Reliance on domestic market and Chinese furniture

Interesting times. Trump’s in, and resoundingly with the senate, electoral college and populist votes. It looks like Elon is going to take the knife to as many government jobs as he can, tariffs will skyrocket, and democrats are top of the list in googling ‘how to move to New Zealand’. Those that understand the US economy and politics and, don’t pay much attention to media, will understand that there needed to be some major structural economic and social change if the US is to remain as a viable superpower, and this may be what is needed – only time will tell.

What does this mean for our forest industry? China is our largest purchaser of logs and that the main sector our logs have previously been used in – construction – is about as popular as Rieko Ioane at the Sexton’s dinner table. Exports of logs to China in 2023 totaled 18 million cubic metres and 2024 is looking to be slightly under that. Luckily, China has a massive wood-based furniture industry accounting for around 39% of total global furniture production, making it the largest in the world. In addition, exports of wood furniture from China have risen 24% in the first 7 months of 2024 – great news, then along came the Don.

The US accounts for around 27% of the furniture exports out of China which totaled $20 billion in 2023. The current tariff for Chinese furniture into the US is 5.4%. A report commissioned by the US National Retail Federation explored the impacts of proposed tariff increases on demand in the US. Trump hasn’t set any definitive tariff yet, but the expected range for furniture is between 32.8% and 54.3% which the report predicted to result in a reduction in demand for Chinese manufactured product of between 73% and 87% respectively. If we assume the mid-point of 80% is likely, this will result in a total demand reduction of around 350 million pieces of furniture, a $16 billion drop in revenue and an overall 20% drop in total Chinese furniture exports, which is all a bit untidy.

NZ radiata is a favoured product for the Chinese furniture industry, a reasonable volume of our log exports is utilised in this sector, therefore any dip in demand will directly impact us. We won’t know the full extent until tariffs are set, but it’s very likely we will feel the impact of reduced supply volumes from NZ.

Irrespective of the above, market conditions are the best we have seen since March, with A-grade shorts priced at $126/m3 in the mid-third of the country. Shipping costs rose sharply in October, but the market has softened somewhat, and the next few months look reasonably solid.

It would be dangerous to view this as a strengthening market, as sentiment in China remains subdued. The recent stimulus package missed the mark, followed by a $US$1.4 trillion debt package targeted at easing local government financial strains. Local government debt has risen steadily, now at 117% of GDP, sparking uncomfortable discussions around the CCP board table. Since 2008, local governments relied on revenue from construction projects, but this has dried up. It will take a significant shift in Chinese sentiment to reignite the construction sector in the near term, but we have seen stranger things.

Back home, things are looking better domestically with September building consents up 2.6%. So long as Adrian Orr plays ball and keeps dropping the OCR in a sensible manner, we will likely see some further buoyancy in 2025. The domestic market is the backbone of our industry, so we need to see strong numbers returning to keep forest owner returns at an acceptable level.

In summary, what happens to log demand and therefore pricing in the next 12 months will have some influence from Trump et al., and it probably doesn’t look too positive for NZ exports as a whole. With some luck, shipping rates will ease, the $USD will strengthen under the republican rule and if we can keep a lid on inventory, log prices should look reasonable until late January when the Chinese New Year shutdown rears its head again. Fingers crossed the Europeans get a hankering for Chinese made furniture, and lots of it.