Stars align for NZ foresters as ‘wall of wood’ comes on stream, prices reach record highs
New Zealand forest growers, long overshadowed by booming returns from the dairy industry, look set to cash in on record prices for logs as they prepare to harvest trees planted in a flurry of activity two decades ago.
Forestry plantation activity in New Zealand jumped between 1992 and 1998, as a surge in Asian log prices lured investment syndicates to the sector. Radiata pine, which makes up about 90 percent of the nation's plantations, are typically felled between 26 and 32 years, meaning the "wall of wood" will start being harvested from about 2018, according to government figures.
Rising prices for forestry products, the nation's third-largest commodity export, have been overshadowed in the past year by a rapid rise in the fortune of dairy products, with overseas sales of milk powder, butter and cheese worth more than three times as much as sales of logs and wood. Still, forestry has been the quiet achiever, with the ASB New Zealand forestry index and the forestry sub-group of the ANZ Commodity Price Index touching record highs in January.
China is underpinning New Zealand commodity price strength as Asia's largest economy undergoes urbanisation, growing incomes and demand for better housing, says ASB rural economist Nathan Penny.
Forestry exports to China rose more than 50 percent in 2013, putting New Zealand ahead of Russia as the biggest seller of logs into that market. Russia's log exports have dipped as a result of an export tax aimed at stimulating its domestic timber processing industry. At the same time, shipments from the US and Canada have dwindled as demand picked up in their home markets.
"There's a structural lift in demand from China which on average will mean prices will be higher than they have been over history," said the ASB's Penny. "China's own housing market is really starting to accelerate with their housing construction at record levels and they haven't got many places to go for supply so they have turned to us."
While an increase in supply in coming years may put some pressure on prices, foresters have the ability to stagger harvests and continued Chinese demand is likely to underpin the sector, Penny said.
"China has this ability to really mop up a lot of supply. It's not just the price of New Zealand logs which has been high but incredible growth in volume as well, put those two factors together and it is quite phenomenal," he said. "That is the phenomenon that you see with China, is if you can supply them, they have an ability with a massive scale to take on large quantities of supply."
Increased demand in New Zealand from the rebuilding of earthquake damaged Christchurch and a surging Auckland housing market are also adding to wood demand and supporting prices, Penny said.
New Zealand exports of logs and wood surged 22 percent last year to $3.86 billion. In comparison, meat exports rose just 2.2 percent to $5.28 billion and dairy exports increased 17 percent to $13.4 billion. The Wood Council of New Zealand, which represents forestry and wood processors, aims to triple export earnings to $12 billion by 2022.
Constraints in the meat sector, combined with increased encroachment from dairy and growth in forestry means the gap between the value of forestry and meat exports will continue to narrow, said the ASB's Penny. Forestry overtook meat as the nation's second-largest commodity export to China in 2013 and it is likely to also overtake it in New Zealand's main export figures, he said.
The future payout for local logs has lured big investment to the sector.
The New Zealand Superannuation Fund partnered with Harvard Management Company, the endowment fund of Harvard University, and the Public Sector Pension Investment Board, Canada's largest pension investment managers, for the harvesting rights to the 178,000 hectare Kaingaroa Forest, New Zealand's largest plantation forest and one of the largest contiguous plantation forests in the Southern Hemisphere.
The NZ Super Fund valued its 41.25 percent stake in Kaingaroa at $1 billion as at June 30, saying it has delivered an 18.05 percent return since it was purchased in 2006.
Other large plantations are owned by US-based Hancock Natural Resource Group, the world's largest timberland investment manager which bought 260,000 hectares of forests from Carter Holt Harvey, and Matariki Forests, a consortium managed by US-based Rayonier which owns 130,000 hectares of forests, according to Forest Owners Association records.
Demand for logs from China is hurting the local sawmilling industry as forest owners send their logs overseas rather than sell them to local processors, according to the New Zealand Timber Industry Federation.
Some 40 sawmills have closed since 2003, according to the New Zealand Forest Owners Association. In October, the Tachikawa Forest Products sawmill in Rotorua was put in receivership with the loss of 120 jobs.
Rather than going head to head with local sawmills or plywood factories in countries such as China with lower labour costs, New Zealand is better off focusing on exporting logs to those factories, Rayonier New Zealand managing director Paul Nicholls has said.