Slowdown being suggested for forestry

Friday 25 May 2018

 
New Zealand’s forestry sector has had a stellar two to three years, with China soaking up the country’s logs as fast as they could be sent there. However, Westpac industry economist Paul Clark explains clouds are gathering, to Simon Hartley of the Otago Daily Times.

New Zealand's forestry owners, managers and contractors are being cautioned to heed the changing times, as Chinese building activity is expected to ease in the year ahead. Westpac industry economist Paul Clark said the Chinese softening in demand during the next year is expected to slow demand for New Zealand logs, and prices should fall as a consequence.

"This won’t be good news for forestry owners, managers and contractors, who have, for some time, dined out on China’s massive appetite for logs. Cashflow-dependent contractors will be especially vulnerable during this time," Mr Clark said in report on the forestry and wood processing sector.

However, as with every supply and demand story there is a winner, and Mr Clark picked lower prices would be better news for the downstream wood processing industry. That sector had struggled during the past two to compete with prices paid by the Chinese for logs produced locally, he said.

"Since 2008, the volume of logs exported has grown by a whopping 190%," Mr Clark said. That was mainly because of the growth in demand from China. Almost 12.7 million cubic metres, or 70% of softwood logs harvested in New Zealand were exported to China in the year ending June 2017. That figure compared with just 1.4 million cum exported in 2008, he said.

"Not surprisingly, earnings generated from exporting logs to China have also risen sharply, from $131 million in 2008 to $1.9billion for the year ending June 2017," he said.

Mr Clark said the increase was largely driven by strong demand from China’s subsidised wood processing sector, supplying its own construction sector. Increased Chinese demand came from a lowering of import tariffs on logs and a clampdown on logging activity, following an extended period of unsustainable harvesting in China.

"Residential building activity in China has begun to slow, with recent indicators suggesting that there’s been a decline in completed dwellings. The implementation of wide-ranging structural reforms in China, slower economic conditions overall and tighter credit conditions is likely to deepen contraction, slowing demand for New Zealand exports”, he said.

However, Mr Clark said the medium to long-term outlook for demand looked promising for log producers. "As the world’s population expands, so too will the demand for logs. "Growth will be driven by emerging markets, especially those that have large populations and rising income levels," he said of countries such as India, the Philippines, Indonesia and potentially Brazil. Demand from India, in particular, was expected to grow strongly as its economy expanded, following a similar, albeit delayed, trajectory to that of China’s economy”.

"That’s not to say that there will be no further growth in demand from China," Mr Clark said. “While China’s population growth had slowed dramatically because of its strict adherence in the past to the one-child policy, and its economic growth pace had "ratcheted down", China’s urbanisation drive still had some way to run”, Mr Clark said.

"This is likely to mean that over the medium to long-term, residential building activity should continue to grow strongly, which is likely to be good news for New Zealand exports," he said.

New Zealand’s downstream sawmillers, in particular, should benefit from having to pay lower prices in the future and having more logs being directed to their mills, as external demand slows. "Whether they will be able to take advantage of this depends on what happens to residential building activity domestically," Mr Clark said.

New Zealand’s competitive advantage is in growing logs, producing them quicker than most other countries. However, New Zealand loses that competitive edge in downstream processing, as it does not have the economies of scale to compete head-on with large overseas producers.

"Despite some significant investment, this is unlikely to change anytime soon," Mr Clark said. Mr Clark painted a tough "knock-on" effect for sector participants, in the event prices begin to soften. He said forest owners and forestry managers were much more likely to limit their harvesting activities, which would mean lower revenues and falling investment returns.

"This will have negative consequences for contractors, particularly those involved in logging, a large number of whom will be heavily indebted because of prior investments made in capital equipment when times were good," he cautioned. “Those cashflow-dependent operators were unlikely to survive for any period of time and could well leave the industry”.

Transport contractors could similarly be affected, and while being able to service other industries, they would face strong competition. Domestic road freight charges could be forced lower.

Source: www.odt.co.nz

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