Marcus Musson - Forest360 Director
As we bid farewell to the NZ summer, we also wave goodbye to what we thought earlier in the year would be a reasonable period of solid log pricing from our export markets. May has seen export A-Grade prices drop to the early $100’s/m3 from the mid 120’s in April and the mid $140’s in March.
Although the April reduction was on the cards, May was completely out of the blue. Our reasoning for the initial expectation of reasonable returns for this period, were based on the low level of inventory in the Chinese market, compared to this point in time in previous years, which, would usually point towards upward price pressure.
While we used to be able to operate at these lower price points a few years ago, continued inflation pressure has effectively added around 15% to the cost of production; resulting in forests located a distance from ports currently at, or below, break-even. The inflation debate is interesting when looked at in context of our largest export market – China.
If you take the NZ inflation rate of 7.3% for 2022 and the forecast rate in the mid 6% range for 2023, we have a total increase of around 13.5% over the past 18 months. This is compared to China at 0.9% for 2022 and a forecast of 0.98% for 2023. Quick math shows a gap of around 12% between our production costs and the theoretical increase in revenue from our largest trading partner.
What is apparent, is that Chinese log demand has reduced significantly from 2021 levels. We are looking at a demand profile similar to 2022, down 25% on 2021 and remembering 2022 demand was hampered by full covid lock down mode in China. If we look at the graph, it is not hard to see what pricing is going to look like based on history. This is simple supply and demand 101 with the market reaction to increased supply or decreased demand being reduced prices. So, in the face of subdued demand, the solution is to reduce supply.
There is evidence of a reasonable increase in China’s domestic forest harvesting, which has historically provided logs around $US20/m3 cheaper than NZ radiata, hinting at a switch to lesser reliance on imported wood fibre. Should China decide to nationalize Taiwan, which some would say is just a matter of time, the ensuing trade sanctions would have huge ramifications for all NZ primary industries and basically stop NZ in its tracks.
That may be a scary thought, but as time goes on it is becoming more of a reality that China is becoming more self-sufficient and as such the need for a sustainable and profitable NZ domestic processing sector is vital. So, if you are sitting on the harvesting fence waiting for A-Grade to reach $150/m3 before the go button on your retirement investment, you might be waiting a while so make sure that fence is comfortable.
However, as history is a reasonable predictor of the future, one would expect we have hit the bottom of the cycle and prices should increase quickly, but probably not to the levels of mid-2021. Shipping cost is low, Chinese inventory is low, Forex is stable, and supply is reducing so the rebound could be swift; but it likely won’t be through increased demand.
