The massive global economic stimulus provided by China in 2009-2010 began to run out of steam in 2011, but the year as a whole still showed large growth in China’s economy. As measured by GDP, it is estimated that China will record growth of approximately 9.2% in 2011, down only moderately from 2010’s increase of 10.3%. Consequently, growth in 2011 will be comparable to 2009.

But unlike 2009, when growth accelerated throughout the year, 2011 witnessed slowing economic activity as the year progressed. It was marked by growing concerns over inflation; a possible, troublesome, housing bubble (mirroring those in the US and UK?); corruption issues; and growing imbalances in China’s society and economy.

In the economic sphere, the concerns about inflation and the ‘frothy’ housing market led to significant further credit tightening and higher interest rates. These policy shifts were designed to reverse the growth in overall inflation and to make speculative activity in the housing market less attractive to ‘flippers’.

As 2011 ended, it seems as if inflation rates had dropped from their highs of around 6% and continue to edge lower. Meanwhile, housing construction activity, at least in the private sector, contracted towards year-end (it is believed that construction of subsidized public housing continued to run at high levels through the second half of the year).

In addition, average home prices dropped in the second half of 2011, indicating that downward pressures on China’s housing market will likely continue well into 2012.

However, these developments are somewhat of a ‘good news/bad news’ story! Slower inflation and a deflating housing market bubble are good news for a government concerned about social unrest arising from higher food prices and the lack of affordable housing. But these economic readings also indicate that China’s overall economic growth could be slowing. Certainly the accumulating evidence from the second half of 2011 leans towards that view.

Slowing export growth has been reflected in anaemic growth in industrial output, lay-offs, and a growing number of bankruptcies as tight credit conditions have squeezed marginal businesses.

The deceleration in China’s economic growth will continue into 2012. Government policy has already started to loosen some of the tight credit policies that were implemented in 2010-2011, but it will be at least several months before these policy changes (and others that can be expected in the first half of 2012 in response to growing concerns about slow employment growth) result in a re-acceleration of the economy.

Possibly this will start as early as the first quarter, but we lean to the belief that Europe’s recession, along with slower growth in many other developing countries, will hinder China’s rebound through at least the first half of 2012 as the export sector struggles. Consequently, we do not look for much improvement before the second half of 2012, and China’s GDP for the whole year will grow slightly less than 8%. But accelerating growth towards the year’s end will set up 2013 for another year of 9%+ growth, which will be reflected in another surge in wood products consumption.

Construction markets, particularly housing, are key to the level of, and growth in, China’s wood products demand and production.

End-use markets for panel producers

The housing sector is seemingly a mix of contradictions. Most of the commentary about China’s housing sector feeds off activity in private construction. Just as in the US in the early years of the 21st century, China’s rapidly growing upper middle class (China’s 1%) had few lucrative investment opportunities better than housing. Consequently, a significant proportion of China’s recent boom in new home construction has been, at least partially, fuelled not by the housing needs of the growing middle class as much as by the needs of an investment class eager to make a quick profit (the house ‘flippers’).

The resulting upward spiral in home prices through 2010 and into 2011 pressurised a large portion of China’s urban middle class, pricing many of them out of the market. In addition, the rural poor, as well as rural workers living in dormitories and factory towns around China’s industrial centres, remain significantly underhoused. This sector’s needs are largely not being met by a profit-driven housing industry and as a consequence the government has pushed a significant boost in the construction of subsidised (social) housing, particularly in 2011-2012. The government’s housing targets are likely to prove over-ambitious, but the public sector will counter-balance near-term weakness in the private sector in the next year.

Nevertheless, despite recent problems in the housing market, China clearly remains an under-housed nation, and over the next 20 years there will be a huge number of new homes built, old ones demolished, and existing ones upgraded. The problem will continue to be matching homes built with the needs, and the ability to pay, of potential occupiers.

However, these developments will provide massive further demand for wood products in construction facilitation (concrete forming, framing, etc) and home finishing (millwork, doors, mouldings, cabinets, counter-tops, builtin closets, etc).

Our forecast assumes continued growth in the total number of square meters of new living space built, but at a slower rate in 2012 than in 2010-2011 as the share of larger, privately-owned housing units drops and the share of smaller, publicly subsidised units climbs. However, falling interest rates and looser credit conditions, in combination with strong underlying demand for shelter, will lead to a rebound in the construction pace late in 2012 and through 2013.

China’s furniture industry consumes a huge volume of panels and will be closely watching developments in the housing sector as the furniture industry becomes ever more dependent on the domestic market for growth.

The reduced reliance on furniture exports has been an increasing factor for China’s furniture producers since 2008. For example, it is likely that US imports of Chinesemanufactured furniture and components in 2011 will increase only minimally over 2010; possibly the final full year data will reveal US furniture imports from China slightly lower than in 2010 (similar to the first-ever drop in US imports of furniture from Vietnam, recorded in 2011).

