Hardwood chip owners, exporters and supply chains under sustained cost pressures

In May 31, 2017

Modest price increases in recent months and reports of further increases for premium hardwood chip grades mask the reality of the last two decades – real prices received by growers and exporters have been falling almost continuously.

Unlike the actual or money price reported continuously and much discussed, real prices record how prices have fared by comparison to the costs of production. Changes in the costs of production are measured by the relevant Producer Price Indices, reported by the Australian Bureau of Statistics.

For the twenty-one years since the March Quarter of 1996, woodchip production costs have increased by 22.7%, while the average actual or money price of hardwood chips has increased just 13.4% over the same period.

This is displayed in the chart below, which shows the actual average price for each year (for the year-ended March), and the same prices, deflated by the woodchip production cost index.

Hardwood Chip Price v Manufacturing Cost Comparison: MQ’96 – MQ’17 (kbdmt & AUDFob/bdmt)

Source: ABS & IndustryEdge

What the chart demonstrates is that since 2007, almost continuously, Australia’s hardwood chip growers and exporters have received less and less for their resource. For the year-ended March 2017, the actual average price of Australia’s hardwood chip exports was AUDFob176.68/bdmt, but the deflated or real price was just AUDFob143.97/bdmt.

While barely sustainable, these real prices have arisen by a mixture of supply-chain tightening, capital investment, revised and streamlined investment models and ultimately, reduced margins.

If nothing else, this analysis demonstrates why there is constant pressure from growers and exporters for higher prices for their hardwood chips and why there is financial stress within the supply chain. At a more strategic level, it underscores why new investments in hardwood plantations, as well as re-investment in second and subsequent rotations are so challenging.

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Reprinted by agreement with IndustryEdge, the publisher of the monthly, subscription only Wood Market Edge and Pulp & Paper Edge. Go to www.industryedge.com.au for further updates and complimentary resources.

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