NIS-EEP PROJECT Newly Independent States Environmental Economics and Policy Project

Transcription

1 THE RUSSIAN FAR EAST TIMBER SECTOR AND ITS PRINCIPAL MARKETS Guy Robertson Environmental Discussion Paper No. 29 November 1997 NIS-EEP PROJECT Newly Independent States Environmental Economics and Policy Project This paper was sponsored by the USDA Forest Service under an interagency Agreement with the United States Agency for International Development (USAID) and with technical assistance from the Harvard Institute for International Development (HIID). Guy Robertson is a forest economist with the USDA Forest Service based at the Pacific Northwest Research Station in Corvallis, Oregon. Acknowledgements: The author would like to thank the Project staffs in Vladivostok and Khabarovsk for their logistical support. Also, Hilmar Foellmi of the Harvard Institute of International Development and Pete Owston of the USDA Forest Service for their ongoing support and assistance in this project. David Brooks of the USDA Forest Service supplied valuable comments and general guidance in initial

2 drafts of the report, and Vadim Zausaev of the Far East Institute of Market Economy in Khabarovsk supplied extremely useful background information about domestic production considerations in the Russian Far East. The views expressed are solely those of the author(s) and do not necessarily represent the views of the U.S. Agency for International Development, the host government, or the Harvard Institute for International Development. The boundaries, colors, and other information shown on any map in this volume do not imply any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. This paper is for discussion purposes and HIID welcomes comments, which will be relayed to the authors. This document should not be quoted without the permission of HIID or the author(s). For additional information please contact: International Environment Program, Harvard Institute for International Development, One Eliot Street, Cambridge, MA Tel: (617) Fax: (617)

3 SUMMARY The purpose of this report is to describe recent developments and assess possible near-term future developments within the Russian Far East s (RFE) forest products sector and its major export markets in East Asia. Perestroika and the dismantling of the Soviet command economy have drastically altered the domestic economic environment in which the RFE s forest products sector operates, with the principal result being the dramatic reduction in harvest and production levels. In the future, the size and vitality of the sector will increasingly depend upon its ability to compete in a market environment, and this, in turn, will depend not only on domestic considerations, but also upon developments within Pacific Rim timber markets at large. The principal export markets for RFE timber are identified as Japan, China and South Korea. Most of the recent growth in demand for wood products in these markets has been and will continue to be in the paper and wood panels sectors, sectors with strong linkages to overall economic growth. Owing to consumer tastes and the predominance of non-wood construction techniques in China and Korea, sawnwood markets will continue to be dominated by Japan, and far less growth is anticipated in this already mature market. Nevertheless, the Japanese sawlog and sawnwood market will likely persist as a key and quite lucrative outlet for RFE products of suitable quality. The RFE must compete in East Asian softwood markets with several other major suppliers, including the U.S., Canada, New Zealand and Chile. Recent supply restrictions of West coast federal timber in the U.S. (a traditional competitor of the RFE in softwood sawlog markets) have had substantial repercussions in Asian markets, particularly the Japanese softwood sawlog market. Chile and New Zealand, on the other hand, have enjoyed rapidly expanding production and export volumes over the last decade, but their products are still confined mostly to lower-valued end uses. Consequently, RFE timber has generally benefited from recent supply trends among its competitors in the sawlog market and has maintained relatively steady exports to Japanese markets in spite of sharp declines in the region s total log production. Softwood panels also constitute a promising product category given the increasing scarcity of Southeast Asian hardwoods and the favorable characteristics of Russian larch for softwood panel production. Increased competition from Chile and New Zealand Radiata pine, however, can be anticipated in this product category. In the near-term, the future prospects for RFE forest products production and trade will be greatly constrained by the current absence of investment in processing capacity and infrastructure. Little or no investment in new facilities has been reported in recent years, and replacement of capacity is reportedly lagging well behind depreciation. This, in turn, can be seen as a symptom of many of the broader problems facing the Russian economy as a whole, rather than an indication of a lack of profitability specific to the wood products sector. While longer-term market prospects will be more evident once a degree of stability is established in the Russian economy, the RFE remains well situated to take advantage of East Asian markets provided it is able to compete successfully. 1

