only come back to work in a reduced capacity this week. The banks are required for LCs (Letters of Credit). Affecting the price is the larger port inventories in China. Inventories are currently sitting around 6 million tonnes, a comfortable level for this time of the year is around 4.5 million tonnes. As well, the beetle damaged wood continues to supply the Chinese market from Europe.

We will update you again when we have more information.

Attached is an update from the Forest Owners Association explaining the current situation.

Kind Regards
Will Dickie


11th February 2020

FOA, FICA and Te Uru Rakau have been working collaboratively to monitor the situation and provide as much up to date information as we can on a very fluid situation. The summary messages below follow the briefing provided at the end of last week.
Coronavirus and the forestry sector situation as at 11 February, 2020.

• Now that the Chinese lunar New Year is officially over supply chain activity has picked up again in China as hoped but it is not a business-as-usual level of activity.
• Coronavirus restrictions are still impacting some businesses and the level of impact varies regionally. The central government is encouraging workers to return after the extended holiday period but, depending on the area, local jurisdiction restrictions may remain in force including self-quarantining in some instances. Working from home will be also be used by a number of companies.
• NZTE have established a web link to provide people with what information they have access to. The URL is: https://www.nzte.govt.nz/coronavirus
• The resumption of pre-coronavirus market conditions is likely to be gradual and take time. If the coronavirus spreads within China this recovery could rapidly reverse and become very serious for all exporters – growers and processors.
• The resumption of activity in China post the lunar New Year extension has led to a pick-up in activity in New Zealand but this is also not universal. The export activity represents a slow easing of pressure on the system and is influenced by existing commitments. The extent to which this is maintained or improves will be influenced by a number of factors that have still to resolve themselves including very high inventory levels on the Chinese ports, the approval of fresh lines of credit and what happens to prices which have already fallen.
• The situation for NZ log suppliers and traders varies. PFP have taken the decision to resume purchasing and some companies in Gisborne and Southland that had curtailed operations are following suit by also resuming production but at a reduced level. As is usually the case the corporates will all be maintaining a level of production that will reduce the impact on the workforce as much as possible. The reduced level of harvesting, however, is likely to be in place for some time.
• Woodlot owners and smaller forest owners have less ability to even out the market highs with the lows and thus be more likely to cease operations until more favourable market conditions return. The stalling of a lot of woodlot purchasing is also affecting roading set-up work. The latter is a concern as this is a prerequisite to allow woodlot crews to operate through the winter.
• The impact on the contractor workforce mirrors the variability in grower response - for some there are manageable reductions in activity; at the other end of the spectrum some are facing losses of jobs and/or businesses.
• Te Uru Rakau, FICA and FOA are investigating what support may be made available to that section of the workforce who are facing a total loss of income or unsustainable cashflows. This is only a proportion of the forest industry and is being looked at in other areas of the economy.

Regards
David Rhodes

​Early last week we were advised that the flow of our logs into China is facing significant global disruption caused by Coronavirus. China is our main buyer of logs and is the market that sets the price for all other end users – including the New Zealand domestic market.
 
Last week, after discussions with the exporters and a number of forestry companies we made the decision to stand down the harvest crews. Other forest management companies have made similar decisions. For most of the crews their last day of work was Tuesday last week – with a plan to review operations today.
 
Over the past week we have been closely monitoring the Coronavirus situation. Businesses, ports and government departments in China remain operating on very restricted capacity. The Chinese workforce is still under movement control and in many cases cannot get to work, or back home. The government extended Chinese New Year, which is normally celebrated around this time of the year, this means log inventories on ports have continued to build. And with no one returning to work, transporting from the ports and processing hasn’t begun.
 
Because of the build up of logs on the wharves, price indications for February have reduced significantly with indications of A grade logs dropping from around $125 to $90 per JAS. Coupled with this is an increased supply of beetle affected spruce logs being railed from Europe to China and competing with our Radiata.
 
The situation remains very dynamic. Today we are continuing discussions with the exporters around log movements off the ports. All parties are unsure how long this disruption will last.
 
The underlying demand from China for logs remains positive – it’s a matter of working through the short term Coronavirus repercussions and the current build-up of inventories on the port.
 
