Log export market update - Forest 360

Wednesday 16 Jun 2021

(OPINON - Forest 360) Another month, another set of record export prices. - June has seen A grade export logs increase a further $8/JAS to around $170/JAS, a level that pruned logs were at not so long ago. With improved genetics and season factors, the conversion from JAS (the sale unit of export logs) to tonnes for A grade logs is generally over 100%, meaning that the actual price is more like $177/tonne!!

If we back the harvesting, transport and roading costs out of these figures, you would be looking at a net return between $35,000 and $40,000 per hectare for an average pruned hill country forest with a distance to the port of 180km. If that forest was flat to rolling and only 100km to the port then the net increases to over $50,000 per hectare, or $2,000 per hectare per year.

Nothing has changed in the global log supply dynamic in that China and Australia are still pulling faces at each other across the playground, the European’s can’t find containers to put their logs in, USA and Canada are using all their supply domestically as Biden's stimulus package has created a building boom and Russia has signalled a total log export ban from the start of 2022.

To put the global log supply into perspective, China’s imported softwood demand sits at around 60 million cubic metres annually of which around 22 million comes from New Zealand, 12.5 million from Europe, 6.5 million from Russia, 5.5 million from Australia, 3 million and from the Pacific Northwest. The remainder comes from a number of smaller suppliers. New Zealand is the single largest supplier of Softwoods into China, dwarfing all other suppliers by a significant magnitude.

While we are only around 35% of the total imported softwood supply into China, China is around 60% of our total log market. It’s easy to see that if our Govt leaders take a similar line to Australia in criticising the Chinese regime, the effect of a log ban on NZ logs would be catastrophic. Having said that, China is still happily importing iron ore from Australia, which makes up around two thirds of the total iron ore imports into China.

Steel is obviously a key component of the Chinese construction and manufacturing industry and, as there is no other country able to supply at the quality and levels of Australia, China cannot ban this valuable product – especially if it wants to reach the GDP target of 8.4% in 2021. New Zealand radiata is in a similar situation, there is no other alternative supply that can match the volume and delivery performance of our export market. As with steel, lumber is a very important ingredient in construction and therefore a consistent supply is vital. This is somewhat comforting as, should we decide to join Australia and pull faces across the playground, the log supply might just keep flowing.

It’s not just logs and lumber that are having a dream run as most of the major globally traded commodities are seeing record pricing as well. So much so that the Chinese Government have recently expressed concern at record prices being a factor of speculation in the iron ore market. While there hasn’t been any talk of their eyes being cast over the log market, it will only be a matter of time if prices continue to increase at the current rates.

In-market log and lumber inventories have continued to track down slowly with no easing in demand and no upside in supply. While it is expected that construction activity in China will decrease slightly over the hotter months, it will take a significant drop to see any worrying inventory build. We generally see a reduction in NZ supply over winter months as wet weather slows harvesting crews, especially in the private woodlot and forest sector. This may not be as significant as previous years as, at current pricing levels, you can afford to spend more on road construction and maintenance to keep the log volumes moving.

While the harvesting sector is enjoying what has been a much longer than usual run, domestic sawmillers have been sweating bullets each time the monthly export prices have been released. As many of the sawmills are locked into medium term lumber price contracts it is hard for them to pass on additional costs of raw materials as they occur.

The last time we saw a sustained log price increase such as this was in the 2012 – 2014 period where increases were in the magnitude of $30/JAS. Although there was a couple of significant crashes in the 18 months following that period, the market rebounded quickly and continued to increase albeit slowly through to mid-2019. Fingers crossed we may have now taken another leap in long term price levels.

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