With much commentary around the detrimental effect of Covid on hospitality businesses in New Zealand it is almost embarrassing that our industry is firing on all eight cylinders.
Forest owners and investors are enjoying returns as high as we have seen in many years and, while we generally start reaching for the wet wipes this time of year as global supply exceeds demand, everything is ticking along nicely.
This is not through good practice in supply chain management on our behalf however, it's more through issues with other supply points that allow us to keep production cranking.
The wee geopolitical tiff between China and Australia and subdued supply from Europe has given NZ pole position in terms of supply into our biggest market, China. It's not looking like China and Australia are going to sit around, hold hands and sing Kumbaya for some time yet and, while the European supply may increase once the snow melts and containers become more available, it's unlikely this will tip the supply/demand balance.
Current Chinese log inventories are around 4.3 million cubic metres and with daily offtake from Chinese ports running at 85,000cu m per day (2900 truck-and-trailer loads!) the inventory position is very favourable to suppliers.
The Chinese economy is expected to expand by between 6 and 7 per cent this year, which generally has a direct correlation with log demand. Lumber imports into China are currently around half of their usual level as high demand for Canadian lumber into US has put the squeeze on supply. CFR log prices (the price paid delivered in China in $US) are at the highest point in seven years, which would usually create a bit of anxiety but without obvious alternative supply, there's nothing that looks set to kick us back to the 22 just yet.
New Zealand shipped a record number of log vessels in February (around 2.3 million cu m), with March looking similar. It is unlikely we can squeeze much more through the supply chain and at present it looks like a pelican trying to swallow a kingfish – it'll get it down but will take a while.
Most harvest crews in the southern North Island are sitting on much higher than usual cut-log stocks, trucks are being held up at ports for hours trying to get offloaded and the rail system is at capacity. In addition, vessels are pretty much back-to-back at most ports and even if we could get all of our volume on to the ports, it is unlikely we would have the capacity to load these vessels quickly enough.
This is nothing unusual for this time of year as good weather and strong prices almost always result in a glut of available supply. So, while being infrastructure constrained is painful and inefficient for all involved, at a market level its actually not a bad problem in terms of supply-and-demand tension, as we would potentially have the ability to oversupply key markets if all infrastructure constraints were removed.
Freight has continued to charge away, with many exporters contracting vessels in the $US50-55/cu m region for April, which is up by $US20/cu m on January. This is being fuelled by souring commodity demand worldwide. The resumption of the Australian grain trade following years of drought has not helped and getting a vessel sideways in the Suez Canal wasn't ideal with fuel prices spiking, albeit briefly.
While much of the increased CFR price will likely be lost on increased freight costs, at least our Government is doing its best to foster investor confidence and hence the NZ:USA dollar ratio down by announcing the recent changes to its housing policy. The result of all of this is likely to be a small lift in AWG prices around NZ ports for April.
Domestic markets remain very strong for both pruned and sawlogs, with many mills running at capacity to meet ever-increasing order files for structural lumber. There are plenty of calls from different corners for the Government to intervene to help increase domestic sawmilling capacity, especially in the wake of Carter Holt Harvey pulling supply from many of the retail chains.
This either means tax breaks, subsidies or capping export log volumes/prices (labelled as Government procurement policies). While any handback from the Government is attractive to a business, limiting volumes or the price of export logs is not the lever to pull as forest owners will simply put their investment dollars elsewhere, and one day there'll be very few forests with which to build a house.