I'm not alone in being relieved that 2020 has been kicked into touch and the prospects for 2021 are looking better…so far.
2020, courtesy of Covid-19, featured a massive roller coaster in terms of log prices and demand for export logs, which make up around 65 per cent of our total production. The swing from highest to lowest price was $56/JAS and the largest we have experienced since 2014.
We don't rely heavily on export markets because we want to, it's purely that our log production, driven by available harvest, far exceeds the domestic sawmill demand and, more importantly, many of the lower quality, knotty logs are not suitable for domestic sawmills. These logs are either of smaller diameter, have much larger knot (branch) sizes or are not straight enough to go through the sawmill.
China has come out of the Covid blocks firing on all eight cylinders with a huge amount of infrastructure spending which has, in turn, created sustained demand for all raw materials, logs included. Iron ore prices are up 60 per cent year-to-date and increases in other key imports such as copper indicate strength in manufacturing and construction. Chinese softwood log and lumber imports are at the highest point ever, at around 8 million cubic metres per month.
I commented in this column a few months back about the expected headwinds in the export market with a foreseen large increase in supply expected from Europe and Australia that would have likely driven the export price south. Thankfully, this has not manifested.
The Chinese Government has got into some geopolitical biffo with Australia which has culminated in the banning of all Australian softwood imports into China. This has left a supply hole of around 400,000 cubic metres per month (10 per cent of total supply into China) which is likely to be filled by NZ radiata. European supply has been thwarted by the Covid resurgence and a global shortage of container freight (most European logs arrive in China in containers).
In addition to this, the supply from Canada and the US continues to reduce due to declining allowable cut levels and strong internal housing demand. Other Asian markets are not performing as well as China, with India feeling the full effects of Covid and the re-direction of the Australian supply putting pressure on these markets.
January has seen export prices increase to over $140/JAS for A-grade logs in most ports and, though not as high as the $150/JAS in the month immediately following lockdown, it is a very strong price compared to the 3-year average of $126/JAS.
This is considering the $US:NZ forex has increased from $0.66 to $0.72 in the past three months, which is unlikely to rectify itself until the US sorts its leadership issues.
Shipping rates have firmed following increases in fuel costs, but reduced cargoes following the Christmas slowdown may somewhat negate this.
In market Chinese softwood inventories have reduced from more than 5 million cubic metres post-NZ lockdown (the first one) to around 2.7 million in late December. This will likely increase somewhat as China goes into Chinese New Year celebrations in late February.
It is expected, however, that the Chinese Government will implement a staggered holiday period to prevent any Covid outbreaks, which may see some production continuing over this period. In any case, heading into CNY with inventory below 3 million cubic metres is a very good place to be for suppliers.
Domestic sawmills continue to perform strongly with demand for pruned and sawlogs very high. Many sawmills are running very low inventories of sawn lumber and this is unlikely to change as housing demand continues to surge and New Zealanders pour their holiday money and low-rate mortgages into renovations and decks.
So, 2021 is off to a good start in our industry and we are expecting to see strong pricing for at least the first quarter of the year. One thing we have learned, however, is that who knows what curveballs are around the corner and it may not be time to put the steel undies away just yet.
Having been in this game for a couple of decades now I have seen prices reach the mid-$140's/JAS numerous times. Each time the drivers for strong pricing are different, and each time there is a sharp correction soon after. The current scenario does feel like it has some legs……but I have heard that before.