BMO: Timber REIT implications of low China demand
Wednesday 15 Dec 2021
Bottom Line: New Zealand's log export market is grappling with steep declines in Chinese demand. Chinese log inventories are reportedly 5mm+ cubic meters. Demand is expected to remain weak in FY22. Trade reports are pointing to construction declines of 20% y/y. While this will have some impact on US PNW log exports, NZ producers are more highly levered to China. NZ log prices have eased. Among the US Timber REIT’s, Rayonier is the most leveraged to China.
Key Points - Falling prices, lower demand, and elevated inventories have triggered a 30% drop in NZ production between July and November. Producers are reportedly taking longer- than-normal Christmas breaks to help balance S/D and reduce Chinese inventories. January 2022 could see some relief as Russia's log export ban kicks in. However, the central near-term issue is the slowing in Chinese construction markets.
Because of its high dependence on Asian exports, NZ is among the world’s most volatile timber markets. Early 2021 saw the highest pricing levels in recent memory. Since late summer, markets have pivoted dramatically in the other direction. Weyerhaeuser ships ~20% of its West Coast log exports to China. Rayonier also has West Coast exposure, but it is further exposed through its large NZ operations. RYN has already flagged the China issue. The question is whether the current drop proves deeper/longer than expected.
Source: BMO Capital Markets • Timber and Wood Products
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