Inventory build-up at Chinese ports drives sharp drop of NZ$17/tonne in New Zealand log export prices in May, national average price for A-grade logs has fallen NZ$24/tonne in last two months
DUNEDIN, New Zealand
May 30, 2014
– NEW ZEALAND
There has been a significant price reduction for log exports in May. The national average for A-grade logs has dropped by NZ$17/t in May, following on from a NZ$7/t drop in April. This NZ$24/t plunge has wiped off all of the gains from the previous year, and brings prices even with February 2013. Pruned log exports have also dropped by NZ$17/t in the past two months to hit NZ$132/t, which is the lowest level in 24 months. In historical terms an average A-grade wharf-gate price of NZ$100/t is still high, 11% higher than the five year average.
The volume of logs exported was again very high in March, reaching 1.5 million m³. The volume of logs exported to China reached 1.1million m³. This brought the first quarter volume to 3.1 million m³, which is the highest volume for any quarter bar the fourth quarter of last year. This is especially significant given that there is usually a smaller volume delivered to China in the first quarter.
Though price reductions started in April it’s unlikely that April volumes exported will be significantly lower, in terms of NZ exports. NZ exports leapt by 21% from 2012 to 2013 based on rising prices, which shows that NZ has significant capacity to respond to price signals. On average exports decline 5% from autumn to winter (June-August) from NZ due to the tougher harvesting conditions, but there should be a greater decline this year.
Prices in China have eased significantly due to high inventory levels that built up during the first quarter. The large inventory build-up has come from many factors, but is largely attributed to an oversupply in the first quarter. However, there are also building inventories of other commodities on ports in China, which indicates an issue that has a wider cause.
It appears as though the property market is cooling, with sales falling and price growth slowing. This leads to a general tightening of credit to developers and importers of logs, and depends on market sentiment to some extent, as lenders will not want to lend to a falling market. The signs of weakness in the property market don’t indicate a crash by any means, and though the government has shown a willingness to let it slow, there is still a very high dependence on the property market from the government in order to meet its GDP growth targets and its population urbanisation targets.
There is also no doubt that the huge volumes that had been delivered to China in the first quarter have been a major contributor to the high inventories and lower prices. There was a 22% increase year-on-year for China’s log imports in the first quarter. The drop in prices will mean that supply should correct reasonably quickly. A large proportion of the logs that are supplied from the US South, Eastern Europe and even younger NZ stands become unprofitable at the lower prices. Once the volume that was already committed to China clears, and inventories are allowed to lower, the market can become demand driven once again.
It’s expected that this drop is a (large) correction but not a change in trend. It will take some time for inventories to clear out and this will lead into the hotter months in China, when building typically slows. This means that prices are expected to stay close to current levels, or slightly lower until at least late in the third quarter.