4 INTRODUCTION A great deal of attention has been devoted to the size of the RFE s forest resource. The fact that timber production volumes for the region have not been any where near commensurate with this physical potential, however, indicates the need to differentiate between physical and economically viable production volumes. In attempting to understand the economic dimensions of the region s timber sector, the analyst must consider not only the costs of production, but also trends impacting foreign and domestic demand for the region s products and the nature of other suppliers of comparable products. The object of this paper is to provide a broad description of these factors and summarize recent projections of prices and production volumes for the RFE and its major markets. The regional, national and international economic environment within which the RFE s forest products sector operates has been undergoing rapid change, and any analysis of the forest sector s future must consider this broader context.. This context includes abrupt changes in the regulatory and macroeconomic environment in which RFE firms operate, equally abrupt changes in product prices and input costs specific to the wood products industries, and a generally chaotic domestic economic atmosphere with little or no investment to replace depreciating production capacity. Pacific Rim export markets have also been in considerable flux, with sharp contractions in North American conifer and Southeast Asian hardwood supply, increased supplies of plantation grown Radiata pine from New Zealand and Chile, and a potentially large expansion in regional demand owing to the probability of continued economic growth in China. Given this context, recent events within the RFE s wood products sector (specifically a sharp decrease in production and domestic consumption but comparatively stable export volumes) become more understandable. Predictions of future performance for the sector likewise demand careful consideration of both domestic and foreign determinants of supply and demand. RFE products will increasingly be sold in competitive markets. This is already the case for much of the region s exports, most of which are sold in Japan. Whether domestic log markets and markets for productive factors and services are truly competitive is far more doubtful, but it is at least apparent that the sector has increasingly been exposed to more realistic production costs. Likewise, it is evident that producers have been free to react to the large price differential between domestic and export markets. This has resulted in a drastic reduction of shipments to domestic markets, a result which is perhaps disturbing but, nonetheless, quite predictable given the collapse of domestic demand. With increased economic stability and the firm establishment of competitive domestic markets, market prices will come, more and more, to be used as the basis for production, marketing, and investment decisions. As a result, future developments within the RFE s forest sector will be more directly determined by domestic and foreign prices and the shifts in supply and demand which underlie these prices. The following report is divided into four main sections. In the first, the RFE s primary export markets are discussed, concentrating on current trends and expected developments in wood products consumption in Japan, South Korea, and China. The second section describes recent developments in the forest sectors of the RFE s major competitors in Asian export markets. The third section focuses specifically upon the RFE s forest sector, including discussions of domestic developments affecting the economics of timber production and trends in RFE exports to Asian markets by species and product. Possible future developments in RFE timber production and trade are discussed in the fourth section. This section also includes price projections for RFE export sawtimber based on recent FAO (United Nations Food and Agricultural Association) global projections (FAO, 1997). Before continuing, a note on the availability and quality of statistics is in order. Due to the broad scope of the study, a number of different statistical sources for the various countries participating in Pacific Rim softwood markets were drawn upon. The quality and quantity of these data varies widely across the different countries and products considered in this report. In general, a broad range of statistics relating to Japan, North America, and New Zealand are available and are deemed to be relatively reliable. Data for other countries, particularly consistent time series data, were largely unavailable outside of FAO 2

5 general wood products trade and production statistics. Owing to recent upheavals in the Russian economy and society at large, data on the RFE and its forest sector were particularly problematic. Where possible, discrepancies and potential biases in the data are indicated, but a detailed assessment of the accuracy of many of the statistics used in this report was impossible. 3

6 PRINCIPAL MARKETS FOR RFE WOOD PRODUCTS This report concentrates upon Japan, China, and South Korea as the principal markets for RFE products. In the past, substantial volumes of RFE timber have been shipped to Western Russia and European 1 markets via the Trans-Siberian railway, but such shipments have virtually ceased in the last few years due to large increases in shipping costs. Local consumption has also accounted for a substantial share of log production, with volumes being further processed for export or for domestic markets. This trade, however, relies upon significantly lower prices for logs sold in domestic markets than those sold in export markets. With the narrowing of this differential in recent years, both domestic processing and final consumption have been in sharp decline, and further declines can be anticipated in the short to medium term. Additionally, RFE exports to North Korea have been important in the past, but the majority of this trade has been in the form of barter and shared labor agreements, and it is hard to imagine that North Korea will play an important role in cash export markets anytime soon. In contrast, other foreign markets in East Asia, particularly in Japan, constitute some of the highest value markets for wood products in the world. These markets are likely to continue to be the primary outlet for RFE timber. If so, these prices will largely determine the true market value for RFE products, whether this value is actually realized or exists as an opportunity cost arising from policy interventions designed to curtail log exports and thereby bolster declining domestic lumber production and consumption. Final Demand Demand for RFE timber will largely depend upon demand for finished wood products in the Asian countries identified above. Figure 1 displays wood product consumption by major product category in China, Japan, and South Korea. 2 Of these end-uses, sawnwood (shown in the first panel) has traditionally been the most important export market for RFE timber, with Japan purchasing approximately 80 percent of RFE roundwood exports and processing the majority of this volume into lumber for use in housing construction. Given strong preferences for wooden structures and a high rate of new housing construction over the last 30 years, Japan has long displayed one of the highest rates of sawnwood consumption in the world, both in terms of absolute levels and on a per capita basis. As will be discussed below, this has translated into large volumes of sawlog and, increasingly, sawnwood imports from other Pacific Rim countries and, in more recent years, even from Europe. While large, Japanese sawnwood consumption levels have shown no discernible increase over the last three decades. Sawnwood consumption in China and Korea, on the other hand, displays somewhat stronger growth but is still relatively low owing to the predominance of non-wood construction materials in the housing construction market. While the low intensity of sawnwood use in these two countries will perhaps allow for further increases in per capita consumption in the future, the current result is that neither country has approached the primacy of the Japanese market as a consumer of coniferous sawlogs and sawnwood. The result is that East Asian sawnwood consumption remains closely tied to the large but static Japanese housing market and has been relatively unaffected by the rapid economic growth occurring in China and Korea. 1 As of the mid-1980s, under centralized management, percent of timber production was shipped to other regions of the U.S.S.R., about 25 percent was exported abroad (with percent of this volume going to Japan), and the remainder was processed locally for export or local consumption (Sheingauz et al., 1996). 2 Fuelwood, which comprises a major proportion of total wood consumption in China, is omitted from this analysis as it is assumed that fuelwood will be supplied locally and no RFE timber will be utilized in this category (with the possible exception of the burning of mill residues). While the Chinese Ministry of Forestry estimated 1990 fuelwood consumption at approximately 100 million CUM (Waggener et al., 1996), FAO (1997) estimated 1994 Chinese fuelwood consumption at 207 million CUM. 4

