Forestry fortunes looking up

Forestry fortunes looking up

The New Zealand forestry industry has had to contend with a changing regulatory framework and wildly fluctuating global demand over the last couple of years.   But there have been some promising developments sincemid-2009.   Export tax hikes in Russia have helped push world forestry prices up more than 43% over the last nine months. Suddenly, the future doesn’t look too bad for New Zealand log exporters.   With the supply of logs picking up again, both the value and volume of New Zealand log exports should hold up over the next 3-5 years.

From Russia with love

The vast forests of Siberia are the preferred source of logs for many of the world’s saw mills.   Siberian timber is favoured by Asian importers, in particular, because of its perceived superiority to Canadian and New Zealand timber.   The slow growth rate of Siberian forests is said to produce a better-quality timber.   But the supply of timber from Russia has been falling, leading to a substitution effect which has boosted demand for New Zealand logs.

The fall in the supply of Russian logs is largely artificial, with progressively higher export taxes restricting supply.   The Russian government imposed a 25% export tax on 1 April, 2007.   This tax was part of previous commitment to raise taxes from 6.5% in 2006 to 80% by 2009, with the taxes intended to slow down shipments of raw logs and encourage more domestic processing of timber in Russia.

The looming final stage of the tax hikes to 80% had Asian timber processors shaking in their boots heading into 2009.   But this planned increase has now been put off at least three times.   The latest word from Moscow is that it won’t happen until 2011 at the earliest.

All reports seem to indicate that Russia is still determined to increase levies 80% eventually.   This course of action would cause a significant further up swell in demand for New Zealand logs from the Asian region.

The influence of China

Chinese demand has been a big boost to the forestry industry since mid-2008, as shown in Graph 8.1. The Chinese government’s US$586bn stimulus package has helped prop up both China and the entire Asia-Pacific region during the global recession.   Ongoing infrastructure spending on China has had a significant effect on commodity prices, including prices for logs.

In contrast to China, Japan’s economy is in poor shape after suffering a 5.4% contraction during 2009.  Traditional Japanese construction styles mean that the Japanese housing market consumes a lot of wood, and in the past a great deal of this wood has been sourced from Russia.   The situation with Russian exports has some timber processers in Japan very worried, but with the Japanese economy struggling to grow, it will take some time for these trends to translate into any significant increase in New Zealand log exports to Japan.

Shipping costs

The global recession saw shipping costs take a sharp dive.   According to The Economist, by June 2009 around15% of the world’s shipping fleet was completely idle.

This drop in bulk shipping rates was further good news for forestry exporters.   Although there has been a bounce-back in shipping costs over the last year, they remain well down onpre-2008 levels.

The Baltic Dry Index is a composite measure of shipping costs for bulk materials such as coal and mineral ore.  Although forestry is not one of the inputs used to calculate the index, the index is still the best indicator of shipping rates for bulk commodities including forestry.

While much has been made of the rises in the index since mid-2008, these increases need to be put in perspective.   The94% plunge in the index around mid-2008 clearly shows the effect the recession and spare capacity had on shipping rates.

Domestic situation

Roundwood removals dropped off during 2008, after forestry owners became liable for carbon charges under New Zealand’s Kyoto agreements.  But removals have since picked up sharply in response to improving global demand and a pick-up in prices.   During the second half of 2009, harvesting activity was close to levels last seen in mid-2002.

MAF’s forecasts predict that wood availability from New Zealand’s forests will increase over the next 15 years. Large-scale owners’ forests (with more than 1,000ha) are expected to be able to sustain harvests of 20-22m cubic metres per year. Between 2010 and 2015, smaller holdings are expected to supply an additional 3-4m cubic metres per year.

Conclusion

The medium-term outlook for the forestry industry is good.   Increasing levies on Russian log exports have already led to substitution towards New Zealand supplies.   It looks likely that further increases in Russia’s export tax are on the way from 2011, which would boost global log prices.  

With plenty of wood available for harvest, and global prices already recovering, the importance of forestry to the New Zealand economy is expected to increase over the next five years.

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