WoodWeek 28 August 2019
Moving onto markets with the facts from Statistics NZ. Last month, log prices tumbled in China. Log exports fell $67 million (19 percent). Eighty percent of logs exported in the last year went to China. Values to China fell $39 million (15 percent) as prices fell, after a period of relative stability. The quantity exported to China rose 5.9 percent. The average value of logs sent to China has dropped from almost $180 per cubic metre at the start of the calendar year to less than $140 per cubic metre in July.
Adding commentary to the figures, we have links to log market news from both Radio NZ and PF Olsen. Take your pick – read the summary, go on to read more in the links or click on the radio link and listen.
To add to today’s news haul, we also have commentary from Russia and Canada on China markets. Russia could ban timber exports to China unless Beijing takes action to help mitigate the effects of illegal logging, a Russian government minister said in an interview published on last week.
Wood markets forecaster Russ Taylor from FEA Canada summarises the year to date succinctly saying, “Exporters from Canada, Europe and Russia have oversupplied the China lumber market, and New Zealand has (almost singlehandedly) oversupplied China’s log market.”
To round out this week’s issue we have a carbon market update from Carbon Match and some general interest wood stories. Enjoy!
This week we have for you:
FOA: We need gene editingForesters says gene editing valuable against climate change – A forest industry leader is calling for serious public debate on the advantages of using gene editing to combat wilding pines and in the broader context of fighting climate change through carbon sequestration.
Forest Owners Association President Peter Weir says the Royal Society’s just released report on gene editing should be taken seriously by anyone concerned about the state of the environment.
‘The Royal Society has highlighted the problem of wilding conifers, where, despite the millions of dollars spend on a control programme, these tree weeds continue to spread from old farm shelter belts, old catchment board soil conservation plantings and from old state forests, onto land where they are not wanted, including our native forests.”
“If the fertility was switched off in these trees through a gene edit, then not only would the spread of wildings from new plantations be curtailed, but as the Royal Society quite rightly points out, the tree would divert more energy into growing wood. That adds to the carbon dioxide absorbed from the atmosphere and helps combat climate change,” Peter Weir says.
He says the current regulatory regime around gene editing in the Hazardous Substances and New Organisms Act is one of the most restrictive in the world.
“Not only that, the view of the Environmental Protection Authority, which administers the Act, is that there should be a zero-risk oversight, and that is contrary to the expressed view of the High Court in 2011.”
“There is some research already on sterile wildings. But we are caught with an EPA requirement that the experimental trees are destroyed as soon as the cones appear, so we can’t confirm we are producing sterile trees. But without that proof we are not going to be allowed to release them. That is crazy.”
“If the EPA persist in its attitude that the risks of not conducting a particular piece of research and using the result are irrelevant, then the government has an obligation to direct the EPA as an Agent of the Crown to balance risks of gene editing against the risk of not researching that gene editing.”
Logging contractors feeling the pinchLogging contractors are letting staff go or are working on reduced hours after the sudden fall in log prices earlier this year, and some are having trouble meeting their loan repayments on capital equipment, a spokesperson for the Forest Industry Contractors Association said.
The association, which has 200 members who are responsible for about 75 per cent of the annual harvest, said the sudden fall had caught many unawares.
Many forest owners have put their harvest on hold in the hope that prices will soon recover.
Chief executive Prue Younger said about 20 per cent of the association's membership had made workers redundant, were working on reduced hours, or were struggling to make capital repayments on their equipment.
About 3000 people are employed by the association's members, which tend to be the bigger contractors. Most FIEA members have one to eight crews, and each crew comprising eight to 10 workers.
The sector is no stranger to market downturns - there have been three over the last 20 years, but Younger said this one is different.
"It's such a rapid drop this time," she said.
Source: NZ Herald
PF Olsen: Log markets updateMarket Summary (courtesy of PFOlsen via 'Wood Matters' news) - The CFR sale prices in China for New Zealand logs has increased to around 113 USD per JAS m3 for A grade. Log supply into China has reduced considerably while log demand is still relatively healthy as they progress through their hotter months of the year. As demand in China increases and the log inventory reduces we expect CFR prices to increase further.
