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About Tenco Tenco is one of New Zealand’s largest exporters of forest products. We have built to this position since 1991 when the company was set up to export lumber to growing Asian export markets.  Experience and reputation count; from small beginnings Tenco has become the largest independent exporter of New Zealand lumber and New Zealand’s 4th largest log exporter.  Tenco has a regular shipping program of their own log vessels and in combination with these and other ships currently calls  at 7 New Zealand ports (5 North Island and 2 South Island).   Tenco buys standing forests.  Tenco currently has a number of forests which they purchased at harvestable age to log over a number of years for export and domestic markets.  Tenco also regularly buys smaller tracts of forest to harvest immediately.  Tenco is interested in broadening  the  base of owners from whom it purchases forests and stands of trees.  A deal with Tenco is a certain transaction.  The owner and Tenco will agree on a value of the tree crop and then Tenco will pay this amount to the owner either in a lump sum amount or on rate per volume unit out-turn from the forest depending on the nature of the tree crop.   Tenco knows there are a lot of farmers who have trees that are close or ready to harvest and will be asking themselves how they should proceed with the sale of their trees.  For some farmers the kind of certain transaction with money in the bank could well be appealing. Tenco is actively interested in buying harvestable forests or trees from areas including and north of Wanganui and in Hawke’s Bay (except the Gisborne and East Coast districts). If you own a forest in this area (16 years and older) and are ready to enter into this kind of agreement Tenco is interested to develop something with you. Please contact: Josh.Bannan@tenco.co.nz  Work: +64 7 357 5356  Mobile:  +64 21 921 595  www.tenco.co.nz

Market Report - November 2011

China market dominates a rather unhappy scene

Our editor has graciously agreed to a last minute delivery of this report to enable me to relate the latest developments in the China market. Regrettably I can report there will probably be some negative effects on the log trade scene in New Zealand for the next few months.

I have also just returned from a visit to the market in China. This was a very timely visit, given the potential effects we are seeing, and will continue to see, on supply lines and prices in New Zealand. In a whirlwind tour I was able to to take in five ports, three sawmills, a plywood plant and five cites. It was a throughly absorbing and enthralling trip I would recommend to anybody, particularly fro those who do not regard sleep as a priority.

Avoid stress

For readers in the middle of harvest or contemplating harvest I strongly recommend you read no further if you do not handle stress well. Over the last three months prices at the wharf for export logs has pitched around within a range of $12 a cubic metre. However, quite surprisingly, the log price table this month reflecting October prices has remained largely unchanged since my last report. But all indications are for price softening during the next three months as the market reacts to very high inventories in China.

Export log market

There is no doubt that the general weakening is starting to affect the likes of China with demand good but expected to decline. Most see the China government's recent moves to quell growth by applying constraints to house purchase as eventually leading to a building industry slow down.
Consumption rates in China have continued to chug along at a pretty good rate at between 800,000 and a million cubic metres a month. As a result of the global economy changes, particularly centered in Europe and the US, softwood log deliveries to China from the Pacific Rim have significantly exceeded consumption rates. This, along with the normal season slow down in China, is seeing inventory levels at ports reaching and passing a very unhealthy four million cubic metres.
As a result, settlements in US dollar terms are coming under pressure and this can be expected to continue until demand and supply reach balance, thought to be at inventory levels at around two million cubic metres. The biggest culprits are the US and Canada who have woken up to the market. They see China as being able to consume their huge inventories of saw logs and timber which have been building in the face of declining domestic consumption.

Stocking up

Almost every sawmill I saw and visited in China has a stock of spruce, pine and fir mix timber from Canada. This is coming in to China at a rate of over 10 vessel loads a month compared to the normal two or three. This timber is the product of bark beetle harvest which commentators have suggested will last another eight months to a year. At around US$200 a cubic metre, sawmills can buy the timber, reprocess it and make more of a margin than they can from milling logs from New Zealand and Australia.
The US has also been sending 14 to 16 vessels of logs a month to China when again the normal supply is two or three. Most contain Douglas fir which is more highly regarded than radiata pine selling at US$15 to US$20 a cubic metre premium. However end users spoken to acknowledge the US supply may be short lived. They continue to see New Zealand as a main long term supplier.

Ships waiting to unload

Many issues result from the current situation. Demurrage - ships waiting to discharge time - has suddenly become a major problem. Lanshan port north of Shanghai is a major destination for New Zealand logs and one of the more congested. Inventories around the port are running at in excess of 500,000 cubic metres or around 17 weeks supply. It is normally 150,000 to 200,000 cubic metres for a port with a normal consumption level of around 30,000 cubic metres a week. Three log ships were unloading while I was there with another eight holding off waiting discharge.
Current demurrage for Lanshan is over 20 days. With a Handy class vessel currently costing around US$11,000 a day to hire, high stress levels and some serious losses will be the order of the day.

