Log Market Weighs on China

Transcription

1 Log Market Weighs on China The question on everyone s mind right now is where will log markets go in 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 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%

2 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

3 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 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.

4 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

5 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 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.