The trade war and now potentially a currency war between China and the US could have an impact on log buyer confidence, and the resultant movements in the relative exchange rates will likely have a significant effect on September AWG prices.
There will likely be an increase in sawn timber inventory in NZ as some sawmills have signed-up to a supply of logs at lower prices yet don’t have the sawn timber sales to match. The domestic market is currently two paced with reasonable demand for structural sawn timber yet weak demand for industrial grade sawn timber.
Due to the increase in the AWG prices the PF Olsen Log Price Index for August increased $2 to $114. The index is currently $14 below the two-year average, $13 below the three-year average, and $6 lower than the five-year average.
Export Log Market Update: China - The CFR sale price for A grade logs in China has recently increased and now sits around 113 USD per JASm3 and expected to increase next month. However, the more recent depreciation in the CNY against the USD is of concern as this has reduced the buying power of the Chinese log buyers. There was a similar sudden depreciation of the CNY this time last year which caused a drop in CFR and resulting AWG prices for one month. The market recovered quite quickly then due to steady demand and the stabilisation of the CNY against the USD.
There was a wide range of August AWG prices offered by log exporters with higher prices in some locations as exporters manoeuvred to maintain their position in the supply chain or made up shortfalls of volumes for pre-ordered vessels. We have also fixed modest increases in AWG with some exporters over the next three months to provide some owners with certainty.
Total softwood inventory in China is around 4.5million m3 so has only risen about 600K over the last month. Daily consumption is currently 65-70k m3 per day which is the same as this time last year. While the daily usage has dropped from the 73-74k m3 per day used at the start of July, this was expected as the temperature increases in China. The demand is still reasonably healthy for this time of year in China.
For a more comprehensive market analysis and summary of factors including port inventories, search Wood Matters on the PF Olsen website or click the link below:
Source: PF Olsen - Wood Matters
Logs tumbled in July; recovered in AugustFrom StatsNZ - Log prices tumble in China - Log exports fell $67 million (19 percent). Eighty percent of logs exported in the last year went to China.
Values to China fell $39 million (15 percent) as prices fell, after a period of relative stability. The quantity exported to China rose 5.9 percent. The average value of logs sent to China has dropped from almost $180 per cubic metre at the start of the calendar year to less than $140 per cubic metre in July.
Source: Statistics NZ
Now to bring you up to date for August, we have the RNZ Rural Report on radio here is the latest log market update from earlier this week:
"After taking a big tumble last month, log prices have recovered slightly ... "
Click here to listen
Russia warns China over illegal loggingRussia warns China it could ban timber exports over illegal logging - Russia could ban timber exports to China unless Beijing takes action to help mitigate the effects of illegal logging, a Russian government minister said in an interview published on last week.
Russian authorities this month attributed some of the vast wildfires that have engulfed portions of Siberia in recent weeks to arsonists trying to conceal illegal logging activity.
Dmitry Kobylkin, Russia’s minister of natural resources and environment, used an interview with the daily Vedomosti newspaper published on Thursday to complain about what he said was China’s unsatisfactory attitude towards the problem.
“They come, buy up the (illegal) timber and leave us to clear up the debris,” Kobylkin said of Chinese loggers.
“China must clearly understand that if they don’t take part in resolving this issue, then we will have no other option but to completely ban timber exports.”
Kobylkin added that he wanted China to help Russia plant saplings on the Russian side of their shared border to compensate for the damage caused by illegal logging in order to restore the area for “our children and grandchildren.”
Russia exported 17.4 million tonnes of timber in the first half of 2019, according to data from the Federal Customs Service.
Source: Reuters Moscow
US China trade wars - Blowout?(Canada) It is now clear that 2019 so far has been a blowout, with company results splattered with red ink from weak sales prices to key markets (especially the US and China). Wood products companies have been operating their sawmills at or below cash costs for strategic reasons for part of this year. “Burning cash,” especially for lengthy periods, is always a complicated decision, and companies analyze the pros and cons of it before considering curtailments.
Some of the objectives of not curtailing include maintaining (or even gaining) market share during weak markets (at the expense of higher-cost competitors); this in turn forces higher- cost or less capitalized companies to take downtime first. Also, during unsettled markets, companies want to hold on to their key employees, and perhaps even pick up some skilled workers from mills that do curtail or close. The same applies to contractors: losing a key partner can be problematic when it’s time to restart operations.