7 Wood-based panels and paper consumption (panels 2 and 3 of figure 1) show a much different profile. Here, rapid economic growth, especially in China, has resulted in strong and sustained increases in the consumption of both products panel consumption for the three countries was over 4 times that of 1980, with consumption in China and Korea increasing by over 500 and 400 percent respectively. Paper consumption likewise displayed a 150 percent increase for the region with China and Korea both posting increases of over 300 percent. Paper consumption is often assumed to be directly linked to economic growth, and figure 1 displays strong support for this assumption. Concrete forming constitutes the major use for wood-based panels, and panel consumption is strongly tied to economic growth through the commercial, industrial, and civil construction sectors. Here, as in the case of paper, consumption appears to track overall economic growth quite closely but with perhaps slightly more volatility. Derived Demand and Imports High or increasing consumption levels, in themselves, do not necessarily indicate high or increasing levels of demand for RFE products. Rather, the attributes of RFE species and grades must be considered relative to specific end-uses and to competing suppliers in order to ascertain their competitive position within these markets. For example, while China s paper consumption has been increasing at a rapid pace, much of this is supplied using non-wood fibers obtained from domestic sources, and Chinese imports of pulp and paper in 1994 were approximately one third that of Japan, in spite of the fact that reported paper consumption in China exceeded that in Japan by 10 percent. In a similar vein, Japanese sawnwood imports have been growing rapidly in the last few years in spite of slight declines in total sawnwood consumption. The main reason cited for this is the restricted supply of U.S. conifer sawlogs and the ability of Canadian and European producers to respond with increased supplies of sawnwood products. A final example can be seen in the case of wood panel products, a product area traditionally dominated by tropical hardwoods, but increasingly open to substitution by temperate softwoods due to technological innovations and a generally constrained supply of tropical peeler logs. In each of the above examples, the competitive position of RFE products will depend upon a host of supply and demand characteristics specific to each country and product. While the consideration of each of these specific markets and their characteristics is well beyond the scope of this report, a general discussion of trends in import volumes will prove useful in understanding historical and expected future trade patterns. Table 1 displays historical import volumes for major forest products for China, Japan, and Korea along with growth trend estimates for the period. Since both intermediate goods (roundwood and pulp) and final goods (sawnwood, paper, and panels) are included, care must be used in interpreting these figures, particularly in the case of industrial roundwood. The pattern of imports by country generally mirrors the consumption patterns shown in figure 1 with two notable exceptions. The first exception is the lack of growth in industrial roundwood imports in spite of robust growth in final product consumption. This is the result of a combination of constrained log supply for tropical hardwoods and North American softwoods and increasing import penetration by processed goods such as Canadian sawnwood and Indonesian panel products. The second exception is the 10 percent annual growth in sawnwood imports despite a 3 percent decline in total lumber consumption over the period. Most of this increase is driven by increasing market shares for imported sawnwood in Japan where shortages of North American sawlogs, in combination with changing trade policies and long-term declines in Japanese sawmilling capacity, have drastically reduced domestic lumber production. The other categories in table 1, namely panels, pulp, and paper, display rapid increases in import volumes in line with the strong growth in total consumption of paper and panel products discussed in the preceding paragraphs. These trends characterize the overall picture for wood products demand in the RFE s principal export markets, and, in conjunction with supply factors specific to the RFE and its competitors, they will shape the future market potential for RFE logs and processed wood products. 5

