Forest360: Log export market commentary

Wednesday 6 Apr 2022

Dynamic is a great word which means ‘a system or process characterised by constant change, activity or progress’. The forest industry is very ‘dynamic’ and the optimists within us will use the term with great endearment but, in reality, being dynamic can also be a tremendous pain in the derriere.

Export log prices conform to the ‘constant change’ part of being dynamic very well as illustrated in the graph below. This year we have seen export prices jump from $115/JAS (A grade) in January to $142/JAS in February and now back to $123/JAS in -March and, with a cost base of around $90/JAS in many regions, you’re looking at swings of 80-100% in net return to forest owners within a 3- month period. Much of this swing is around shipping cost increases since Putin started lobbing missiles at his neighbour. Actual CFR prices (sales price in China in $US) are reasonably strong in the mid $US170’s/JAS but foreign exchange and shipping costs have closed the bar early and taken the fun out of the party.

While it appears that the upward pressure on shipping prices has abated, the China log demand has come off the boil from around 80kJAS/day into the high 50kJAS/day. This reduction in demand can be attributed to a number of reasons but principally slowing construction sector and covid related shutdowns in sawmills and construction sites. In-market Chinese log inventory is in the 4.5Mm3 region which is a reduction from February, but this is likely to increase as NZ supply has strengthened following the March price increases – remembering it takes round 5 weeks from stump to market. While China holds tight with it’s covid elimination strategy (we all know how effective that is) we will likely see subdued demand and increased port waiting times as ports are shut without notice – dynamic.

I have fielded plenty of questions from forest owners regarding the impact of Putin’s rampage on the demand for NZ logs and lumber. It will be interesting to see how this plays out as Europe have effectively stopped any Russian log and lumber imports which will likely re-direct volume into China. Total Russian log/lumber supply into Europe was in the vicinity of 25Mm3/annum and should this redirect to China, has the ability to displace the total NZ supply. Although this is unlikely as Russia had imposed a log export ban in January this year, there is the potential for this supply to switch as Russia scrambles to seek sources of funding – remember he wasn’t going to invade Ukraine either.

As covid/omicron sweeps through the country, a lack of staff has resulted in longer port wait times for trucks and reduced vessel unloading and loading capacity. The ingenious decision of the EPA to effectively ban methyl bromide as a fumigant (which was used to fumigate logs stowed on the top deck of a vessel) means exporters are now scrambling around to find enough debarked logs (the only current alternative treatment to fumigation) to finish vessels off. This has created issues with adequate port storage and, when combined with covid issues, is seeing many exporters unable to accept cargo due to reaching limits on port storage. Some may see the EPA decision as the ‘progress’ part of being dynamic but I see it as a spectacular own goal.

Meanwhile, Ministers Shaw and Nash have shown how ‘dynamic’ they are by proposing changes to the ETS legislation by removing exotics from being able to be included as permanent forest from January 2023. This is more than likely an attempt to keep Damien O’Connor from going postal as mounting pressure from the Ag sector regarding farm to forest conversions will be giving him the sweats.

While the 50 Shades of Greeners will be feeling rather smug over this proposed change to policy, the reality is that there are plenty of farmers and Iwi landowners who have had the opportunity taken away from them to earn an income off very marginal land that is otherwise not viable. The Government’s idea that indigenous planting will work in these areas is flawed as the cost of establishment far outweighs any carbon gains in the short to medium term – especially in this marginal country. Anyone who has tried to establish an indigenous forest from greenfields will know that every pest wants to eat it, every spray wants to kill it and even if pests and spray are kept under control, it wants to die anyway.

In summary, there are plenty of dynamics going on in our wood-based world. Operationally there’s a few wrinkles with covid and logistics related issues, prices are a crap shoot going forward with global instability and Government policy changes to the ETS are likely to see reduced ongoing investment in greenfields projects which will likely pull the handbrake on increased carbon related land prices. So, lets raise a glass to being a dynamic industry, one thing’s for sure – it’s never boring.

Source: Forest360

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