For some companies, cash-flow can be a requirement to meet commitments to financial institutions, so mills often continue operating at large losses long past when they should have curtailed. This is why the decision to do so can be a least-desired company strategy and will be delayed as long as possible — until, eventually, it simply needs to happen. When companies delay right-sizing their lumber output to balance overall market demand with supply, it puts more product in the market for longer, exacerbating oversupply.
This seems to be the pattern since 2018-Q4: lumber (and more recently OSB) markets have consistently been oversupplied, keeping prices at low and unsustainable levels. The resulting reduced prices (below breakeven or shut-down costs) eventually lead to capacity closures and longer-term curtailments. However, firms tend to delay these decisions until it is far too late, so low prices start to become semi-permanent.
Looking at the financial results of wood products companies in H1-2019, it is clear that business and market conditions have been a financial blowout thus far. Some companies in the lumber segment have reported losses, with most just barely in the black (on an EBITDA basis). Within any company, this means there are some regions/operations that are more profitable than others, so a below-breakeven situation requires reducing capacity in high-cost or negative- margin areas.
It is apparent from various public companies’ quarterly analyst calls, as well as transcripts and releases over the last four quarters, that some firms have been generally too bullish in their expectations for a U.S. market recovery — and, well, everywhere else. Hoped-for demand increases (in housing starts, repair and remodeling, industrial applications, export markets and even mass timber) have collectively failed to materialize due to a wide variety of unanticipated, uncontrollable factors that have stalled or slowed demand in 2019.
Business strategies that are more heavily weighted to a strategy of waiting for demand improvements can easily fail given that such factors as weather, global politics, etc., cannot be controlled. A dangerous herd mentality can emerge, and if too many producers remain overly optimistic in unsettled times, relatively few negative events are needed to topple market momentum. Furthermore, reacting to unplanned events takes time, so inventories tend to go up while prices drop. A low-cost production strategy works well when you are the highest-margin supplier (versus other mills or regions when markets are more balanced).
In North America, the US South has held this position (at least until recently), while other regions have faced skinny to negative lumber margins. As the FEA global sawmill cost benchmarking analysis shows (full report to be released in 2019-Q4), various European countries are now positioned as the second-lowest-cost lumber suppliers to the US South (after the South itself), while the highest-cost mills are mainly in the BC Interior. Until more capacity is removed, lumber operating rates will continue to drop until market demand improves; they are also being hampered by steadily rising offshore imports (also a factor in the US plywood market).
Expanding offshore exports can be another strategy to balance domestic markets, i.e., shipping incremental volumes away from the prime North America market to reduce domestic supply. However, exporters from Canada, Europe and Russia have oversupplied the China lumber market, and New Zealand has (almost singlehandedly) oversupplied China’s log market.
Like the industry in general, FEA (in both the US and Canada) remains mildly optimistic that Q4- 2019 and (especially) 2020 could surprise to the upside, but there is currently too much supply chasing oversaturated markets. More curtailments/closures are likely (and will eventually reduce the oversupply), but it is the last thing companies really want to do! So … onward the cycle goes.
Source: Russ Taylor, Managing Director, FEA Canada
NZ: More farms for forestryAnother one bites the dust – Well-known businessman, Sir Michael Fay, has obtained Overseas Investment Office approval to sell his Lagoon Hill Station near Martinborough in the Wairarapa.
The Lagoon Hill deal was set up by rural property manager Craigmore Sustainables for Swiss company Kauri Forestry LP, which has also bought a Northland farm owned by a member of the wealthy Spencer family.
Lagoon Hill will be managed by Craigmore which says it will create jobs planting more pine trees. This is controversial because some farmers in the area say converted properties will never return to stock production.
"Climate change is undisputed and carbon sequestration through tree planting is one of the most cost-effective tools to address it," Craigmore chief executive Che Charteris said.” He added they will obtain good management Forest Stewardship Council Certification within 36 months and would work to a higher standard.
It would make forested areas available for grazing once trees were established, plant up to 100,000 native trees in 30 metre wide swathes along waterways, rehabilitate wetlands and boost pest protection. Harvesting will be spread over a longer time for more stable full-time employment, and to reduce post-harvest erosion.
