International Market Opportunities and Risks: Global Trends Impact Local Markets
International Markets: Exploring global lumber markets poses both great opportunity and risk. Learn about how international markets are impacting the industry at home and abroad as well as how you can profit from the global market trends.
By Chaille Brindley
Date Posted: 10/1/2013
“It’s a small world after all,” is more than just the name of a ride at Disney World that is used to educate children about the similarities between foreign cultures. This has become the reality in global wood and lumber markets. What happens in huge markets, such as China, does impact exports as well as even domestic pricing in places all over the world.
One thing is true about international markets. They are always changing. “There will be changes in the coming years. There are always changes,” said Hakan Ekstrom, president of Wood Resources International, which covers international markets and provides regular reports on global trends.
Voracious Wood Appetite – The China Dragon
Trade experts generally agree that China’s appetite for foreign logs and lumber will continue to increase as it remains the number one global market for wood. Ekstrom said, “Since China does not have enough wood in China to supply its needs, it will continue to have to import wood in all types, such as logs, lumber, plywood, chips. This should continue for at least the next 5-10 years until China can get more wood from its own plantations. The general trend is up in terms of demand from China. The trend will be China favoring lumber over logs.”
Looking at hardwood lumber, Andy Johnson, regional editor for Hardwood Publishing, which produces the Weekly Hardwood Review, commented, “China, specifically Chinese domestic demand for wood products, will be a hot spot for U.S. hardwoods into the future. Initially, when the industry was just starting to ship to China in the early 2000s, about 90% or more was made into products to be exported to other markets outside of China. It is probably safe to say now that a majority of the hardwoods going into China today from the United States are being used for products consumed in China, not exported to other countries.”
Even though growth in Chinese exports of wood products is starting to slow down, the domestic market in China is picking up the slack and then some when it comes to hardwoods. Johnson said that the Chinese love U.S. red oak and oak flooring. As Chinese wages increase, it appears that its importers are becoming a bit more selective in terms of going after higher grade material. This is likely because Chinese producers can’t just throw labor at inferior quality wood to cut around defects with labor rates rising.
Johnson explained, “China used to be a market for #1, #2 and #3 common lumber with a heavy emphasis on #2 common lumber. Now it is a market for almost all types of lumber, including a lot of upper grade lumber. The competition from China for the lowest grade material is not increasing that much because China is shifting to using more upper grade material.”
China keeps on setting records every year for lumber and wood imports. More than 40% of all U.S. hardwoods exported today are going to China. If you take Canada out of the mix, that number rises to over 50%.”
Over the last few years a concern has arisen that a housing bubble could be developing in China. Thanks to its huge expansion rate, China has built hundreds of thousands of housing units more than it can use. Mainstream media reports have identified huge “ghost towns” that are largely uninhabited, particularly in the interior part of the country. But we must remember that China, because it is so closely regulated, is not a free market, and it is vastly different than the United States and other parts of the world where such a rapid rate of housing expansion would have caused a problem.
Ekstrom said, “It is hard enough to forecast housing bubbles in this country. Imagine how difficult it is to predict anything in China because the government can decide tomorrow that it will spend a lot of money in infrastructure suddenly. Everything can change overnight because of one government decision.”
Johnson agreed that the Chinese are not likely to let the market get out of control. He said, “China builds in advance of demand. If we did the same thing in this country, we would definitely have a housing bubble that would burst. But in China because so much is manipulated, it works to their advantage. In my view, there is less than a 25% chance that there will be a bursting of the housing bubble in China mainly because the Chinese authorities will manage it through tightening credit policies and limiting the number of houses people can buy. But, if it happened, yes, it would be disastrous for the global lumber market.”
Even though the Chinese may be buying more high quality lumber, they are still very price conscious. Ekstrom said, “The Chinese care more about the price than the quality of the wood, which is totally opposite from the Japanese. The Chinese are in and out of the market. They don’t believe as much in long-term relationships and loyalty. They look a lot at the price.”
This explains why producers in the western United States have seen China come in and out of the market so much over recent years. Ekstrom explained, “When the Chinese start to see lumber prices go up, they start to back off because they have a tradition of building big inventories in China. The Chinese are in the market when they think the price is right and then when they think it is the right time, they would pull out of the market.”
As the global lumber market favors suppliers over buyers, the Chinese will have to be willing to pay more if they want to secure the raw materials they need. One way that China is combating this issue is seeking wood and lumber from non-traditional sources, such as Africa.