We will send you more information as the situation develops.
  
Kind regards
 
Will Dickie & Roger Dickie

Log prices have continued to track northwards for November. Export A grade log prices in Napier are now averaging around $125.

Our exporters feel the market will stay very similar to this over the next two or three months. Some are suggesting the prices will not change much over the next 12 to 18 months.

In July (when log prices dropped sharply), we reduced all our harvest crews to 75% of their winter harvest volumes. This has in many cases caused financial hardship with some of the crews now advising us they cannot continue under the harvest caps.
None of the other forest companies operating in the Napier area are constraining harvest volumes any longer and this is also creating issues with our own crews who perceive the grass to be greener with the other companies.

The combination of increased log prices and the difficulties the harvest constraints are placing on our crews has led to our decision to lift the caps and allow our harvest crews to operate at their normal capacity with no constraints.

We are optimistic the log prices will hold up as we know that one of the triggers of the July log price fall was the Chinese Holiday season (the increased socio economic status of Chinese leads to a longer summer holiday season). Traditionally the Chinese New Year has led to a decrease in log off take at Chinese ports which has meant a buildup in volume at the ports—not good for log prices.

Chinese New Year in 2020 is 25th January and fortunately this should dovetail nicely with our own reduced volume created by the Christmas/New Year break. Lead time is about six weeks, which should mean reduced log supply in early February.

Towards the end of October one of our log exporters took our Forest Manager, Steve Bell to China (and later to Japan) to visit log purchasing clients. They took Steve to Chongqing which is the largest city by population in the world with about 32 million people. It is on the Yangtse river and is 2,200 km from the ocean port (close to Shanghai) where our logs are offloaded onto barges of about 5,000 to 8,000 tonnes for the trip up the Yangtse.

Steve met the largest log buyer in Chongqing (Mr Wong), he was very bullish about our radiata logs. The sawmills enjoy the consistency of the product and the reliability of log supply. Mr Wong purchases about 700,000 Jas per annum. This is about half the supply of radiata sent up the river and around 3% of total New Zealand log exports.

Steve visited a mill site using very old technology and discovered the head rig operator was paid US $1,600 plus per month. This is about a 300% increase since Steve was last in China, four years ago.

We have also visited mills in China that are modernising because of the dramatic increase in wage costs. The good thing about this for us is that wood consumption worldwide relates directly to socio-economic status, so we anticipate per head, the wood consumption will remain strong in China.

Steve said he got the message quite clearly that radiata was not going to lose its market share to the European volume of spruce. The Chinese see the European volume as being inconsistent, the supply is not going to be long lasting and their sawmills require retooling to efficiently handle it.

We can now look forward to a busy summer on the harvest front and hope the positive market information from our exporters and their buyers is resilient and we continue to see small increases over the next months.

UPDATED INFORMATION OF TIME LINES BELOW IN RED FOR YOUR SPECIAL ATTENTION. 

​Dear all valued customers
As per company plan, Arbor factory relocation will be starting and carried out in the 4th Quarter this year.
While this project is happening, all the kilns and plant will be uninstalled.  As a result, it will affect the processing and production.
Therefore, we would like to post this notice to make you all aware of this schedule, and meanwhile we request that all orders are to be confirmed before 30th Sept 2019, so that we can prepare the products for you and store at our place for shipments in the months of October and November 2019.

AS PER SCHEDULES, THE PLANT WILL BE UNINSTALLED IN EARLY TO MID NOVEMBER, WHILE THE KILN DRYING FACILITIES ARE TO BE TAKEN DOWN AT THE END OF OCTOBER.

RELOCATION WILL LIKELY BE COMPLETED AT THE END OF JANUARY 2020.  AFTER THE KILNS BEING TUNED FOR PROPER DRYING PROCESSING, OUR EARLIEST NEW SHIPMENT SCHEDULES WILL ONLY BE ETD NZ IN MID-LATE FEBRUARY 2020.