Craigmore would engage with tangata whenua to protect important sites, and create opportunities for bee-keepers, and local tourism operators. Also on the agenda was mountain biking and hiking for nearby communities and Wellingtonians, Charteris said.
Carbon Match: Riding the UpdraftLooking to the latest carbon market trading activity thanks to the team at Carbon Match - NZUs have firmed again, last trading yesterday at $24.35 on Carbon Match, check back at 1pm for an update.
We are not seeing significant supply much below $24.50 so if you've some to let go by all means get in touch and it'll find a new home on Carbon Match.
The previous week had seen a bit of a stand-off, with good supply shown at $24.50 and higher but buyers sitting stoically lower, or off the board altogether. Many have made the argument that on paper it would be better to wait and just pay the FPO in May. But yesterday saw several buyers just get on with it and pick up what was available up the $24.35 mark.
Can we remind the buy-side again of the risks you face:
- we are a closed domestic scheme currently without the safety valve that a formal link to international supply could provide;
- to date the only plan for NZU generation that could be scaled up significantly is forest sequestration but that's a slow process;
- forest owners have now endured a number of policy changes that not all have appreciated and to our mind, are engaging with ever-increasing caution in the ETS. Witness the disappointment of owners of older forests who now find that they are not to have the option of "averaging", but rather will continue to face harvest liabilities in respect of forests planted before 2019. This won't help supply;
- buyers have been put on notice that the days of the fixed price option are numbered. To date there has been great security for a buyer in knowing that if push came to shove, it would be possible to comply by simply paying the $25. Yes, at lower price levels that would have hurt, but even out of the money options have value;
- the CCR will be an entirely different beast and is not directly comparable to the very simple sleep-easy-at-night FPO.
On the flipside, sellers need to keep real. 2020 is an election year, and anything can happen. And in this very politically driven market, if things DO get too hard, history has shown us that there could be some kind of response.
As a seller, you need to bear in mind that the removal of the FPO appears to peg off the commencement of auctions.
The MfE has said that they are aiming to have auctions up and running by the end of 2020, but if that timeframe slips we could well see the fixed price option continue for longer. If that were to be the case it would continue likewise to keep a lid on prices, artificially depressing prices below the cost of most of the real abatement opportunities this country can pursue.
So while there is a general sense of optimism among NZU holders, it's certainly not silly to be a seller of something at some level - NZUs are not cash in the bank until they are sold.
Carbon Match - every weekday from 1-5pm.
Investors grow on trees but money doesn't always(Ireland) Sell-off of forestry funds leaves shareholders asking why they believed the hype - It turns out that money doesn’t grow on trees after all.
Forestry investment funds were all the rage in the late 1990s and early noughties, as thousands of retail investors were lured by suggestions of huge returns after lock-in periods of typically up to 30 years. One of the main operators in the sector, Irish Forestry Funds (IFF), co-founded by industry veteran Paul Brosnan, suggested in some of its early prospectuses that investors might receive compounded annual returns of up to 14.6 per cent.
Such “illustrative returns” aren’t cast-iron legal guarantees. But the inclusion of these lofty figures in an official 1997 prospectus is evidence of the hype surrounding the sector at that time.
To the surprise of many of the 12,400 shareholders who pitched in over the years, IFF has just sold its portfolio of 18 funds to Axa Investment Managers. Shareholders, who thought they were locked in for years still to come, weren’t consulted ahead of the sale, which was decided by Brosnan and IFF co-director Trevor McHugh. The directors say the decision was legally mandated to them.
IFF investors’ cheques arrived in the post on last week, and, judging from correspondence to this newspaper (The Irish Times) and on online forums, many are furious with the outcome.The Axa deal has resulted in annual returns of between 2 and 3 per cent in most cases. That’s a far cry from the huge “illustrative returns” in the marketing bumph.
McHugh insists there are many headwinds affecting the sector, from Brexit to crop disease to the US-China trade war. He defended the sale and the returns by saying IFF had “locked in value” for investors. Veon, a company in which McHugh and Brosnan are involved, is being kept on by Axa to provide “technical” forestry management services.
