"Spare a thought for forestry. While it's still waiting for global commodity boom benefits, it is surely looking as poorly as any sector right now including the more widely noted, and severely squeezed, household sector," Bank of New Zealand economist Craig Ebert said yesterday.
Mr Ebert was commenting on the latest performance in manufacturing index (PMI) undertaken each month by the BNZ and Business New Zealand.
The May index showed the wood and paper product sectors registering a 37.8 result, the second-worst on record and "very deep" into the contraction zone.
A reading below 50 indicates contraction in manufacturing and a reading above 50 shows expansion.
The contraction in the forestry sector should come as no surprise as it was facing a multitude of barriers, Mr Ebert said.
The sector was exposed to the current downturn in the domestic construction industry.
While much of that was centred on the housing market - where an already marked pull-back was likely to continue for a while longer - there had also been signs that non-residential construction work was looking less robust, especially beyond the next six months.
On to that could be added the international housing and construction markets, which were either weak already or about to weaken, particularly in respect to New Zealand's traditional forestry export markets of Australia, North Asia and the United States.
China would be the notable exception, he said.
"Adding to the production woes most recently has been the talked about hangover from the harvesting that occurred last year in order to beat the Kyoto deforestation charges that kicked in on January 1, 2008."
For the March quarter, there were also reports of premature shut-downs because of the early Easter.
Fire risk and tinder dry conditions also hampered activity in some areas, Mr Ebert said.
Therefore, it had been of little surprise to see total roundwood equivalent harvesting in the March quarter down 11% on a year ago.
That was weaker than the 4% fall in the December quarter and implied a further drop on a quarterly basis according to the BNZ's seasonally-adjusted estimates.
"And it's not as though the forestry sector is enjoying higher prices to offset production weakness, the way the dairy sector is in light of the recent drought. Forestry product prices have, in the main, completely sidestepped the global commodity boom.
"Sure, the industry is hopeful of better returns later in the year as fundamental demand-supply factors are seen tightening up."
However, in the meantime, prices looked subdued, he said.
The May ANZ world commodity price index for New Zealand forestry product exports had fallen 12% from its August 2007 peak.
There was also potential for domestic prices to come under pressure in line with weaker housing demand.
That would leave builders under pressure to reassess their margins in order to get contracts and make sales.
At the same time, input costs for the forestry sector continued to rise.
One of the most noticeable of those had been fuel, which was always a big issue for a sector so reliant on the running of capital equipment.
Forestry operators not only had higher internal costs to consider but also faced rising world freight charges.
The Baltic dry bulk international shipping rate had nearly doubled since the start of the year to be comparable to the highs seen around October of last year.
"Rolling this all together, it's easy to see how difficult business has become in the forestry industry," Mr Ebert said.
