The West Looks to the East: Exports to China Play Key Role in Western Forest Products Industry
Growing wood demand from China is creating opportunities for North American exporters. Companies on the west coast have already begun focusing on this new market and growing market.
By DeAnna Stephens
Date Posted: 3/1/2011
As the housing market in the United States remains sluggish, the hope for the forest products industry in the western U.S. and Canada may lie in eastern Asia.
The forest products industry in British Columbia, Washington and Oregon saw a considerable increase in exports to China during 2010. The value of North American softwood logs and lumber exported to China reached over $1.6 billion last year, 150% higher than 2009, according to the Wood Resource Quarterly (WRQ).
Canada has more than tripled its wood exports to China over the past five years, going from $109 million (CAD) in 2005 to $385 million in 2009, according to the Forest Products Association of Canada. Much credit for this can be given to the high priority B.C.’s Ministry of Forests, Mines and Lands placed on opening and expanding Asia Pacific markets for B.C. wood products.
“We have worked hard to strengthen our forest sector by diversifying and opening up new markets overseas,” said Pat Bell, B.C. minister of Forests, Mines and Lands. “The increased demand from China means more forestry workers are back on the job, more mills are running, and forest-dependent communities are enjoying more economic stability.”
B.C.’s aggressive China campaign hit a milestone in November when Canada surpassed Russia to become China’s largest trading partner in softwood lumber. Part of the achievement was credited to a recent trade mission to China, which resulted in participating Canadian companies generating sales of 418 million board feet of lumber.
“Total sales orders taken by the 2010 trade mission are five times greater than the China mission of just two years ago,” said Minister Bell. “This incredible surge in demand shows that B.C.’s annual trade missions and other marketing efforts to grow the Chinese marketplace are paying off in spades.”
Canada is gaining ground in the housing market in China, and has gotten to the point where they are being approached by developers in the country. “We’ve moved away from having to build demonstration houses to attract developers and we are now at the point where they are approaching us,” said Minister Bell. In addition, he said there are multiple more housing developments on the way in addition to a new memorandum of understanding which has been signed with a subsidiary of the largest importer of softwood lumber in the country.
The growth of the Chinese market played a key role in making up for the decreased demand from the U.S. housing market which remained lethargic throughout 2010.
“The numbers show our expansion into the Asian market continues to gain traction, and that means more jobs and greater economic activity in B.C.,” said Minister Bell. “We’ve worked hard to lessen our reliance on the market south of the border, and that plan is clearly paying off now with the U.S. housing market in a prolonged slump.”
Though the United States has long been the top recipient of forest products exports from B.C., receiving over 67% of the province’s forest products export value in 2005, that distinction may soon be given to China. At the beginning of December 2010, the United States had received only 47.5% of the province’s year-to-date forest products export value, while China and Japan held almost 34%, double the 17% they received in 2005.
Not everything is picture perfect in China’s economy. Although some point to the burgeoning middle class in the country as a sign of future growth potential, some are concerned that Chinese companies are actively leveraging their financial resources to increase production at the urgent prompting of their government.
Dr. Charles Ray, a wood products operations specialist at Penn State University, said that China’s stock market has been weak over the past year, down 18% while the U.S. market was up by about that same amount. Beyond heavy investments in commodities and energy development, the Chinese are also investing in infrastructure projects that amount to little more than the construction of modern ghost cities in China.
It is widely believed that about 65 million new units have been built and are sitting vacant but nobody can afford them. These homes could provide space for about 200 million people or about 15% of China’s population. Ray commented that some experts fear this growth is leading to a housing bubble that far outpaces anything that has occurred in the United States. China has indicated these measures are just part of its effort to modernize central and western provinces and develop excess capacity to ease congestion in existing cities. Also, China may be spending its current surplus of foreign currency now while the U.S. dollar still has some value in trading markets.
Regardless of the reason, many international financial experts are worried that runaway inflation in China will cause these asset bubbles to pop, and to send the world’s economy into another major shock. Chinese officials are doing what they can to avoid this. But for each action there may be some undesired consequences.
