Rayonier Inc. (NYSE:RYN) Q2 2019 Earnings Conference Call Transcript
Aug 08, 2019 • 10:00 am ET
David L. Nunes
it here is we look at the ratio of inventory-to-demand, expressed in terms of the number of months. And generally speaking, if we see that ratio at/or below two months of demand, we consider the markets to be pretty healthy from a pricing standpoint. Towards the end of Q1, we saw this ratio climb up to three months after the Chinese New Year, where we experienced some sluggish return to construction activity, which impacted that. We saw in June a big increase in New Zealand log shipments, which grew 26% year-over-year and that really is what contributed to this 15% price correction that we saw towards the end of June. We have subsequently seen the inventory to demand improve to roughly two months. And so, we're encouraged by this for a number of factors. First of all, we are entering a normally increased construction demand period in China, and so, as such, we weren't terribly surprised to see recent small increases in the neighborhood of $2 to $3 per cubic meter on log prices. So, that's a high-level sense of where things stand on the inventory sense.
I think the bigger impact, if you go back to what I was describing earlier, we have seen a big jump in lumber volumes going into China, and that's probably been the biggest factor on the margin that has influenced markets. In May, in the main Yangtze Delta lumber ports, we saw lumber inventory climb to 1.9 million cubic meters. This is roughly two times the level it was in 2018 and a lot of this is being driven by volume coming from Europe. Europe has experienced some pretty severe damage associated with beetle kill as well as windthrow damage. And just to give you some sense of that, there are four countries that have contributed to this fairly significantly, Germany, the Czech Republic, Switzerland and Austria. In terms of the percent of harvest in those countries associated with either beetle kill or windthrow volume, they've gone from 28% of their harvest in 2017 to 53% in 2018, and we've seen big jumps in both of these categories. Beetle kill volume in 2017 in these four countries was 12 million cubic meters, it grew to 31 million cubic meters in 2018, and the windthrow went from 15 million cubic meters in 2017 to 20 million cubic meters in 2018.
The One Road One Belt initiative in China, which has really opened up rail linkage into Europe has also facilitated the movement of these increased lumber volumes into the China market. And so, not unlike what we experienced when we saw the beetle kill epidemic hit western Canada, we've seen a big movement of volume into the Chinese market. And it's going to take some time for that to be fully absorbed. We think that it represents, at least for the short period of time, some element of substitution that's going to impact log markets really from all countries. What we've seen in terms