Domestic log supply was one of the big issues of 2010.
An explosion in log export markets saw some domestic yards empty as unprecedented volumes of logs drove straight past the mill gate and onto the wharf.
The drivers of this export boom are well known. China’s economic growth, fuelled by a government stimulus package in late 2008, continued to power forward and the country’s appetite for wood fibre surged with it.
Growing domestic wood consumption fuelled by a booming property market has been one of the drivers for this record demand for logs.
To compound things Russia, China’s biggest log supplier, had introduced an export tariff forcing China to look elsewhere to plug the shortfall created by the higher priced Russian logs.
To put it in perspective Russian logs into China have declined from 25.4 million m3 in 2007 to approximately 4.8 million m3 in 2010.
In the meantime Chinese Customs report that the totalled export and import value of forest products for the first half of 2010 totalled 44.7 billion, up 41% on the same period in 2009.
New Zealand log sellers have certainly been the beneficiaries from this explosion in demand with export log volumes to China quadrupling since 2008.
So what does this mean for the future of domestic log supply and will it be affordable?
At the moment Chinese demand for logs powers on. In fact due to the change in supply dynamic from Russian logs coming over China’s northern border to logs now arriving at the Southern sea ports, processing plants have moved to the south. This shows a commitment to the idea that logs will, for the foreseeable future, be arriving by sea from countries like New Zealand.
Log sellers with a medium to long term horizon for doing business in New Zealand are certainly mindful of the need to ensure that the domestic market does not get starved of log supply. Having a healthy domestic industry is imperative for a sustainable business, especially when log export markets contract.
That said, the desire to make hay whilst the sun shines and get some good returns for shareholders must be hard to ignore.
The reality is the booming export market is returning forest owners stumpages of $40 to $50. Another advantage of sending logs to export is the fact that the Chinese export market seems to pay no heed to quality (it is purely about the wood fibre). This means no need for log grading. When you add it all up it could seem that supplying the domestic market is too much like hard work.
One of the things that is probably stopping even more logs disappearing to export is that infrastructure is probably near capacity in terms of freight/transport/wharf space.
Currency movements in 2011 could also have an issue on log affordability. Considering the export price parity that log sellers seem to expect from domestic customers imagine the effect of a fall in the NZ$ back to around 0.40¢ US. We could then be talking about domestic log prices of around NZ$200.
So if the current log export boom continues what does the timber industry do about a stable and reasonably priced future supply.
The reality is that our destiny in terms of affordable log supply sits in the hands of the forest owners and the hope of the realisation that at some stage in the future they may need to rely on strong domestic customers.
The only other alternative is for Government to protect domestic processing which would involve supply incentives being put in place. One would imagine that this would only be likely under the most extreme of circumstances.
There is a chance however that export demand may ease off in 2011.
There are some whispers that China’s enormous appetite for wood fibre could be on the wane. Some forecasters are suggesting China’s growth could be 5% this year and that is tantamount to a recession. If this were to happen it is forecast that global commodity prices would drop by an incredible 20% (see China’s credit bubble on borrowed time page 15 ).
With the air let out of China’s property market the effect on demand for wood fibre could likewise deflate.
The other thing to consider is a change in market dynamics on the supply side.
There are rumours that the Russians are contemplating removing their log tariff.
As late as last month it was announced that the 80% rate would be implemented on 1 January 2012.
However at the same time, Russia has been seeking membership of the World Trade Organisation. One of the impediments to becoming a member has been the export tax on logs as this contradicts the rules on free trade.
The latest news is that there could be a development in terms of either a reduction or elimination of the export log tax. If a reduction or elimination proceeds there will be implications for the New Zealand export log trade, especially to China.
The knock on effect for log supply to domestic sawmillers could be increased log availability as competition in China heats up and also possible price adjustments.