Dennis Neilson: Demand for softwood logs and lumber to be high next two years minimum – Lesprom Network

Credit: Original article can be found here

The demand for lumber is on fire. In the United States prices have gone up 300% or 400%. The Canadian supply is going down fast. Is it a new super-cycle for lumber and permanent high prices? No one has an answer to this question. That never happened, but now wood prices are through the roof again. We tried to figure it out together with Dennis Neilson who started working in the forest industry sector more than 50 years ago. His DANA consulting firm is one of the world’s leading wood market think tanks.

Lesprom Network: When you worked for Fletcher, in 1984 you were the first to organize the sale and first shipment of sawlogs from New Zealand to China. Since then, New Zealand sawlog exports have reached incredible volumes. You probably feel proud now that you were the first to discover this forest Eldorado when you see these huge ships in the port, which are loaded with logs for China. And now, your company DANA is the leading think tank for the forest industry in New Zealand, please tell us how you are helping your clients.

Dennis Neilson: Well, I see you are saying we are the leading think tank. A lot of people in New Zealand would not agree. However, we have been in the business for a long time and I started working in the forest industry sector more than 50 years ago. I worked for major forest products companies for 20 years, until 1992 and during that time I got involved in the export and sales of logs domestically to sawmills and pulp mills, but also the log export market. In those days, almost all of the logs from New Zealand were shipped to Japan. But I had an opportunity in 1984 to travel to China with a joint government and private industry delegation. We were able then to negotiate a shipment of logs. That volume grew to quite a lot from zero to about 800 cubic meters per year. But then it stopped for some years.

I’m now 71 years old but I am still active in the industry. But in the last few years rather than do consulting work only with private clients, our company DANA NZ Limited has been involved mostly in organizing conferences and field trips, and industry tours around the world, and in writing/publishing multi-client Reviews on forest investment and wood trade topics. So most of our work has not been in New Zealand. It’s been overseas. For instance last year 2020 we had largely organized a major conference in Helsinki in June on the Russian forest industry sector, including a field trip in Finland to see companies that make machinery sold to Russia. For 2020 we also had organized an investment conference in New York City, and wood trade conferences in Shanghai, Melbourne, Durban, and in Hamburg.

Unfortunately, we had to postpone all of those because of Covid. We would like to continue that work, but will not be able to in 2021 for sure.  We might be able to in 2022 – including possibly a seminar or conference in St. Petersburg, and with a field trip in Russia afterwards.

But we are also actively involved in writing articles and reports for associations, public, giving presentations in New Zealand and to overseas clients. And what we’re telling them is some mostly good things about New Zealand, from a political, social, financial and economic point of view, about investing in New Zealand and about the globally enviable plantation forest sector, which is small but very productive. When we look to bring in overseas investors or have conferences in London and New York regularly each year, we have teamed up with a UK/American company called Fast Markets RISI.

We can advertise the advantages of New Zealand and there are many. We emphasize how New Zealand is measured by a German company called Transparency International each year. We are the world’s first or second least corrupt country in the world. Our central government and local government officials are effectively not corrupt, zero. Unfortunately, around the world that can be rather unusual. We have an independent judicial service, the law, with our legal system being very independent. So international investors in New Zealand can have a dispute either with the NZ government or with other private companies or banks. And they can expect to get a fair hearing in the local Courts. Try doing that in some countries for instance, it doesn’t work.

We have a very productive but small plantation sector, mostly Radiata pine introduced into New Zealand from California over 130 years ago. It is very productive, growing at 25-30 cubic meters per hectare per year. In comparison the growth of natural Russia Pinus sylvestris (Scots pine) or spruce is often only two or three cubic meters per hectare per year.  NZ has a very sophisticated tree genetics improvement situation where we will get 30-40 and some people are looking to 50 cubic meters per hectare per year by 2050.

