Lunar Landing
Chinese spree more than doubles pine log exports
There is a palpable euphoria on the New Zealand waterfront these days, where previously hardpressed exporters are riding a tsunami of demand for radiata pine logs. And so long as the Chinese economy does not boil over, the good times should continue well into next year.
By its very nature, the log trade requires its devotees to be of sanguine personality and able to take a punch. So, after many years of the most dreadful trading conditions imaginable, some are still disbelieving of the good fortune that has recently been visited upon them.
They don’t come much more sceptical than Pentarch New Zealand managing director Peter Hill who has traded hundreds of millions of tonnes of softwood in his career, and rarely experienced anything approaching the conditions that have prevailed for most of 2009.
“Basically, everything started to go crazy from midFebruary. The Chinese came into the market after the Lunar New Year and they haven’t stopped since,” he told InWood in December.
In 2008, New Zealand and Australia exported about 1.9 million m3 of pine logs to China. This year, Hill expects the figure to be around 4.8 million m3 – a 250% increase.
Everything is being driven by the US$5.8 billion that China pumped into its domestic economy at the end of 2008. The money is being spent on internal infrastructure – including the rebuilding of Sichuan province after the earthquake – and that means a lot of wood (ply and lumber) for concrete forming.
So why the sudden demand for New Zealand pine? “The key to this whole thing is that the Russian log supply [to China] dropped from around 27 million cubic metres two years ago to 11 million cubic metres last year, less again this year and declining further in 2010,” says Hill.
“The Russians simply didn’t believe that with an 80 percent tariff on their logs coming into force in April that anybody would buy their logs … So they reduced their cut significantly.
“The Russian Government wanted that volume going into local processing and subsequent export as lumber, and there has been some of that but not a lot. Everybody is very nervous about investment there, particularly with the Russian Government seemingly heading back to the old communist ideals.
“Couple that with the fact that real production and transport costs in Russia are huge and that all the subsidies that operated around the [wood] industry have gone. Also, Russians don’t want to work in the logging business anymore – it is a terribly tough industry and doesn’t pay much. [Previously, it was actually the Chinese who managed and financed most of the logging business across the border.]
“Now the Chinese have found that they can deal much more easily with New Zealand, and that we can meet their requirements at better prices. So why bother to bring wood out of Russia again?”
Although he remains wary of a resurgent Russian trade, Hill is confident 2010 will be even better for Kiwi log traders. “Around September we were saying how marvellous the market was and that it couldn’t last – mainly because we have never had a period in our recent log export history that suddenly hasn’t had a crash because we have oversupplied the markets. But this one has kept on going and all the major exporters believe it will continue.”
The GFC factor
In normal circumstances, so much wood going overseas would have created serious shortages on the domestic market. But the global financial crisis has taken care of that, for the time being anyway. Most of the extra 1.5 million-plus m3 of wood New Zealand is expected to have exported in 2009 would normally have been sold domestically.
“We are now seeing signs that the domestic market is improving and that will tighten the supply situation for China and India, and probably push up the price,” Hill says with anticipation.
The combination of high ocean freight rates and New Zealand’s isolation have traditionally been other negative factors, but Hill doesn’t see any immediate problems there. “Freight costs have come up from the rock bottom of US$16 a tonne to about US$38 to China and Korea, and they look pretty stable around that. It is still high historically but nowhere near the US$70 we got to about 18 months ago. We can all live with something that might stabilise around US$40.
A development of concern, however, is the increased activity of US softwood exporters in China (Douglas Fir) and Korea (hemlock). “Korea doesn’t worry us because all the volume we might have got out of there has gone to China. But the Americans are certainly picking up on the hemlock because they can put it in cheaper than radiata, which is rather ironic.” (When the radiata trade into Korea started in the mid80s, hemlock had 95% of the market and was priced much higher than the New Zealand product. Now, the Americans are pricing it below radiata pine.)
Indian recovery
Hill is also talking positively about the Indian log market – something of a graveyard for the unwary. “Prices dropped dramatically when the GFC struck and people got caught all over the place. A number of New Zealand and Australian exporters lost millions late last year.
“But India has recovered well. It will take about the same or a little more radiata this year than last … Every time the price goes down to around US$100, demand picks up. It is now around US$125 and is workable.”
The main problem is congestion at Kandla, the country’s only viable log port. Discharge delays of 20 days are common and waiting time (demurrage) quickly racks up costs – US$10,000 a day is standard. “And if you can’t get the buyers to cover it, you have a loss on your hands,” Hill says.
“But the thing that scares us all because we can’t do anything about it is the ridiculous kiwi exchange rate. We assume it will correct but everything hinges on the US dollar.”
Meanwhile, a note of caution about the Chinese economy was sounded at the recent national conference of the Engineered Wood Products Association of Australasia (EWPAA) on the Gold Coast by Aucklandbased Pöyry Forest Industry associate principal Marcel Vroege.
“The Chinese Government has stimulated the economy so hard that there are serious concerns it is overheating again. All of the [wood products] demand growth is being driven by government spending, and there are serious worries around China’s ability to continue at this pace for too much longer.
“If China falls away as a demand centre for Australian wood products, it would not matter so much, but for New Zealand it would be felt to a much greater extent.”
Tony Neilson
