Forest360 Log Export Market Update

Wednesday 8 Jun 2022

(Forest360) June is historically the poorest performing month in the export log market and this June is no exception, with A grade generally in the mid $90’s/m3 across most exporters. There’s nothing new in this level at the bottom of the price cycle, as we have seen it a number of times in the past few years, but this year the difference is the increase in costs due to fuel. If you deduct the increase in logging, cartage and roading costs over the past 12 months from the current export prices, you’re looking at a further reduction in return of $12/tonne. This gives an equivalent A grade export price in the early $80’s/m3 which is the lowest since November 2015 (when costs where probably $20/tonne lower). With current costs for your average forest sitting in the high $90’s/tonne it doesn’t take a rocket scientist to figure out there’s less in current export returns than Amber Heards’ lawsuit.

Generally, in June there is a supply and demand imbalance in China as the seasonal demand drops during the Chinese hot season, and the global slug of volume that has been delivered over the Chinese New Year holiday pushes inventory levels higher than what the customers’ financiers are comfortable with. In this scenario, it’s reasonably easy to see the price drop coming (by monitoring in-market inventory increase) and relatively predictable as to when it will revert (again, based on inventory reduction).

True to form however, 2022 is different. The sharp price drop this time around has come about for a number of non- inventory specific reasons with freight cost and demand being the two key drivers. Although construction in China has been on the ropes since the Evergrande debacle raised its ugly head last year, the current demand issue is more due to the continued Chinese covid elimination strategy which has seen 93 out of the top 100 cities locked down. Underlying demand for NZ logs is still relatively solid as supply has dried up from Europe, the Pacific northwest and Russia. So long as Putin keeps carrying out his legacy, it’s unlikely supply will resume from these regions. Shipping costs are completely out the gate and, contrary to what we had initially expected, the Ukraine situation has created more demand for energy and grain in Europe resulting in vessels leaving the Pacific for the more lucrative Atlantic region. Current freight costs are over double those of around 18 months ago and freight is now more than half of the sales price of export logs.

Covid and general lack of labour continues to constrain port operations with many ports bursting at the seams – a problem that this current price level is likely to fix rather quickly. It is very likely that NZ supply will drop around 40% over the next few months as many forests either shut down or drop production significantly. It generally takes 6 weeks for this reduction to be felt in China and, if history is anything to go by, the rebound will be very sharp and likely starting in August. The fallout of this drop is likely to be felt with logging and cartage contractors who are already feeling the pressures of wage and general cost increases. Those that operate in the woodlot sector are always the first to feel any slowdown and are also generally less well capitalised that their counterparts operating in the corporate sector.

Domestic markets continue to box on strongly with solid demand for both pruned and unpruned logs. Most sawmill managers will be turning their phones off as forest managers try to be their new best friends in securing additional supply to offset some of the export losses. If the downturn lasts longer than a few months, it is likely that domestic supply will also be impacted as more forests are shut down. Much of what is exported is not of suitable quality for domestic markets so you can’t just switch this volume between markets, and, if you can’t sell the offal, you can’t produce the chops.

If you live in a rural community, make the most of having less log trucks on the road for the next month or two as it will be short lived. The Chinese market is very reactionary, and sentiment driven and, as shown in the above graph, things turn very quickly. Inventory in China is currently at modest levels and we are likely to see panic buying once customers are faced with the reality of supply reductions, remembering that there’s not much in the way of alternate global supply. If you’re a forest owner thinking of harvesting shortly, you’re best to make your move sooner rather than later as you’re much better off catching the start of the wave than waiting for it to pass you by.

Source: Forest360

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