New Zealand log exports are forecast to drop by 12 percent to $3.4 billion for the year to 30 June 2022. Prices remain relatively high, but export volumes have decreased. Export volumes fell 12 percent in the nine months to 31 March 2022 compared with the same time last year, mostly due to heightened uncertainty in logistics, says New Zealand’s Ministry of Primary Industries (MPI). A substantial portion of the decrease was attributed to the roughly 40 percent of forests owned by NZ small-size growers who are not willing to risk the uncertain profits in export markets. Larger growers will continue to harvest regularly to supply their long-term customers.
Under normal conditions, production ramps up in response to higher prices. However, in the current environment, production is being hampered by high shipping costs, putting downward pressure on demand and profits. Port congestion is contributing to the uncertainty and putting further pressure on profit margins as growers have to pay for delays, disincentivising harvest. Logistics issues are forecast to remain an issue until 2023, affecting production over this period. China’s lockdowns and the Russia-Ukraine conflict have increased logistics disruptions in recent months. More recently, China also has elevated log inventories at port as COVID-19 disrupts logs flowing out, decreasing its capacity to take New Zealand’s logs in.
Construction in China has slowed due to high levels of debt among its main developers and stricter lending policies. This slowdown is now exacerbated by the country’s latest COVID-19 outbreak, further putting downward pressure on demand and prices as port congestion increases and projects slow. Despite this, supply and demand dynamics in China are keeping upward pressure on New Zealand log prices. Log prices are driven by the Chinese market, New Zealand’s top export destination with 87 percent of logs shipped there in the year to 30 June 2022.
Currently, China has limited options as to where it can source logs. This constrained supply has resulted in New Zealand log exporters achieving higher than usual export prices in the Chinese market. The Chinese Government has banned log imports from Australia and Lithuania and has new customs regulations on pine imports from the US and Canada. In addition, Europe has stopped imports of sawn timber from Russia and Belarus, which has put pressure on the domestic supply market to fill the gap. This means lower exports from Europe to China. Alongside this, continuing supply chain issues, including difficulties accessing containers, will reduce the volume of log exports from Europe to China. Log supply to China from South America continues to be subdued due to high freight costs. These supply constraints are generally outweighing the drop in demand from China, keeping prices relatively high.
New Zealand log export volumes to India as a proportion of total exports are forecast to fall 7 percent to 0.1 percent in the year to 30 June 2022 from three years ago. The market decline is partly due to increased competition from Australia and Uruguay. In 2020, exports dropped substantially as a result of the implementation of regulations by the Environmental Protection Agency (EPA) regarding recapture of methyl bromide used to fumigate logs. In the March 2022 quarter, log exports stopped completely upon a decision by the EPA to further restrict methyl bromide fumigation to small quantities (allowing containerised only). The EPA has approved a new fumigation product, ethanedinitrile (EDN). MPI is awaiting confirmation for India’s approval to allow methyl bromide to be applied in India upon arrival. The Indian market presents diversification and growth prospects that should support demand in the long term.
Looking ahead, there is a high level of uncertainty. Shipping costs and port congestion are likely to remain elevated into the medium term. China’s construction industry is experiencing a slowdown, but infrastructure investment and a loosening of policies by the government is expected to increase demand for logs in the medium term. As a result, New Zealand log exports are forecast to reach $3.6 billion for the year to 30 June 2023.
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