Tom Hammett, professor of marketing at VA Tech’s Department of Sustainable Biomaterials, said, “China is going everywhere for material, including Africa and South America. They are buying up land, buying foreign companies and building roads in these countries. They are investing in these markets to obtain natural resources. They need the wood. They are finding it in places that are pretty atypical for the United States. “
For example, Hammett mentioned recently visiting Uganda and seeing where China was building roads in that country to obtain precious natural resources for its own manufacturing capacities in China.
Impact on Low Grade Markets
Even as wood demand continues to generally grow globally, one question is how will this impact local markets at home.
Ekstrom commented, “If focused on lower grade lumber in the United States, I think more of that will stay here due to domestic demand on the rise as well as prices likely to go up. When China and others look for where they can get the cheapest low grade lumber, it is probably not going to be the United States. China might go to New Zealand or Russia.”
Johnson agreed that the biggest competitor for low grade material may be other industrial, domestic markets, such as board road, crane mats, pulp, crossties, etc. Since China is tending to move away from #2 and #3 common lumber, the largest international competitor for the resource may not be as great as it once was. Johnson said, “I don’t view international markets as big of a threat competitor for resources as I do all the domestic markets. This is mainly because there are only a few markets looking for the low grade material, such as Vietnam or Mexico in the case of some items. Europe is an upper grade or one common market. The Middle East is almost exclusively upper grade with a couple of exceptions. China is climbing the ladder.”
Johnson added, “As exports expand, there will be an increase in demand for lower grade material, but I don’t view it as nearly the threat that it used to be to domestic buyers of low grade material because of the climb up the value chain. Part of that again is driven by wage growth. When you have wages grow, companies can’t afford to throw labor at low quality processing.”
Other Emerging Hot Spots
Beyond China, one area of growth that Hardwood Publishing is keeping an eye on is Mexico. Johnson said, “Due to wage growth in China, we are starting to see a shift back of at least some wood products manufacturing from Asia to Mexico. That is not hurting China so much because it is experiencing a significant growth in domestic demand.”
Year to date, U.S. hardwood shipments to Mexico are up 8%. Mexico is not quite as strong as its peak in 2008, but it is getting back there and will likely reach that level over the next couple of years.
In Asia, Vietnam has experienced almost exponential growth over the last ten years. Hardwoods have been shipped to Vietnam to make furniture and flooring. Almost all of Vietnam’s use has been for export. This year growth is only up 5% as Vietnam’s exports are starting to decrease some. Vietnam has a pretty big inflation problem as well as some wage growth concerns. Hardwood Publishing expects growth to continue but to cool somewhat in Vietnam. Some of Vietnam’s manufacturing may go to other Asian countries with even lower wages.
For hardwoods, South America holds long-term potential. But as a region, it still struggles to understand U.S. grading rules and how U.S. mills produce lumber. South America is closing off more of its domestic tropical forests to harvesting. This could increase demand in the long run although the region uses a lot of softwoods and plantation lumber. South America remains a fairly small overall market for U.S. hardwoods. Despite its large population and growing economy, Brazil still only buys 450,000 bf per year of U.S. hardwoods.
Hammett said, “The hot spots are primarily in Asia right now. But there is growth everywhere, even in Africa. Too often we discount these smaller markets and supply points. It is truly a much more global market than it used to be.”
Major Global Competitors
Although the U.S. remains in a strong position when it comes to log and lumber exports, it is by no means the biggest or most powerful player in many markets. Increasingly with globalization these markets are all somewhat connected. Hammett commented, “Whether these areas that are coming on strong compete in our markets, there is a ripple effect because they fill up other markets that might have otherwise opened up for us.”
One competitor on the downswing is tropical hardwoods that are falling out of favor due to legality and environmental concerns. This will create further wood opportunities from other markets.
Looking at specific countries, Russia looms as a potential major competitor on the hardwood front. But it has had infrastructure problems and is not known for moving quickly to market. Also, uncertainties in tariff policies hamper Russian exports. Johnson said, “Russia is a big potential competitor, but it never seems to be able to realize its potential.”
Ekstrom agreed that Russia shows promise and yet will struggle to achieve it. He commented, “Russia is probably not going to see a dramatic change in the short term because that is not how the country works. If you are talking 10-20 years, that could change for Russia.”
In Europe both western and eastern countries produce a lot of oak that competes with white oak coming from the United States. These markets tend to be impacted a lot by exchange rates. Although American producers have lost some share to European companies in the European market, they still can’t seem to keep up with demand.
Ekstrom said that Canada can export some more hardwood depending on prices. But he pointed out that it is fairly difficult to produce hardwood in Canada.
