China s Industry & Market: Growing Impact on the World

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1 China s Industry & Market: Growing Impact on the World UN-ECE Timber Committee Meetings Geneva, Switzerland October 3, 26 By: Russell Taylor & Jane Guo 1 INTERNATIONAL GROUP ( R.E. TAYLOR & ASSOCIATES & INTERNATIONAL RESEARCH) Vancouver, B.C., Canada

2 Presentation Outline Introduction to 1. China s Role in Global Trade 2. Russia s Fit with China 3. China s Industry & Trade in Transition 4. China s Increasing Exports to USA 5. China s Increasing Exports to Europe 6. China s Business 7. Outlook on the Chinese Processing Industry 2

3 3 Introduction to: International We are wood products industry consultants and we assist companies around the world to develop operational, marketing & business strategies. We are known as global market & industry experts/analysts on timber, lumber, panels & many millwork products sold in the U.S. market & key export markets We produce Multi-Client Reports: Europe & Russia; Clearwood Pine; Global Lumber Benchmarking; The China Book; WOOD Markets 2, 22 & 26; & the WOOD Markets Monthly Report

4 About: International Consulting Projects: US/Global Markets Global Topics Benchmarking: - Manufacturing - Timberland - Market Audits Competitor Analysis Product/Market Analysis Entry & Export Strategies Regional/Global Supply & Demand Forecasts US/Global Price Forecasts Due Diligence: Investments Specialty Products Various Lumber Items OSB/Plywood/MDF Engineered Wood: - I-Joists & LVL - Finger-joint items - Edge-glued panels Doors & Windows Mouldings & Millwork Treated Wood

5 WOOD Markets Multi-Client Reports 5

6 About: International Consulting Projects: Clients International: Lumber ~4 of the Top 5 Companies are Clients Moulding/Doors ~8-1 of the Top 1 are Clients USA: Lumber ~14 of the Top 2 Companies are Clients Plywood/OSB 3 of the Top 5 are Clients Canada: Lumber ~16 of the Top 2 Companies are Clients Plywood/OSB 3 of the Top 5 are Clients

7 About: International China Office, Beijing (Est. Jan. 1, 26) Services Offered: Market research in China; Trade data analysis & of China imports & exports; Industry tours & supplier/company assessments; Sourcing of Chinese suppliers for finished products; Sourcing of Chinese buyers of logs, cants & lumber; Liaison with Chinese government, legal personnel & others for setting up businesses in China. R.E. Taylor & Associates Ltd. WOOD Markets

8 We have Produced: The China Book THE CHINA BOOK Wood Products Industry & Market Review Part 1 & 2 = Released in March 26; Part 3 = Released in June 26 8

9 1. China s Role in Global Trade China s rank in global trade: Production: Global Rank Softwood lumber #4 (could be higher) Hardwood lumber #2 (may be #1) Plywood #1 Blockboard #1 MDF #1 Particleboard #3 Furniture #2 Finished Products Soaring Imports Exports #1 #2 after the USA 9

10 China = #1 Softwood Log Importer Global Industrial Roundwood (Coniferous) Imports 8, 16, 7, 6, 14, 12, (Million bf) (x m3) 5, 4, 1, 8, Other Europe - Top 1 3, 6, S. Korea 2, 4, Japan 1, 2, China Source: FAO/ Wood Markets 1 China & Europe = the 2 major global importers

11 China = #1 Hardwood Log Importer Global Industrial Roundwood (Non-Coniferous) Imports 5, 45, 4, 1, 9, 8, (x m3) 35, 3, 25, 2, 15, 1, 7, 6, 5, 4, 3, 2, (Million bf - Scribner) Other Belgium Japan Italy Canada Sweden Finland 5, 1, China Source: FAO/ Wood Markets 11 China has absorbed all the incremental supply since 98

12 China = #3 Plywood Exporter Global Plywood Exports - By Country 24, , , 2.3 Other (x m3) 15, 12, 9, (Billion sf - 3/8" Basis Canada Finland Russia Brazil China 6, 6.8 Malaysia Indonesia 3, Source: FAO 12 China (& Brazil) = the fastest growing exporters!!

13 China = World s 2 nd Largest Import Market % Global Market Share 6% 5% 4% 3% 2% 1% % Softwood Lbr Hardwood Lbr China: Global Import Market Share Tropical H/W Lbr Softwood Logs Hardwood Logs Tropical H/W Logs Plywood Tropical H/W Plywood China is the #1 Import Country for Logs & H/W Lumber & the #1 Exporter for a variety of commodity & finished products 13 China is 2nd to the U.S., in terms of imports, but is the world s largest importer of logs.

