Analyst Intel

22 June 2020

PULSE | A month of wild swings

By Reece Brick

Only a month ago log exporters were breaking all-time records for the returns. 

Such a strong reawakening of the New Zealand log market was welcomed by those in the industry following the shutdown through level four but there were major doubts at the time whether those prices could be maintained. 

It turns out those doubts were well founded.

Almost all the elements that skyrocketed export log prices – the exchange rate, shipping costs and Chinese demand – have turned against traders since the start of May but particularly since early June. 

That extends one of the most turbulent years in the industry’s history. 

In the past year the market has bounced up and down, violently at times, between $100/JASm3 and $155/JASm3, often leaving harvesting operations in precarious positions given the 25-30 year cycle they operate in. That is in contrast to the three years to 2019 when month-to-month changes rarely exceeded more than $5/JASm3.

Looking at the big picture it’s hard to see anything other than more cuts for log values. The difficult part is figuring out by how much and for how long.

China is the heartbeat of export log processing with alternative markets nothing more than buffers when values slide. 

Information out of China gives little confidence. 

Perhaps scariest is the port-level log data. Only NZ is supplying logs into China at usual volumes and has been doing so for only a few weeks now yet port stocks are already growing by the week. By the time this article is published it is expected port volumes will begin pushing above the traditional threshold used to monitor whether the market is in oversupply.

Ultimately, log use rates in China are tied to businesses with the western world, whether that is in relation to direct sales of wood products or confidence about future income to commit to building construction or spending. Though the slow re-opening of European and North American economies is helping to some extent, economists worldwide are warning the ripple effects of covid-19 have only just begun to be felt through the business environment.

What does all of this mean for NZ? 

Well it is more than likely logs will be in for a tough run to the end of the year at a minimum but the longer-term outlook isn’t all that favourable either. 

The wall of wood from forestry planted in the 1990s is already beginning to hit the market and international markets were having trouble working through what NZ and other competing countries were supplying well before covid-19 shut the world down.

There is some silver-lining in that some of these competing countries will trade only when the market is strong enough but salvage efforts in Australia and Europe to clean up after bush fires and spruce beetle infestations respectively should keep the logs going into China thick and fast for a while yet.

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