Fri, Feb 24, 2023 5:00 AM
I’m sure most people in our industry were happy to say sayonara to 2022 with the gilded belief that 2023 will see some economic stability in China - now that Xi Jinping has realized covid is as hard to keep under control as a problematic prince. The theory is: Now that covid has taken to China like Harry has to the media, it should blow through the population reasonably quickly and everyone can get back to building things and making things which use logs...without the threat of continued lockdowns.
This belief has been buoyed by increased AWG (At Wharf Gate) export log prices in January with many exporters upping the ante by around $8/m3 over the December offerings. What is important to note is that this isn’t a direct result of increased demand, moreover: a realization by Chinese buyers that NZ supply is subdued, in market inventories are tracking down slowly, and the bottom of the market cycle has likely been reached.
Shipping rates have reduced into the very early $US30’s/m3 and the in-market sales prices (CFR) have increased to a bit over $US130/m3 giving an FOB (Free on Board – CFR sales price minus shipping costs) price of around $US100/m3 which is about the point where we can get forest owners paying attention. The simple math on how these numbers translate into actual $NZ AWG sales prices (the gross price that forest owners receive) is as follows: ((CFR price-Shipping cost)/$US:NZ exchange rate))-Port storage and marshalling costs. Putting this into current numbers we have (($US130-$US30)/0.635)-$NZ20=$NZ137/m3 AWG. But wait, there’s a $7/m3 difference between $137/m3 and the $130/m3 that we have been offered for by exporters.
No, Grant Robertson hasn’t been fiddling around in there somewhere; this is exporters profit margin which will include some accounting for vessels and foreign exchange fixed at higher rates. It’s also important to note that different ports have different storage and berthage costs, so AWG prices vary between regions. What are my thoughts for price and demand through 2023? Unfortunately, my crystal ball was stolen in a ram-raid. Looking at the macroeconomics of China, it’s hard to see a substantial (or any) upswing in demand even though there has been a recent announcement of residential construction stimulus.
The mitigating factor which will help keep some buoyancy in pricing, is the reduced NZ supply which is likely be carried through the year as a significant number of harvesting contractors have exited the system over the past 12 months. History shows that as soon as prices go through the $NZ135 AWG mark, supply increases significantly. The problem is this generally hits China while they are on holiday for a month over Chinese New Year.
Inventories blow out and prices fall, and it is unlikely we will be able to react as quickly to price increases - as we have in the past. A decent chunk of the pruned logs sawn in NZ are destined for overseas lumber markets; and it is no secret that Europe and the USA are facing some economic headwinds in their housing market, which will also have a knock-on effect to lumber demand. However, prices for domestic pruned and sawlogs remain solid - and these markets continue to underpin forest owner returns.
So, fingers crossed that 2023 is a better year than last with 2023 is shaping up well at this point. The first two quarters are likely to see attractive log prices due to a tight supply situation and a return to work in China, but the rest of the year might be less attractive.