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 several 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 3-year average to protect the baseline volume of our clients, however, this is at lower volume levels which means harvesting and cartage contractors must reduce production to levels generally below breakeven.
While there’s nothing new in the cyclical nature of the forest industry (it is a commodity trade after all) this time the cycle is more painful with the effects of fuel costs, staff illness and a couple of covid lockdowns thrown in the mix. Due to the lack of reliable labour and continued focus on health and safety, more people are in cabs rather than wielding chainsaws. This mechanisation of our industry and the resulting capital investment and debt loading of many of these businesses is eyewatering.
What was a medium sized ground-based crew with a capital cost of $2M 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, not to mention someone eating a bat from a wet market.
There’s 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, but the luckier (read higher equity) ones will. A quick search on Trademe shows this is a reality and, although most finance companies understand the game they’ve 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 early 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 currently in the high $US140’s to early $US150’s/m3, a reduction of around $US30 from April.
To read this week’s full commentary, click here.
Source: Forest360
Share this Post
