Wednesday, December 6, 2023

More than one knock on wood in tough year

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New Zealand’s forestry and wood markets are having to stand up to challenges from factors as diverse as Chinese real estate and the carbon trade back home.
Carbon markets have dropped significantly, mainly due to uncertainties around future changes to the scheme.
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For forestry and wood markets as a whole, this year has been one of the tougher ones on record, bringing with it a lot of the same problems that were plaguing the trade last year. 

An extended rough patch wasn’t completely unexpected – wood markets are mainly dictated by construction rates, which themselves are dictated by economic outlooks. And those outlooks have been poorer for a while now.

When it comes to logs, the obvious place to start is China. In the past 12 months it has purchased 89% of New Zealand’s log exports. While buyers there did come back from the Chinese New Year with a zing in their step, that was short lived as it sent log prices out of kilter with what mills there were receiving for their lumber. The end result was a swift correction going into this month, bringing the price for logs landed in China down to their lowest since early-covid days.

A few in the industry had picked this before it happened. China’s property development market has been in a spot of bother for a while now, with a number of major companies barely skirting bankruptcy with the aid of the Chinese government. 

In 2022 the amount of starts on new property builds in China was 39% down on the year prior, which was already lower than at least the three years beforehand. This was largely responsible for log prices into China losing value step-by-step throughout last year. For the first four months of 2023, property starts are down an extra 20% from last year.

A new potential pressure point could come from Australia too. Before 2021 they used to supply a little over 10% of softwood logs into China but were banned from that point forward after the Australian Government criticised China’s response to the covid outbreak. However, this ban was listed in mid-May.  

One thing that’s smoothed the ride down at the NZ end of the supply chain is shipping costs. From mid-2021 to mid-last year these were at their peak and took around a 40% bite out of the money exporters were getting paid by Chinese customers. 

But these costs have almost halved since August, only holding a little above historic norms since the start of the year.

Locally, there’s been little for the industry to get excited about either. Constant interest rate lifts and the subsequent cooling of house prices have really popped the bubble in demand for timber that developed through 2021. 

Given input costs have risen for mills over this period too, many are trying to manage the drop-off in orders by cutting back output. Others have sold excess timber at discounted rates to overseas buyers to try to re-balance the market, though challenges in getting shipping containers have made this more difficult than otherwise would be the case.

As a whole, there’s yet to be a major change in log prices into local mills, though. The structural and industrial grade logs are likely to come under more pressure going forward given the aforementioned housing issues, plus extra supplies coming on the market as efforts are made to recover trees in the central plateau felled by Cyclone Gabrielle’s winds. 

Pruned logs are more likely to hold up short term as these are often pulled from smaller scale forests, and owners of these are more likely to halt harvesting while export markets are poor.

Carbon markets have dropped significantly lately too, mainly due to uncertainties around future changes to the scheme, specifically how exotics forests will fit in long term. The market peaked at $88/NZU in November last year but has settled to the low-$50 range since the start of the month, the lowest since mid-2021.

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

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