Log Market Weighs on China
The question on everyone’s mind right now is where will log
markets go in 2016. TPT Group gives its views.
THE CHINESE AND KOREAN MARKETS ARE EMERGING FROM their Lunar
New Year holidays, which effectively slows trading to a near
standstill in China, and to a lesser extent in Korea, for
three weeks. Demand for softwood forest products in the month
prior and post the holiday period in China has historically
set the tone for the following six months.
Year to date consumption of softwood logs within the
key Chinese market has been stable compared to more
volatile conditions seen during 2015. The last quarter of 2015
saw CNF prices in China recover from Q3’s sub US$100/jas
levels, and coincided with a falling ocean freight market and
a weakening in the NZ dollar against the US currency. The
resulting increase in NZ AWG returns during November/December
was widely expected within Asian markets to stimulate supply.
Buyers’ appetite for logs started to wane during mid-December
with prospects for Q1 2016, at that stage, starting to
deteriorate in anticipation of over-supply prior to their
current holiday period. The reality has been Q4 exported
volumes were in line with the 2015 monthly average from NZ at
1.2M jas, with the normal increase noted in December as
port stocks were shipped.
With volume arriving across Chinese ports remaining
reasonably balanced compared with demand during December and
January, the lead into the New Year holiday period has been
stable, with only a modest increase in aggregate port
inventory levels seen prior to the market shut from the 2nd
week of February. Currentport inventory levels are
approximately 3.2M jas, with an increase of up to 20%
expected on this level before sawmills re-started in late
February.
much reduced rate, with current GDP levels at a 20-year low.
There remains an excess of housing stock after a period of
intensive construction activity following the GFC. There have
been, in recent years, measures taken to cool the housing
market and discourage speculation, but these are now largely
being removed or reversed to try and encourage what is now a
stagnant construction sector.
China’s central bank, in early February, announced measures to
stimulate housing purchases through reduced minimum mortgage
deposits to record lows, down from 25% to 20% for first home
buyers. Buyers of second homes have seen their required
minimum deposits reduce from 40% to 30%, for cities where
restrictions are no longer in place. This reflects a growing
disparity in the health of the residential housing market
between Tier 1 and Tier 2 & 3 cities, and a push toward
clearing excess housing stock across the market.
Despite the construction sector no longer firing on all
cylinders, Australasian Radiata logs in China have a strong
customer base. One of the advantages Radiata logs have over
competing species is flexibility of end use, with a typical
grade mix across a log vessel being suited for:
Appearance grade/furniture feedstock market, with pruned
grades making up 5-15% of a typical cargo mix.
Construction grades, mostly comprised of the A/K grade
mix, generally ~50% of a cargo.
Peeler logs, largely KI/KIS grade used as core veneer in
plywood, making up the balance.
In addition a wide range of grades are used in engineered wood
products, primarily used in the rapidly expanding Edge Glued
Panel sector.
The construction sector plays a significant role in Radiata
log use, and has been behind what seemed to be insatiable
demand for logs until late 2014. Last year saw a marked
decline in imported softwood log volumes from major supply
points into China, except Australia – see panel – (down 9%)
and across all major softwood markets from 45M m3 to 39M m3
(down 12%)
While the Chinese construction sector was booming, the
potential for large swings in prices and inventory levels was
ever-present with this causing much of the volatility
associated with log supply into China in recent years. As
demand for logs eases back to more sustainable levels, the
market is unlikely to drive spikes in price or supply to the
same extent.
While NZ AWG returns have, to date, not encouraged any
significant lift in supply, equally the market is very
unlikely to have the ability to support current CNF price
levels should supply and inventory levels increase following
the New Year holidays. Margins are slim across the wholesale
sector and in light of a contracting market, domestic log
wholesalers are becoming far more risk adverse and
increasingly focused on quality rather than quantity. The
influence of end-users’ specific log requirements, both in
volume and specification, is likely to intensify, just as has
been seen in Korea and Japan as wholesalers have progressively
less influence throughout the supply chain. At the coalface
this will likely result in a gradual move toward more specific
supply across export orders, to allow shipped volumes to meet
end users’ requirements. Currently the majority of logs
shipped to China pass through the hands of a domestic
wholesaler, with logs being on-sold off Chinese Ports to a
range of smaller end-users.
The cost of ocean freight is currently at very low levels, due
to a combination of factors. Softening global bulk trade
largely driven by China’s slowing economy and environmental
coal policies, coinciding with an increase in new vessel
deliveries has resulted in historically low daily hire returns
across all dry bulk sectors. Very low bunker prices are also
contributing to the low sea freight rates. Unfortunately for
those vessel owners who ordered the latest technology ships
the low bunker prices are reducing the competitiveness of
these more expensively-built eco designed vessels.
As a result of the historically low dry bulk freight market,
younger and younger ships are being scrapped with the latest
report that a vessel as new as 13 years old was heading to the
beaches. Very low scrap prices are not making this and easy
decision for owners. Typically vessels would be 20-25 years
before scrapping.
In summary, 2016 has started off well for those involved in
Australasian log exports, but strong AWG returns are being
driven by favourable freight and Forex, rather than growing
demand or sales prices. The China market, which has a heavy
influence on pricing across all export markets, is in a
sensitive state and any sign of oversupply of logs or lumber
relative to demand is likely to cause a rapid response in
pricing, with buyers becoming reluctant to hold stock.
Wholesalers are currently managing the surges in supply and
variations in grade mix relative to demand and effectively
help to insulate all involved in log supply from these
factors, which has allowed for largely unconstrained export
log production over recent years.