Source: The Irish Times
BC new fee-in-lieu for exported logs(Canada) - In British Columbia, the provincial government is taking the first step toward ensuring that more BC logs are processed in BC, creating jobs for British Columbians by applying a new, targeted fee-in-lieu of manufacturing for exported logs harvested from a coastal BC Timber Sales licence.
“British Columbians believe that BC workers and the communities they live in should be first in line to benefit from our natural resources, and for too long government policies encouraged exporting logs even when there were local mills that couldn’t get access to fibre,” said Doug Donaldson, Minister of Forests, Lands, Natural Resource Operations and Rural Development. “This change will give BC mills more opportunity to get the fibre they need."
The fee-in-lieu is one of the changes that came out of the Coast revitalization initiative government launched last year, with the aim of transforming the Coast’s seminal forest sector. The fee will be dependent on the economics of individual stands. Stands containing high- value species and that are easily accessible will have a higher fee than stands with low-value species that are remote and difficult to access.
Forest communities in more remote areas of the BC coast will benefit from other changes government has made to allow the continued harvest of timber in uneconomical areas, which will help maintain jobs and make additional logs available to local mills.
“As part of our revitalization of the Coast forest sector, we’re making sure these forest communities can continue to harvest in uneconomical areas so they have access to timber that otherwise wouldn’t normally be harvested,” said Donaldson.
While log exports will likely continue in areas that are remote and difficult for forest companies to access, the change will allow continued timber harvesting in coastal forests that have low- grade timber, so that forest communities facing economic challenges can maintain jobs in the harvesting sector and provide fibre to local mills. Stands of timber in more remote areas of the Coast may not be economical to harvest if they have a high proportion of low-grade wood and operating costs are high to harvest that wood. This will be in effect for five years, starting July 31, 2019. Companies will still have to demonstrate that stands are uneconomical to qualify.
Forest communities that will benefit from the change on the BC coast are in Nass, mid- Coast, North Coast, northwest Interior and Haida Gwaii. As well, the Soo Timber Supply Area is now included to allow continued harvesting in otherwise uneconomical stands in that area.
The coastal forest sector is an integral part of the BC economy. In 2017, it generated more than 24,000 direct jobs and $3.1 billion in gross domestic product. However, over most of the last two decades, timber harvesting on Crown land has declined and lumber and pulp production has diminished, resulting in reduced employment and significant increases in log exports. Under the Coast Forest Sector Revitalization Initiative, government is making changes to create more jobs from every log harvested and processed.
Source: BC News
almost finally ... get paid to borrow money???A Danish bank is effectively paying home buyers to borrow money - Jyske Bank, which is Denmark's third-largest lender, is handing out 10-year loans at an annual rate of -0.5% — the world's first negative interest mortgage. Nordea Bank, another Nordic bank, is offering 20-year mortgages at 0%.
Buy and Sell
... and finally ... people you meet on airplanes
As our jet was flying over Arizona on a clear day, the copilot was providing
passengers with a running commentary about landmarks over the PA system.
A lawyer is at an airport and starts feeling really bored while waiting for his flight. He notices that he’s sitting next to a blonde woman.
She’s reading a book. He assumes that the woman is an idiot because she’s a blonde.
“Hey, I want to play a game. I’ll ask you a question, and then you ask me a question, and we’ll see who answers the most right.”
“Thanks but no thanks, I’m trying read this book.”
“How about this, if we don’t know the answer, we’ll give each other $5?”
The blonde woman shakes her head.
“How about you give me $5 if you don’t know the answer and I give you $500 if I don’t know the answer.”
The blonde woman shrugs, “Alright.”
“What countries neighbor Tajikistan?”
The woman gives him $5 and he laughs.
“What has 12 legs at birth but loses 1 every time it rains?”
The lawyer looks at her with a confused expression. He repeats the question to himself multiple times and starts to look it up on the internet. The woman goes back to reading while the lawyer reads every single website he could find. He spent hours searching and started calling friends and family members to see if they knew. Eventually, his flight arrived. The lawyer sighed in defeat and handed the woman $500. She smiled and took his money. “So what’s the answer?”
She gave him $5.
A blonde rings up an airline and asks: "How long are your flights from America to England?"
The woman on the other end of the phone replies: "Just a minute". The blonde thanks her and hangs up.
That's all for this week's wood news.
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