- new sawmills being constructed in the Shandong Provence,
- new players entering into the log wholesaling business,
- new sourcing/supply organisations being set up within Pacific Rim countries.
The real imbalance of supply vs demand started to become evident in Q4 2010, but wasn’t significant until Q1 of this year when supply from NZ was at record levels and supply from the United States and Canada was increasingly rapidly. Q2 log supply into China from Pacific Rim countries is some 33% higher than during Q1, with the big increase in supply over Q2 being from the Pacific North West. Q2 supply from the Pacific Rim countries is ~ 51% higher than the average of 2010. The result is record inventory levels in China which are equivalent to 4 months log consumption. Historically any more than 2 month’s inventory in the system is enough to flatten demand and soften pricing. However until mid-May, even with slowing Chinese domestic sales and increasing inventory, overall demand for softwood logs was high enough to increase and hold CNF pricing. This demand was largely sentiment driven and gave an overly positive view of a market which was in reality over supplied by ~ 40%. The turning point in this cycle in the Chinese market has been on the horizon for some months, and was expected to eventuate earlier in the year. The reality in China has been an additional quarter of strong supply in Q2 for imported logs which hasn’t been matched with strong domestic sales within China. Over supply has increased inventory over the last 3 months ~1 million m3.
Due to the current high rate of softwood supply into China, which is in excess of 1.5 million m3/month, it is likely the inventory situation will get worse before it gets better, meaning the recovery period won’t be overnight. To regain some balance in the Chinese market there needs to be an inventory reduction of at least 1.0 million m3 and approximately 200,000 m3 in India.
Currently credit lines available to Chinese log buyers are stretched to the limit, due to losses incurred in selling down inventory and overall lack of profitability in the sector. In addition, log storage in yards and ports has been at full capacity, limiting options for discharge and adding cost to both charterers and receivers.
There are currently mixed signals emerging from within China with regards to the health of the market, with views ranging from bullish to bearish. The mixed signals are due to a combination of the geographic spread of the market impacting regional inventory, seasonal and economic variations between regions, domestic species alternatives, variations in log/lumber demand specific to regions, and the variations in inventory levels specific to individual buyers. The common theme throughout the market is that total inventory is excessive and that the level of activity within the sawmilling sector is less than what is seen in the log sector, reflecting an imbalance and suggesting that there remains a level of speculative log buying. The point at which the market moves back in favour of suppliers in terms of pricing very much depends on how quickly log/lumber usage overtakes the rate at which inventory is building in specific regions. The turning point may have already been reached, or could prove to be some months away. The situation in Korea, while operating at much lower levels of supply/usage has some similarities to China with supply of competitively priced PNW logs having increased significantly in the last two months.
The Japanese market has remained relatively stable in terms of the forest products sector in comparison to other markets recently. In general, lumber, plywood and log inventories remain in balance. However there is a reduction in activity becoming evident as the surge of activity post the Tsunami has settled into a more routine recovery process.
In India, inventories have reached record levels as lumber buyers have effectively shut up shop on the expectation of further price reductions. Buyers have purchased large amount of inventory over recent months and now have sufficiently high lumber stocks to take the wait and see approach to see where prices will settle. ‘Why buy today when prices will be cheaper tomorrow’ is the prevailing sentiment in the market all the way through the supply chain.
And now for the good news! A combination of the softening log market and reducing Handysize indices has resulted in freight rates reducing by between 15-25% over recent months. Expectations are for freight rates in the short term to ease further due to anticipated supply reductions.