We have well developed infrastructure, roads and so on. We’ve got 12 ports in our tiny country, maybe too many. And most of those are log export ports or can export sawn timber and other forest products. We have developed a contracting industry so people who invest in New Zealand can come here and feel comfortable that they will be able to hire contractors to plant and manage trees, build roads, harvest and transport logs to mills or ports.  No port is more than 150 kilometers from the furthest point. So that has been a focus of minds for 30 years.

DANA has not actively been involved in bringing investors to NZ recently, but we have brought maybe $500 million in investor money over the years to New Zealand. There are some Russian investors here in New Zealand – some of the wealthiest oligarchs, for instance Alexander Abramov, but they’re not in forestry. I’ve tried to persuade one major Russian wood company to invest in New Zealand – but have been unsuccessful so far.  When we advise clients either privately in confidential reports or publicly by way of conference presentations or talking, then we are generally very positive about New Zealand – with some minor caveats.

I would characterize and tell people that the New Zealand forest growing and supply chain management of logs, from planting a seedling to growing a forest, to harvesting, to transport to ports, to selling logs domestically or particularly exporting would be at the top of the first quartile of countries in the world. Cannot be beaten. But for wood processing that is sawmilling, plywood, pulp and paper, wood panels – that is still, with some exceptions, a different story.

We have some exceptions, one or two only. Where I would put our efficiency and global competitiveness is at the middle of the bottom of the fourth quartile. A lot of chances to improve. But when we are telling people privately and publicly about New Zealand there are some of the factors we talk about. Generally positive about our country and its competitiveness domestically in sawmilling and so on, but very good log exports. More challenging in processing exports. In 2018 I was a major author with an American and a Chinese co-author, of a 500 PowerPoint format page multi-client report on the Russian forest industry sector. We were able to compare New Zealand and other countries, United States, Canada, Australia, Chile, Germany, UK and Russia  – both the positive strengths and less strong parts of the Russian sectors.

Lesprom Network: New Zealand has become one of the world’s largest exporters of softwood logs. How did it happen that a country with a small area compared to Canada, the United States and Russia was able to become a strong player in the forest products market? What’s the secret here?

Dennis Neilson: No secret but interesting history and study. In 1919, over hundred years ago, the New Zealand government was probably the first in the world to recognize that it could no longer just continue to harvest its native forests, which were of magnificent quality, but with very slow growing species. It recognized that it could not keep harvesting or the native trees would run out. So it decided to form a government organization called the New Zealand Forest Service. And it decided to plant exotic plantation forests instead — so these plantation trees, mostly Radiata pine, could take over from native forest harvesting, decades later. Which they have done, and now all native tree harvesting is banned.

Before 1919, the NZ government had already tested for 20 or 30 years, almost a hundred different species of imported trees from Europe, Mexico, United States, and so on. It found out that Radiata pine grew far better than any other species. Douglas fir also grows quite well, maybe half as fast.  So the government started a major planting program from 1919, and it developed most of our plantations. By the 1980s 50% of the 1.0 million hectares of plantations were government owned. Major plantation tree industries started up from the 1950s — pulp and paper, sawmilling, then MDF, plywood and more recently LVL and from 2021, major production of CLT.

But in 1984 the NZ government went bankrupt basically, and it had to sell its assets. So it sold its trees. So we had a huge international bidding process and we attracted new forest owners from the United States, Japan, Malaysia, Australia and other countries. Some others, but they were the main countries, some institutional investors like pension funds and some forest product companies, particularly from Japan. And that happened around 1990.

But then, from 1993 to about 2000 there was a huge increase in planting on farmland. For our little country of 5 million people, up to 100 thousand hectares per year of new land planting.  But, that didn’t last. It was sort of a temporary expectation. And it was not the big companies, it was smaller people, farmers and people like yourselves – for instance we had two, now one, we call them tree farms — 300 hectares each. But there are 14,000 tree farmers in NZ. So they planted these trees and they were independent. They don’t have mills they have to service. They can sell to the highest bidder.

