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        New zealand: market will be uncertain until log inventory in China falls by a quarter

        August has seen a reversal in the dramatic four month slide in export log prices – at-wharf-gate prices were up around $9/JAS m3.

        This was driven mainly by reduced ocean freight costs and a lower kiwi dollar.

        Strong demand for domestic logs continued, with tight supply of pulp, structural and pruned logs in several regions.

        Export Log Market

        NZ at-wharf-gate prices have dropped some 40-50% since their last high point in April of this year.

        In-market (Asian) prices of the same logs have also dropped dramatically, as have prices of logs from Russia, North America and Australia.

        Despite this, Wood Resources International reported that log imports into China reached an all-time high in the second quarter of 2014 with volumes from New Zealand 15% higher than the prior quarter.

        Canada and the USA volumes we also up; volumes from Australia and Russia we down marginally.

        In addition, importation of lumber increased by 19% from the first to second quarters of 2014.

        So why are more logs and lumber beingimported when inventories are high and the Chinese real estate growth rate is declining?

        - The Chinese economy grew by 2.0% in the second quarter, up from 1.4% in the first quarter. The annual growth rate now looks like coming in at close to 7.5%. This is supporting fundamental demand for wood.

        - While the real estate market continues to be weak, there is still considerable construction activity driven by the Chinese urbanization mega-trend, low-cost government housing projects and the demographic of large numbers of young Chinese men needing a house to increase their marriage eligibility (to a smaller number of eligible young woman do to lower female birth-rates).

        - Chinese traders seeing an opportunity to purchase lower priced wood to dollar-cost-average down their total cost of inventory.

        - Much of the imported volume was clearing commitments in a supply chain that spans several months from stump to market.

        - Constrained availability of domestic wood due to inaccessibility (further away and harder to extract) and more restrictive environmental policies.

        Daily off-take of logs is still strong at 60,000 JAS m3 across the 25 Chinese ports monitored.

        Log inventory, however, has remained stubbornly high and reported as still over 4 mln m3.

        Looming supply shortages, however, are becoming evident as the impact of suspension of scores of harvesting jobs along with the delay of starting many new jobs are more visible in the supply chain. This is stimulating purchasing interest and in-market prices are expected to firm.

        In summary, the log market has, for the time being, bottomed.

        The in-market price for “A” grade Radiata pine in China is around US$ 120/JAS m3, a price last seen at the bottom of the 2011 market downturn in December of that year. The sentiment is that this, again, is the floor price.

        If this is the bottom of the cycle, and if ocean freight rates and foreign exchange don’t move unfavourably, most are forecasting a steady improvement in export log prices for the remainder of the year.

        However, until log inventory in China falls by 25% or more, there will continue to be nervousness about the robustness of any market recovery.

        Korea and India took higher volumes of logs in the past few months as volume was diverted away from China. Any price advantage was short-lived, however, as price falls in China flowed through to these markets. Due to the much smaller size of these markets, the diversion of volume only had on minor impact on volumes going into China.

        Domestic Log Market

        The purchase of of the Thames Timber by Profile Woodproducts, expected to be settled in July, has been delayed due to complications related to the settlement transaction. Supply of logs continues to the receiver, Kordamentha, albeit at lower levels due to moving from two shifts to a single shift.

        High levels of building activity and growth in building consents continues in New Zealand. For the three months to May, building consent issuance in Auckland increased 32% on the same period last year. Canterbury increased 16%. Over the rest of New Zealand there was a 10% increase over the same period. This is the seventh consecutive month of double digit growth.

        While structural lumber processors are focussed on the domestic market, pruned log processors are seeing strong demand for clear boards in the USA, Europe and Australia. This is a departure from the prior dominance of the US 5/4 inch flitch and mouldings market for exporters of clearwood products.

        Different regions, even adjacent ones, are experiencing very different supply/demand patterns. For example, pulp logs are well-supplied in the Central North Island/Bay of Plenty regions due to the pulp mills not running at full capacity, and some diversion of low grade export logs to domestic pulp. On the other hand, pulp logs are short-supplied in the Manawatu Region due to the much lower harvesting activity resulting from the export log downturn and more difficult winter operating conditions.

        The PF Olsen log price index reversed its recent downward trend and rose 4 points from 87 in July to 91 in August.

        Source:Rural news

        Posted and edited by Hanbao News Department

        Contact: import-export@hanbaogroup.com

         



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