Just when you think you've reached the bottom of a cycle and things are looking slightly rosier on the horizon, along comes something out of left field and slaps you fair in the face.
In this instance, that thing is Evergrande.
With record-high prices in the traditionally slow months of June and July now seeming like a lifetime ago, we have seen at wharf gate export prices drop from NZ$170/JAS for A
grade to sub-NZ$120/JAS in October.
It looked like things were stabilising in September with in-market pricing seemingly finding a floor level and some exporters even reporting increases; however, once the Evergrande debacle came to press and exposed the greater liquidity issues of
many other large Chinese development companies, market sentiment took a turn for the worse.
It now seems that Evergrande may be only the tip of the iceberg (or more aptly, top of the scab) with the Wall Street Journal predicting a day of reckoning in the Chinese development sector to the tune of US$5 trillion. The Chinese government is no stranger to throwing large sums of money around, but this is a fair chunk of change even by their standards.
It will take a while for this to play out and although it is becoming increasingly likely that Evergrande will get bailed out, to some extent, by the government, there will be a lot of blood on the floor for other development companies, investors and the construction market in general.
Chinese in-market log Inventory has been building over the past few months as NZ has been producing at near-record levels and Chinese demand has softened. Traditionally, this time of year is the start of the Chinese construction season when demand increases substantially, but there are no signs of that eventuating at this point.
Add to that the Golden Week holiday that has just concluded in China and we are now seeing inventory top the 5 million cubic metre mark, a level that generally puts significant downward pressure on sales prices.
This needs to be put into perspective, however, as the CFR (sales price in China in $US) is still about 20 per cent above the three-year average. The biggest contributor to low-at- wharf-gate returns continues to be freight costs, which are near double the 2020 levels and 15 per cent higher than pre-GFC when commodities were at record levels.
There are several factors driving this, most of them Covid-related.
Companies that are struggling to move container freight are chartering bulk carriers that
would otherwise carry logs. There is evidence of bulk carriers being converted to carry containers under-deck, which effectively takes them out of the available bulk fleet. Add to this the long wait times at Chinese ports effectively reducing the availability of vessels, and it's a great time to own a bulk carrier.
There are rumours of some softening in the freight market as vessel owners have started
reading the commodity tea leaves, but only time will tell if it manifests into lower freight costs.
Lockdown in NZ allowed most ports to completely clean out all log stocks, however, after little more than a month back at work, most ports are bulging at the seams again. With two-three-week wait times to discharge in Chinese ports, there's about three months' production already in the supply chain, so it's unlikely any reductions in sales prices will result in reduced supply until early 2022.
The general rule of thumb is that price levels under NZ$120/JAS for A grade start to see reasonable reductions in supply as the private woodlots slow or stop and many of the larger forests put supply restrictions on harvesting crews.
It is likely that the remainder of Q4 2021 will be rather ugly and Q1 2022 may not be far behind. Some exporters are talking prices in the very low $100s for November, which sends shivers down the spines of even the most steeled in our industry.
Many forest owners are clinging to the hope of a return to NZ$150/JAS A grade, but that might be like clinging on to the guard rail on the Titanic waiting for a lifeboat.