Laurie Forestry - Quarterly Market Reports

Allan Laurie writes a quarterly forestry market report which keeps readers up-to-date with forestry developments nationally and internationally, offers a unique perspective and investigates new products and services.

Quarterly Market Report - May 2015

Business definitely not as usual 

This report will not be what most of you will want to hear. I would strongly suggest you get the chin strap on because this one is going to be a very bumpy ride. For the brave souls who want the real oil on the current situation please read on. 

I have taken the unprecedented step of not including any log price tables. First, it is because I did not want it to be the catalyst for ridicule. Secondly, by the time the report is published, the log prices would probably be historic.

This is a reflection of an export market, centred on China, in freefall. If you still have your last issue of Tree Grower, and if you want an update, you should take anywhere between $25 and $30 off the listed prices. That is as at the 16 April. By 16 May it is highly probable you can take a further $5 to $10 off. This would mean most forest owners will be on a small or negative return if still harvesting radiata pine in May and more than 100 km from a port.

This almost catastrophic and rapid decline in value is the direct result of factors in China. As I have just been there I will devote the majority of the report to this critical market for New Zealand forest growers.

China, the new and dynamic present and future 

What are some of the critical elements which make up the current almost perfect storm.
  • Current softwood log consumption is running at about 60,000 cubic metres a day across the China eastern seaboard. 
  • This compares to about 70,000 cubic metres day at the same time last year with spring time being the major construction period before the onset of the hot summer.
  • Current consumption is based on a seven day working week so equates to 1.8 million cubic metres a month.
  • New Zealand remains the largest supplier, with 60 to 65 per cent of the total volume.
  • Softwood log deliveries from all countries in February and March were each about 2.2 million tonnes.
  • The Russian rouble has reduced in value by 70 per cent against the yuan in six months, resulting in a dramatic increase in timber and log volumes heading to China markets which have been previously dominated by New Zealand and Australia.
  • US and Canada log volumes have declined slightly but timber sales, ultimately heading to the same markets as radiata pine, have remained unchanged. 
  • At least 70 per cent of all softwood log and timber sales are for making construction plywood and timber for apartments to hold up concrete until it dries.
  • New start apartment projects have slowed dramatically with default and slow sales adding to the pot of negativity.
  • Inventory levels are heading well above 4.5 million cubic metres across all eastern seaboard ports and at the expected delivery rate for April, the inventory is likely to quickly run close to 5 million cubic metres, or three months of supply. 
  • Many China buyers and traders are in default, with three major liquidations or cessation of involvement in the log trade having occurred in recent weeks. 
  • Cash and credit is in short supply. Letter of Credit deposits for logs have gone from 20 per cent required to at least 50 per cent due to nervousness about default. There have been many examples of buyers walking away from the earlier 20 per cent deposits.
  • House prices appear to have bottomed out in tier one cities but nationally house prices have fallen five per cent year-on-year across the 70 major cities.
  • The China government has just announced a new construction and house purchase incentive programme including reducing interest rates for the second time in four months and we can expect at least a two month lag before this revised suite of policies starts to take effect.
A five million cubic metre inventory in effect means there is at least US$3 billion in cash not circulating in the log and timber segment. The China government have been focussing on reducing environmentally poor performing polluting industries and in the case of the wood sector this is seeing the forced closure of plywood operations in particular.

No buyers
China buyers do not want any more logs. The million cubic metres or more of inventory currently on New Zealand wharves effectively has no market. Sellers are trying for sales at any level just to move cargo and heavy discounting becomes the order of the day.

Most commentators are suggest this year’s growth in GDP in China will drop just below seven per cent, firmly ending a 30 year double digit run until 2012. The speculative run on the housing sector has come to an abrupt end with the realisation that there is a large number of apartments purchased for speculation rather than to live in. The resulting is a glut of unoccupied housing in many cities

Six month warning
On reflection, the supply of softwood logs has been exceeding demand for at least six months. In New Zealand, forest growers could not see the problem as they were cushioned from the realities of declining prices by lower shipping costs and a slightly more favourable exchange rate. Settlements in China - the price per cubic metre in US dollars landed in China - have gone from US$130 for a JAS cubic metre in October 2014 to US$100 in mid April 2015. Current predictions are the price will fall further in April and May to US$90.

Available cash within the general population and from the investment sector has been very firmly heading towards the share market. Exponential growth has been the order of the day with many companies experiencing a very strong bull run. One example I learned of was a known associate’s boss who invested $30 million yuan, about US$6 million, in shares over 12 months and made a staggering $70 million yuan profit.
Measured growth
The new regime in China includes a big clamp down on corruption, particularly at senior government level. This is causing the policy makers to be very cautious, very considered and very long-winded in implementing policy and standards. The rate at which new projects are initiated, in the absence of the normal lubrication, is slowing sector development considerably.

A very definite swing from communist principals and policies of the past to the more socialistic policies of the current and future will see the emergence of an economy without exponential growth. It will be more measured, more controlled and more widespread across the population. In terms of wood use I see dynamic change ahead. A smaller volume profile but a more holistic approach to wood use will, I believe, be the new China to which we will need to adapt.

Blunt instrument

The only saviour for New Zealand in the current significantly difficult situation is for log supply to slow down and for inventory to be reduced. Then we must remain at a reduced supply level to avoid a repeat this time next year or earlier. Based on the imposition of this very blunt instrument called price, and what we see of the market in the next quarter, we can expect the current situation to last at least until July. If demand wanes at all and supply does not decrease, it could last longer.

Despite this recount of the current situation, there are many positives to consider. Consumption is running at 60,000 cubic metres a day and that is not too shabby. Incentive programmes and a continuance of urbanisation policies should see a generally strong but, compared to the past, slightly subdued demand profile for the next three to five years.

