Price and demand correction in China coupled with new players entering the market lead to drop for millers .

Log export prices have dropped sharply since March because demand in New Zealand's biggest market - China - has fallen while supply has substantially increased.

Log prices are at their lowest point since early 2012 after a strong run higher over the 12 months to March because of a build-up in supply that led to a rapid expansion in inventories in China.

Just as in the dairy trade, last year's high log prices have helped drive up production around the world, resulting in more product landing on Chinese shores.

"There has been a price and demand correction in China this year," said Dennis Neilson at Rotorua-based forestry consultants, Dana Ltd. "It's the standard commodities cycle and the China market just adds another layer of volatility."


Forestry is the country's third biggest export after dairy and meat. Analysts said log prices had become volatile after a number of new, non-traditional players had entered the fray.

They spoke of a flood of logs hitting the Chinese market at a time when the housing sector there was cooling off. Like dairy, New Zealand is a major player in the international log export trade.

While the drop in price is a major setback for exporters and ports such as the Port of Tauranga, which relies heavily on the log trade, lower prices will be a reprieve for local sawmillers, many of whom have struggled to stay afloat after paying inflated prices for their logs.

In March, prices for China A Grade logs peaked at US$160 JAS (Japanese Agriculture Standard) a cubic metre but have since fallen to around US$120 this month.

The market has followed a similar pattern to that shown in 2011, when prices rocketed up before crashing early in the following year. Neilson said there were parallels between the log trade and the dairy sector, where increased supply, plus a build-up of inventory in China, had depressed prices to the point where economists now expect a farmgate milk price of around $6kg, well down on last season's record price of $8.40kg.

With log prices getting so high, it became profitable for the non-traditional exporters in the south of the United States, Australia and Ukraine, to export logs to China over and above what was coming from the usual suppliers of Russia, the northern US and New Zealand.

Higher prices also meant that local harvesting was ramped up to where a number of small woodlot owners were felling trees as young as 19 years, as opposed to the usual 27 years, bringing about a huge supply surge, Agrifax agriculture analyst Ivan Luketina said.

At the start of the year, a credit crunch in China meant house prices started to fall in some major cities, which meant banks were less willing to lend into the property market.

Export logs take about six weeks to get to China, during which time market conditions can change.

"The gap between reduced log use and supply meant that the inventories on the wharf built up like crazy," Luketina said. "It has taken until now for supply to slow down and there are early signals that inventories are starting to reduce."

But the log price cloud has a silver lining for sawmillers, who have been feeling the squeeze of sharply higher prices. Even so, the price decline has been quite muted, because demand for structural timber remains strong, thanks to increased building activity in Christchurch and Auckland.

In the past month, structural timber for the domestic market has fallen by $7 to $110 a tonne.

Log prices cut down
March: US$160 per cubic metre
July: US$120 per cubic metre