Log export update: At the risk of tempting fate …
Wednesday 24 Feb 2021
This was around the longevity of the current pricing levels in China (our primary market), as history has dictated, time and time again, that once A grade exceeds $145/Jas it's time to brace yourself for a good old-fashioned walloping.
Whenever export prices get to these levels there is plenty of talk about the drivers of price being "different this time" and "this is the new medium-term level". Within a month we're generally crying into our soup and dialling back production as prices plummet faster than John Banks' radio career.
So, here we are with A grade in the mid $140's, Chinese in-market softwood inventories at the lowest level since late 2016 (1.2Mm3 less than this time last year), zero supply from Australia and a relatively high exchange rate.
As Chinese Lunar Celebrations commence, we have seen daily sales drop to around 60Km3 from 85Km3 in early January. It is expected that this usage will drop to miniscule volumes for February before returning with some gusto in March following the almost month-long holiday. Inventory will build through this period as we keep the foot on production throttle in New Zealand. However, as we are heading into the Chinese holiday period at a very low inventory position, we don't expect to see any negative price pressure in the short term.
Even at the current price levels, it is hard to see any significant increase in NZ production or supply volumes. Harvesting crews are all generally in work, trucks are working to capacity and it is highly unlikely the rail network will increase its efficiency. Many of the ports are struggling to move the current production levels through the system let alone any increases.
The Chinese market remains very strong with continued government stimulus pushing China's GDP forecast to 8.2% for 2021 from 2.3% in 2020. The Chinese real estate market has rebounded post Covid and is showing positive signs for 2021 although the government has hinted at a crackdown on speculation.
Other supply points have not had any impact on inventory levels with Australia being shown the door (9% of total supply) and supply from USA and Canada approximately half of their peak in 2018.
Europe is the one outlier with a significant volume of wood available due to widespread bark beetle infestation. This volume has been more subdued than expected as container freight cost has increased markedly and supply reduced thanks to Covid. Russia has proposed a ban on log exports from the beginning of next year and buyers are already looking to secure supply from other sources.
The three main components that make up the export price that forest owners receive are delivered sales price in US$ in the export market – known as the CFR price (Cost and Freight), shipping cost and foreign exchange rates between NZ and USA. The CFR price is forecast to rise post February although sentiment varies between many of the export companies as to the degree of this.
Whatever gains are made will likely be wiped out with rising shipping costs. Strong commodity demand and higher oil prices are pushing shipping costs north and shipping companies currently hold a hand of aces during a period in which the freight market is traditionally soft.
Foreign exchange has not been playing ball with an increase of 4 cents in the past 3 months. Rule of thumb is a reduction in real returns of $2/log tonne for every cent increase in the $NZ:US. We are hopeful that the new regime in the US will provide a shot in the arm for the US economy and take some heat out of the exchange rate. This is yet to manifest but one would expect Biden's $1.9 trillion stimulus package would get their economy fizzing.
All in all, it's looking rather positive around the traps and forest owners are making tidy returns on their forest investments. Domestic markets continue to be strong with many sawmills short on log inventory and long on timber orders.
In a period where we are generally bracing ourselves for a rapid price correction and a bit of soup crying, things seem to be tickety-boo. Maybe this time the drivers are different …
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