Normally, at this time of year, we are seeing strong increases in demand as the Chinese construction industry kicks into 5th gear and in-market log inventories start depleting at a reasonable rate, leading to at wharf price increases. The current inventory position in China is around the 3.7Mm3 mark which equates to around 48 days supply. This is down around 800Km3 from a month ago but still not at the level that gives buyers uneasy bowel motions.
In reality, although the October at wharf gate (AWG) prices are mostly flat across the exporters (around $133/m3 for A grade), the actual sales price in the market is down around $US20/m3 in the last month. The ability to hold the NZ AWG sales prices is primarily due the spectacular value drop of the $NZ against the $US in the wake of the US Fed Reserve hiking rates much faster than many other peer banks.
This has given most currencies a Tyson Fury sized smack on the nose which has driven many to drop to lows against the greenback not seen since the Global Financial Crisis some 14 years ago. The FOREX rate can’t do a Jacinda and steal all the limelight though, as lower global shipping rates have also played a part in keeping NZ returns flat through sales prices. Shipping rates are expected to come under continued pressure during October and November which may help offset further sales price reductions.
So, what is leading the reduction in sales prices in China? There’s a number of factors all at play here with the biggest uglies being continued lack of demand from waning confidence in the construction sector. The oversupply of built and part built residential property is yesterdays news but it’s not going to go away as easy as wrapping it around and order of fish and chips and it is likely to linger for the medium term.
The increased US interest rates are having a double whammy as, although it’s helping our exporters with lower $NZ:US rates, it is increasing the cost of finance for log buyers which is further eroding the price they are able to pay in $US terms. To put some icing on the bad news cake, the continued covid restrictions have severely dented China’s ability to produce and consume which has hit Chinese consumer confidence in general.
To read this week’s full commentary, click here.
Marcus Musson, Forest360