After a relatively slow start last year NZ ended up with the highest volumes ever exported to China with 12 million m3 reached for the first time. This amounted to 25% of the total logs imported by China last year. Russian volume is steady and even with the weak rouble their volume is still sitting on around 11 million m3/annum. The Pacific Northwest (PNW) and Australian supply both increased significantly by 28% to 8.1 million m3 and 3.6 million m3 respectively.
The trading year was a very stable one as far as both demand and pricing were concerned. There was the normal seasonal operational effects created by summer and winter weather conditions within the major trading nations mentioned above but last year the volatility of pricing movement was contained. Movement in CFR pricing was around half of the annual average experienced over the last 8 years. Potentially the same again for this year.
Domestic logs bubbled along nicely buoyed by the national construction boom and favourable exchange rates for pruned sawn timber products leaving our shores. Export competition and parity positions have seen on truck returns for domestic logs peak nicely.
We think more of the same and an ongoing opportunity to harvest your forests and achieve historically high log sale returns in both export and domestic markets depending on how your wood is sold.
It is impossible to forecast what will happen with the NZ dollar but the majority of analysis out there is that it will stay somewhere close to current levels without the volatility of movement seen in previous years. NZ is still attracting more than our fair share of Kiwi dollar buyers with its robust economy and solid economic outlook but the USA is also entering a stronger position with increasing wage growth and a strengthening labour market. Federal Reserve chair Janet Yellen has indicated three possible interest rate hikes for 2017 so it remains to be seen whether our currency will weaken on the back of this.
Export Log pricing remains solid with prices at or very close to historical market highs with sawlogs back to the March/April 2014 levels which were the highest ever. Pruned is still a little sluggish with that market stalling in China. 2017 started with unchanged prices in January but you have to remember that current pricing at or above $NZ170/jas for export pruned is still very good.
There is bound to be some pushback on US$CFR prices at some stage but the fundamental demand and supply equation is well balanced internationally and there shouldn’t be too many surprises in the short term.
If pricing remains where it is, at around US$130/m3 CFR for A grade, there is potentially some increase in potential supply but nothing that is going to fundamentally change the market balance that we have right now. There is a reduction in volume from the PNW region due to a harsh cold winter and a ban on red pine exports from Ukraine which will focus more attention on Australasian supply in the near term as well.
After a sedate start to this summer we have had good weather, good market conditions, good pricing and now good production. Stock is turning over consistently in China along with regular volumes to Korea, Japan and Vietnam and India. A slower overall shipping month in January to minimise the impact of the Chinese Lunar New year period appears to have been appreciated by export customers.
Inventory in China has increased from 2.3 million m3 to 3.5 million m3 over the past month as a direct result of the Chinese lunar New Year holiday period. Most major exporters have specifically planned their shipping schedules and sales plans around this event to mitigate the impacts of the slow down until we see a return to solid demand from end users in China towards the end of February. The construction and manufacturing sector there is currently positive.
Most shipping forecasts are anticipating a stronger freight market in 2017 having already moved US$1-2/m3 this year. There is currently more dry bulk demand than experienced in 2016 and the market has been slowly rebalancing with increased levels of scrapping and lower levels of new ship builds. Owners are currently optimistic re the freight market and are looking to push rates up into the US$20/m3 range for March shipments. Some of this optimism is around a current squeeze in the supply of vessels open on the NZ & Australian coasts, and this may yet prove to be relatively short lived. However, in the meantime we will be faced with slightly higher freight costs over March.
Availability of quality harvesting capacity in conjunction with the ideal time to harvest is still arguably the greatest single challenge that forest owners face today and in the foreseeable future as the contracting sector continues to tighten and we see harvesting costs rise.
Nevertheless, the outlook ahead in terms of market fundamentals for 2017 looks sound and if you can combine this with effective operational implementation and management of the harvest you will do well.