Ray said, “If the Chinese government is forced to continue to increase interest rates, Chinese purchases of all commodities, including lumber, will slow. Announcements on Chinese interest rates will foreshadow Chinese demand for North American lumber…higher rates will mean less demand, and lower lumber prices in the U.S. This process began in October 2010 and is now in motion.”
Unlike Canada, which has focused lumber exports, the United States has concentrated on log exports. “While Canada has drastically raised lumber shipments to China in recent years, the United States has instead expanded exportation of logs to Chinese sawmills and plywood manufacturers,” reported the WRQ. It also noted that U.S. log exports in 2010 were an estimated 24 times greater than in 2007, creating a strong export market which caused sawlog prices in the Northwest to rise more than in any other North American region during 2010. According to Washington’s Department of Commerce, wood products exports experienced the second largest year-over-year increase for the third quarter of 2010 for the state, with an increase of 60.7% to $356.9 million.
The state of Washington has also worked to expand export opportunities to China. In September 2010, Washington Governor Christine Gregoire led a delegation with over 100 Washington business, education, science, and technology leaders to China and Vietnam as part of an effort to expand export opportunities and encourage new investments.
An even larger outreach program to the Chinese construction market was also launched by American industry. The US-China Build Program (USCB) is a cooperative effort between government and industry to promote US building materials and technologies to China’s residential and light commercial construction market. The result of a grant from the US Department of Commerce Market Development Cooperator Program (MDCP), it is supported by multiple industry associations, including the Evergreen Building Products Association, the American Forest & Paper Association, the State of Washington Community Trade & Economic Development, the Center for International Trade in Forest Products, APA-The Engineered Wood Products Association, the Softwood Export Council, and the Southern Forest Products Association. More information on the program can be found at www.uschinabuild.org.
Some companies in the Pacific Northwest have even reportedly changed their production process to better serve foreign markets.
“One problem in China is that they are not familiar with the NHLA grading rules and measurements,” said Michael Snow, executive director of the American Hardwood Export Council. “This can make it hard to communicate. We do things in inches. They measure things in meters.”
However, multiple companies in Washington have reportedly begun cutting metric sizes, as their major business is exporting to China.
All of the efforts from North American markets did not create the Chinese demand; they have simply successfully cashed in on a growing market created by the country’s ever-increasing economic growth, and wood demand doubled with a log shortage based on the Russian log export tax. According to the Center for International Trade in Forest Products (CINTRAFOR) at the University of Washington, China has become the largest importer of unprocessed or semi processed wood in the form of logs and lumber, the largest exporter of value-added wood products, and the most important player in the global trade of wood products over the past two decades.
China’s domestic wood products demand is growing between 9% and 10 % a year, according to the International Wood Markets Group (IWMG). However, China’s logging quota policy limits the supply of domestic timber, forcing the growing wood processing
Russia had long been the largest importer to China. When the Russian government scheduled a tariff increase on wood exports, the resulting uncertainty over future prices gave the U.S. and Canadian forest products industry a unique advantage in the Chinese market. Since 2008, the Russian duty on unprocessed log exports has been set at 25% of export value. In an attempt to discourage raw log exports and increase domestic processing, the Russian government originally scheduled a tariff increase to 80% of value for both softwood and hardwood for January 2009. However, multiple delays left Russian log exporters with a large degree of uncertainty and caused exports to drop significantly.
Like the United States, Canada, and all other major economies, China was impacted by the global recession and saw significant decreases in production and imports, dropping from more than 37 million m3 (valued at over US$ 5.3 billion) in total log imports in 2007 to 28 million m3 (valued at over US$ 4 billion) in 2009, according to CINTRAFOR. Unlike North America, China seems to have been making a strong recovery throughout 2010 with log and lumber imports reaching record highs.
