Is China Our Silver Bullet?
By Bill Tice
As Canada’s forest industry continues to struggle, there has been a lot of talk about new and emerging markets. Discussions have centred on China and how this country, with its huge population of over 1.3 billion people, just might be the saviour our sector has been searching for. But is China the silver bullet we need to stimulate our industry? If you talk to our elected leaders, the answer from most is a resounding “yes.” Federal Minister of Natural Resources Lisa Raitt and B.C. Minister of Forests and Range Pat Bell were full of optimism following a November 2009 market trip to China by politicians and some of the industry’s key leaders. Their excitement was understandable. The Housing Bureau in Shanghai, a city of almost 20 million residents, had just signed a memorandum of understanding (MOU) that will help Canada get a piece of a $141 billion urban housing initiative that is part of China’s $586 billion stimulus package. The introduction of a wood-frame building code by the Shanghai civic government also fuelled the optimism and Raitt responded with $800,000 in funding for three demonstration projects that will showcase Canadian wood and building techniques. In a press release, Raitt said, “We are confident the Shanghai local code provides a framework that will be easily adapted to other cities and provinces across China.”
By Bill Tice
For the most part, the investment world seemed to agree with Raitt and share prices of some of Canada’s largest lumber producers have skyrocketed. Although they have fallen back since the New Year, they are still higher than at any point in 2009. The new market for Canadian wood in China may even be impacting the strength of the Loonie according to one currency strategist with the RBC Capital Markets. “This is an opportunity the Canadian lumber industry has been dreaming about for years,” said David Watt in an interview with the Financial Post in December of last year. “This gives us a chance to take advantage of a huge market that has suddenly overcome an aversion to your product,” he continued, while adding that lumber could be the “oil of the next decade” in how it impacts the dollar.
But there are concerns about the stability of China’s economy and Canada’s lumber industry needs to make sure it doesn’t set itself up for a repeat performance of what has transpired in the United States over the past few decades. As we all know, by putting almost all of its eggs in the red, white and blue basket, the Canadian industry was essentially crippled when annualized U.S. housing starts dropped from a high of 2.2 million in early 2006 to under 500,000 in 2009. Our U.S. neighbours had a huge appetite for lumber for many years. Now it might be China’s turn, but could that bubble burst as well?
Many publications, including “The Times Online,” which is part of the U.K. group that produces “The Times newspaper,” have recently published numerous business articles that question China’s overall ability to maintain its bullish trend. “The Times Online” says “bubble fears” have been driven by new bank lending last year of £1,000 billion (C$1,700 billion). The online publication also says property prices in China’s 70 largest cities surged in December at their fastest pace since 2008, “stoking anxiety” that speculative bubbles may be forming.
The Geneva, Switzerland-based World Economic Forum, which is an independent, international organization incorporated as a Swiss not-for-profit foundation, is also cautious on China and said in its “Global Risks 2010” report that many of China’s “domestic impulses derive from high credit growth, which entails an increased risk of misallocation of capital and renewed bubbles in financial asset prices and real estate.” The WEF goes on to warn, “A loss in China’s growth momentum could adversely affect global capital and commodity markets.”
So for Canada’s forest industry, China may very well be the next huge market for its products, but companies ready to take the plunge may want to tread lightly until they see where the economy in China is heading. There is the old saying, “every cloud has a silver lining.” It could be that it took the fall of the U.S. market for Canada’s lumber industry to take a serious look beyond North American shores, and maybe China is the silver lining in the dark cloud currently hanging over the United States. It might also be the silver bullet that will help revitalize our industry. But only time will tell.