And that volume, in the last five years especially, a little bit longer and going on for another five years, is becoming mature 25 to 30 years. So we have all these new matured forests, owned by thousands of small people. And then, just by chance in 2009 we had the global financial crisis, and China decided to spend hundreds of billions of dollars to prevent the crisis, by heavily subsidizing its construction sector. It looked around where it could get wood and suddenly New Zealand had this new lot of wood. And then we developed two or three very big, very efficient log export companies. Biggest in the world – at about five million cubic meters per year each.

And China started to learn how to use Radiata pine in a big way and it found NZ was a very reliable supplier of very big volumes of logs. When they ordered log ships, they mostly arrived – on the day they asked for them. Also, every time we sign a contract that’s honored – to the letter mostly.  Before that NZ was exporting small volumes to China, but from 2010, and particularly after 2015-2016 suddenly we took off for log exports and big volumes, and we remain that way today.

We harvest about 36 million cubic meters per year, a small volume compared with Russia which harvests maybe 230-250 million cubic meters, but over half of that is exported as logs. So we are unique in the world. So in summary, to answer your question, there is no “secret” to NZ being by far the world’s largest log exporter.  It is occurring as the result of a combination of several historical events, starting more than 100 years ago.

Lesprom Network: Next year, Russia is expected to stop exporting logs to China. There is an opinion that China will be able to replace the volume of imports of logs from Russia by increasing imports from New Zealand. Russia exported 6 million cubic meters of sawlogs to China in 2020. If supplies stop next year, will New Zealand be able to deliver that additional volume in 2022?

Dennis Neilson: If I had a certain answer to that question, I’d be a billionaire. But I studied this myself. Personally I have a lot of friends in the industry who are forest owners, exporters, associations, chief executives, wood processors. My personal feeling is we are close to what we would call peak harvest. At around 36 million cubic meters. Now, if the price suddenly goes up, doubles or goes up 50% then a lot of forest owners might want to harvest earlier instead of at 26 or 28 years. They could go down to 22 or even 20 years. So we have some what we call elasticity of supply based on price.

But I think we’re close to peak and I think we might be able to squeeze one or two million cubic meters extra. Maybe I could be wrong, but I think that’s about all. And the other major thing that’s changed in New Zealand is our Covid and post-Covid situation – almost unique globally. Luckily we have been effectively Covid free for more than 9 months. And after we went back to work after a short, severe lockdown we expected our economy to be in tatters and demand for housing to be low.

But, the opposite happened. The demand for housing is just gone crazily up. And for the first time in decades, our sawmilling industry is going at capacity to keep up – in fact we now produce enough lumber for the New Zealand market demand. We have the biggest and second biggest mills now refusing to deliver to customers to cut run out. We have a combination of a very strong domestic industry and I don’t think we can harvest much more. But can I ask you a question please? What is the status of the announcement about Russia restricting exports?

Lesprom Network: The decision to stop the export of softwood logs from Russia was made by president Putin. Usually his decisions are implemented. In addition, this decision is supported by Russian sawmills, which have long advocated an end to the export of softwood sawlogs due to its shortage in the country.

Dennis Neilson: It may be good news for New Zealand forest owners. And may be bad news for New Zealand sawmills because already Australia was the third largest exporter after New Zealand and Russia, until late 2020 exporting about 4.5 million cubic meters mostly to China. But relations between China and Australia are now so bad that China has banned the import of Australian logs. So that’s 4.5 million cubic meters off China’s availability. Now next year the Russian 4-5 million cubic meters are maybe gone. Combined, this is about 9 million cubic meters, impossible for New Zealand and probably anywhere else to replace.

In the United States their demand is on fire there, lumber prices have gone up 300% or 400%. The Canadian supply is going down fast. Uruguay is logging some softwood logs, Southern Yellow Pines, but that is mostly one off temporary because they are logging those and replanting with eucalyptus for pulp – because they have two big pulp mills operating and a third huge pulp mill (UPM #2) is starting next year. Where else?

