New Zealand log exports are expected to decline by 12% to US$3.4 billion as of June 30, 2022. Prices remain relatively high, but export volumes have declined. New Zealand's Ministry of Primary Industries (MPI) said export volumes fell 12% in the nine months ended 31 March 2022 compared to the same period last year, mainly due to increased logistical uncertainty. A large part of the decline is attributable to around 40 per cent of the forests owned by New Zealand's small-scale growers, who are reluctant to risk uncertain profits in export markets. Larger growers will continue to harvest regularly to supply their long-term customers.
Under normal circumstances, production increases as prices rise. However, in the current environment, high transportation costs hinder production, putting downward pressure on demand and profits. Port congestion exacerbates uncertainty and puts further pressure on profit margins as growers have to pay for delays, thereby inhibiting harvests. It is expected that by 2023, logistics issues will remain a problem, which will affect production during this period. In recent months, China's lockdown and Russia's conflict with Ukraine have exacerbated logistical disruptions. Recently, chinese ports have also seen an increase in log stocks as the COVID-19 pandemic disrupted log outflows, reducing their ability to receive New Zealand logs.
Construction in China has slowed due to high debt from major developers and stricter lending policies. This slowdown has been exacerbated by a new wave of the Opichron outbreak in China, which has further put downward pressure on demand and prices as port congestion has increased and projects have slowed. Still, supply-demand dynamics in China are putting upward pressure on New Zealand log prices. Log prices are driven by the Chinese market, New Zealand's largest export destination, where 87% of logs were shipped as of 30 June 2022.
Currently, China has limited access to logs. This supply constraint has resulted in New Zealand log exporters achieving higher than typical export prices in the Chinese market. The Chinese government has banned the import of logs from Australia and Lithuania and has established new customs regulations for pine imports from the United States and Canada. In addition, Europe has stopped importing sawn timber from Russia and Belarus, putting pressure on the domestic supply market to fill the gap. This means that European exports to China are decreasing. In addition to this, ongoing supply chain issues, including difficulties in obtaining containers, will reduce European logs exports to China. South America's supply of logs to China continues to be sluggish due to high freight rates.
In the year ended 30 June 2022, New Zealand's log exports to India as a percentage of total exports are expected to decline by 7% to 0.1% from three years ago. The market decline was partly due to increased competition from Australia and Uruguay. In 2020, exports fell sharply as the Environmental Protection Agency (EPA) implemented regulations on the recycling of methyl bromide used in fumigated logs. In the quarter of March 2022, log exports were completely halted as the EPA decided to further limit methyl bromide fumigation to small amounts (only containers are allowed). The EPA has approved a new fumigation product, ethylenedinitrile (EDN). The MPI is awaiting confirmation of India's approval of methyl bromide for its application in India upon arrival.
Looking to the future, there is a high degree of uncertainty. Transportation costs and port congestion are likely to remain high in the medium term. China's construction industry is experiencing a slowdown, but infrastructure investment and government policy easing are expected to increase demand for logs in the medium term. As a result, New Zealand log exports are expected to reach $3.6 billion as of June 30, 2023.