“Log imports through the first 10 months of 2010 were up by 23.5% and are projected to reach a record 34 million m3,” CINTRAFOR said. “During the same period, China’s lumber imports exhibited strong growth, jumping from 6.5 million m3 (valued at US$ 1.7 billion) in 2007 to a projected 14 million m3 (valued at US$ 3.8 billion) in 2010. Chinese lumber imports have grown so rapidly that China is projected to become the largest importer of lumber in the world, a position traditionally held by the U.S.”
Last year, almost 14 million m3 of lumber was imported by China, a huge increase from the 3.5 million m3 imported in 2000.
“China is scrambling to fill the fiber gap,” said Gerry Van Leeuwen, vice president of International Wood Markets Group (IWMG). He said he expects the trend to continue and estimates that China will reach 20 million m3 of annual lumber imports by 2015.
Some of the main driving forces behind Chinese demand are quality, certification, and green initiatives. The top domestic concern in China is quality, said Hongfan Li, president of China Wood International, a consulting firm for international trade in Chinese wood products. And North American timber has a reputation of being high quality. “Russian and Canadian wood is quite welcome in China, but not wood from Thailand because it is inferior material,” Hongfan Li said.
A growing global concern over illegally harvested wood has forced China to look for safer sources of wood imports. The European Union, United States and Japan have all adopted environmental procurement policies requiring all imported wood products be sourced from legally harvested wood. As a major exporter of finished wood products to these regions, China has little choice but to import from certified sources.
“One strategy to minimize the risk of unintentionally introducing illegally harvested wood into their supply chain is to eliminate all wood sourced from countries where illegal harvesting has been demonstrated to be a substantial problem,” said Ivan Eastin, director of CINTRAFOR. The result has been that countries with well managed forests, such as the U.S., have seen their wood products exports increase.
Unlike in the U.S. the housing market in China is not the driving force behind wood demand. Concrete and brick currently make up the majority of construction in China. Only about 5,000 homes are built with wood each year in China, compared to the 1.6 million built in the U.S., according to Russell Taylor, president of IWMG.
“Wood frame housing is still the end game, but it’s very small,” Russell said. “We believe it will take a long time for that to really grow but it is starting to move a little bit. In Shanghai and two other cities the governments have allowed the use of wood trusses and that’s becoming a good business where they use structural lumber to replace roofs.”
The market for wood frame construction has been growing very slowly due in large part to the government’s tight restrictions on land use in urban areas, according to CINTRAFOR. However, participation in regional reconstruction projects by the Canadian Wood Council since the Sichuan earthquake last May along with an $8 million donation to help build wood frame houses for local residents has helped wood frame houses win wider market recognition.
“The Chinese government is looking for longer term solutions and partnerships,” Russell said. “The government’s trying to get more into energy efficient buildings so lumber and wood are part of that.”
CINTRAFOR said China’s new green building program, the Three Star System, has the potential to increase the demand for wooden building materials in residential construction, but that the extent of its impact on demand will be influenced by the degree to which it is accepted and utilized by developers, builders, architects and home buyers. In addition, the green building program does not specifically mention wood as a material of choice, suggesting that the U.S. government and industry groups may need to continue working to encourage the use of life cycle analysis as the basis for future revisions to the green building program, according to CINTRAFOR.
Looking ahead, Ray of Penn State said, “We will see China increasingly dictate world lumber prices, and that may be either way up, or way down. The American housing industry is likely to underperform for a decade, and will exert less influence over U.S. lumber prices as producers strengthen their export supply chains. Oil is becoming a better predictor of lumber prices, and we should monitor oil price fluctuations as well as American, Chinese, and Russian government actions for potential inflection points.”
Unfortunately, shipping distances and logistics costs will likely prohibit companies from the central regions of the United States and Canada from taking advantage of opportunities in China. That does not mean that they will not be affected by it. The Chinese demand will affect domestic supply and demand balances. There could be a scarcity of low-grade lumber in North America due to the large amounts of logs and lumber being exported to China.
The bottom line is that China will have a significant impact on global lumber trade flows, said Russell. China will keep demanding more wood, providing greater opportunities for exporters, but also creating equal disruptions to the U.S. market.
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