Forest 360 Export Market Commentary

Wednesday 10 Nov 2021

It might be time to park the gear up and shut for an early Christmas. The export log price slide has continued with November prices now in the mid $90’s for A grade in most ports, with the exception of Gisborne which is at the mid $70’s level. While prices in the $90’s are above breakeven in many regions, it’s only really forests very close to a port that will stack up to carry on if prices hold at these levels for an extended period of time.

While we all know we’re in the commodity game and part of signing up to this is the knowledge that prices fluctuate, sometimes wildly, in reaction to supply and demand imbalances. The scary part of the current situation is the magnitude of this drop which is the largest in both percentage and dollar terms since the 90’s ‘Asian crisis’. While most of us had conveniently blocked that fun part of history out of our memory, this situation feels very similar.

So, what’s caused this price drop and how long’s it going to last for? The drop can be attributed to a number of reasons. The Chinese market is very sentiment driven so any negative sentiment generally leads to reductions in price. It appears demand has significantly reduced in a period where seasonal demand is usually starting to ramp up. Trying to get any meaningful information around demand is very difficult as everyone has differing opinions and data sources, however, the general consensus is a vastly reduced offtake from most Chinese ports. Inventory across all Chinese ports have moved through the yardstick of 5Mm3 and is the highest inventory position coming into China’s construction season in memory.

Freight costs are around double that of the same time last year. While actual sales prices in China are still around $US20/m3 higher than the three-year average, freight has chewed up all of that and some. Much of this cost is in demurrage as Chinese ports have been struggling to handle freight resulting in wait times for a berth of up to 3 weeks. While freight does appear to be easing as wait times have reduced considerably on the back of reduced NZ supply, a bumper grain crop in Australia and poor grain harvests in the northern hemisphere has given vessel owners optionality.

Even if the demand was there from the construction sector, continued power supply issues in China from import restrictions on coal (veiled as an intention to reduce carbon emissions) have stopped many factories operating, including sawmills. Some that have diesel backup generators have switched them on which has put pressure on diesel supplies further complicating transportation and uplift issues. Let’s not forget about Covid, with China continuing with the elimination strategy there have been a reasonable number of sawmills closed in Shandong with outbreaks popping up all over the place.

The year ended September 2021, New Zealand delivered around 19.3Mm3 to China, up from 15Mm3 in 2020. Total China softwood imports rose around 7.5Mm3 to 50Mm3 in 2021 with NZ and Europe being the biggest suppliers by a country mile. During the same period, lumber imports dropped by just under 6Mm3 and, when the conversion factor from log to lumber is taken into account, the real lumber useage in China dropped by a magnitude of around 2Mm3 (3.8Mm3 log equivalent) for the 2021 year. These figures may suggest a slowing in real construction activity has been occurring over the past 12 months and there’s more than likely more to come. It’s old news that investors in China have been going pretty hard on speculative housing investment which has created a reasonable oversupply which is now coming to the fore with liquidity issues for Evergrande and a number of other aptly named development companies.

The domestic market continues to be the shining light with continued lumber shortages in retail outlets driving up prices. If I hear another builder complain about the increased cost of lumber being laid squarely at the feet of forest companies because we’re ‘exporting all of the logs’, I’ll go postal. To be very clear, most domestic sawmills are running at capacity with more than enough log supply. Sawmills could increase lumber output ‘simply’ by double shifting their operations (some already are), however, there’s not much appetite to do this as it would require additional staff and overhead costs for, more than likely, no additional margin and, in reality, who wants additional HR issues when most of the unemployed are probably unemployable anyway.

So, in summary, it’s ugly, it’s probably going to be ugly until February next year, at least. There’s a number of influencing factors that we haven’t seen before in the Chinese economy and it’s a crap shoot to see how these will affect log demand. Harvesting crews are being slowed or stopped nation wide and NZ supply is likely to drastically reduce for the remainder of the year. If you’re holding out for $150 A grade you may be waiting a while.

As the saying goes, history repeats, the last decent NZ recession was preceded by a pandemic and maybe this pandemic is a sign of things to come …

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