8 COMPETING SUPPLIERS In supplying Chinese, Japanese, and Korean markets, the RFE competes with a number of other major softwood producers. This study concentrates on North American suppliers (Canada and the U.S.), southern hemisphere Radiata pine producers (New Zealand and Chile), and consumer country domestic timber production as the RFE s principal competitors in East Asian softwood markets. Tropical hardwood producers receive less attention, but they are nonetheless important in so much as they affect softwood panel markets. Likewise, European producers have gained a substantial foothold in the Japanese market in the last few years, and, while they receive no explicit analysis in this report, their importance should be noted. North America Canada and the U.S. have long been major suppliers of softwood logs, intermediate materials, and finished wood products to East Asian markets. This is particularly true in the case of Japan, where the Japanese housing construction market, in conjunction with ample supplies of high quality timber in the Pacific Northwest and British Columbia, has fostered the largest net trade flow of softwood logs and lumber in the world. Japan accounts for approximately 80 percent of total export volumes from western North America (shown in table 2), and developments within this trade relationship will have major repercussions for other Pacific Rim suppliers and producers, the RFE not least among them. Reductions in supply since 1990 owing to environmental restrictions and the general exhaustion of more accessible old-growth inventories on public lands in the western U.S. (and Canada to a lesser extent) have resulted in substantial declines in export volumes since their recent peak in 1988 (figure 2). The largest declines have occurred in log export volumes, primarily of Douglas fir and Western hemlock from Washington and Oregon exports were less than half of their levels in the late 1980s in spite of substantial increases in the dollar price for Douglas fir and Western hemlock sawlogs exported to Asian markets. Lumber exports, dominated by British Columbia in Canada (which largely restricts raw log exports), have fallen to a much lesser extent than logs, with the vast majority of these declines coming from a fall in U.S. volumes. British Columbia, however, is also facing increasingly severe constraints in its supply of coastal Douglas fir and Western hemlock, and it is doubtful that it can maintain current export levels for these species. 3 Chile and New Zealand In contrast to Canada and the U.S., Chile and New Zealand have greatly expanded their supply of timber exports to Asian markets in recent years. Much of these exports are based upon plantations of fastgrowing Radiata pine planted since the 1950s, an increasing area of which has reached harvestable age in the last decade. The result has been a doubling of log production since 1985 for the two countries (table 3), and this, in turn, has led to strong growth in exports of roundwood and processed wood products (figure 3). In both countries, forest sector exports have become major contributors to the gross domestic product and have been targeted for further expansion through the sustained creation of new plantations and active domestic and foreign investment in wood processing capacity and related infrastructure (U.S. Department of Agriculture, 1995a and 1995b). However, while New Zealand focuses its exports in Asian markets, Chile exports to a much more diverse set of customers, and increases in Chilean supply will not necessarily result in increased supply to Chinese, Japanese, and Korean markets. To date, the largest growth (in terms of total volume) has been concentrated in roundwood exports, and log exports from Chile and New Zealand now exceed those from North America. Fast growing Radiata pine, however, is commonly viewed as less suitable for many sawnwood applications than Douglas fir, Western hemlock, and northern hemisphere SPF. Consequently, we cannot automatically assume that 3 Close to two thirds of total harvests in British Columbia are from forests in the interior region (primarily spruce, pine, and fir, or SPF ). While higher-valued coastal species still account for approximately 70 percent of exports to Asia, interior SPF constitutes a growing proportion of this trade. 6

