Praneeta Mahajan
Hamilton, July 3, 2023
Having risen to record highs around the same time in 2021, forestry prices have been more subdued over the past eighteen months. Of all the exports as a country, the Forestry sector by far remains the most dependent on the Chinese market and hence suffered the most from the Chinese slowdown.
Softening during June has taken the ASB Forestry Index to a fresh three-year low in US Dollar terms. Underlying US Dollar prices are down close to 20% over the quarter.
With New Zealand only marginally lower over that period, new Zealand Dollar prices are down by a similar magnitude, which takes them to an eight-year low. Of all New Zealand’s major primary exports, it is the forestry sector that is most exposed to China.
While about 20% of New Zealand horticulture exports and about 40% of NZ meat and dairy exports are China-bound, for Forestry products, and particularly logs, the figure is more like 60%. Sometimes that is a positive, just like the whopper construction growth in China in 2019, which drove export prices to whopping highs. But it means there is little diversification of risk during a Chinese property downturn.
“It is a classic case of having all your logs in one basket. The Chinese housing sector remains weak, and we don’t expect a swift turnaround. As we noted in our recent Rural Quarterly, a softening property sector precedes last year’s Chinese economic downturn. Thus, at the moment the property sector is struggling not only with weaker economic activity more broadly but its unique challenges around over-building and indebtedness.”
“While the underperformance in recent Chinese economic data has prompted policymakers to signal further stimulus, it may be difficult to boost the construction sector without risking financial stability. China already has an oversupply of new homes, and developers are having to borrow further simply to pay existing debts as per International reports.”
Fewer support in the domestic market
Support for the forestry market from the local property market is also looking fairly precarious, as noted in the ASB quarterly report. While the strong near-term pipeline of building work has kept construction activity looking resilient so far, comparatively high-interest rates and cooling house prices are starting to weigh in, with business surveys showing the construction expectations to be low, a trend which is likely to continue for the remainder of 2023 and early 2024.
Forest industry contractors are rapidly abandoning their business, following too many tough years with no improvement in sight.
The breaking point for Industry
Forest Industry Contractors Association (FICA) chief executive Prue Younger has repeatedly emphasised how the forestry contractors were at a breaking point, with some already in liquidation and many more at risk of losing their livelihoods, amid a global downturn in demand and prices.
Ms Younger said the downturn coincided with a renewed concern about the viability of the forestry contracting businesses which was more recently dealing with high inflation, higher interest rates, wet weather, as well as the aftermath of the Cyclone Gabrielle disaster.
Those challenges, along with falling prices and staff shortages were making it impossible for some contractors to continue to operate.
A recent survey of FICA members indicated a widespread drop in production over the past year, with 57% of respondents indicating their production was down 20% or more, and a further 16% reporting a drop of more than 30%.
About one in five contractors did not have a current contract in place, while 40% were operating on one-year contracts.
FICA board member Ross Davis said two large Gisborne-based contractors had recently closed their business after operating in the region for between 15 and 20 plus years.
Davis said the industry needed support, given the poor outlook.
“Working with the wider industry and the Ministry of Social Development on the best possible subsidy schemes is imperative,” he said.
“We are working with Ministry for Primary Industry – Te Uru Rākau to get better recognition at the government level.”
The forestry sector was the third biggest contributor to export earnings alongside dairy and meat.
Praneeta Mahajan is an Indian Newslink reporter based in Hamilton.
