LOG PRICE UPDATE

You will be aware that in early July, following the significant reduction in export log prices, we carried out a full review of our harvest operations.  We subsequently instructed our forest managers to place harvest production caps on their contractors of approximately 25%.   Over the past two months, we have monitored the export log markets and as advised in July, have now undertaken a further review of our harvest operations now that we have the September prices from the exporters.
 
What has happened to pricing since then?
 
You will have seen from the abbreviated August review that log prices have risen from their July lows. Recent September prices have also shown another incremental increase.  Overall prices have risen approximately 10% from the July lows and have recovered more than 25% of the June to July fall.  This is welcome news for all harvesting forests.

The market summary 
This month we engaged once again with our two major log exporters to obtain a market update.  Between them they export approximately 30% of New Zealand’s logs. The overall sentiment is that the Chinese markets have stabilised since the dramatic price decreases in July.  While our exporters expect further incremental price increases into the end of 2019, they remain cautious in their longer-term view.  We discussed the many drivers for those log price reductions in our July correspondence, below is an updated summary of changes since that July review.
 

• European Log Supply into China via Rail – This remains an issue with Russian lumber arriving at inland and coastal areas (part of the Belt – Road initiative) where radiata has traditionally been the predominant supply.  Subsidies have been reduced recently and the competitiveness of Russian lumber has decreased.  The total volume of these European arrivals is around 2 million tonnes, about equal to one month’s log exports from New Zealand to China.
• United States and China Trade War – The exporters express the most caution around the current trade war between the US and China.  This is slowing the Chinese economy.
  
•   RMB and NZD Exchange Rates – The offshore Chinese Yuan has depreciated more than 4% against the US Dollar since our July update, largely as a result of the trade wars.  This depreciation has a significant impact on Chinese buying power with one exporter suggesting that every 1% decrease in the Chinese Yuan results in USD $2 less buying power.  Fortunately, the surprise 50bp rate cut from the Reserve Bank has helped drive a larger fall (more than 5% over the same period) in the NZD/USD exchange rate.  This increases the New Zealand exporter’s return which helps offset the decrease in the Chinese Yuan. 
  
• Wall of Wood Supply from New Zealand – There is no doubt that supply of logs from New Zealand has increased over recent years and NZ Inc was exporting a record number of logs into China at the outset of the price fall of July.  The exporters allude to a two-tiered supply market from New Zealand with the small to medium sized suppliers reducing their overall cut while some of the very large corporates are continuing to harvest at near full production to fulfil supply contracts and keep supply chain infrastructure intact.  Supply constraints will be a significant factor in helping prices to rise again and it would seem logical to us that NZ should take a combined view as to supply volumes to export markets if we want to maximise our income.  One exporter monitors vessel movement from NZ and has noted a reduction of approximately 18% (from 110 vessels to 90 vessels) between July and August.  This will be taking effect now by shortening supply and the RDNZ efforts to cap harvest production by 25% are playing a part in this. 
  
• Demand from China and Inventories – The exporters have noted that log off takes from Chinese ports have increased by approximately 13% over the last month as the seasonal lows (due to warmer and wetter weather) are coming to an end.  The off takes are now close to outstripping the supply to ports however, inventories remain high at around 4.6 to 4.7 million m3.   The exporters expect we shall start to see a reduction in inventory later in September or early October as off takes begin to outstrip new landings of logs.  This will be a result of tightening supply and a seasonal increase in demand.  One of our exporters was very firmly of the view that we needed to see wharf inventories drop before we would see significant log price increases. 
  
• Shipping Freight Rates – Despite the lesser demand for vessels, the shipping market remains tight and increases in fuel costs for regulatory reasons are pressuring prices higher.  Log exporters expect we will continue to see higher freight rates across 19Q4 and 20Q1 due to the higher fuel costs.

 
Price expectations from here?
 
The unfolding supply/demand pressures are creating positive tensions and exporters expect this theme to continue and for log inventories to decrease. This should be the key driver for prices to continue with incremental moves upwards. There appears to be a consensus that log prices could move toward $120-$125 over the next three months as a result of supply and demand pressures. Most caution remains around the trade wars and the medium-term impact this is having on both the Chinese and USA economies; it is for this reason that price increases are expected to remain modest.
 
RDNZ initiatives going forward
 
Given the modest recovery and upward trajectory of export log prices since we last reviewed them in July, RDNZ has decided to take the following initiatives.  Please note the viability and extent of these initiatives may vary from forest to forest for a variety of reasons.  The specifics for your forest will be discussed subsequently.  Key initiatives are:
 

• Retain harvest production caps of approximately 25% for another month.  Because there is a six to eight-week time lag from harvest until our logs are added to wharf inventory in China, most commentary suggests that the real supply/demand impact should take hold in the next few weeks. RDNZ will review the price changes and market dynamics in one month’s time. 
  
• Where possible, harvest crews will move to road lining operations which is a more effective process over the dryer summer months.  Road lining generally involves reduced production per month and allows the forest roading infrastructure to be set-up ahead of time.  This gives the newly formed roads time to settle and stabilise, increasing their durability for harvest traffic during winter months.  The earlier the road lining is carried out the lower the average harvest roading costs for your forest will be. It is important that the roadlining continues so that we can move to clearfell operations when prices recover. This is in line with what other similar sized Forest Managers are doing. 
  
• Drive harvest efficiencies to reduce costs.  The Forest Manager will engage contractors during this period of low pricing to negotiate reduced harvest rates in exchange for an easing of harvest production caps.  This will not occur until it is decided the harvest production caps can be lifted.  
  
• Engage regulatory bodies in discussion on NZ Inc log supply management.  RDNZ plans to work with exporters and forest owners through NZFOA to engage regulatory bodies and help drive better co-operation in supply management.