We were hoping this would result in a sharp reduction in Chinese log inventories and trigger an increase in demand and hence price, but it looks like those hopes are flushed well past the S bend now.
The outlook for the Chinese construction sector is about as rosy as Rotorua's motel strip, with house sales down about 30 per cent on this time last year and stalled projects nationwide.
There's much talk of government stimulus to boost the construction sector, but this is probably going to be in the form of assistance to complete half-built projects rather than start new ones.
Announcements were made last week by China's housing and finance ministries that US$23.9 billion will be provided in "special loans" to complete unfinished residential housing projects. There's still an abundance of empty housing throughout China and the ability for the government to continue to use residential construction to falsely project economic growth is starting to wane.
To top it all off, with Covid now spreading to most major cities, the Chinese government is still using lockdowns as a Covid control, doing nothing for economic growth or productivity.
This week, China's sixth-largest city, Chengdu, home to 21 million people, is the latest lucky lockdown recipient in Covid roulette. As of last week, about 65 million people in China were under lockdown in one form or another. Maybe Xi Jinping should have a read of Jacinda Ardern's Covid playbook to see how well that worked out economically.
What this does highlight is our dependency on exports, primarily to China, in supporting our industry at the current level of production. Exports are a very important part of our supply chain as our available harvest level is well beyond our domestic processing capacity, by a number of magnitudes, and the lower-grade logs that are exported are not economically viable to be processed in New Zealand – yet.
There is a desire to change this, however, and it is being led by the New Zealand Government. Last week the Minister of Forestry, Stuart Nash, announced the Industry Transformation Plan (ITP) for the forest and wood processing industry.
The ITP is a very ambitious plan that basically aims to process more product on shore, increase the use of wood-based products in construction and drastically reduce the need for coal and gas-fired energy by replacing it with wood fibre energy, therefore creating a high-value "bioeconomy".
The word bioeconomy sounds very flash and is becoming the new buzzword in the industry – for good reason. The increase in technology and the drive to utilise harvesting residues has meant a large increase in the conversion of coal and gas-fired industrial boilers to wood fibre.
The problem we have is there are not enough harvest residues available to feed the demand for fuel fibre nationwide. This is where export logs come into play as, with the cost of coal and gas skyrocketing due to increased carbon offset costs, the viability to throw the lower-grade (and value) export logs down the chipper is becoming more likely, which will directly reduce our export log dependency and supply.
Wood fibre as a fuel is only part of the ITP as the Government has stated the desire to replace carbon nasty steel and concrete with engineered wood-based products, which can also be manufactured from those lower-grade export logs.
In the short term the ITP won't fix the China supply/demand equation but it's a massive step in the right direction. It will take time to build the infrastructure required to carry out Nash's vision, but in the long term it will mean that we are less dependent on others to secure the success and sustainability of our industry while also providing some very exciting and varied career paths for the younger generation.
Now that summer is around the corner and the export prices are on the rise, there will be an inevitable increase in New Zealand log supply. The Chinese construction season isn't at all likely to kick off, which will probably see Chinese log inventories increase and the lift in export prices over faster than David Parker's GST increase on KiwiSaver fees.
It's unlikely that shipping rates will increase as most global commodities are slowing, the $NZ-$US exchange rate has more downward than upward pressure but the most significant component is the downward pressure on the CFR price from supply increases.
The key question is, when will we hit that hole in the bridge and how much of the train will go over it?
Marcus Musson is a director of forest management company Forest 360
