All change in China?

The awesome growth in Chinese panel consumption and production since the beginning of the century seemed a year ago to be uninterruptable. Total consumption (domestic plus exports) of all types of panels (plywood, blockboard, MDF/HDF and particleboard) leapt from little more than 21 million m3 in 2000 to over 82 million m3 in 2007. This near-quadrupling of consumption in just seven years is unprecedented, if only in terms of the absolute volumes involved (see chart below).
Consumption grew for each panel type: Plywood leapt from 9.4 million m3 in 2000 to 33 million m3 in 2007; blockboard jumped from 4.3 million m3 to 12.8 million m3; MDF/HDF soared from 5.6 million m3 to 27.8 million m3; and particleboard leapt from 3.1 million m3 to 8.9 million m3.
Most of this growth was concentrated in domestic markets. Thus, even though total panel exports increased strongly from 0.66 million m3 in 2000 to 11.44 million m3 in 2007, domestic market consumption more than tripled, from around 20 million m3 to more than 70 million m3 over this seven-year period. Thus, while export growth was a lot faster than that for domestic markets, we should not lose sight of the fact that markets are dominated by domestic consumption (86% of total consumption
in 2007).
The other part of the panel story which has drawn attention is that consumption has increasingly been met by domestic production. Imports of panels have slipped since 2003 as the average quality of Chinese production has improved. Total panel imports peaked in 2003 at 2.2 million m3 and dropped to 1.2 million m3 in 2007. Meanwhile, Chinese panel production leapt from around 21 million m3 in 2000 to a record 84.5 million m3 in 2007. This increase was led by large increases in plywood and MDF/HDF which, when combined, reached almost 63 million m3 in 2007 (compared to 15 million m3 in 2000).
That, in brief, is the remarkable story of Chinese wood based panels since the end of the 1990s.
The unspoken assumption has always been that this growth would continue for as far as people could foresee. However, developments over the past year, both within China and in the global economy, now cause us to question this assumption.
Obviously no market grows for ever without interruption. The problem for the forecaster has always been to determine the point at which physical growth passes first from surging adolescence to young-adulthood, and eventually to full maturity.
In China, the first turning point seems to have been reached in 2008. As we peer through the economic gloom, it would seem that prospects for China’s panel industry, while still healthy by any normal measure, have begun a transition to a new paradigm whereby industry and markets are now approaching maturity rather than being at the early stages of development.
Several factors support our expectations for slower future growth:
Firstly, the global financial and economic crisis is propelling the major developed economies into recession and many other countries will experience much slower growth (albeit avoiding recession) than over the past several years. This will impact negatively on the demand for manufactured goods, commodities and other
traded products.
For China, ‘recession’ could easily be defined as when GDP grows at just 6-7% annually rather than the 10-11% rates it enjoyed over the past several years. This global slowdown has major implications for Chinese exports, particularly of products which consume huge volumes of lumber and panels, such as furniture.
Secondly, the over-building of homes, and non-residential structures, in China even before the financial crisis became evident was negatively impacting the level of new construction, as well as the volume of wood products being consumed in finishing and decoration. This construction downturn will continue well into 2009, and possibly into 2010, before new government stimulus packages may reverse the direction of activity in China.
Third, China’s furniture industry has been facing a growing need to re-structure in the face of an appreciating currency, rising production costs, labour shortages and growing international competition. We have already seen significant growth in furniture production in Vietnam over the past five years (often from Chinese-owned
component and assembly plants).
Recently, furniture plants in China’s booming coastal region have been closed in large numbers and moved further west to where labour is more abundant and less expensive; and where land costs are lower. It is not clear if this growing western China-based furniture industry will be focused primarily on domestic rather than export markets. But with further appreciation of the Chinese yuan, and relatively high internal transport costs, these operations will likely be hard-pressed to be major factors in offshore trade.
Fourthly, the on-going increase in the Russian log export tax has major ramifications for the cost structure of China’s furniture industry, particularly the sectors utilising a lot of solid wood in bedroom and dining room furniture. Assuming that the Russian duties are effectively implemented (perhaps a huge assumption), one can expect further restructuring of both the primary and secondary wood products industries in China over the next five years.
For the panel industry, one of the major changes will be the encouraging of further investments in plantations to secure domestic supplies of fibre to produce plywood, MDF/HDF and particleboard.
In addition, substantial consolidation in the panel industry will result, partly in response to government policy to close multiple smaller, older and less efficient operations, and partly because of market pressures, particularly on those companies unable to secure adequate credit and working capital to operate efficiently.
CFPA’s new forecasts assume that China’s GDP growth rate drops to between 7 and 8% in 2009; construction activity slides nearly 10%, 2007-2009; and furniture production falls 10% between its 2007 high and 2009, before starting to recover in 2010 (see chart below).
Furniture is the single largest factor driving Chinese wood product demand and any projection of weakness in this all-important sector will have profound impacts on panel production, pricing, profitability and investment (particularly given the over-building of capacity seen over the past several years).
Between 2000 and 2007, China’s furniture production vaulted 490% (a compound annual rate of growth of 29% – see chart below). For 2008-2009, we project
a 10% drop in furniture production because of weakness in both export and domestic markets.
For example, through the first seven months of 2008, inflation-adjusted US furniture imports from China were down 15% from the same period in 2007. The forecast then calls for a return of growth in 2010. Between 2009 and 2013, a solid 47% increase in total furniture output is projected (average of 10% annually).
By any non-Chinese standards, this would be regarded as strong growth, but given China’s recent past this forecast marks a substantial shift, at least for the furniture industry.
What will this economic outlook mean for China’s wood based panel consumption? For the two-year period through 2009, we anticipate an 11% drop in total panel consumption, led by a 15% fall in MDF/HDF (the panel most dependent on furniture – see chart on right).
In the recovery period, panel consumption will again climb to set new records. Total panel consumption will jump 29%, 2009-2013 (but the increase would be just 14% from the 2007 peak – see table above). Plywood is expected to lag other panels because of its higher costs and a switch of users to MDF/HDF and particleboard.
Consumption of MDF/HDF by 2013 is expected to exceed plywood, and blockboard consumption will jump further as more of this product is used as a substitute for lumber, which will be sourced either directly from outside China or made within China from expensive Russian logs.
Five-year forecasts given the current (October 2008) economic uncertainty may have little credibility. However, once this economic crisis is resolved, then it will be important to be aware not only of short-term cyclical factors, but also of the longer term secular trends that are also undergoing seismic shifts.
This forecast attempts to combine both cyclical and market trend factors and provide insights into the likely transition of the very important Chinese panel market to a more mature growth path.
Risks can be identified on both sides of the forecast: China’s panel industry could continue to astound by maintaining further massive rates of growth for several more years, or it could experience little or no further growth if the furniture industry accelerates its shift offshore, perhaps because the yuan strengthens well beyond predicted levels.
These are indeed both interesting and dynamic times in which we live!