Some other regions are slowly coming online as plantations become ready for harvest. Ekstrom forecasted, “We will see more lumber coming from hardwood plantations in South American and Asia. But that will not be big volumes considered on a global basis.”
Shifting focus to softwood, Ekstrom suggested that New Zealand, Australia, Brazil, Chile, Russia, Finland and eastern Canada can all increase lumber production.
Tricks of the Trade
Competing in global markets is certainly not easy, but it can be rewarding. There are two basic ways to go about it. You can either work through a middle man, such as a broker, consultant or trading house. Or you can develop your own expertise and handle everything yourself. Either way, it is smart to seek assistance from various outside resources, including trade groups, government agencies, state export agencies, university extension specialists or consultants.
The top source for information on hardwood export markets seems to be the American Hardwood Export Council (AHEC). Although it does not handle transactions itself, AHEC can assist American producers in finding the right trading partners, knowing the basics of the process as well as overall marketing of U.S. hardwoods abroad. Likewise, the Softwood Export Council (SEC) does a similar job for U.S. softwood products.
Hammett said, “If you want to sell into these areas, you have to learn about these markets. Go there, visit them and learn about these emerging markets.”
Developing international customers requires a lot of hard work. Hammett explained, “You don’t want to cut and run when another market picks up. You want to keep your customers and be available to them. You also want to visit these markets. You want to be mindful of the culture and customs. And sometimes they are changing very quickly.”
Many areas of the world are much more into global standards than used to be the case. This might include everything from packaging, safety, documentation and size specifications.
Picking the right customer depends on what you produce or plan to produce in the future, your location, and patience and resources to invest in international markets.
Being close to a port can help if you want to get into exports in a major way. Paul Owen, president of Vanport Intl., said in a webinar on Asia last year, “It depends on who your competition is and what the market price for your products are – whether logs or lumber. As a rule of thumb, logs need to be within 3 hours of a port and lumber needs to be within ten hours trucking to a port.”
When you ship overseas you have lots of documentation to complete, which can be a complicated maze of things to monitor and process. That’s why a good broker or trading house can be an invaluable partner for companies that want to participate in export markets but don’t plan to deal in the volumes that would substantiate foreign offices and in-house expertise.
A good broker may have more pull in getting containers shipped out or in negotiating lower freight rates. They also have expertise in foreign customs as well as knowledge about customers in those markets. They can take a lot of the risk involved with not getting paid on time or properly timing markets. Conducting financial transactions with overseas partners can be tough.
Johnson explained, “When you ship overseas, one of the common mistakes is that people treat it as just another market from a credit standpoint, but it is not. Even having letters of credits doesn’t necessarily insulate you from risk, it all depends on who the bank is.”
That’s why many U.S. producers will choose to work through a middle man and let someone else take that risk. Some markets are hard to maneuver because they can be so unpredictable. China for instance can change its buying practices from day to day. Ekstrom stated, “It is hard for lumber suppliers to plan how to serve Chinese demand because they do go in and out of the market compared to Korea, Japan or Taiwan.”
Hammett stated that most small sawmills work with export agencies instead of navigate those markets alone. He said, “The intermediary may cut the price that you get paid a bit. But they absorb most of the risk and know how to get the product to foreign markets.”
When you are exporting lumber, you have to consider a wide variety of details from the size, the grade, the shipping and storage practices, the method of payment, government documentation, shipping distances for proper delivery schedules, etc. The fact that the rest of the world uses the metric standard can complicate sizes for U.S. companies.
Some U.S. companies choose to ship lumber and have it loaded at the port at a container stuffing facility. Others choose to send shipping containers already loaded and ready to ship. A good rule of thumb for lumber pack sizes is a maximum of 24 inches high by 45 inches wide according to Owen.
Another big mistake is trying to ship product that does not fit the customer request. This may result in you either not getting paid or losing future business. Johnson said, “Even more than domestic markets, overseas buyers want what they want.” He indicated that many U.S. hardwood producers are still more accustomed to producing what they want to produce instead of what the customer wants. The industry has come a long way in its ability to handle specialized requirements. But it still has room to go.
Johnson suggested, “Foreign customers are asking for very specific width sorts, length sorts, very specific products, and a lot of U.S. shippers resist that very strongly. And I think that is a very big mistake. To the extent that the resources allow, companies should be trying to make what the buyers wants. People who are heavily resistant to doing specific things for overseas customers are going to lose their market share.”
Everything may be different when dealing with a foreign market. Ekstrom said, “You need to take the time to understand the culture of doing business in foreign markets. The key is to see each market and realize that you don’t typically do business the same way as you do in a domestic market.”
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