Increasing Demand from China
By Russell E.Taylor
There are some incredibly “good news” stories for log and lumber exporters to China emerging from the latest report by WOOD MARKETS: The China Book — Outlook to 2015. The 300-page report indicates that China will be under increasing pressure to source raw materials if it wants to achieve sustained growth in its wood products industry. This excerpt highlights some of the potential challenges and raw materials shortages facing the country over the next few years.
By Russell E.Taylor
The dynamics surrounding China’s imports of logs, lumber and wood products really started with the implementation of the National Forest Protection Plan and a massive logging ban in 1998. At that point, Chinese domestic timber harvests started to decline, during which time timber imports rose rapidly. This caused the Chinese government to initiate a massive plantation program to create a more self-sufficient timber processing industry. Today, the driver behind the rapidly expanding industrial timber harvest in China is, without question, the successful development of new plantation resources countrywide. It is reported by Chinese government officials that the harvest from plantation resources — very small just 10 years ago — now accounts for 65% to 70% of China’s total domestic industrial timber harvest.
The position of the Chinese government is that timber supply and demand is to be theoretically balanced as the new plantations come on stream. However, the majority of experts believe that even in the best-case scenario, the actual harvests will be much smaller than what is being projected. Very little of this plantation fibre will be able to substitute for higher-quality, imported softwood/hardwood logs and lumber. As a result, it is expected that there will still be a huge supply gap between China’s forest resources and its industry demand: the projected fibre supply gap will reach some 100 million m3 in 2010 on a roundwood equivalent (RWE) basis and about 150 million m3 (an equivalent log volume greater than the Canadian timber harvest in 2008 and 2009) by 2015 — an indication that Chinese imports related to required “fibre inputs” (logs and lumber) will continue to rise in the short-to-medium term.
Due to the global recession that began in the second half of 2008, China’s total log imports declined in 2009 to 28.1 million m3— a staggering 24% drop from 2007’s peak. Chinese log imports in 2010 are projected at about 31 million m3 — still some six million m3 below the peak level of 2007.
The current 25% (minimum 15 €/m3) Russian softwood log export tax is the main reason for the huge plunge in Russian log exports to China, as their delivered cost advantage over other global suppliers has been eroded substantially. The problem for China is that there are no other large log exporters in the world that can come anywhere close to providing even part of the log supply that has been lost from Russia. Chinese imports of logs from New Zealand (now the second largest supplier to China at 4.4 million m3 in 2009 with a 16% import share) and other countries have risen substantially, but the relative volumes are small. For example, Canada’s share of Chinese log imports (almost all from B.C.) was just over 1% (400,000 m3) in 2009.
Imports of Russian logs are expected to remain flat even though total Chinese log imports should rise over the next five years. With the current 25% (minimum 15€/m3) log export tax on softwood logs, Russian logs could become less competitive than softwood logs from other global suppliers. Major Russian hardwood species (oak, ash, elm, etc.) have an even higher log export tax (40%; minimum 100€/m3 since Jan. 1, 2009), and have quickly become much less competitive with other global hardwood log suppliers.
As Chinese demand for log and lumber imports rises during the next five years, it is likely Russian log imports will increase very little (if at all) given the current 25% export tax, which has created higher costs and has scaled-down Russian logging infrastructure. If Russia raises the log export tax to 80%, which, although unlikely in the short term, could certainly happen at some point down the road, it is predicted that legal Russian log exports to China will almost cease as a direct result. At an 80% tax, there could be global chaos in log and lumber exports, as China would need to step up imports from all available sources and in many cases would be required to push up prices to secure volume. It appears that China will need to scramble to combine its domestic timber harvest with available log and lumber imports to have any chance to grow its wood products industry at the same pace as its overall economy.
Chinese Sawmill Industry
The sawn lumber industry in China is very fragmented, composed of thousands of small sawmills that produce between 500,000 bf to perhaps five million bf per year. The majority of these sawmills are similar to typical sawmills found in most Third World countries, usually consisting of one head rig band saw to break the log down, one secondary band resaw to produce the required finished sizes, and manually operated trim saws to produce the required lumber lengths. These mills are generally very labour-intensive, as they do not have any mechanized lumber handling system(s) to move lumber from one machine centre to another. Each piece of lumber produced by the head rig band mill is carried by hand from the outfeed section to the infeed of the next machine centre. Sawmill lumber handling systems, as we know them, do not exist in 95% of Chinese sawmills. Wood-waste handling systems are also non-existent in these mills; board edgings and waste wood are usually burnt or carried manually to a small chipper in another location on the site. Sawdust is often allowed to pile up close to the band mills, and then is shovelled by hand into large wood boxes or bags when the pile gets too high However, with low labour costs and little capital and depreciation, these sawmills are by far the lowest cost sawmills in the world! And as the third largest lumber producer in the world (after the U.S. and Canada), the lack of a suitable log supply is becoming China’s Achilles’ heel.
Softwood lumber exports from Russia have expanded, as have imports from Canada, the U.S., New Zealand and other regions. China’s growing demand for fibre is unlikely to be met by domestic and imported logs alone, and has therefore created a huge opportunity for lumber imports.
Steadily declining softwood lumber prices in the U.S. market since 2006 were offset by rising prices in China. As U.S. market prices continued to plunge, almost every export market in the world was looking attractive from a B.C. perspective, given that the U.S. was offering some of the lowest global lumber prices by 2008, not to mention the lowest prices in 20 to 25 years. It became economical to consider selling more and more low-grade lumber to China as the delivered price to the Chinese port became more attractive relative to U.S. market price returns — and the U.S. market couldn’t take the volume anyways. As a result, China has suddenly become a significant market with substantial volumes and a reasonable price fit for B.C. lumber and, to a much lesser extent, lumber from the U.S. Pacific Northwest.
Russia and Canada are the two main lumber-supplying countries to China, accounting for almost 56% of China’s total lumber imports in 2009. During the last three years, Canadian (almost all from B.C.) lumber exports to China have been increasing at a faster rate than Russian lumber exports mainly due to the weak market returns in the U.S. market and the high volumes of mountain pine beetle-killed logs that yield more low-grade lumber.
China must continue to search the world for relatively low-cost, consistent softwood lumber suppliers; the two largest fits will continue to be Russia and B.C., with the U.S., New Zealand and other smaller exporting countries providing the balance.
One of the biggest issues that will impact how much each country will be able to ship to China will be the delivered lumber prices (and costs). Since most imported softwood lumber to China is used mainly in low-value end uses (construction, crating, pallets, remanufacturing, etc.), lumber substitution — depending on price — is a constant reality of the Chinese lumber market. In early third-quarter 2010, B.C. SPF low-grade lumber appeared to have a price advantage over Russian and U.S. softwood lumber. However, currency exchange rates and the prospects of higher lumber prices at some point in North American markets could swing the price advantage to Russia at some point in the near future.
Chinese lumber imports are projected to double over the next five years to 12 billion bf or more simply to meet China’s growing appetite for wood fibre. Since the bulk of low-grade lumber produced in B.C. is already going to China, most of the projected increase in B.C. lumber exports (from the 1.6 billion bf in 2009) will be higher quality #2 Structural & Better grade lumber – this could have big implications for the U.S. market, not to mention the impact on U.S./Canada lumber prices!