THEREFORE WE WOULD APPRECIATE IT IF YOU CAN CONFIRM YOUR ORDERS FOR HT DRY TIMBER WITH US BEFORE THE END OF SEPTEMBER FOR ALL SHIPMENTS ETD NZ PORTS REQUIRED FROM NOW UNTIL MID-LATE FEBRUARY 2020.

IT IS IMPORTANT TO INFORM YOU THAT DURING THE PERIOD OF TIME WHEN KILNS ARE DOWN, THE ONLY PRODUCTS WE CAN SHIP ARE GREENSAWN PRODUCTS AND PART OF AIR DRY PRODUCTS WITH FUMIGATION (STILL ISPM 15 COMPLIANT, BUT THEY ARE NOT HT KILN DRY).
There will be no shipments in the month of December 2019.
 
Important Cut-Off Times:
Order Acceptance Cut-Off:  Monday 30th September 2019. We must have your LC or deposit payment received on or before this date as a confirmation of your order.
Shipment Cut-Off:  Saturday 30th November 2019.  All orders must be shipped on or before this date.
Please review and prepare your orders if you have demand.  Thank you.

Log prices in NZ have improved slightly, after falling to their lowest level in four years. In July a backlog of imports into China, a downturn in demand, and nervousness over its trade war with the United States pushed prices down about 25 per cent to their lowest point in four years. 

AgriHQ forestry analyst Reece Brick said A-grade logs, which were considered the benchmark grade, had for six months been sitting around $150 - $145 per JASm3 (Japanese Agricultural Standard cubic metre), but in the space of two weeks fell sharply to $105. 

Mr Brick said the wider forestry industry was still feeling the strain from the recent Chinese log price re-adjustment. But he said prices had recovered slightly, helped by a small decrease in port-level inventories. Latest figures from August showed A-grade log prices were now sitting at $110 per JASm3. 

Mr Brick said while it was hard to quantify, it was estimated there had been a 20 per cent drop-off in harvesting while some in the industry opted to wait for prices to improve. Most of the people that have stopped harvesting now are those with woodlots planted 25-30 years ago and who are looking to cash. 

"They can only really make money in one go. The bigger companies, which have constant harvesting rotations, they're just going to keep on going as per usual more or less." 

Mr Brick believed those in the sector were cautiously optimistic that prices would start picking up in the short term, although they were still a long way from the record high levels seen earlier in 2019. 

"Volumes leaving New Zealand shores are already tightening, which is expected to impact on China from September/October, when Chinese log use usually increases. This is creating some level of confidence that the market should rise from here to the end of the year," he said. ​

​

New Zealand’s wood processors say the international log price war and protected overseas economies are crippling the New Zealand trade. The Wood Processors and Manufacturers Association told a meeting in Nelson that distortions in international trade were starting to make it difficult for local processors to be competitive globally. 

The industry worked to add value to New Zealand's raw timber and supported 25,000 jobs nationwide, but it was fighting to survive. The association's chief executive, Jon Tanner, said the global playing field was tilting less in New Zealand's favour. 

That was because international competitors were playing by a different set of rules. "And all this, we believe, is being caused primarily by subsidies that are being paid out across the world, and that are supporting the industries we are competing with," Mr Tanner said. 

"MFAT (Ministry of Foreign Affairs and Trade) likes to call them non-tariff barriers - let's just call them the covert world of subsidies because they're really, really, really hard to see." They were focused on finding ways to tackle the problem, but the elephant in the room was log supply and prices, he said. The global manipulation of pricing was hurting New Zealand processors and timber growers. 

The government recently commissioned an inquiry into the log market, which was looking into barriers to fairer international competition. Mr Tanner said it was a good start. 

“We’ve certainly made the case for the issue. What officials are doing now is drilling into what we can understand about the sector and what’s supporting it around the world because we really don’t - as a global industry, understand that.” 

The government was also working on securing a range of trade agreements, but warned it would not be a quick-fix. The Minister for Trade and for Export Growth, Damien O'Connor said agreements in principle with ASEAN member countries - from South East Asia - were expected to be in place by the end of the year. 

"We won't get all the things we want but if we can get in place rules of trade that all those countries have to adhere to, around e-commerce, around investment and around goods, then we'll be in a safer space," Mr O'Connor said. ​

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.