The day China lifted its ban on Australian timber imports, shares in Australia’s largest woodchip exporter, Midway Limited, began falling. This turn of events was not a result of trade disputes. Instead, it was driven by economic changes in China affecting global supply and demand for forest products.
As ABC Landline reports, Midway Limited’s shares dipped by 11% on Thursday and fell 7.5% on Friday, closing the week at $0.74. The issue was not due to trade friction but a question of supply and demand influenced by a softening Chinese economy.
Consumer inflation in China is rising at its slowest pace in over two years. At the same time, factory outputs are not meeting expectations. April saw a significant 7.9 percent decline in China’s imports. Though exports still grew, the pace was slower – 8.5 percent compared to 14.8 percent the previous month. All these economic shifts in China are impacting the global timber market.
In 2020, China placed trade sanctions on Australia’s $1.6B timber trade, pointing to quarantine risks. Although these sanctions didn’t include Australia’s woodchip exports, the economic changes in China still resulted in decreased demand.
Midway revealed to the ASX that Chinese ports are witnessing a growing backlog of pulp and paper stocks, attributed to “depressed global trading activity”. This situation, in turn, has triggered a drop in pulp prices and slowed down purchases of wood fibre by Chinese pulp producers.
China’s economic contraction is shaping significant impacts on consumption and manufacturing markets. Consumer inflation rose at its slowest pace in over two years in April, with factory outputs underperforming.
It’s not just pulpwood; structural timber prices are also softening
Alongside the pulp market, the demand for structural timbers is falling. In a Wood Central report earlier this month, New Zealand’s log prices dropped by 14% from March to April, causing A-grade log prices to fall from $130-$133 NZD to $112-$115 NZD due to a slowdown in Chinese demand for logs.
Managing Director of Laurie Forestry, Allan Laurie pointed out that prices must be “north of $120” for harvesters to break even. China is New Zealand’s largest market for forest products, contributing to 10% of China’s total import of forest products – $3.3b NZD or $3.00b AUD.
The NZ Forest Owners Association, a body representing all major exporters, acknowledged the uncertain nature of international trade. The spokesperson for the association emphasized that log prices have remained relatively stable compared to other New Zealand exports like dairy products.
The spokesperson also noted that New Zealand exporters have become used to inventory disruptions in China. However, they also acknowledged the slowdown in China’s construction sector and its potential impact on the demand for logs and other wood products from New Zealand.
DW Report: China is in the midst of an unbalanced economic recovery
This brings us to the core issue: as the world stands on the brink of recession, the economic recovery pattern of China – a key driver of global economic growth since the 2008 financial crisis – is crucial. A report by DW last week suggests a lopsided recovery is unfolding in China, something Western policymakers are striving to avoid as they aim to stabilize global economies.
In further worrying signs, Standard Chartered warned that China’s Consumer Price Index (CPI) might approach zero soon.
China’s producer price index (PPI), which tracks the prices factories charge wholesalers, fell at the fastest pace since May 2020. Last week Standard Chartered warned that China’s Consumer Price Index (CPI) may approach zero in the coming months.
The South Morning China Post reported that this was down for a seventh consecutive month after also missing expectations and falling by 3.6 percent in April, year on year, down from 2.5 percent in March.
“Producer price deflation deepened last month to a 35-month low, and consumer price inflation dropped to its smallest point in more than two years. Although reopening pushed up services inflation, this was more than offset by lower food and energy inflation, driven largely by base effects,” said Capital Economics.
Impacts on freight at the port
In light of these fluctuations, one of Midway’s primary customers in China indicated that it planned to follow a different mutually agreed shipping schedule for the second half of FY2023.
Midway stated, “Four vessels that were in the agreed schedule may be impacted and the timing of these vessels remains uncertain.”
Consequently, Midway anticipates a 35% drop in export volumes for the second half of FY23, potentially resulting in higher-than-normal inventory levels by the end of the fiscal year.
Despite the challenges, the China slowdown underlines the importance of market diversification. In addition to China, Midway’s major export markets include Japan and Indonesia.
On Friday, Australian Minister for Agriculture and Forestry, Murray Watt, noted that it could take some time before trade is completely restored. He suggested that, within a few months, we might start seeing imports picking up. “There’s a couple of other little quarantine things that have got to be resolved,” he said, “but clearly this is really positive news for Australia’s timber industry that a really important export destination has reopened.”
While admitting the industry has been able to find new markets, Senator Watt highlighted that these haven’t been substantial enough to fill the gap left by China. He explained, “Very often China is prepared to pay a premium for Australian products, including timber, so it would be fair to say we’ve lost in the hundreds of millions of dollars as a result.”
Opportunity to strengthen the domestic processing market
David Quill, leader of the South Australian Timber Processors Association, offered a pointed critique of China’s recent lifting of the ban on importing Australian timber logs on Friday.
“Any saw log exported would come at the expense of the future survival of that industry. China can go and get their wood from New Zealand…we didn’t plant these trees 50 years ago just to satisfy the Chinese market. Australia is not at all rich in terms of timber resources.”
This viewpoint raises an interesting proposition. Could the slowdown in China’s demand pave the way for more timber to be directed to Australian processors, thus strengthening Australia’s own domestic market?