9 Radiata pine exports are substituting for increasingly scarce North American species in Asian lumber markets. Rather, it is likely that a majority of Radiata pine logs continue to be used in lower valued uses such as for pallets and packaging, and as a supply of fiber for panel or paper production. This does not mean that Radiata pine will be restricted to such uses in the future. New Zealand has devoted a great deal of effort to increasing the acceptability of the species in construction uses, and innovations in lumber production technology as well as changes in Asian construction techniques (primarily the broader adoption of Western framing methods in Japan) will bolster these efforts. Indeed, the rapid growth in New Zealand s lumber exports may be seen as an indication of success in promoting wider use of Radiata pine, but it is unclear how much of this volume is simply remanufactured into packaging materials in Japan. Other major export categories include pulp, paper, and wood-based panels. Pulp exports are dominated by Chile, which may rely on an expanding eucalyptus plantation resource in addition to its Radiata pine plantations and natural forests. Paper exports are substantially smaller (on a volume basis) and are mostly from New Zealand. At 842,000 cubic meters, wood-based panel exports are quite small, but they have experienced rapid growth in both countries in the last decade. Japan-side import data indicates that these exports consist exclusively of coniferous products, and this further suggests an increasing penetration of Radiata pine into Japanese panel markets (with important implications for RFE larch as will be argued in a later section). China, Japan, and Korea Domestic Supply For the three East Asian markets considered in this report, it is reasonable to assume that the vast majority of domestically produced timber will be consumed locally and, therefore, that timber production in China, Japan, or Korea will have a correspondingly direct impact on market volumes and prices for wood products in these countries. Table 4 shows industrial roundwood production for the three countries from 1965 to the present. In terms of historical trade patterns, the steady decline in Japanese log production is the most important development as it is directly tied to the massive trans-pacific trade in logs and lumber mentioned above. In the past, it was generally argued that this decline in production was the result of a lack of mature forest inventory, but more recent years and events indicate that the underlying cause is more related to the high cost of timber production in Japan relative to other producers than to a simple lack of raw material (Robertson and Waggener, 1992). Though total import volumes are much smaller than in Japan, Korea also relies on foreign producers for the vast majority of its wood product consumption. Korean domestic production has, in fact, accounted for less than 20 percent of total domestic consumption over the last two decades. Once again, a lack of mature timber has been listed as a major reason for the inability of production to increase in line with rising demand (well over half of Korea s total forest area is in stands under 20 years old), but a combination of slow growth, the low quality of Korean species, and a rapidly rising real wage mean that it is likely that many of Korea s maturing forests will not be harvested anytime soon (Tak, 1994a). In contrast to Japan and Korea, China has seen substantial increases in log production over the last three decades. Much of this volume has come from China s traditional timber producing region in the northern provinces, an area where natural conifer forests predominate and the distribution of species and forest types is similar to that found in the southern portions of the RFE. Future harvests, however, will increasingly come from rapidly expanding forest plantations in the southern part of the country. 4 While the ability of these plantations to increase China s total production in the face of expected resource constraints in the north is unclear (due for the most part to a lack of reliable data on inventory), it is certain that any increase would be quite small in relation to expected increases in total consumption. 4 Chinese government statistics report the creation of 32 million hectares of forest plantations in the period. The status of these plantations, however, is unclear as regeneration is often unsuccessful and reporting practices allow for a broad definition of plantations (Waggener et al. 1996). 7

10 RFE TIMBER PRODUCTION AND TRADE The broad discussion of supply and demand factors in East Asian markets presented above provides a necessary context for a more specific discussion of RFE timber and wood products. Growing demand for paper and panels and a large but perhaps nonincreasing Japanese demand for imported sawlogs and sawnwood are the most salient features on the demand side. Reductions in the supply of North American high quality sawlogs and increased supplies of lower quality materials from plantations in Chile and New Zealand (and perhaps China) are the most important developments amongst Pacific Rim softwood suppliers. The RFE is also a major Pacific Rim producer of softwoods and has for many years maintained a substantial market presence in the region, particularly in Japan. RFE export volumes are, in fact, significantly higher than New Zealand or Chilean exports to East Asia and are large enough to impact regional markets significantly. This report relies on various statistics for measures of RFE domestic activity, but these statistics generally do not account for barter trade and black market activity. In the case of export markets, Japanese data are the most extensive and dependable among the three principal consumer countries, and these statistics provide the basis for a description of RFE exports. 8

