Forestry: Is it time to park up the harvest gear for Christmas?

Those in the commodity game like log exporters know prices fluctuate, sometimes wildly, in reaction to supply and demand imbalances. Photo / Alan Gibson A_230810NZHAGLOGS01.JPG

It might be time to park up the gear and shut for an early Christmas. The export log price slide has continued, with November prices now in the mid-$90s for A grade in most ports, with the exception of Gisborne, which is at the mid-$70s level.

While prices in the $90s are above breakeven in many regions, it's only really forests that are very close to a port that will stack up to carry on if prices hold at these levels for an extended period of time.

While we all know we're in the commodity game, part of signing up to this is the knowledge that prices fluctuate, sometimes wildly, in reaction to supply and demand imbalances.

The scary part of the current situation is the magnitude of this drop, which is the largest in both percentage and dollar terms since the 'Asian crisis' in the Nineties. While most of us had conveniently blocked that fun part of history out of our memory, this situation feels very similar.

So what's caused this price drop and how long will it go on for? The drop can be attributed to a number of reasons.

The price drop is down to various factors and expected to remain until February at least.

The Chinese market is very sentiment-driven so any negative sentiment generally leads to reductions in price. It appears that demand has significantly reduced in a period where seasonal demand is usually starting to ramp up.

Trying to get any meaningful information around demand is very difficult as everyone has differing opinions and data sources. However, the general consensus is a vastly reduced offtake from most Chinese ports.

Inventory across all Chinese ports have moved through the yardstick of 5Mm3 and is the highest inventory position coming into China's construction season in memory.

Freight costs are around double that of the same time last year. While actual sales prices in China are still around $US20/m3 higher than the three-year average, freight has chewed up all of that and more.

Much of this cost is in demurrage as Chinese ports have been struggling to handle freight, resulting in wait times for a berth of up to three weeks. While freight does appear to be easing as wait times have reduced considerably on the back of reduced NZ supply, a bumper grain crop in Australia and poor grain harvests in the northern hemisphere has given vessel owners optionality.

Even if the demand was there from the construction sector, continued power supply issues in China from import restrictions on coal (veiled as an intention to reduce carbon emissions) have stopped many factories operating, including sawmills.

Some that have diesel back-up generators have switched them on, which has put pressure on diesel supplies further complicating transportation and uplift issues. And let's not forget Covid - China is continuing to pursue an elimination strategy so there have been a reasonable number of sawmills closed in Shandong, with outbreaks popping up all over the place.

In the year ended September 2021, New Zealand delivered around 19.3Mm3 to China, up from 15Mm3 in 2020. Total China softwood imports rose around 7.5Mm3 to 50Mm3 in 2021, with NZ and Europe being the biggest suppliers by a country mile.

During the same period, lumber imports dropped by just under 6Mm3 and, when the conversion factor from log to lumber is taken into account, the real lumber usage in China dropped by around 2Mm3 (3.8Mm3 log equivalent) for the 2021 year.

These figures may suggest a slow-down in real construction activity over the past 12 months, and there's more than likely more to come. It's old news that investors in China have been going pretty hard on speculative housing investment, which has created a reasonable oversupply. This is now coming to the fore with liquidity issues for Evergrande and a number of other aptly named development companies.

The domestic market continues to be the shining light, with continued lumber shortages in retail outlets driving up prices. If I hear another builder complain about the increased cost of lumber being laid squarely at the feet of forest companies because we're 'exporting all of the logs', I'll go postal.

To be very clear, most domestic sawmills are running at capacity, with more than enough log supply. Sawmills could increase lumber output simply by double-shifting operations (some already are), however there's not much appetite to do this as it would require additional staff and overhead costs for, more than likely, no additional margin. Who wants additional HR issues when most of the unemployed are probably unemployable anyway?

So in summary, it's ugly - and it's probably going to remain so until February next year at least. There are a number of influencing factors that we haven't seen before in the Chinese economy, so we don't know yet how these will affect the demand for logs.

Harvesting crews are being slowed or stopped nationwide and NZ supply is likely to drastically reduce for the remainder of the year. If you're holding out for $150 A grade, you may be waiting a while.

As the saying goes, history repeats, the last decent NZ recession was preceded by a pandemic. Maybe this pandemic is a sign of things to come…