What is the Forest Datasheet? The Forest Datasheet is a regular update of market changes within the NZ forest industry.  It's designed to assist owners of private forests gain a snapshot of factors that could impact on the value of their trees.

The Forest Datasheet is produced by Woodmetrics, an independently owned and operated business that provides private forest owners with a sale management service that maximises sale price and minimises sale risks. Woodmetrics conducts all pre sale work such as resource consents, roading, inventory etc and then markets a grower's trees through a transparent competitive tender process. More money, less risk.

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WOODMETRICS FOREST DATASHEET:  June 2009

If you are at the Mystery Creek Fieldays this year, the team from Woodmetrics invites you to call in for a catch up at our stand. We’ll have the latest market news, refreshments and a chair for you to take a load off your feet! We are at our usual site G106, just inside Gate 1 next to the portable sawmills.

Although recent times have been tough for NZ’s forestry industry, there are positive signs of improvement on the horizon. Woodmetrics is confident that next summer will be a better time for forest owners and we are looking forward to a busier stumpage sales programme.

DOMESTIC LOG MARKETS

Pruned

The New Zealand economy appears to be slowing, catching the rest of the world. The unemployment rate has hit a six year high of 55 in April 2009. Mill closures continue to hit the headlines in both islands and reduced shifts and/or reduced hours on a regular basis. Falls in both shipping and exchange rates have provided some welcome relief for some but demand is very weak.

Structural

It comes as no surprise that both structural & pruned logs are becoming harder to sell. Supply appears to be reducing to match demand but Regional shortages of key log grades are emerging. A call for forest owners to support mills is a strategy worth considering for those considering market access over extended periods. Historically there are times when domestic log prices are stronger than export prices.

Pulp

Pulp and chip log prices are steady with reduced sawmill residues and reduced harvest levels helping keep prices stable.

EXPORT LOG MARKETS

Export log prices have improved slightly over the last couple of months with signs of improved demand, especially from China, but wharf gate prices continue to be volatile as fright rates and exchange rates continue to be subject to the whim of the vagaries of the global economy. Log volumes exported from NZ have been at very high levels in April and May with many ports at or near capacity. High levels of export volumes expected to continue in upcoming months.

In Korea, demand is slowly improving but it is down considerably in comparison to a year ago. Sawmills are generally carrying sufficient inventory for now so demand is expected to continue to be flat in Korea for the next few months before any signs of recovery are seen.

In China, demand has picked up considerably in recent months and continues to be strong – see story below. In the first four months of 2009, over a million JASm³ were exported from NZ to China. Supply from Russia is declining due to less harvesting during their summer. CFR prices in China have firmed slightly recently but although expected to remain firm and possibly increase slightly, prices are not expected to rise significantly in upcoming months.

Japanese industrial production levels are considerably lower than last year but there are now signs that levels are beginning to recover. Demand from India remains firm.

Shipping rates have increased from the low levels earlier in the year and the Handysize market in the Pacific remains firm to steady. Spot rates are currently slightly over US$30/m3 and will probably remain firm in upcoming months.

FOCUS ON CHINA

As all sorts of craziness in the world commodity markets hits us in the news every week it is fascinating to look at the China log market in recent months. In the midst of all the depressing economic news and despite a lot of it about China, China is actually proving to be the log exporter’s saviour at the moment.

China has just surpassed Korea as our largest log destination. This heralds a new era in our Asian log trade. The New Zealand ports are at capacity with enormous log volumes passing through. Gisborne has broken monthly log volume records in both March and April.

Beside the more favourable $US exchange rate and shipping rates compared with a year ago, the recent upswing in demand from China has been as a result of two main factors. Firstly the production costs of Russian logs continues to climb as wood has to be harvested from increasingly more difficult county, as the easy country gets depleted. Secondly the Russian Government has imposed tariffs on their whole log exports to encourage more wood processing within their own boundaries. The tariffs are now at 25% and planned to go to 80%, although this has been deferred and may not even happen. However just the threat of it has caused unease amongst those relying on logs from Russia and new supplier relationships are forged.

The combination of the 25% tariff and the increasing production costs is already helping the New Zealand log market. As one log exporter told Woodmetrics recently, “China is saving our bacon at the moment. Even though the prices aren’t that flash at least they are taking the volume to keep our industry moving. Let’s just hope China doesn’t fall over on us!”

