Forestry facing headwinds in 2018

THE NEW ZEALAND FORESTRY INDUSTRY is likely to face some headwinds going into next year, according to a leading economist.

With log prices hitting records in recent weeks and export volumes boosted by ongoing demand from China, helped along by low shipping rates, 2017 has been a stellar year for most forestry participants.

But don’t expect the good times to be quite so good in 2018, says ASB Bank rural economist, Nathan Penny.

In a report on the outlook for the commodities market, Mr Penny says “forestry’s banner 2017 year is unlikely to repeat”.

Mr Penny says 2017 has been a year “out of the box” for forestry, with log prices at or near record highs in New Zealand dollar terms for most of the year, but he then goes on to say: “The question then is: can it last? In short, probably no.”

There are three critical areas of concern looking ahead, he explains; currency movement, risks in the Chinese market and firming shipping rates.

Although our dollar has been relatively steady, after falling against other major currencies earlier in the year, Mr Penny believes it will head up again.

“First up, we expect the NZD to rise to US$0.75 by mid-2018 and then US$0.77 by the end of 2018, from around US$0.72 currently,” he says.

“Secondly, Chinese demand has been consistently firm, but there are risks that Chinese demand may soften. In particular, falling house price growth may translate into less construction activity.

“Thirdly, shipping rates continue to rise off last year’s lows. For example, Baltic Dry Index prices for September (2017) are some 63% higher than in September 2016.

“On the positive side, local demand is likely to remain firm. The construction backlog is long and likely to continue to drive activity and demand for logs and timber for years to come. Indeed, the main question for local construction centres not on demand, but on the capacity of the construction industry to carry out the work.

“All up, we expect forestry prices to ease over 2018. That said, prices are likely to remain high by historical standards, with local construction still underpinning prices.”

New Zealand structural log prices edged up to the highest level in more than two decades at the end of September, as mills competed with the export market to secure supply for the local construction market.

AgirHQ reported that the price for structural S1 logs lifted to $128 per tonne over the previous month, which was 11% above last year’s level and 21% higher than the five-year average. The S1 structural log price reached its highest level since April 1994.

NZL