14 2. Russia s Fit with China Siberian & RFE Log Exports are high volume to China (and Japan) = High Margin Business! There remains a strong incentive for Russians to export logs regardless of how they obtain them (legally or illegally, although this is changing ). China s northern wood industry is booming based on a heavy diet of imported Russian logs and lumber = gold rush in terms of Chinese processing plants. But delivered log costs from Russia to China are increasing = getting to be very expensive and becoming one of the highest cost in the world! 14

15 Russia = #1 Softwood Log Exporter Global Industrial Roundwood (Coniferous) Exports 8, 16, 7, 6, 14, 12, Million bf) (x m3) 5, 4, 3, 1, 8, 6, Other Europe - Top 1 Canada New Zealand 2, 4, U.S. 1, 2, Russia Source: FAO/ Wood Markets 15 7% of Russian softwood logs are shipped to China!

16 Russia = #1 Hardwood Log Exporter Global Industrial Roundwood (Non-Coniferous) Exports 5, 1, 45, 9, 4, 8, Other (x m3) 35, 3, 25, 2, 15, 7, 6, 5, 4, 3, (Million bf - Scribner) France Gabon Papua NG Latvia U.S. Malaysia Russia 1, 2, 5, , Source: FAO/ Wood Markets 16 ~4% of Russian hardwood logs are shipped to China

17 China s Surging Log Imports Hardwood Softwood China Log Imports Million m Source: China Custom s Statistics; USDA-FAS * '3 & '4 Estim ated 17 68% of China s log imports are from Russia

18 China s Surging Russian Log Imports 25 China: Logs and Lumber Imports From Russia 2 Million m Lumber (RWE) Logs 5 Source: CTDA Note: RWE (Roundwood Equivalent) 18 Total log imports = 68% from Russia!

19 19 Russia/China Fit in Global Markets China = largest log importer in the world. Russia = largest log exporter in the world. China needs Russia; Russia needs China. Putin government is considering (is threatening) to either increase log export duties, or reduce/eliminate log exports. IF this occurs in part or in whole, China s processing industry would lose much of its raw material supply! Global raw material prices (logs, lumber, plywood, etc.) would soar and/or China s output would crash! Need to key your eye on China & Russia!!

20 3. China s Industry & Trade in Transition: The Chinese Wood Processing Industry Continues to Evolve Initial success was primarily in furniture and capitalized on: 2 Low cost labor Lower priced imported raw material Various levels of imported technology and quality control were introduced and applied. Investments in shipping/containerization improved transportation logistics and reduced export costs.

21 Chinese Furniture Industry Growth China: Furniture Total Shipments and Exports 5 USD Billion Shipments Exports f Source: CNFA & WOOD Markets For the period , Shipments up 18%/year - Exports up 34%/year! 21

22 7 Transition: Buyer to Supplier China: Wood Based Panel Production 6 Million m Other Particleboard Fibreboard Plywood Source: SFA 22 Panel output soars in all products!

23 What is the Export Potential? 6 China: Wood Based Panels Production, Imports and Exports Millions m3 4 2 Imports Exports Production Source: CTI & SFA Wood Based Panel Exports are just a fraction (~1%) of total production! 23

24 Transition: Imports to Exports China: Plywood Production Source: SFA Million m Output continues to explode!

25 Transition: Imports to Exports China: Plywood Imports Volume Value Million m Million USD 6 China: Plywood Exports 2, Source: SFA & CTI 4 Million m ,667 1,333 1, 667 Million USD Volume Value * Source: SFA & CTI * Note: '6 (6 m ths) 25 Imports plunge as exports explode!

26 Transition: Imports to Exports 3 China: Plywood Supply/Demand 25 Million m Imports Production Consumption Exports Source: SFA & CTI Note: '5 Im ports Estimated 26 Production & exports growing at similar pace

27 Transition: Imports to Exports 6 China: Plywood Imports and Exports 5 x m3 4 3 Export Import F Source: SFA & WOOD M a rke ts Plywood imports are slowing while plywood exports continue to explode! 27

28 Transition: Imports to Exports 15 China: MDF Imports and Exports x m3 1 5 Export Import Source: SFA & CTI +MDF imports have peaked while MDF exports continue to surge! 28

29 Transition: Imports to Exports 45 China: Laminate Flooring Imports and Exports x tons Export Import Imports plunge as exports explode! Source: CC 29

30 China s Wages = ~US $.5/hour; ~$1/Month Canada Nordic Countries USA W. Europe Oceania Korea Singapore Taiwan E. Europe Hong Kong Latin America Malaysia Thailand Philippines Operating Labor: Monthly Wages US$/Month China Vietnam Source: $ $1, $2, $3, $4, $5, $6, Chinese workers = 1 Western worker!

31 31 China s Industry Scale The industry scale in China ranges from: World class (furniture, doors, MDF, paper); Moderate scale (plywood, flooring); Small scale (sawnwood, mouldings). The level of technology to meet export quality requirements is also critical (kilns, moulders, lacquer lines, finishing equipment). The future growth in the Chinese industry will likely include even larger, more high-tech plants that will incorporate scale and export quality.

