November 2023 NZ log market update
Friday 17 Nov 2023
Opinion Piece: Marcus Musson, Director, Forest360
Rugby world cup aside, there's a bit of good news starting to stir some
fizziness amongst us tree huggers and, while not at shaken beer can levels, it is
enough to improve the fettle and shelve the navel gazing for a while. This has come
in the form of an increase in export log prices which has seen November
offerings in the $123-125/m3 range for A grade, up around $10/m3 on October and
$30/m3 on June.
A few years ago, this price level wouldn’t have been
anything to get excited about but after the lows of the past 6 months, it’s a
welcome relief. There’s a bit of caution in this however as the increase is
not specifically demand driven and is due as much to lower shipping costs and Forex
(which has since bounced) as actual sales price increases.
Real demand hasn’t really changed in terms of volume, and offtake from
Chinese ports is still sitting around the 60Km3 per day. NZ supply has decreased
with the lower prices and unfortunately this supply reduction is courtesy of
logging contractors being slowed down, parked up or at worst going to the wall.
This current Chinese demand level isn’t likely to lift, especially with the
well documented housing oversupply and litany of other economic woes that are
starting to surface. It is thought that previously, construction accounted
for around 70% of the softwood demand in China, however this is more likely now
reduced to around 40%. Quick Marlboro packet numbers would tell you that
demand for construction-based logs has dropped 60% from pre covid times. Luckily
our radiata is a very universal product and is used for a multitude of end uses.
Reduced global log supply has also helped the China supply and demand balance
with logs from Europe and Russia dropping significantly in recent months. European
harvesting has receded back to normal levels as bark beetle infestation has reduced
resulting in less requirement for log exports while the Russians are facing weather
related issues with their seasonal harvest. Chinese log inventory is sitting at
around 2.7 million m3 which is the lowest point in years and not unexpected given
the reduced overall demand.
Efforts by the CCP to inject some stimulus into the Chinese economy have
seen some traditionally unconventional measures with the issuance of a
$US137 billion sovereign debt plan which will take the budget deficit ratio to 3.8%
of GDP, well in excess of the 3.0% target set in March this year. While this
isn’t at Grant Robertson levels yet, there is clearly a strong desire within
the government to bring some confidence to the economy with stronger fiscal policy.
This likely won’t do much to help the construction sector as the government
has realized that it has become too big to kick down the road. Much of the stimulus
has been targeted at fast growing, advanced manufacturing including electric cars
and semiconductors – not much wood in those.
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The world has looked to China as the global economic powerhouse for decades, but
it appears that India is now emerging as credible player. While India lags behind
China with a $US3.5 trillion economy compared to China’s $US15 trillion,
early signs are showing foreign investment pulling out of China at rapid
pace and reinvesting in India. China’s official growth target of 5%
will be surpassed by India in 2023 with the IMF projecting a growth rate in the
world’s most populated country of 6.3%. India is embarking on a large-scale
infrastructure build with around 50,000km of new roads built in the 8 years between
2014 and 2022.
Unfortunately, NZ has been locked out of the Indian log market for a
number of years as the EPA put ideology ahead of common sense with the effective
banning (through unachievable recapture targets) of the use of the only India
approved fumigant, Methyl Bromide in 2022. The recent concession by India to allow
fumigation at port has seen the first vessel from NZ head to India in a few years.
Understandably, we are watching this with anticipation as it’s always risky
to be the first to send $NZ7 million worth of cargo across the globe to test a new
process, however, all going well this will relieve some supply pressure from China.
After a rally in August, the NZU price has very slowly been heading in the
positive direction with current spot fixtures around $70/NZU. This is good news if
you’re in the ETS as that price level represents an annual return of around
$2,100/ha. Spear a thought for the ETS administrators around the country who are
not so fizzy with the continued failure of MPI’s newly built online ETS
administration system, Tupu-ake.
MPI kicked off this online disaster earlier this
year, right at the end of a mandatory reporting period, causing massive frustration
and cost for all who have the displeasure of having to use it. This system has been
plagued with problems (which makes Novapay look like a dream) and MPI officials
continue to keep their heads in the sand about its efficacy. In Māori, Tupu-ake
means ‘grow up’, it might be time to rename the system
‘Korenga’ meaning ‘failure’, or better still, simply bin it
and go back to the old system.
In summary, we’re heading into the end of the year in better shape
than many expected. There’s talk of a number of larger forest
companies taking a month out over Christmas and the windthrow salvage in Taupo,
which has been running at around 15,000 tonnes per day, will start to slow leading
to a lower supply and inventory position in Q1 2024. The chances of a strong China
led rebound are about as likely as David Seymour becoming a socialist, but if we
can keep a lid on supply levels, we should see some price stability over the summer
months. However, like the Winston factor, you never know what will come from left
field….
More >>
Source: Forest360
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