After rising to record highs in 2021, forestry prices have experienced a subdued past 18 months with no significant rebound on the horizon, according to the ASB rural quarterly report.
Economist Nathaniel Keall said of all New Zealand’s major exports, the forestry sector is by far the most dependent on the Chinese market, hence the “timber tantrum” has suffered most from the Chinese slowdown.
In a given year, almost 60% of NZ forestry exports are China-bound, compared to about 40% of dairy exports, 40% of meat exports and 20% of horticulture exports.
Meanwhile domestic demand has also been progressively slowing, with higher interest rates, low population growth and a less acute housing shortage all cooling the domestic property market.
“If there is one consolation prize for exporters, it’s that freight costs have eased substantially over the same period,” Keall said.
With Chinese economy projected to rebound after its dismal 2022 performance, some exporters will be hopeful that strengthening property market activity boosts forestry demand and supports global log prices.
“For our part we expect any price gains to be modest.
“The Chinese quota for special bonds, the primary mechanism through which it funds infrastructure spending, is set to be 7% lower in 2023, implying we shouldn’t expect a renewed construction boom.
“So all up, any increase in log demand looks to be modest in the near term.”
On the domestic front, support for the forestry market from the local property market is also looking “fairly precarious”.
While the strong near-term pipeline of building work has kept construction activity looking pretty resilient up until this point, comparatively high interest rates and cooling house prices are increasingly weighing, with business surveys showing construction expectations are deeply in the red.
“That dynamic is set to remain a feature over the remainder of 2023 and beginning of 2024.
“The good news is that with net migration proving much stronger than anticipated and the Reserve Bank getting closer to the end of the hiking cycle, the housing market will eventually turn, but probably not until next year,” Keall said.