11 RFE Production of Wood Products The economic upheavals following perestroika have had a devastating effect on wood products production in the RFE. A combination of a collapse in domestic demand, substantial real price increases in the cost of production inputs (especially rail transportation), and a generally chaotic economic atmosphere mitigating against investment and orderly business practices has had severe repercussions throughout the RFE s wood products sector. The most obvious of these is a 74 percent decline in reported harvests, relative to 1985, and even greater declines in the production of lumber and other processed goods (table 5). The decrease in actual harvests, however, is no doubt considerably less, as the reported figures do not take into account black market activity and under-reporting on the part of forest enterprises, nor do they measure production by newly established small-scale operators. A recent study has estimated that these small-scale operators account for up to 40 percent of total harvests, and a survey of timber enterprises in Primorsky Krai cited in the same study indicates that total harvests for the Krai are twice the level reported in official statistics (Sheingauz et al. 1996). The discrepancy between reported and actual production levels is believed to be less pronounced in the case of processed goods. Another important development in the sector is the higher decline in the production of processed goods relative to log production. The RFE now processes a much smaller proportion of its harvest than it did in the past and therefore generates less employment and (assuming processing adds value) income per cubic meter of logs harvested. 5 Given the collapse of the domestic economy, it is not surprising that processing would experience a disproportionate rate of decline as a majority of processed goods are sold within the country and are thus liable to fluctuations in domestic demand. An added factor is the rapid increase in rail rates which have made shipments to western Russia increasingly uneconomic. Demand for RFE products in foreign markets, on the other hand, has been quite strong owing, in part, to supply reductions in North America. Japan, in particular, has maintained pre-perestroika levels of log purchases from the RFE in spite of large declines in RFE log production. The result has been a major increase in the importance of export markets to the RFE s wood products sector. This has also further exacerbated the decline in processing as logs have traditionally constituted the vast majority of exports. Given the high prices for sawlogs prevailing in Japan, it is not surprising that RFE mills are unable to bid logs away from the export market to supply either domestic demand or foreign markets for lumber, and thus that an increasing share of RFE timber is concentrated in the log export trade. Another recent development with far-reaching implications for the future of the RFE s wood products sector is the collapse of government funded capital investment in the timber industry and the failure of the private sector to fill the gap. Capital investment is quite difficult to measure, but it is generally believed by RFE experts that investment has fallen to the extent that current expenditures are inadequate to maintain existing plant and infrastructure, much less replace aging machinery 6 or expand capacity (Zausaev, pers. com., 1997). One estimation specific to Khabarovsky Krai places the decline in total investment at more than 80 percent between 1991 and 1994 (Sheingauz, 1996). This lack of investment is not restricted to the processing industries but also includes transportation infrastructure and forest regeneration and management. Consequently, the current shortage of investment capital will have a longterm impact not only on the RFE s ability to produce processed wood products competitively, but also on the health and productivity of the region s forest resources. Joint ventures with foreign companies have been promoted as one means of procuring badly needed capital for the sector. However, political and economic instability have proven to be major barriers to attracting substantial amounts of foreign capital (Tak, 1994b). While such operations hold the potential of funding a growing proportion of future forest production, current levels are relatively limited. 5 It cannot automatically be assumed that processing will add value to an unprocessed log. This is especially true in the case of exports to Japan, a market which demands relatively high precision and quality in lumber manufacturing and where price premiums are attached to raw log imports. 6 Outdated machinery is particularly a problem in the capital intensive pulp and paper sector, where, as of 1985, close to 40 percent of production was from mills over 40 years of age. 9

12 RFE Wood Products Exports to Japan The following section concentrates upon RFE log exports to Japan. There are three reasons for this. First, roundwood exports dominate the RFE s export trade in wood products, by one estimate accounting for up to 90 percent of total wood product exports (on volume basis excluding pulp and paper) to Pacific Rim countries in 1993 (Zausaev, 1994). Second, Japan is the principal purchaser of RFE roundwood, accounting for 73 percent (or 3,219 thousand CUM) of total roundwood exports in The remainder was divided between China (237 thousand CUM), South Korea (402 thousand CUM), and North Korea (521 thousand CUM). And third, Japan publishes the most reliable and extensive set of import statistics; comparable data from South Korea or China (much less North Korea) are unavailable. The focus on Japanese data does not mean that other East Asian markets are not important, and it is hoped that a discussion of RFE products in Japanese markets will shed light on their market potential in China and Korea. RFE Roundwood Exports to Japan Table 6 displays total Japanese roundwood imports by source. After North America (predominantly the U.S. as Canadian log exports are largely restricted), the RFE is Japan s second largest supplier of softwood logs. In contrast to RFE domestic production, log exports to Japan have been relatively stable over the last decade and have even been increasing over the last few years. This has allowed the RFE to increase its market share in relation to declining U.S. log exports, and it has also been the source of extremely valuable hard currency exchange for the RFE economy. RFE log exports to Japan are further broken out into species groups and their respective unit values in table 7. The three main species groups are pine (commonly referred to as red pine in Japan, but probably corresponding to Korean pine in the RFE), spruce and fir (often termed whitewood in Japan), and larch. Amongst the three species groups, spruce and fir constitutes the largest volume, but volumes for the other species are also substantial. Pine is the highest value species, followed by whitewood (spruce and fir) and then larch. Both whitewood and pine are used primarily for smaller, non-structural components in Japanese traditional housing construction, with a small proportion of pine reportedly being milled for moldings and other fixtures. Due to its high pitch content and subsequent resistance to rot, larch is used primarily for ground sills. A recent survey of Japanese mills processing Russian timber indicates close competition between RFE species and North American hemlock or SPF, with a majority of respondents citing low price as a major reason for favoring RFE products (Kakizawa, 1994). Other reasons given centered on quality factors, particularly the lack of warping in comparison to hemlock a concern which has no doubt become more and more important with the increasing shift of U.S. supply from old-growth to second growth. However, an examination of the average value of Japanese log imports from the RFE, North America, and New Zealand (figure 4) gives no indication of an increase in the relative attractiveness of RFE roundwood to Japanese purchasers. While strong linkages are evident in the values for all three countries, both absolute levels and changes in RFE values are more strongly correlated with those of New Zealand than of North America. This is particularly true since 1989, a period of generally rising prices for North American timber but stagnant values for both RFE and New Zealand logs. There are several possible reasons underlying this price stagnation. First, the above discussion implicitly assumes that all RFE timber is used in housing construction, but at least a small proportion of logs are 7 The Japanese government reports 4,973 thousand CUM of roundwood exports from Russia in 1993, a figure 54 percent higher than the 3,219 figure reported by the Russian government. Part of the discrepancy may be related to the inclusion or exclusion of pulp wood in roundwood trade figures. Misreporting is another possible explanation. There are various incentives for Russian firms to under-report their sales (tax evasion being chief among them), and the discrepancy between Japanese and Russian statistics may provide some indication of the extent of under-reporting. Russian and Japanese reported volumes for lumber trade between the two countries in 1993 is 102 thousand CUM and 126 thousand CUM respectively. 10

