Kerstin CanbyForest Trends

Beijing, July 2006

China and the Global Market for Forest Products:Look at Russia and Africa

Basic Dynamics of Supply and Demand

Varying projections of domestic production and China’s ability to be self-sufficient by 2015.

NDRC 2006: 150 million m3 gap between domestic supply of industrial roundwood and demand (domestic consumption + exports).

This gap to be addressed by: • imports• improvements in domestic production• substitution• greater efficiency

Global Context: Increasing Imports

World’s Top Industrial Roundwood Importers

Source: FAOstat and China Customs

0

5

10

15

20

25

30

2000 2001 2002 2003 2004

Canada S. Korea Austria Sweden Japan Finland China

Mill

ion

m3

China’s Timber Imports by Product Type

0

5

10

15

20

25

30

35

40

45

50

1997 1998 1999 2000 2001 2002 2003 2004 2005

Imp

ort

s(m

illi

on

cu

bic

met

ers

RW

E)

Logs

Sawn wood

Wood chips

Fiberboard

Plywood

Particleboard

Veneer

Other

Logs & sawnwood up * Plywood & veneer down

Total consumption of wood products has grown rapidly over the past decade.

Adapted from Figure 17 of Fuller, Bernard. 2006. China's Rapidly Expanding Wood Products Market: Are they Sustainable? Bedford, Massachusetts: Resource Information Systems Incorporated (RISI).

0

10

20

30

40

50

60

70

80

90

100

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Mill

ion c

ubic

met

ers

RW

E

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

Export

s' S

har

e of Consu

mption

Exports Domestic Consumption Export Share (right axis)

Drivers of DemandExports vs. Domestic

Consumption

Drivers of Demand: Domestic Consumption

0

100

200

300

400

0 5000 10000 15000 20000 25000 30000 35000 40000

GDP per capita, USD 2000 prices

Consumption 2000, kg per capita

Japan 1980-2000

USA

Denmark

Sweden

Ireland

UK

Finland

CanadaNetherlands

Austria

Belgium

Singapore

Germany

France

Australia

Italy

Spain

New Zealand

Rep. of Korea

Malaysia GreecePortugal

ArgentinaMexico

Venezuela

BrazilTurkey

South Africa

Russia

China

India

China

USA

GDP per capita and Paper Consumption

Drivers of Demand: International Demand

36.1 million m3 RWE

44.6 million m3 RWE

Imports Exports

China80% imported volume

China's net domestic consumption of timber products is quite low compared to its timber product trade

Pulp and paper different story: only 11% is re-exportedRussian timber different story: majority stays in China itself

Mainly tropical timber processed into furniture, plywood that are exported

China’s Growth as a Wood Processing Center

0 5 10 15 20 25 30

other*

wood furniture

plywood

fiberboard

veneer

particleboard

wood chips

lumber

logs

million m3 RWE

Export – led growth

0

2000

4000

6000

8000

10000

12000

14000

1997 1998 1999 2000 2001 2002 2003 2004

Year

Expo

rts

(milli

on U

S do

llars

)

Major Destinations of Chinese exports

US +800%Japan +200%Others +600% **EU +700%Hong Kong 20%

-

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

1997 1998 1999 2000 2001 2002 2003 2004

Expo

rts

(RW

E m

3)

Hong Kong Korea South Singapore Taiwan Japan United States EU Others

Major Destinations: Plywood

1000% increase

US and “others”

1. Taiwan 16%2. USA 13%3. S. Korea 12%4. Japan 8%5. Indonesia 7%

1. Canada 27%2. Indonesia 18%3. Russia 13 %4. Chile 10%5. US 10%

1. Indonesia 65%2. Malaysia 21%3. Russia 3%4. Japan 2%5. Hong Kong 3%

PaperWood PulpPlywood

1. Russia 18%2. USA 14%3. Thailand 13%4. Indonesia 12%5. Malaysia 8%

1. Russia1 68%2. Malaysia 6%3. PNG 6%4. Myanmar 4%5. Gabon 3%1 20 million m3

1. Russia1 49%2. Malaysia 8%3. Indonesia 6%4. Thailand 5%5. PNG 4%1 26.4 million m3

LumberLogsTimber Products

Largest Exporters of Wood Products to China (2004)Largest Exporter of Wood Products to China

Largest Exporters

of Wood Products to China (2004)

Largest Exporters of Wood Products to China (2005)

Importance of Russian – Chinese Trade

Overall TradeChina : Russia’s 4th largest trade partnerRussia: China’s 8th largest trade partnerAverage annual growth rate of 30%

Forest Products Trade10% of overall trade between the two countriesRussia: #1 forest products supplier to ChinaChina: Most important market for Russian timber40 fold increase in log trade between 1996 – 2005

Clearly important trade relationship to both countries

(a)similarity of wood species in the Russian Far East and northeast China (China’s traditional timber base);

(b)low prices and China’s decision to reduce tariffs (0% log import tariff);

(c)convenience in border trade and rail links between Russia and the neighboring Chinese provinces of Heilongjiang and Inner Mongolia;

(d)favorable tax policies for border trade; and

(e)Russia’s resumption of maritime shipping of timber products in 2001, enabling Russia’s timber to be directly shipped to the major timber consuming regions on China’s eastern coast

Drivers of Russian – China Forest Trade

Rapid Growth of RU-CN Timber Imports

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1997 1998 1999 2000 2001 2002

Imp

ort

s (R

WE

1,0

00 m

3 )

