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THE FACTS
- Export log prices dropped in June after around 10 months of relative stability in the Chinese market.
- Shipping costs have increased significantly in recent months, putting pressure on returns for forestry exporters.
- Log supply in China remains high, with steady daily demand, meaning there is little upward pressure on prices.
Winter – not the most enjoyable season for most, especially those in the forest industry.
While many would agree that temperatures and rainfall would have you think we are still in mid-autumn, winter is still winter.
History would dictate that if it hasn't rained much yet, it will more than likely catch up in the coming months, which can be more problematic, as that generally means more intensive rainfall events, more forest infrastructure damage and ultimately, more cost.
Having said that, history is becoming less of a reliable predictor of the future, and this year may be a testament to that.
Last week, Earth Sciences NZ released its prediction of a 95% chance that we will have one of the most significant El Nino events in years, which is likely to build through winter and peak in summer.
This will likely bring lower rainfall, more wind and increasingly varied temperatures, so maybe, just maybe, we might get through this winter relatively lightly.
I wouldn't bet the house on it though, as in my view, weather forecasting is a bit like being an economist in that you can be wrong most of the time and still get paid.
Predicting log market movements is a bit like weather forecasting.
We have just come off a 10-month run of stability in the China market, the longest such run in memory.
Much like summer, all good things must come to an end, and the end of this one is June.
Export at wharf gate prices have dropped around $10/JAS this month, although there are some different risk positions being taken by different exporters at different ports.
There are a few things at play that have led to the drop, but the biggest issue is increased freight.
The freight market has increased steadily in recent months and now sits at around $US45/JAS, up around $US15/JAS since the start of the US-Iran conflict.
These increases are despite falling oil prices and show the current supply and demand imbalance for dry bulk freight.
Cost and freight (CFR) prices have moved up since the start of the “war”, which has offset much of the freight increase, but unfortunately June sales look to be reversing the trend, with sales prices dropping, putting more pressure on reductions rather than increases.
A strengthened NZ dollar in relation to the US dollar didn’t help the situation either, with the k sitting at just under $US0.60 at the beginning of June.
This has since dropped to a two-month low just under $US0.58, which may give some comfort to July prices should it hold at sub $US0.58.
In-market inventory in China is sitting at around 2.4 million cu m, a slight reduction on April but not enough to create any upward demand pressure.
Current offtake is running slightly over 60,000 cu m/day, which annualised is around 22 million cu m.
There’s been plenty of hand-wringing around supply reductions from New Zealand as fuel costs have taken all the fun out of forest owners’ net returns.
In many regions that are more than 150km from a port, there is very little left once increased harvest and cartage costs are taken into account.
The rule of thumb is that an increase of $1/litre in diesel costs will add around $4/tonne in harvest cost and an additional 40 cents to every kilometre the log truck has to cart the logs.
Put those in the abacus, and you get an additional cost of $4800 per hectare for a forest 100km from the port – not pretty.
China is well aware of the impacts that fuel is having on New Zealand forest owners and the ability for exporters to lever price will come from supply reductions.
To date there hasn’t been much in the way of reduced supply, which has been buoyed by large-scale windthrow salvage in the top of the South and lower North Islands.
While the salvage operations in the South Island will continue for as long as the wood quality allows, the salvage in the lower North is winding down rapidly, and a number of crews are now looking for work.
There is also the lead-time issue, which means any reduction in New Zealand activity generally doesn’t show up as reduced supply in the market for three months – which is June.
There’s not a whole lot of sunshine in the domestic market, either.
Recent numbers by Stats NZ have revealed a decrease in New Zealand residential construction activity of 5% for the 12 months to the end of March, which is the lowest since 2016 and a 25% drop from the 2023 peak season.
There may be some light at the end of the tunnel, with the number of new dwelling consents up 11% from the previous year.
This may take some time to filter through, with the upcoming election likely to keep people sitting on their hands until policies – if any – are revealed.
Regarding carbon – nothing to see here, as NZU prices have played in a tight band for the past few months and currently sit at a shade over $52/NZU.
While there does appear to be a tight supply in the market, emissions returns are due by the end of June, and a significant number of larger players are yet to file their returns.
To date, only just over 9 million NZUs have been claimed in the current reporting period compared with 25 million in the 2022 period.
So, plenty to think about when pondering what marbles will fall where.
A lot will depend on the President in the land of the free and home of the brave and his “will I, won’t I, shall I, shan’t I” stance on Iran.
Unfortunately, until this war is resolved, it is very likely that we will be looking down the “barrel” of increased operational cost structures for some time to come.
