Thursday, November 30, 2023

Forestry set to log worst year in a while

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Deep cuts are being inflicted on the industry at home and abroad, writes AgriHQ analyst Reece Brick.
There are a lot of moving parts, which explains why profits on logs and timber have dropped off big time.
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This year is going to go down as one of the toughest in a long time for the wider forestry industry. Wounds are slowly healing after a brutal first half of the year, but the fact is no one is over the moon about the present state of play, and there’s little on the horizon to suggest a return to the good old days any time soon.

There are a lot of moving parts, which explains why profits on logs and timber have dropped off big time, but if there’s an overarching theme it’s the health of the economy both here and worldwide. 

Historically, this is often the case when it comes to wood markets. Underlying demand is highly reliant on construction activity, and the choice to build by companies or the general population depends on a perceived level of financial security going forward.

Here in New Zealand the big killer is interest rates and their effect on house values, as well as the much higher cost to build than only a few years ago. 

The number of new home consents issued this year dropped 26% versus last year through to the end of August, with this deficit expanding as the year has progressed. This has left mills battling to sell structural and framing timber, often resorting to cutting production or selling timber overseas to try to rebalance the market. 

It’s a similar story for roundwood producers, where forecasts of a tough farming season have already seen spending tightening on posts and poles.

While it looks like mortgage rates aren’t going to ease over the short term, the pure need to house a growing population could be the counterweight to eventually reinvigorate construction activity. 

Since the turn of the century a new house has been consented per every 2.1 people added to the official population count. In the first half of this year the ratio had expanded to one consent per 3.4 people. In other words, building activity is approximately 37% lower than would be expected over the long term – although this comes with the caveat that 2021 and 2022 saw high construction rates and a steady population.

Overseas it all comes down to China, which buys a little under 90% of the logs that are exported from New Zealand. Log traders and harvesters are used to a few swings up and down through the year, but we’re about to head into a seven consecutive month of export log prices being below the 10-year average. And the cost of getting a tree from woodlot to wharfgate has risen significantly over that decade.

Economic troubles in China are definitely limiting demand for NZ’s logs. What makes it worse is that much of the economy’s woes are tied to numerous high-profile, large-scale property development companies flirting with bankruptcy for two years straight.

Chinese consumers’ confidence in this sector has fallen away massively as a result, and with that construction activity has massively slowed. According to data published by the Chinese government, the number of new houses under construction has fallen by a quarter versus last year and is less than half of what was being constructed each year between 2018 and 2021.

Luckily, NZ traders have managed to dodge the worst of this impact. A shift in log usage trends has partially sheltered the market, with other avenues, like Chinese furniture production, making up a larger portion of NZ log usage than in the past. 

Also cushioning the blow has been the massive drop in shipping costs, now essentially half what they were through 2021 and much of 2022. As well, China is much more reliant on NZ for softwood log supplies than in pre-covid days. Our market share has slowly lifted to 55-65% over the past two years, having traditionally ranged between 35% and 40% in the late-2010s and the start of this decade.

This article was written by AgriHQ analyst Reece Brick. Subscribe to AgriHQ reports here.

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