32 Constraints Hitting Chinese Industry 32 Increasing difficulty sourcing competitively priced raw materials. Increased energy costs Increased transportation costs Increased labour costs. Trade action - from US, Canada, Europe, other. Competition - i.e., from Vietnam. Lack of high-level management expertise. Lack of branding, innovative designs Other specific constraints by sector.

33 33 Some Strategies Being Implemented To remain competitive, Chinese producers are increasingly: Substituting lower quality, lower cost domestic plantation wood for imported solid wood. Incorporating newer technology to not only increase product quality but to also to re-engineer the wood, using these alternative raw materials to produce export quality finished wood products at lower costs. (= this a similar strategy employed by plantation pine exporters in Brazil, Chile and NZ. )

34 4. China s Increasing Exports to USA China continues to increase its export to high volume, high paying export markets such as the USA. Total China Exports of Wood Products to the USA in 25 (excluding furniture): = US$2.3 billion 34

35 US Imports from China US Wood Products Imports from China (excluding Furniture) (Billions US$) Source: USDA 35 Exports of non-furniture wood products are just starting to get rolling = similar growth trend to furniture!!

36 US Imports: China is the #2 Wood Products Supplier to the U.S.* US Imports of Forest Products 25 2 Other Sweden US$ Billions 15 1 Mexico Malaysia Indonesia Germany Chile Brazil China Canada Source: USDA FAS; Note: Excludes Furniture *Value Basis Note: Excludes Furniture 36 China s imports growing at 8%/year

37 US Imports: China s Commodity Product Growth has been Spectacular! 2,1 US Selected Wood Products Imports from China x m3 1,8 1,5 1, OTHERS H/W LUMBER PARTICLEBOARD S/W LUMBER S/W PLYWOOD HARDBOARD MDF OTHER PANELS H/W PLYWOOD Source: USDA 37 Note: Excludes Furniture A 1-fold increase since 21

38 US Imports: China s Finished Product Growth has also been Spectacular! A 1-fold increase since 2! 4, U.S. Imports of Finished Wood Products US$ x 35, 3, 25, 2, 15, 1, 5, SOFTWOOD FLOORING HARDWOOD FLOORING BUILDERS CARPENTRY Source: USDA-FAS 38 Note: Excludes Furniture

39 39 China s Competitiveness in Export Markets Relative Rating of Chinese Products: Basis = Delivered to the U.S. Market (Scale of 1 = Poor to 5 = Very Good) Chinese Export Product Rating FJ Mouldings Stile & Rail Doors Engineered Flooring Solid Wood Flooring Detailed Laminated Flooring Evaluation Softwood Sawnwood Available Softwood Plywood in our Hardwood Plywood CHINA OSB BOOK Particleboard MDF Engineered Lumber Source: WOOD Markets A Variety of Chinese products are assessed & evaluated in our CHINA BOOK Report: Now Available

40 5. China s Increasing Exports to Europe Total China Exports of Wood Products to the Europe in 25 (excluding furniture): = US$83 million (About 1/3 of the USA) 4

41 China s Imports from Europe = Stable 25 China: Imports from Europe 2 Million US$ 15 1 Hardwood Lumber Softwood Lumber Logs Source: CC 41 Europe is still exporting logs and lumber to China

42 China s Exports to Europe = Rising Fast 1,2 China: Exports to Europe 1, Million US$ Flooring Doors Particleboard Plywood Furniture Source: CC 42 Big increase in furniture and plywood!

43 China s Plywood Exports to Europe = Rising China: Plywood Exports to Europe Source: CC x m This is despite a number of publicized trade actions

44 6. China s Approach to Business China's purchasing (procurement) polices are inconsistent - they include some illegal log sources but also a move to buying from sustainable forest managed suppliers. Current Chinese Government policy measures (laws, taxes, tariffs, regulations, incentives) are generally open, but restrictive import duties still apply to some countries. Still issues on patronage and corruption, but overall, China is doing a good job compared to other developing countries. 44

45 45 China is Learning & Improving to be a more Responsible Timber Purchaser! 1) China is aggressively encouraging domestic plantation development, with strong supportive policies on capital, taxation, & loans from gov t. 2) China is Increasing the recovery rate of timber using newer technology and is encouraging the use of other substitute materials to wood. 3) China & Myanmar timber trade: After several months of closed border trade to protest illegal log exports from Myanmar, China re-opened its border under new responsible rules. Timber importers in China will start paying an additional 1-15% as reforestation fee that China & Myanmar will share.