We’re seeing this already with prices. I can give you an example, the average price of New Zealand A-grade sawlog last year averaged CIF landed China Port US$125, in early May was US$180 – and a week later almost $190. And we think it’s going up next month.

We think China is getting seriously worried about its timber supply, both for logs and sawn timber. Because stocks are going down, not up, including at the major Chinese lumber storage depot at Taicang Port.

We cannot even make up Australia’s deficit for logs. And almost certainly, in my opinion, we will not be able to make up Russia’s deficit. So that may give Russia some opportunity to further increase the sawn timber price by a huge amount. So there should be an opportunity for Russia to replace the missing logs with sawn timber without any problem. And New Zealand will be a beneficiary. We expect a strong market into next year and perhaps beyond.

Lesprom Network: How large is New Zealand’s domestic sawlog consumption?

Dennis Neilson: Well, in total the domestic consumption of logs is about 50% and the exports about 50%. Some of that is pulpwood, we have some pulp mills here, not huge. We write a report every two years about the New Zealand sector. Right now, sawn timber production is around 4.3-4.5 million cubic meters per year. So you can double that for the sawlogs volume used. So it might be 8.5 or 9 million cubic meters of sawlogs for domestic consumption. And about 40% of that sawn timber is exported, and about 60% is sold in New Zealand. So even with our sawn timber industry, a large percentage is exported — because we have the supply and we have a small population of only 5 million people.

Lesprom Network: How do sawmills feel about increasing exports of unprocessed timber?

Dennis Neilson: The sawmilling industry is furious about log exports. It has been lobbying the New Zealand government to ban the export of logs for five years. It blames what it defines as illegal subsidies paid by the Chinese government to Chinese sawmillers, which allows New Zealand forest owners to sell logs at high prices. The New Zealand sawmill industry until this year was mostly struggling. And in fact we have a list of 56 sawmills that went bankrupt between 2003 in 2020. And every year, more and more are closed because they are too small to be internationally competitive and efficient. So the industry has been trying to stop the log exports for years. In 2019-2020 it got close to persuading the government to get serious about banning log exports, but that’s not legal under WTO laws. That’s interesting and I’m smiling here because New Zealand’s a small country. We are controlled by the WTO. And the WTO will not allow us to ban the export of any products.

Now this contrasts with Russia, which is huge. So the opposite occurs. Russia controls the WTO. And so in Russia, Mr. Putin can tell the WTO to go away, if it moans about Russia banning log exports – “What are you gonna do about it?” And the WTO will likely do nothing. New Zealand is different, so the Forest Minister tried to get the New Zealand government to ban log exports last year, but the Trade Minister said no, you cannot. So the NZ wood processing sector would love to have log exports banned, but we do not see that happening.

Although there is a worrying decision this government has taken this year, just two weeks ago. It will ban the export of live cattle, in two years’ time, not now. But they’re using the argument that it’s not humane, and the cattle die on the ships etc. But that’s upsetting a lot of farmers in New Zealand who are big cattle exporters. My take is that we will not see any restrictions on log exports for the foreseeable future. But the sawmill industry will keep on trying and trying — and trying.

Lesprom Network: How do you estimate how long the current upward trend in lumber prices in the global market will continue?

Dennis Neilson: Well, I’ve been around in this business for a long time, probably 40 years looking at the trade and supply, demand, wood products and so on. And I’ve seen about three or four instances where world experts talk about super-cycles and I’ve watched it closely in the iron ore industry, dominated by Australia to China trade, and in our own wood industry, we see these “super-cycles.” The last one for iron ore was about 2012 and suddenly the price of iron ore to China went from $30 to $150. And everyone said this was a new permanent super cycle — but then prices crashed again soon after — and only in 2020-2021 this year came up again, from $60 to almost $200. Now they’re talking about a super cycle again. Until it crashes again?

