Forestry: Hope from China as log prices drop - Marcus Musson

Log prices generally start heading south in late autumn. Photo / Alex Cairns

Marcus Musson is a director of Forest 360.

OPINION

Winter is coming, but thankfully the news isn’t all bleak, writes Marcus Musson.

May’s a funny month - you’re hanging on to the autumn weather and good times over summer, knowing winter is around the corner and it’s going to get cold and ugly.

This is usually the case as log prices generally start heading south in late autumn and rain is not our friend.

However, winter came early in terms of southward-heading log prices via a significant drop in April that extended into May, with mainly flat pricing at the $106/JAS level for A-grade logs.

Thankfully, the weather has played ball with reasonably dry conditions, but this is cold comfort if your logging gear is parked in the paddock.

There were some hopes May would see a price increase of substance but, with both the foreign exchange rate and shipping costs during April and early May, our hopes have been dashed.

There is some good news as Chinese on-port inventories stabilise and demand increases into the 72sq km per day range.

Supply from New Zealand has dropped significantly following the poor April prices and a quickly slowing CNI salvage volume.

This will likely not have an impact on the CFR price (sales price in China) in the short term until inventory gets to an uncomfortably low position.

The Chinese economy grew faster than predicted in Q1, with GDP at 5.3 per cent against a Reuters poll of analysts that expected 4.6 per cent.

However, it looks like the growth was primarily front-loaded, with March data weakening.

Meanwhile, Reuters reported new house prices falling faster in March than any time in the previous eight years.

Sales plummeted 23.7 per cent in March compared to 20.5 per cent for the previous two months, so it’s clear any significant rebound in construction is still a pipe dream.

A recent Chinese trade delegation to New Zealand was wowed by our wooden commercial construction, and there was a definite interest in understanding how New Zealand’s construction techniques and technology could be commercialised in China.

It was clear the ageing Chinese population is reasonably cashed-up and not necessarily interested in living in a 500-storey concrete and steel apartment block.

If we could help develop this market segment, it may provide significant demand for New Zealand radiata by placing more wood into a smaller but differentiated construction sector.

For perspective, the wood usage per capita in China is less than 0.4sq m, compared to India at 1.61sq m and a global average of 0.55sq m.

This indicates there is potential for an additional demand of 210 million cubic metres if China reaches the global average.

There’s been a significant reduction in non-New Zealand supply into China in the past 12 months, with Europe dropping to around 250sq km per month and the Pacific Northwest steady at 180sq km.

Australian export supply is minimal and primarily headed to India, and New Zealand also has a couple of vessels destined for the capital of cricket.

While we still have fumigation issues with Indian shipments, any vessel headed to our Commonwealth partners takes supply away from China, which is a positive.

Domestic demand still remains solid, although the indicators are not looking flash for the New Zealand construction sector in the short term.

Although core inflation was lower than expected, non-tradable inflation was stickier than a half-sucked winegum.

Understandably, until we see a reduction in interest rates, the New Zealand construction sector will remain decidedly average.

Nothing to see on the carbon front, with NZU’s trading in the mid-$50s for the last few months.

It’s the same story as previous months, with plenty of supply and average demand as most large emitters have covered their obligations in the short term and the speculators have left the building, for the time being.

This price point still provides for a very tidy return of around $1605/ha and, with current returns from sheep, there will be many farmers very thankful for including carbon in their cash flow.

So, in summary, it’s been a very volatile few months in terms of export price and we’re currently stuck on a rinse cycle.

It’s unlikely June will see us over the $120/sq m hurdle, but we are forever hopeful, and it will more likely be August before returns are at a level that will stimulate increased supply.

Let’s hope the spin cycle is a bit more user-friendly.