June is never a fun month in this game. We're generally kidding ourselves that it's going to be a dry winter or that we've had enough rain already and there can't be much left, a bit like the Prime Minister hoping the Covid debt is going to miraculously disappear.
To top it off, June is generally the lowest point for export prices as China construction historically slows during the hot season and the log inventory hangover from Chinese New Year celebrations gets a cocaine hit with a slug of volume arriving from the last of the NZ summer production peak.
This year was no different and we're all happy to see June dead and buried with the lowest export log prices for a number of years taking its toll on an already financially stretched contractor workforce.
Most of us have been able to secure longer-term export contracts at prices around the three-year average to protect the baseline volume of our clients. However, this is at lower volume levels, which means the contractors (harvesting and cartage) have to reduce production to levels generally below break-even.
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While the cyclical nature of the sector is nothing new (it's a commodity trade after all), this one is more painful when the effects of fuel costs, staff illness and a couple of Covid lockdowns are thrown in the mix.
Due to the lack of reliable labour and continued focus on health and safety, more people are in cabs and not wielding chainsaws. This has forced the mechanisation of the industry and the resulting capital investment and debt loading of many of these businesses is eye-watering. What was a medium-size ground-based crew with a capital cost of $2 million five years ago is now a high-production, fully mechanised crew with a capital cost of over double that now.
As equity doesn't just magic itself into a business, many of these operators have debt-to-equity ratios that would even make Freddie Mac and Fannie Mae squirm. That's all good when you can keep the volume pumping through the system in a consistent manner and fuel-producing countries don't start lobbing missiles at their neighbours.
There has been plenty of discussion around the traps from harvesting and cartage contractors who have had enough and are looking to exit the industry permanently; some won't have a choice and the luckier (read higher equity) ones will. A quick search online shows this is a reality and, although most finance companies understand the game they have invested in, there comes a time when they have to clear the carparks for the influx of machinery being returned.
July export prices have seen some slight increases with A grade generally in the low-to- mid $110 range per cubic metre which, although a welcome increase, is like being happy with Omicron when you thought you might get Delta.
The CFR price in China (sales price in US$ landed in China) has eroded slightly through June and is now in the high US$140s to low US$150s/cu m, a reduction of about US$30 from April.
Thankfully, shipping rates have dropped faster and are now in the mid-to-high US$50s. This drop in shipping is on the back of an easing in vessel demand and also a reduction in the wait times for vessels around NZ ports. The potential of further softening in shipping rates is unlikely due to fuel costs and, as the $US-NZ exchange rate is at the lowest point since the first Covid holiday, the only opportunity for an increase in NZ At Wharf Gate (AWG) prices rests solely on the ability to increase sales prices. The chances of this are higher than now finding a bottle of 42 Below in a farmer's liquor cabinet, but still not that good until demand increases and supply decreases.
Because it takes about six weeks from stump to market, the June NZ supply reduction won't become a reality in China until August and the thinking is, at that point demand will have increased from present levels of low 60K/cu m/day to somewhere in the mid-70s.
July production in NZ will probably be weaker than June as woodlot jobs finish and crews have nowhere to go; therefore, August supply into China will be decidedly average as likely will September. Generally, history dictates the supply/demand pendulum then swings into panic buying territory around this time and the race to the top begins again.
It's no secret that the China construction industry at present has legs about as long as a dachshund's, so we're definitely not going to see the levels of demand experienced in previous years but, as global supply into China is almost non-existent, we hope what little demand there is will more than soak up the NZ supply, once we kick back into action.
Domestic demand remains strong and at times like this we realise the importance of solid demand from NZ sawmills to bolster returns to forest owners. A number of sawmills that cut pruned logs and rely on supply from private forests are running hand to mouth with supply, a situation that will probably get worse before it gets better.
So, all in all, it's the middle of winter, it's wet, prices are rubbish but there is a light at the end of the tunnel - let's hope it's not a train
