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China's new (and traditional) suppliers

China's-new-(and-traditional)-suppliers

FEA/Wood Markets recently held its 11th China conference in Taicang (near Shanghai). The discussions at China’s Global Supply Chain Conference provided participants with updates on China and current information about key supplying regions (with a special focus on South America).

 The conference theme was centred around the changing global supply dynamics and issues for China, with speakers discussing a range of topics (including a global overview of major suppliers, analysis of various exporting countries (Russia, Brazil, Uruguay, Canada and the U.S.), and discussions about building or enhancing supply chains to China — including the role of industrial parks). In addition, some of the many developments in the market and industry in China were examined. This condensed article from WOOD Markets Monthly International Report summarises some of the key themes of the conference.

China
Chuck Chen, general manager of United Forest Products of Shanghai mentioned that the implementation of the Natural Forest Protection Plan will cause a decrease in China’s domestic timber supply of 45 million m3 annually. As a result, China will need to rely more heavily on imported timber resources. Mr. Chen examined the factors influencing the Chinese imported timber market. Of note, he mentioned that international supply change will lead to domestic demand shifts. Some of the following trends have been in evidence recently: a rising supply of plantation pine logs from South America and Australia that will have some impact on market prices, as well as the dominant market position of New Zealand’s radiata pine supply. 

This new supply will take market share from Northern Hemisphere logs: eucalyptus from South America and/or Australia is indirectly impacting hardwood supply in China (relative to the main suppliers from the Solomon Islands, Papua New Guinea, etc.);
Increasing supply potential for sugi logs from Japan and the consequent impacts on China’s domestic fir supply;
 
Declining Russian log exports, caused mainly by rising log demand within Russia’s domestic sawmilling industry: the resulting growth in Russian lumber supply has already made indirect impacts on imported (e.g., Canadian) lumber volumes being shipped to China:
 
The strength of U.S. market demand — a key factor impacting Canadian lumber supply volumes to China: China’s plantation supply — China has the largest plantation resource in the world, and this fibre will be used increasingly in the domestic market.
Russia
Bogdan Anatolievich, vice director of joint stock company KLM Co. in Krasnoyarsk, provided his view of developments in Russia. As background, it was pointed out that the Russian Federation has huge wood resources and represents ~25% of the world’s standing timber. Although Russia is a much smaller part of the world’s industry, the 2014 devaluation of the ruble has made it very competitive. Huge possibilities exist to increase wood products output and grow Russia’s global market share.
During the last few years, Russian exports of softwood logs to China have stabilised, but at much lower levels than prior to the global financial crisis. A trend evident in the last few years has been substitution of Russian logs by Russian lumber (sawn goods) exports (especially given the current 13%–15% (and higher) log export tax that remains in effect).
As a result of improved economics and sawmill margins, Russian softwood lumber represents 57% of China’s imports, a share that has been rising steadily. While this trend should persist, there are concerns that Russian softwood lumber exports will increase over the next two to three years but then slow down.
Nonetheless, there are several reasons to expect Russia to increase the softwood lumber (as opposed to logs) it exports to China:
  • Toughening of log export procedures;
  • High log export duties that now favour lumber exports;
  • A significant slowdown in sawnwood markets in the Middle East/North Africa since 2015;
  • Rising price trends due to steady demand in China (this has resulted in Russian producers, including from western and northwestern Russia, redirecting their lumber exports to China);
  • The creation of efficient and low-cost transportation schemes (especially container shipments) from all parts of Russia to China
  • The establishment of a large number of small Chinese sawmills at Russian railway stations. These mills produce lumber and/or large squares or cants or order to bypass the log export tax.
Despite the advantages of the ruble’s devaluation, the Russian log processing industry still has looming challenges. In particular, the industry will face a lack of raw materials (sawlogs) that will limit its growth and/or make incremental logs more expensive. All available or accessible harvesting areas are being utilized heavily now, and therefore new areas need to be opened up.
Uruguay
The topic of Uruguay’s emerging exports was addressed by Francisco Bonino, founder and director of Uruguay’s AF Group.
One of the major import trends in China in 2017 has been the rapid development of a supply chain for eucalyptus and pine logs arriving from Uruguay. Pine log exports from Uruguay have already achieved 478,000 m3 year-to-date (October), versus just 17,000 m3 in 2016. 
The reason for the increase in log exports is twofold:
Uruguay’s vast plantations were developed about 20 years ago and the first wave of plantations are now maturing; and there is a lack of domestic processing capacity in Uruguay to process the surging harvest, so the short-term solution is log exports.
 
Uruguay features about four million hectares of forestable land, of which only one million hectares are currently under commercial timber development (26% is pine (mainly loblolly), 73% eucalyptus, and 1% “other species”).
Loblolly pine log exports totalled 275,000 m3 in the first half of 2017 (from just over 50,000 m3 in 2016). Eucalyptus grandis log exports were 75,000 m3 in the same period (versus 150,000 m3 in 2016). The main export markets were Vietnam (58%) and China (22%) in 2016.
Pine lumber exports have been relatively small so far: ~112,000 m3 in 2016, with the main destination being the U.S. (30%), China (13%) and Mexico (also 13%). Eucalyptus lumber exports were ~20,000 m3 in 2016, mainly going to South Africa (37%) and the U.S. (19%).
Over the next few years, vast areas of pruned eucalyptus grandis (red gum) will begin to be harvested. As well, the pruning of eucalyptus grandis is an industry standard in Uruguay, and this creates some unique opportunities for processing options (sawmills and veneer/plywood). In addition, considerable areas of plantation pine forests are pruned forest.
Brazil
Approximately 493.5 million hectares of Brazil’s territory (58%) are covered by natural and/or planted forests; this is the second-largest forest area in the world (behind only Russia). Of this forest area, 483 million hectares are native and 9.9 million hectares are planted (75% eucalyptus, 21% pine, and 4% other species).
Brazil utilises some of the best technologies in the world in its eucalyptus processing, and this has given Brazilian operators a productivity level that is ten times that of the leading producers in the Northern Hemisphere.
Of the plantation forest area, the southern region has the largest planted area at 3.8 million hectares (the three largest are Paraná State with 1.6 million hectares, Rio Grande do Sul with 1.2 million, and Santa Catarina with 991,000). Of this area, 1.7 million hectares is eucalyptus, 1.9 million hectares pine, and 227,000 hectares other species.
Currently, the rotation age of eucalyptus for cellulose pulp is 7 years; thinning of pine trees for the same purpose starts to occur at 9–10 years. For the furniture industry, the minimum age requirement for eucalyptus logs is 12 years and for pine 15–18.
Brazil’s success in having the highest productivity (volume of wood produced per unit area per year) and the shortest rotation (period between planting and harvesting of trees) globally is the result of continuous investments by companies to improve forest management, silviculture and genetics. In 2017, Brazil remained the leader in the global rankings of forest productivity, with average productivity (company-reported) of 36 m³ per hectare per year (eucalyptus) and 31 m³ (pine).
In the nine-month period of 2017, China remained the top destination for Brazil’s wood products exports (40.3%), representing revenue of US$1.9 billion (+21.5%). Europe was second at 31.5% (~US$1.5 billion; +5.8%). Latin American countries are also a main export market for Brazil. 
Brazil’s softwood lumber exports to China were 242,000 m3 in 2016 and grew by 42% in just the first eight months of 2017.
These countries and their fit with China will be further discussed at the 8th annual Global Softwood Log & Lumber Conference scheduled for May 9-10 2018 in Vancouver BC.

 

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