Furniture and finishing
On my latest trip I focussed on non traditional sectors and it was heartening to see more manufacturing in the softwood furniture, finishing and appearance sectors. There was a lot of comment that Chinese consumers were showing a preference for knotty grade furniture which they increasingly recognise as not coming from natural forests.

A further positive note is evident in the pruned log segment with New Zealand wharf gate prices actually increasing and demand also increasing. Pruned log prices have not been higher for many years with current ones at $160 to $185 a JAS cubic metre at the wharf gate.
I also came home with a significant order for cypress and eucalypt logs at well above radiata prices. Cypress is replacing traditional supply sources out of Europe as well as to satisfy increasing furniture demand. Eucalypt is increasingly being used for making the ply in container floors as well as the traditional glut segment for steel packaging.

It is heartening that, after the several trial shipments which I have initiated, China manufacturers have found ways to use the eucalypt to replace the dwindling tropical rainforest hardwood supply. Maybe we could be planting more eucalypts after all. 

Domestic log market
The reports from around New Zealand are tinged with caution and concern. Most sawmill owners recognise that while they may be getting just enough logs at present they do see the writing on the wall. This well-founded concern will be realised when the forest cut drops significantly over the next two months. I can see structural logs in particular being in very short supply. One report suggests that spot sales of good quality high strength structural logs heading over $125 a tonne.

In the face of little or no increase in new house starts, except in Christchurch and Auckland, spot sales at these levels are likely to be the exception rather than the rule, at least initially. If export prices remain subdued beyond July, then anything is possible.

Outside the spot sales opportunities, my spies around the country report that domestic prices are holding except where there are historic agreements linked to export log pricing. Those who thought they would bludgeon their local sawmill owner with export log prices historically might currently regret their folly.

Company failure The liquidation of the Kiwi Forests and Harvest Pro operation in Northland and the East Coast has had a catastrophic fall-out. Logging crews have been laid off without notice, trucks parked up, machinery yards full of repossessed equipment and forest owners left suspended. There are many examples of felled wood being walked away from. This is all undesirable.

The wider effects of loss of technical competence, trained staff and a loss of confidence in the industry are among the longer term problems which will affect us all. The fall-out from the current situation on the export and domestic fronts will be felt for many years to come across all forestry sectors and regions. 

Where to from here 

Perhaps it is times like these when fundamental change can occur. A realisation of a complete lack of any sort of co-operative marketing, no ‘NZ inc’ long term plan or goal and an on-the-hoof sales strategy are the hallmarks of the current situation which cannot continue.

Some people in the industry, and many more outside industry, place the blame firmly at the foot of China for large commodity price swings and the fortunes of the New Zealand economy. This shows that there is little understanding of the actual situation which as far as I can see has more to do with New Zealand than any  other reason. Our failure to work within the basics, I think they call it Marketing 101, is a failure to function within market forces commonly called supply and demand.

Make a change
We need to get our marketing act together is doubtless a question which could be debated well in into the evening. That we should use the current example as a catalyst to make change at whatever level should not be negotiable. 

I am disheartened that some would openly chastise China for some sort of grand rule the world plan as the basis for our current problems. This is disrespectful, and displays an appalling lack of understanding of China, its economy and all the push-and-pull which it entails.

The real issue is that many New Zealand companies operate in complete isolation to, and with no regard whatsoever for, NZ inc in their daily business. One example is quoted where a large North Island corporate recently responded to the current situation by saying they had no intention of changing strategy. In addition, they did not see any long term problem and the situation would correct quickly. I am going to invite that gentleman to stand up and say that in a hall of 1,000 forestry families who are now or shortly to be out of work. 

It is an unrealistic expectation that we could ever eliminate the rolling seas which comprise a normal functioning market place. It is not an unrealistic expectation that we could somehow reduce the winds so that the large waves we all have to continually ride might become moderate swells which we could all enjoy and thrive in. I have every confidence this might one day be achieved.

Clearly and unequivocally I make no apology for being boringly repetitive. There can be no doubt the only way forward for climate, country and the planet is to get out there and plant more trees, and quickly.

Late update

Since I wrote this report in the middle of April my predictions have come to pass. The price at the end of April is US$95 standard settlement basis for A grade logs, around US$35 a cubic metre below US$130 settlements in November 2014. This is close to a 30 per cent drop in US dollars, but in the market it is likely to be an 80 per cent drop in nett return to the forest grower.

Radiata pine log sales (Last update - 2015)

NZ$ per tonne
North NI
Central NI
South NI
North SI
Central SI
South SI
P1 (P36-P38)
135-140
140-145
130-135
135-140
130-135
140-145
S30
98-103
99-110
98-105
100-105
100-105
100-105
S20
85-90
-
-
-
80-85
-
L30/A30
-
-
-
-
68-72
75-80
Postwood
70-75
78-85
75-85
65-80
80-95
75-85
Chip
45-50
45-50
45-50
38-40
43-46
40-45
NZ$ per JAS            
Pruned
152-157
163-168
154-159
153-158
139-144
140-145
KA
108-113
108-113
98-103
99-104
90-95
98-105
K
96-101
97-102
82-87
94-98
80-85
85-90
KI
89-94
90-95
78-83
86-91
74-79
77-82
Pulp
84-89
85-90
73-78
80-83
68-73
72-77

Macrocarpa log sales 

Macrocarpa logs South Island North Island
  Landed at mill door/tonne Landed at mill door/tonne
Pruned Min SED 40cm $280 - $300 -
Pruned Min SED 30cm $99 - $110 -
Small branch Min SED 30cm $145 - $155 -
Small branch Min SED 20cm $110 - $120 $85 - $100
Large branch/Boxing/Sleeper $90 - $100 -
Firewood logs $65 - $75 -