Summary of an unhappy scene

Let me just get my slide rule and protractor out and see if I can work out what is going to happen to prices for the next six months. If we took a snapshot view of prices in China over the last six months we would see a high of US$160 a cubic metre and current settlements are looking like US$120 a cubic metre.
On the surface I found a gross oversupply of log in the face of a market which continues to consume our radiata pine logs a very good rate although now starting to decline slightly. Underneath I found reasons to say, since I have returned, that this situation is totally unacceptable and needs to change.
Having regard to all comments and observations made of this rather unhappy scene I would summarise as follows.

• Outside the current global economy effects I found the log market in China is highly undisciplined with self interest, short term goal setting and unhealthy vying for position by New Zealand and Pacific Northwest suppliers, together with China traders, not at all helpful to New Zealand forest growers.
• China end users, the factory owners, are just as frustrated about the price volatility, almost pleading for changes to pricing and supply mechanisms which would bring about more sensible stability.
• New Zealand suppliers are seen as the market leaders with an ability to make a difference, but seemingly not prepared to do so and some very negative comments were received from a range of sources.
• Many on the periphery of the industry, particularly traders, are growing very rich off the back of forest growers with some making very healthy margins on the way up and exiting the market on the way down.
• There has to be some fundamental change to the export log trade if long term gains and benefit to the forest grower is to be achieved.
• The NZFFA could have a potentially important role in initiating change, with many enquires received as to how such an organisation might operate in the the supply of logs China.

Korea and India

Meanwhile the situation in Korea is similar to that of China. Export sales to China are softening and wood fibre consumption rates are also on the decline. Some suppliers have swung their attention to this market to try and ease the pressure in China. Korea is currently providing a better bottom line to New Zealand forest growers but this may not last.
In India changes to the monetary policy including lifts in interest rates is starting to have an effect with consumer demand weakening and sentiment generally negative. However log deliveries have been more disciplined with sales also continuing at reasonable levels despite shipping costs also rising with port congestion increasing demurrage. For the moment at least, India represents a better bottom line for forest growers but log supply will need to remain disciplined if this is to continue.

Shipping

Over the last three months we have seen reasonable stability around Handysize shipping costs despite the Baltic Index firming considerably. However the index is generally a reflection of the larger Capesize and Panamax with Handysize a bit to the side. Handysize charter costs have fallen within a band of US$40 to $45 a cubic metre.
Port congestion and declining demand in all markets is likely to see hire rates trend down. One commentator has suggested there are 13 to 14 shipments of logs sitting at US ports with several vessels waiting. Traders are trying to negotiate while buyers sit on their hands waiting to see where the market bottoms out.
In the last two weeks we have see the market respond to a clear drop in demand. November shipments are being quoted at down 10 per cent which will help to offset the impacts of price drops.

Domestic log market

Once again there is rather a mixed bag of stories coming in from the domestic market this month. For the most part demand and supply are in balance, if anything starting to lean towards over supply as exports hunt for better paying customers.
However if log export production slows, and slow it must, I can see problems looming for local mills if their demand profile remains. Like log exporters, sawmills are very unhappy with exchange rates which continues to hammer away at their margins.
I have always wondered how the difference in labour cost affects prices between New Zealand and China sawmills. The following table provides and overview.

Domestic prices

Once again the log price table reflects no change since the last Tree Grower report. However the small talk on the street is that some sawmills are looking for reductions in S grade and pruned grade logs. Export pricing parity is being quoted as is FOREX and falling international lumber prices.
This report has been one of the more negative I have produced. However the longer term predictions for wood fiber look robust so I do not see the need to abandon ship at this stage. This latest debacle is to a degree self induced. The global economic slow down is having an effect but the current rapid decline is the more direct consequence of a lack of marketing discipline and New Zealand suppliers and marketers are not squeaky clean in this area.
All of the above of course proves the point well made in previous market reports. Clearly and unequivocally, and I make no apology for being boringly repetitive, the only way to forward for climate and country is to get out there and plant more trees.

Log price table key

Understanding the figures (below)

• Domestic prices are per tonne landed "at mill door".
• Export prices are per JAS cubic metre landed "at wharf gate".
• The absence of data reflects insufficient sales.
• Prices above or below those indicated are entirely possible if wood quality exceeds or is below the normal market expectation.
• P1 AND P2 grades are pruned logs with a minimum 40cm SED and 34cm SED respectively (note SED = Small End Diameter)
• S30 and S20 grades are small branch logs with a minimum 30cm SED and 20cm SED respectively
• L30/A30 grades are large branch logs with a minimum 30cm SED
• K grade are export logs sold to Korea. KA grade is better grade log with a minimum 30cm SED. K grade are smaller standard multi purpose logs and KI is a large branch large Industrial log.
• S30 price for Northern South Island relates to N35 grade
  

Radiata pine log sales

Macrocarpa log sales - Nov - Jan sales

Allan Laurie is the managing director of Laurie Forestry Ltd with over 24 years experience in marketing logs for small to medium growers. www.LaurieForestry.co.nz