In recent weeks some less positive signs have emerged. Ocean freight rates to China have recovered from rates around the mid twenties to be as high as $31. In recent weeks the $US exchange rate has climbed from the mid fifties to over 65 cents. The combination of these two movements is threatening to take the gloss off this recent boom period.  However, the recent increased in demand from China forebodes well and it may continue to be the log exporter’s saviour over the longer term.

FORESTRY IN THE EMISSIONS TRADING SCHEME (ETS)

The Emissions Trading Scheme (ETS) legislation that was passed last year, the Climate Change Response Act 2002 is currently the subject of a parliamentary review. However, it remains in force and forest owners need to be aware of their responsibilities under the legislation, specifically the requirement for pre-1990 forest owners to report deforestation and submit a return for it.

The issue of a Forestry Allocation Plan (FAP) is subject to probable delay. Submissions on the draft FAP closed on April 30 and MAF is now analysing the submissions and briefing ministers on them, which could result in changes to the draft FAP. This process will take some weeks so MAF expects that the timeframe for issuing a final FAP will be clearer in June.

The delay in issuing a Forestry Allocation Plan (FAP) affects who can currently apply for exemptions under the "less than 50 hectares" rule. The only people eligible to apply for a <50 hectare exemption at present are those who have already deforested. No-one else is eligible to apply until a FAP is issued. MAF have stated that “There is no intention to leave foresters with insufficient time to consider whether to apply for an allocation or a <50 hectare exemption. The legislation provides a mechanism to grant extensions to the date by which <50 hectare exemption applications can be made.”

Contact Woodmetrics for any clarification on the rules as they apply to your forest. Woodmetrics is available to complete applications for exemption from the ETS and the associated deforestation liabilities under the 50 hectare exemption rule and for applications for an allocation of NZUs under the Forestry Allocation Plan. Register your interest with us for completing these applications – we will be in contact once the FAP is finalised and the exact application details are known. Until the FAP is finalised, it would be our suggestion not to commit to any provider offering to undertake these processes on behalf of forest landowners, sometimes at costs of in excess of $2,000 for a 100 hectare forest!

COMMON QUESTIONS ON STUMPAGE SELLING

What is a Stumpage Sale?

A stumpage sale is essentially the sale of standing trees. Most importantly, it is the method of selling trees where the price the forest owner will get for their trees is agreed with a buyer before harvesting begins. There are many different types of stumpage sale including a fixed price for every tonne harvested, a fixed price for every grade harvested or even a price benchmarked to a log price index. The price can be fixed through a competitive tender or through direct negotiation with a particular buyer.

What is the advantage of a fixed price?

The alternative approach to a stumpage sale for selling trees is the managed log sale where a forest owner has no certainty about price other than the “best estimate” that a buyer may provide. Buyers will seldom guarantee that they will achieve their “best estimate” so a forest owner will not know what price they have actually received until after the trees are cut – too late if the price achieved is unsatisfactory. In a managed log sale, log sale revenues and production costs are left in control of the manager whose objectives may not necessarily be completely aligned with those of the forest owner. Many variables beyond the control of a forest owner will impact on the net price achieved. Why take the risk?

How does competition achieve a better price?

The benefits of marketing trees to more than one buyer are the same as for any other product – more buyers equals more competition and different buyers value the same forest differently.

No log buyer has access to all domestic and export markets. The question is, which buyer has access to the most valuable mix of markets. Managed log sales remove the opportunity for significant gains in value that are obtained through selling to different markets as selling to one buyer limits the value of the forest to the value that that buyer can extract from their particular market mix. Plus, differences in harvesting and cartage costs, shipping rates etc can easily account for a 10% variation in value.

Independent research of private forest and woodlot sales has shown that the addition of a second bidder competing for a stumpage sale will on average increase returns to the forest owner by 15%. Woodmetrics has also found this to be the case in its experience of stumpage selling over the last eight years.

Is the Stumpage Sales method losing traction?

No. Woodmetrics is the only truly independent forest seller in NZ – it is not a buyer of trees, a forest owner, a harvester, a processor or a log trader and has no relationship with any of these parties. It therefore has no conflict of interest when marketing trees on behalf of a forest owner. For this reason and while log markets were volatile, Woodmetrics has been advising its clients for a number of months not to sell their trees. Beware of a managed log sale where the manager’s objectives may not necessarily be completely aligned with those of the forest owner.

Sources : NZ Herald, Stuff.co.nz, Agri-fax, Crows, Radiata Bulletin, Southemonline, Friday Offcuts, The Independent, NBR.