13 used to produce pulp. Pulpwood is no longer explicitly accounted for in Japanese import statistics, but one source has reported an average of approximately 500 thousand CUM of Russian pulp log imports (or 10 percent of total log imports) for the period (Waggener, 1995). Pulp logs are generally of much lower value than sawlogs, and the Russian pulpwood volumes may serve to depress the average value for total RFE log imports. A second possibility is a decline in the quality of RFE timber imports. Japanese purchasers have recently complained about a deterioration in log quality and decrease in average log diameters. To the extent that this is the result of an actual deterioration in the forest resource base, these problems may become increasingly important in the future. A third cause is related to a perceived lack of quality and reliability in RFE sales and associated services, log quality notwithstanding. Several studies (e.g., Kakizawa 1994 and Tak 1994) have cited an absence of sufficient log grading and sorting in Russian roundwood shipments as a major factor lowering the attractiveness of Russian timber (and thereby its price). Japanese and Korean purchasers also report general instability in RFE supply and the unreliability of exporters in meeting their contracts as another negative associated with trading with the RFE. In either case, it is important to remember that logs, by themselves, do not constitute the sum total of the delivered product, and that grading, reliability, and general marketing services will be an important component in the total value of the product. Just as the collapse of the domestic economy has impacted the RFE s ability to provide more traditional value added products such as lumber and plywood, it has decreased the ability of the region to supply value added through the provision of marketing services and reliability. Softwood Plywood in Japan While still relatively small, the softwood panel market promises to be increasingly important in the future owing to a combination of robust growth in demand throughout Asia and a decline in supply of tropical hardwood veneer logs. In Japan, plywood for concrete forming is the major use for panels, and tropical hardwoods remain the preferred species in this end-use. More and more, however, the Japanese have had to substitute with softwood plywood estimates indicate that 552 thousand CUM of softwood plywood was produced in that year, a level accounting for approximately 15 percent of the 3.8 million CUM of total Japanese plywood production (Kakizawa, 1994) estimates of production volume (table 8) indicate a continued expansion in softwood plywood production, with a projected 27 percent increase over 1996 in panels produced exclusively from softwoods but a 9 percent decrease in softwoodhardwood composite panels. Increases in softwood plywood production are reflected in the import and consumption of softwood veneer logs (table 9). At 63 percent of total log consumption (excluding a small volume of softwood veneer imports), Russian species dominate raw material markets for softwood plywood production. Russian larch is a favored species for this product, and, in the 1994 estimates mentioned above, Russian larch accounted for slightly over half of all production, with other Russian species being used only in a very small proportion of the total. Major competitors of larch in plywood production are Douglas fir and, most importantly, Radiata pine. The use of the latter species accounts for the position of New Zealand and Chile as the second largest supplier of softwood veneer logs to Japan (an expected 26 percent of total log consumption as shown in table 9). Engineering tests of wood properties and producer surveys presented in Kakizawa (1994) indicate that all three species are generally comparable in terms of engineering properties, and that, after Radiata pine, Douglas fir and Russian larch are equally preferred by plywood manufacturers. Kakizawa goes on to conclude that [t]he use of softwood for plywood production will continue to increase, but the percentage [of] Russian softwood will decrease. The implied reason for this declining share is intensified competition from other softwood suppliers, notably Chile and New Zealand. 11