Gabon Germany Indonesia Malaysia New ZealandRussia Thailand United States Others

China’s Timber Imports (RWE)

2000: China replaced Japan as largest market for Russian timber

Logs:1996: 500,000 m3 2005: 20 million m3

77% of timber imports

87% are softwood

90% of log exports go to China

Russia great increaseMY, Indonesia relatively stable

The Commodity Chain for Russian Softwood Imports to China

Source: Estimatesn from Song, W., B. Cheng, S. Zhang, X. Meng (Beijing Forestry University). Forthcoming Forest Trends “Russian logs in China: The softwood commodity chain and economic development in China”

• Recent rise of processing capacity at “gateway” cities (Suifenhe & Manzhouli) •~80% consumed domestically, mostly by construction sector

• ~20% for export to U.S., EU, Japan– over half from Chinese processors at border.

• Complicated supply chain creates challenges for timber tracking

• Proposed log export taxes increasing to 20% of exp value by 2010• Currently 0.28E / m3; could go as high has 24E / m3

• Incentives for investors in wood processing • No VAT to import processing equipment

• 2006: Russian and Chinese officials announce joint forestry venture in Siberia• Long-term lease of 1m ha; joint RU-CN processing enterprises

• Many international investors, however, see Russia as a risky investment climate (new & uncertain Forest Code)

• CN MofCom recognizes need to ensure legal trade and investment relationships with major trade partners: • Need to combat “China Theory”: fear of Chinese domination in mrktplace

• Recognition that small-scale illegal Chinese operations have created a bad reputation for larger operations that would like to invest in Russia

Change Afoot: Russia’s Desire to Increase Value-Added Processing

Expanding RFE / Siberia production zones?

Rise of Chinese Investing Power

Developing countries say China is often prepared to help when traditional donors are not, and will sometimes pay over the odds, to secure natural resources. The west African state of Gabon, for example, after trying unsuccessfully for years to interest American and European investors in extracting its rich iron ore deposits, found China was eager”

– Financial Times, Jan. 12, 2007.

Sources: China Development Bank; World Bank.

China Development Bank vs. World Bank: Outstanding loans

China Development Bank (converted to dollars at averagerate per for year)

World Bank (which also disburses some aid in grants)

0 50 100 150 200 250

2005

2004

2003

2002

Billion US $

Africa’s Forest Product Exports to China

Source: Chinese Customs data

0

1

1

2

2

3

3

4

1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Million

m3

RW

E

Logs Lumber Pulp & Paper Wastepaper & Recycled Pulp

S. Africa & Swaziland (99% p & p)

African Timber Exports to China (with / without Liberia)

0

500000

1000000

1500000

2000000

2500000

3000000

1997 1999 2001 2003 2005

m3

Liberia

Rest of Africa

Top 5 African Log Suppliers to China (2005)

Source: Chinese Customs data

Cameroon Congo

0

500

1,000

1,500

2,000

2,500

1997 1998 1999 2000 2001 2002 2003 2004 2005

Th

ou

san

ds m

3 R

WE

Gabon (2.7%) Equatorial Guinea (1%) Mozambique (0.4%)

* Important forest producing nations in West Africa do not export to China: Ivory Coast, Ghana

(0.2%)(1.5%)

Africa’s Share of CN’s Timber Imports

Three African countries (Gabon, Rep. of Congo, Eq. Guinea) supply almost 21% of China’s tropical hardwood logs.Source: Chinese Customs data

Logs 2nd largest category of African exports to China (4.9%), following oil (62.2%)Source: UN COMTRADE SITC Revision 2, cited in Boardman, G. 2006. “Africa’s Silk Road.” Washington D.C.: World Bank.

0

5

10

15

20

25

30

35

40

45

50

1997 1998 1999 2000 2001 2002 2003 2004 2005

Year

Million

m3 R

WE

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Total Timber Products African Timber Products Africa's Share

China’s Importance to Africa

Share of Country Timber Exports to ChinaGabon

0

200

400

600

800

1,000

1,200

1,400

1997 1998 1999 2000 2001 2002 2003 2004 2005

Th

ou

san

d m

3 R

WE

0%

20%

40%

60%

80%

100%

Logs Wood chips Lumber Veneer Other Share to China

Mozambique

0

20

40

60

80

100

120

1997 1998 1999 2000 2001 2002 2003 2004 2005

Th

ou

san

d m

3 R

WE

0%

20%

40%

60%

80%

100%

China’s Importance to Africa: Natural Tropical Exports

Source: J. Hewitt/COMTRADE

Esti

mate

d R

WE (

million

m3

)e

)

0.0

0.5

1.0

1.5

2.0

2.5

CameroonGabonCongo

(Brazzaville)IvoryCoast

GhanaEquatorial

GuineaOthers

China EU Rest of the World

China’s Forest Product Exports to Africa

Source: Chinese Customs data

• Africa importing Chinese plywood, paper, fiberboard, furniture

• African countries exporting forest products to China import very little processed timber products

• Most Chinese products go to Egypt (25%) and non-SSA countries

• Of SSA countries: S. Africa (0.35%), Nigeria (0.11%), Ghana (0.06%), etc.

0

100

200

300

400

500

600

700

800

900

1,000

1997 1998 1999 2000 2001 2002 2003 2004 2005

Th

ou

san

ds m

3 R

WE

Plywood Wooden Furniture Fiberboard Paper Pulp Other Forest Products

A Work in Progress

Thank you