Comment: Marcus Musson of Forest 360, gives an update on the forestry sector as the global pandemic eases.

While the past few months have been a rollercoaster for many industries, the forest sector has been feeling the effects of Covid-19 since early February.

The annual Chinese Lunar Celebrations generally put a halt on log demand for a four-week period during February which results in an inventory build and subsequent reduction in sales price.

Due to a massive beetle infestation spreading through European spruce forests over the past 18 months, harvest volumes have increased to unprecedented levels with the vast majority of the logs being placed into China at very low prices.

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This resulted in the Chinese log inventory being about 1.5 million cubic metres higher than usual heading into the Lunar holiday. As Covid spread throughout China, the country went into a strictly enforced lockdown while supply points such as New Zealand, Australia and Europe continued to deliver high volumes of logs.

This pushed the log inventory to more than 5 million cubic metres, almost double the usual level and the highest in memory, resulting in a significant drop in log prices.

As New Zealand progressed through lockdown, the Chinese market resumed production at vastly reduced levels and managed to reduce the inventory levels somewhat.

As the NZ industry resumed in late April, the reduction in inventory allowed our log exporters to increase sales prices. This, combined with very low shipping rates and a 12-year low in the US foreign exchange rate, resulted in some of the highest returns forest owners have seen since the global financial crisis (GFC).

Although this was a very welcome shot in the arm for forest owners, it appears to be short-lived because, once again, sales prices have reduced and shipping rates and foreign exchange have both increased.

While we are unsure at what level this will settle, it is imperative that global log supply is reduced to ensure price stability.

The domestic log market has remained very stable during this period in terms of both price and demand and there appears to a high degree of optimism among both pruned and unpruned sawmills.

The graph below shows the recent ups and downs - from October 2016 to April 2020 - of log prices in the volatile export market. Photo / Supplied
The graph below shows the recent ups and downs - from October 2016 to April 2020 - of log prices in the volatile export market. Photo / Supplied

While some regions such as Gisborne are heavily dependant on export sales, the southern North Island is very fortunate to have some successful sawmills which rely on a diet of both pruned and unpruned logs.

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As we enter into planting season, most forest companies are looking forward to some rain to lift soil moisture levels. Re-establishment and greenfield programmes have left most forest companies with a very busy planting season. Demand for seedlings has resulted most companies having to pre-order with nurseries well in advance of the season to ensure sufficient supply.

Many of the greenfield establishment projects are as a result of the billion-tree programme or carbon-based investments which have been supported by strong carbon prices.

Carbon provides for a regular income stream from what is otherwise a long-term investment and has enabled many owners of marginal land to access returns that would otherwise not have been possible.

- Marcus Musson is a director of forest management company Forest 360.