14 RFE Wood Products Exports to China and South Korea In relation to trade with Japan, RFE wood products exports to South Korea and China are quite small both in absolute terms and in terms of the RFE s share of wood products imports in these countries. Log export volumes to China have been substantially higher in previous years. Chinese official customs statistics (as reported in Waggener et al., 1996) report an average of approximately 2.3 million CUM in the latter half of the 1980s falling to 248 thousand CUM in 1991 a level quite close to the 237 thousand CUM reported for Much of the variation in trade volumes is reportedly the result of political considerations, with volumes rising or falling in accordance with cooperation and détente in the two countries bilateral relations. South Korean import volumes have also been subject to political constraints, as it was not until the establishment of diplomatic ties between the two nations in 1991 that wood products trade was officially allowed. Since that time, logs imports from Russia have grown rapidly, but they still account for only a small proportion of the total volume of log imports. Korean import statistics cited in Tak (1994) place the total volume of softwood log imports in 1994 at 800 thousand CUM, or 14 percent of the total import volume. 8 Neither China nor South Korea use wood as a primary construction material for single-family dwellings, and thus sawlogs are proportionately less important in their total wood consumption mix than in Japan. As noted in the previous section on demand, it is the non-lumber uses of wood which have experienced the most rapid growth in recent years, and these product areas promise to become increasingly important in the future. Russian wood product shipments to China and Korea are nonetheless dominated by log exports, but they are divided up amongst a variety of end-uses, ranging from fiber for paper production to furniture, and it is difficult to ascertain which of these uses are the most important. At present, China and, to a lesser extent, South Korea account for the overwhelming majority of the small volumes of panels and pulp and paper products exported by the RFE. PROJECTIONS OF FUTURE RFE WOOD PRODUCTS PRODUCTION AND TRADE Previous sections of this report have described the current and historical situation in RFE wood products trade and production along with major developments in principal export markets. This provides an important context for formulating and evaluating projections of future activity within the region s wood products sector. This section of the report presents an assessment of possible future developments within the RFE s forest sector and wood products trade, focusing first upon likely trends in wood products demand in East Asian markets, then upon competing suppliers to these markets, and finally upon the RFE and its supply potential. A final section will provide projections of prices and net trade based upon the FAO s Global Forest Products Model (GFPM) as reported in the agency s latest projections for the forest sector (FAO, 1997). East Asian Demand A first approximation of a medium-term consumption projection (say for the year 2005) for East Asian wood products markets can be derived by simply extrapolating consumption trends shown in figure 1. This would indicate stable to slightly increasing consumption of coniferous sawnwood and explosive growth in both the paper and panels sectors. Current softwood sawnwood consumption is dominated by Japan, and future developments in this product area are expected to rely primarily upon developments in Japanese markets. Housing starts will be the most important consumer of sawnwood, and it is generally assumed that the number of starts will be relatively stable until around 2010, at which time demographic trends may result in a reduction of 8 The same data source reports 572 thousand CUM of Russian softwood logs imported in Russian export data (cited in Zausaev, 1994) reports total roundwood exports of 237 thousand CUM to South Korea, a figure 2.4 times higher than the South Korean estimate. On a percentage basis, the tendency to under-report export volumes appears to be even more pronounced in the case of South Korea than in Japan. 12

15 housing construction activity (Japan Lumber Reports, 9/24/93). A growing share of western ( 2-by-4 ) platform and prefabricated construction techniques, however, may substantially alter consumer preferences for sawnwood species, eroding the high price to quality gradient and segmented market associated with Japanese traditional post and beam housing. Future trends in sawnwood consumption in China and Korea are less clear. Certainly, growing wealth in these countries will tend to increase demand for coniferous sawnwood, but other factors ranging from demographic trends to the availability and attractiveness of substitute materials may either enhance or offset this increase. Data and general market intelligence regarding these factors, however, is largely lacking in the English literature. Current trends in paper consumption, if continued, would result in large increases in consumption by the year Chinese consumption of paper products, for example, grew at an average rate of 10 percent a year between 1984 and If continued, this growth would result in a consumption level of 90 million metric tons in 2005, a figure close to three times the 1994 level. There are several reasons, however, to suspect that this level will not be realized. First, the growth rate is based upon an extremely low initial rate of per capita consumption, and declines in growth can be expected as per capita consumption increases. Second, and perhaps more importantly, projections of this nature ignore the importance of supply factors and the potential dampening effect of price increases on consumption levels. Where increases in consumption are large enough to impact the market price for a given good, the actual consumption level realized will be less than the trend-based projection (all else being equal). This observation is particularly important in the case of wood based panels, where the trend-based projection indicates a 500 percent and 400 percent increase in consumption for China and Korea respectively. This is in contrast to expected declines in the harvest of S.E. Asian hardwoods, the major source of veneer logs for plywood production. While the trend-based projections for paper and panel consumption given in the previous paragraph are unlikely to be realized, they still give a strong indication of a substantial expansion of demand in China and Korea for these products over the next decade. Depending upon available supplies of wood and substitute materials, this expansion will be met with increases in either consumption, prices, or, most likely, both. 13