46 46 China is Learning & Improving to be a more Responsible Timber Purchaser! 4) China and Russia timber trade: More investments in Russia are occurring and measures are being made to promote legal and healthy timber trade between China and Russia. The main projects from China invested in Russia are still logging and primary processing. Recently, 18 Chinese wood processing company announcing that they will invest US$1 million in wood processing manufacturing in Sino-Russia zone where located in Ussurisk, Russia. This is the first large scale wood processing zone invested by China in Russia..

47 47 China is Learning & Improving to be a more Responsible Timber Purchaser! 5) FSC and Chain of Custody certification is accepted by Chinese companies step by step as more and more companies are in processing or considering in getting FSC and COC certification. 6) This partly in response to accusations that of China s total log imports, some 9% originates in countries without sustainably managed forests or have a record of high illegal log exports. 7) The Chinese government imposed a 5% consumption tax on solid flooring as well as chop sticks from April 1st 26 in China.

48 China is Managing its Economy & Natural Resources Today the urbanization rate in China is 43%, and by 22, the urbanization in China will be 55% - 6% - this will increase demand in forest/wood products. Housing investment and starts has been increasing 2%-3% per year and construction was 6.7% of GDP in 23, increasing from 4.7% in With the increasing urbanization and living standard, the construction will continue to expand in next 5-1 years, maintaining high demand on construction and decoration. 48

49 49 Potential Constraints or Brakes on China s Wood Processing Industry Less favorable policies and developments may be impacting China s wood products export sector: 1) Recently, the VAT export rebate has decreased in some products to encourage more value-added & non-solid wood processing & exports It is estimated the VAT export rebate of other products, like plywood, will be cancelled or decreased in the coming years. 2) RMB exchange rate is increasing (but slowly). 3) Labor costs are increasing. 4) Raw material costs are escalating.

50 5 Chinese Government & the Economy The Chinese state remains deeply entrenched in the economy & drives China s business cycle. According to official 23 data, the state directly accounted for 38% of GDP & employed 85 million people (about one third of the urban workforce). The state controlled $1.2 trillion worth of capital stock = 56% of the country s fixed industrial assets. The state is either a monopolist or a dominant player in the most important sectors. The government maintains tight control over most investment projects via long-term bank credit and in granting land-use rights.

51 51 Chinese Government & the Economy Patronage: Of the large- and medium-sized state enterprises ( corporatized ) in 21, 7% of Party Committee members were on the board of directors. All told, 5.3 million party officials about 8% of its total membership and 16% of its urban members held executive positions in state enterprises. State enterprises are also miserably unprofitable: a median rate of return on assets was 1.5% and more than 35% of state enterprises lose money. Dishonest officials face little risk of punishment as only 5.6%were criminally prosecuted.

52 52 Wealth & Governance A recent study reports that <1% of Chinese households control 6+% of the country s wealth. By comparison, 5% of the households in the USA own 6% of the wealth). According to the World Bank, China s governance ranks in the bottom half of all the countries in the world. China under-invests in crucial social services, especially education and public health. But with a per capita income of nearly $1,5 ($4,5 if you consider people s purchasing power), China is richer than many poor democracies.

53 Come see for yourself! We are Hosting an in-china International Summit Conference & Tour Shanghai, China Oct 28-29, 26 Mark Your Calendars & Plan to Attend our 3rd Conference in China 53

54 54 5. China Competitiveness Summary Increased imports of raw material required: from North American, South American, Southeast Asia, Europe, Russia, etc. Rising raw material costs = a growing problem for some Chinese regions or sectors. Energy, oil, transport costs could squeeze costs further. Chinese are offsetting high raw material costs two ways: Using more domestic plantation species at lower costs; Incorporating more technology to engineer products and lower raw material input costs. China will continue to expand its exports where it can gain or maintain its competitive advantage & market access. Chinese government financing + government interest to create jobs = creating a formidable competitor

55 China Summary Will continue to be the world s engine of production for a variety of commodity and valueadded products Determining the fit with China is the key for many industries and companies. = if you can t beat em, then join em! If China (or Russia) hiccup, then look out for huge supply/demand dislocatons/opportunities! If they continue to both expand, then they will be both be formidable competitors. 55

56 THANK YOU! QUESTIONS?? International Inc. Vancouver, B.C., Canada Suite Granville Street Vancouver, BC V6C 3P1 Tel: (64) / Fax: (64) info@woodmarkets.com

57 Russell E. Taylor, RPF, MBA President & Jane Guo China Office Manager International Inc. Vancouver, B.C., Canada Suite Granville Street Vancouver, BC V6C 3P1 Tel: (64) or / Fax: (64) info@woodmarkets.com

Key Global Supply Trends & North America Market Outlook: Impacts on BC Lumber Industry

Key Global Supply Trends & North America Market Outlook: Impacts on BC Lumber Industry Russell Taylor, President International WOOD MARKETS Group Inc. Vancouver, B.C., Canada Presentation Outline 1. Global