Tariffs imposed by Donald Trump are affecting China’s exports and the New Zealand log trade.
Gisborne’s Juken NZ mill acquisition by Millari will reduce log supply and boost local production.
Proposed land use changes aim to curb farmland conversion to forestry, impacting land values.
Watching world politics play out in the Trump era is a bit like watching the first Austin Powers movie.
The media have employed the ”New World Order” phrase and it’s probably not far from the truth, however, it’s not like any of this is a surprise as Trump’s doing exactly what he said he would.
Tariffs have been imposed with wanton abandon on countries perceived to be inhibiting America’s success both economically and socially and China is at the forefront of those.
How tariffs will play out in terms of China’s furniture exports and the knock-on effect on the New Zealand log trade is yet to be seen, but there’s no doubt there will be some adverse reaction.
Having said that, export pricing is strong, with February’s numbers up a few dollars on January to $130/m3 for A grade 3.9m in southern North Island ports.
Don’t read this as increased demand, it’s purely a function of lower shipping and exchange rates rather than an increase in sales price.
China is slowly coming back to work after the Chinese New Year celebrations, which officially started on January 29.
Chinese New Year usually takes out about a month of demand as the workforce generally has to travel long distances to get back to their families.
In-market log inventories have increased, as expected, to about 4 million m3 which is into loose bowel territory for exporters and, as yet, there has been very little in the way of uplift.
Historically, it is during this period that we usually see the supply/demand balance tip in favour of the buyers and prices start heading south in reaction to high inventory levels.
While the beginning of February looked good with exchange rates in the US55-cent range and shipping sub $US30/m3, March may be a different animal with current Forex at US57c and ship owners sitting on their hands with some exporters finding it difficult to secure fixtures.
Even taking all of that into account, however, there is a reasonable amount of positive sentiment in the market.
The recently minted Chinese log futures market has been trading above expectations with strong price trends.
All eyes will be on July, when settlements need to be made on many contracts and it is hoped that this will buoy demand in a historically low demand period.
The futures market was kicked off with the intent of stabilising pricing and thus far it seems to be a winner.
Like the log futures in China, long-term fixed export pricing in New Zealand has helped many forest owners with price stability during their harvest.
This mechanism offered by some exporters has gained traction in the non-corporate sector in the past few years to the point where many of our clients have signed up for this model.
The advantage for the forest owner is a known return for the duration of their harvest and, for the exporter, a known volume and delivery term with which they can have more certainty around booking vessels and making sales.
Depending on the term, these deals generally sit in the mid to high $120′s/m3 which is well above the one, three and five-year averages.
Some great news in Gisborne with Australian group, Millari signing a deal to acquire the closed Juken NZ mill.
Millari has signalled it will replace the aged plant in the mill and produce around 220,000m3 of products such as veneer lumber from 400,000m3 of logs.
This also has benefits for the export market by removing that volume of logs from the supply base.
In the past 12 months, mill closures at Juken Gisborne, WPI in Ohakune and a fire at the Juken Mill in Masterton have seen just under a million m3 of additional supply hit the wharves.
Image / Forest360
The carbon market has been relatively unremarkable in the past month with prices stable at around $63.10/NZU.
The Climate Change Commission has been flexing this month by supporting a call for an accelerated transition away from the industrial allocation whereby industries in the “highly emissions-intensive” category receive a free allocation from the Government equal to 86% of their baseline.
The theory is that by reducing this allocation, there will be more focus on decarbonisation and support for the Government carbon auctions and hence the NZU price.
The obvious side effect of any allocation reduction is inflationary pressure.
We are all waiting with bated breath for the details regarding changes to Landuse Rules.
The changes proposed by Todd McClay and Simon Watts restrict the ability to register new plantings of class 1-5 land in the ETS while also limiting planting on LUC 6 land of up to 15,000 hectares.
However, landowners are still able to plant and register up to 25% of their properties.
The changes are aimed at curbing the rapid conversion of productive farmland to forestry.
The net impact of this policy change was a super own goal by the farming lobby as it immediately wiped thousands of dollars a hectare and billions nationally off the value of class 1-5 land.
The policy is particularly interesting as New Zealand faces the potential need to purchase up to 90 million tonnes of carbon credits to meet our Paris climate agreements.
It appears that while Todd McClay says we won’t be doing that, Simon Watts has said all options are being considered.
While the Government is at odds with its own policy, and recent land use changes look set to restrict the supply of credits, it does appear that it is inevitable that the demand and price for NZUs will be supportive.
So, in summary, market-wise, things are eerily buoyant and the next few weeks will be telling as the Chinese manufacturing machine wakes back up, however, any additional New Zealand supply won’t be welcome.