Five years ago, the very well respected person who knows a lot about Russia, Russ Taylor from Canada, talked about a new super-cycle for wood – when you look at the supply from different countries and demand from different countries, there is a big deficit, so there is a super cycle and permanent high prices. That never happened, but now wood prices are through the roof again – and I hear indirectly that Russ Taylor is basically saying – I was right – I just got the years wrong.  Maybe he will be right?

However, we also write about the world woodchip trade, every year for 26 years. It’s a big trade, not from Russia or New Zealand, but other countries – especially to the pulp industries of Japan and China. For the last five years, we’ve predicted big deficits and high prices, and each year we are embarrassed, because price increases do not happen. So I’m skeptical about long term super-cycles, long term high prices.

Because with commodities something happens, substitution, new entrants, economic downturns, and so on. But I am confident that certainly this year and probably well into next year I can’t see anything happening which will reduce the high demand and stop high prices going higher. In 2021, for logs or sawn timber, especially softwood sawn timber.

India is likely to be the next big wave of imported wood demand. That won’t happen for five or ten years. It will never be as big as China, but it might be half to 2/3 as big as China for imports of wood. The demand for softwood logs and softwood lumber in Europe, China, Asia, and the United States I think will be high this year and next year minimum. And going higher, perhaps going higher.

Lesprom Network: It is believed that the 20th century was the century of concrete, and the 21st century will be the century of timber in construction. New technologies have begun to be used in housing construction, which make it possible to build high-rise buildings. How is CLT manufacturing in New Zealand developing?

Dennis Neilson: Interesting question and I follow it quite closely. My good friend is just opening a world scale CLT plant here in my own home town of Rotorua New Zealand. Its capacity is 50 thousand cubic meters per year. Now CLT and LVL are interesting. New Zealand has been a pioneer in a lot of products. I mentioned, a hundred years ago it was a pioneer in planting forests, no countries were doing that thing. But NZ was almost a pioneer in using pine wood fibre to make softwood pulp – from in the early 1950s. NZ built the world’s fourth MDF mill. We were also very early into the laminated veneer lumber manufacture.

However, interestingly related to Russia – the major LVL manufacturer in New Zealand closed most of its mill last year. Most of its production was being exported to Australia. But – who started crushing them in Australia?  It was Modern Lumber Technology (MLT), from St Petersburg in Russia, which has a big modern LVL mill, just North of St Petersburg – which is a major exporter to Australia and it has been crushing the NZ product. Of course all of the major forest products companies in Russia are owned by billionaire oligarchs, you will understand that – and I understand MLT is one of them.

Australian CLT demand is very high, the biggest per capita outside of Europe, especially Austria and Germany.  For many years it was and still is importing CLT from Europe, from Austria mainly. But in 2018-2019 the Hyne Company in Australia has opened one big CLT mill using Australian grown Radiata pine. Another company – TimberLink Australia, is opening a CLT mill next year.  Australia is very much a heavier user of CLT for mid-rise buildings. In NZ it is slower but starting. So we have this brand new CLT mill, owned by Red Stag in Rotorua, New Zealand which is world scale just opening now. Now we have an unusual situation in New Zealand and that we are under our building laws. We have to chemically treat our Radiata pine or any wood coming into New Zealand in structural use. And we have to treat it with the boron, with the chemical having to be 100% by pressure pushed right through the middle of the timber. And Radiata pine is the only species in the world you can do that with. NZ cannot import CLT from Europe because each piece has to be treated and the Europeans with Scots pine can’t, and even possibly cannot. Australia can import LVL/CLT from Europe (or Russia) as it does not have to treat the timber – It’s voluntary. So Australia can be a big importer but NZ cannot. So New Zealand will have to export its CLT because NZ and Australia will have a big surplus by next year.

We will see a change in uses in mid-rise buildings slowly, Australia more quickly, and Europe, of course very quickly. Although when you look at the volume of CLT produced even in Europe compared with the volume of softwood sawn timber, it’s still only a few percent.