Banks warn forestry of headwinds
How long can forestry prices continue their upward trajectory? Not long says the banks.
ECONOMISTS ARE WARNING THAT HEADwinds facing New Zealand forestry could slow overseas sales, particularly in the allimportant Chinese market…even if the tariff spat with the US is resolved.
Having just ticked off another record year in export sales, the industry is looking forward to more good times ahead in 2019, but experts at several New Zealand banks say that optimism may be misplaced.
Among them is ASB Senior Rural Economist, Nathan Perry, who is picking prices to remain flat for 2019 and demand for our logs to be at risk – even though the year has started on a high note.
At-wharf prices for exports logs climbed NZ$8 and NZ$5-6 JASm3 in January and February respectively, according to the latest market data from PF Olsen.
With China coming off Lunar New Year celebrations to welcome in the Year of the Pig, the industry does have cause for optimism, says PF Olsen. Total softwood log stocks across China increased only slightly ahead of the Lunar holiday period and are now around 3.1-to-3.3 million m³. That is lower than the same period last year and also compares favourably to when softwood log stocks peaked over 5 million m³ last April with no market issues. Stocks are expected to reduce as work ramps up after the holidays.
Coincidently, log supplies from the US into China are declining and in Canada, the British Columbia regional government has announced plans to make it harder to export logs in a bid to encourage more domestic processing.
Yet, ASB’s Nathan Perry asks the question: Are record forestry prices too good to be true?
He says: “2018 was a fantastic year for forestry exports. Export receipts jumped $684 million from 2017. Moreover, forestry prices have started 2019 where they left off. Indeed, the Forestry Index has been at a record high in NZD terms since mid-January.
“But will prices continue at this level over 2019? In this sense, we are doubtful. Global demand for logs is actually falling, with log import volumes dipping around 2% in three months to November compared to the same three months a year ago.
“In fact, the main reason NZ prices are strong is that NZ log exporters have grabbed significant share off the other major log exporters. For example, over the same period, NZ’s market share increased 4 percentage points to 42%. In contrast, the US and Canada’s share has fallen 5 percentage points to 15%.
“Looking ahead, we anticipate that global log demand will fall further. World economic growth is slowing, particularly in China. Recall that China is the world’s largest importer of logs and NZ’s largest market by a long shot. In other words, unless NZ can continue to grab market share from other exporters, NZ is unlikely to be immune from falling demand for a second successive year.”
BNZ rural economist Doug Steel also wonders if New Zealand has too many eggs in the Chinese basket and is reminded of a similar situation when this country relied too much on the UK in the 1970s with meat and dairy exports, which crashed after Britain entered the Common Market (now EU).
“It does pay to be aware of the rising concentration and potential fallout if conditions were to deteriorate rapidly in that market and plan accordingly,” he says.
ANZ is also urging caution, saying the future price direction for logs will depend on buying activity post the Chinese New Year holiday period. While in-market stocks are low, indicating strong buying activity may result as mills look to replenish inventories, the bank says there is a risk that demand will weaken on the back of the slowdown of China’s economy.