Stumped – Searching for trends in the global trade of forest products

There is nothing easy about searching out supply and demand trends in the global trade of forest products. With the U.S.-China tariff war, the global economic slowing, climate change and environmental challenges, looking for market trends can be like trying to read the tea leaves spinning in a stirred cup.

Stumped. Where do you begin? Over the past two years the tariff war between the United States and China certainly has been a major factor stirring up difficulties in the global trade of forest products (and just about everything else…as soybean farmers can attest). Is it THE factor that is problematical? There are other factors influencing global supply and demand for forest products. Pricing and product availability matched against the demand economics and the regulatory guidelines push and shove forest products from market to market.

Nonetheless, China’s imports of forest products – just as steelmaking commodities – shape the global market. As for market makers, consider the People’s Republic of China (PRC), according to the UN’s Food & Agricultural Organization (FAO) 2017 statistics (prior to the tariff dustup), imports over 40% of the world’s industrial roundwood [logs], 22% of the veneer sheets, 37% of pulp for paper and 46% of the recovered paper (scrap paper). In all of these forest product categories, China easily leads the world.

But these numbers only outline China’s near insatiable demand for forest products. RISI Inc., which provides analysis on the Forest Product sector, in a presentation on China pointed out, “Over the past 20 years, China’s total need for imported wood has grown 14% annually, with the pulp and paper sector accounting for half of the demand.” The same RISI report noted that since 2000, imports of softwood logs had risen 11% (CAGR) while softwood lumber imports grew 26%.

The PRC wasn’t always a major consumer of lumber products, nor a major importer. For example, in 2000 China imported about 47 million cu/m of wood products and now the tally is nearly 250 million cu/m. In the case of softwoods, the rise is even more pronounced – at less than 7 million cu/m in 2000 and now a total hitting 80 million cu/m. So, what happened?

China embarked on the economic reforms of the 1990s and adopted an export oriented economic policy (factory to the world).

The 1990s boom came with a rise in domestic construction and skyrocketing exports from industries like furniture and flooring. And China became the world’s second largest consumer of timber. With the booming economy came a shortfall between domestic lumber production and demand. In 2017 the PRC announced a prohibition on the commercial cutting of natural forests. And the prohibition had an immediate impact on timber imports. From 2013 to 2017, the percentage of imports against demand rose from 48.4% in 2013 to 56.4% in 2017 – a year in which China’s imports hit nearly 109 million cu/m and grew by over 16%. According to China Customs, the wood products trade (imports and exports) rose from just over $120 billion in 2011 to $165.3 billion in 2018. The biggest exporters to the PRC during this period were Russia, the U.S., New Zealand and Canada.

The Tit-for-Tat Tariff War

When the tariff war between the U.S. and China broke out in 2018, it set off a tit for tat tariffs battle – Washington announcing a tariff and Beijing responding in kind and the forest product industry was one of the first targeted.

The latest round of tariffs was particularly excruciating to U.S. lumber exporters. In late August, China announced effective September 1, 2019, the PRC will impose 10% additional tariffs on wood products (including fuelwood, softwood chips/pellets, sawnwood, plywood, wood). And from December 15^th 2019 Beijing said it would levy further tariffs on logs, sawnwood, veneer, fibreboard, wooden wares, flooring, bedroom redwood furniture, bamboo and rattan furniture, plywood, particleboard, and natural cork products.

Of course, all the pain could go away if a trade deal could be negotiated between the respective Presidents Trump and Xi Ji-ping. (At this writing) negotiations are scheduled to start this week and China has lifted tariffs on pork and soybeans and Trump has postponed the October 1^st tariff hike on Chinese imports until October 15^th – presumably as part of the negotiating strategy.

There is a great deal of uncertainty on how the negotiations will fare. From one perspective, the slowing of the Chinese economy [hitting the magical figure of 6% GDP growth is looking out of reach] is pressuring Xi to settle the dispute. The timing is also important as China’s National Day – October 1^st and the “Golden Week” October 1-7 are coming up to celebrate the founding of the PRC some 70 years ago – and Xi would like something more to add to the celebration.

Trump likewise has his motivation with the U.S. economy slowing [will the U.S. GDP growth again hit 3.1% of the 1^st quarter of 2019?] and a highly contentious 2020 election looming.

The governments of both China and U.S. seem to be more comfortable in their quasi-cold war disposition and their global competition than with any economic cooperation.

Finally, there is the commercial reality that the U.S. and China are decoupling and with or without tariffs and irrespective of political parties, the day-to-day business relationship between the world’s two largest economies is unlikely to ever be the same.