Just as China is under-housed, so are its households under-furnished. Rising disposable incomes, as well as the expansion in the housing stock, have helped propel growth in China’s furniture production by double-digit rates for much of the past decade. Growth in China’s furniture output slowed from a fiery 27.5% in 2010 to an estimated 15% in 2011 and will slip further, to 11%, in 2012, before rebounding in 2013.

The forecast presented is near-term only and continues the almost unbroken string of annual increases in most economic measures in China over the past quarter century.

However, one should anticipate that at some point over the next decade there will be cyclical downswings and lower average growth rates than in the past. And cyclical lows will likely show either very small positive – if not negative – numbers for home construction, furniture production and GDP. This will simply reflect the growing maturity of China’s economy as it rapidly approaches ‘developed nation’ status.

Wood based panel production

Last year we commented on the surprising nature of the production data reported by China’s State Forest Administration (SFA) for 2009. Surprise continued with the publication of data for 2010! In particular, the reported 60% jump in plywood production – from 44.5 million m3 to 71.4 million m3 between 2009 and 2010 – seems highly improbable.

Several observers have questioned the accuracy of these reports, wondering, for example, about possible double-counting of plywood and blockboard production. It is not clear whether the 2010 data reflect a more thorough coverage of plywood operations, but if so that would imply that many large operations were previously being missed by the SFA. Either the earlier years were under-reported or the 2009-2010 data are simply too high.

The annual increases in plywood output reported in those two years do not reflect any known comparable leap in economic activity and seem highly improbable. Taken as reported, the plywood data would indicate an earth-shattering change in usage patterns. To our knowledge, such a change did not happen!

However, for want of better information at this point, we are using the reported production data (along with the more reliable data reported for imports and exports) to determine apparent consumption of panels and lumber in China. The reported panel production of 144 million m3 in 2010 was more than twice that reported in 2006, and was led by the aforementioned surge in plywood output. However, unlike Europe and North America, where lumber output is usually greater than production of panels, in China, close to 80% of the country’s wood products output in 2011 was of panels, up from 74% in 2006).

Note: Lumber’s share of consumption (rather than production), is somewhat higher than 20% because of large imports of lumber from North America and Russia, but the lumber share of China’s wood products consumption (approximately 25%-26% in 2010-2011) is smaller than that in Europe and North America.

Plywood’s huge jump dominated the 2010 production report, but MDF/HDF volumes of 43.6 million m3 leapt a large 25% over 2009; blockboard volumes of 16.5 million m3 climbed 12%; but particleboard output, surprisingly, slumped 12% to 12.6 million m3.

For 2011-2012, our forecast calls for a relatively moderate increase each year in total production of these four types of panels to 156 million m3 (+9%) and 165 million m3 (+5%), respectively.

This forecast assumes somewhat faster growth in consumption than production, as we assume that a portion of the jump in plywood and MDF/HDF production in 2010 was actually consumed the following year when inventories were drawn lower as the pace of economic activity slowed during 2011.

We project a recovery in particleboard production, but this may prove optimistic if consumer opposition to products made with particleboard rather than MDF continues to be a problem for China’s oem companies.

Wood based panel exports

Rising production of panels has been supported by a rebound in export markets in 2010-2011 from the cyclical lows recorded in 2009.

This rebound was particularly noticeable for plywood and MDF/HDF.

Total 2010 Chinese panel exports of 10.3 million m3 represented 7% of total production, but this share was down from 14% in 2007. Exports in 2010 were also still off the pace set in 2006-2007.

However, the export share of total production should recover to around 8% in 2011 as exports soared to over 13 million m3 – the highest level ever recorded.

Remarkably, plywood exports jumped to over nine million m3; 73% above their 2009 cyclical low, and were one million m3 above their 2007 peak.

Closely matching the growth pace in plywood was that in MDF/HDF. At 3.5 million m3, 2011 MDF/HDF exports were also at record levels, exceeding their 2007 peak.

Nevertheless, plywood remains the largest-volume export panel product, exceeding MDF/HDF by a factor of 2.6.

Wood based panel consumption

Given the reported production data for 2009-2010, Chinese wood based panel consumption soared to 141 million m3 in the latter year – 54% above the 2008 level of 91.2 million m3. Consumption is estimated to have climbed another 13% to 159 million m3 in 2011.

With a slowdown in economic growth late in 2011, and through at least a portion of 2012, wood based panel consumption growth will slow, but is still expected to edge higher, reaching 167 million m3 in 2012 – 5% above the 2011 estimate. Consumption growth is expected to re-accelerate in 2013, growing 8% to 181 million m3. This will set another record, at twice the 2008 level.

Turning to the individual types of panels consumed, plywood will remain the largest product category, but is expected to grow slowly (if only because plywood consumption levels have already reached surprisingly high levels). From 67.5 million m3 in 2010, plywood consumption in domestic and export markets will rise to around 84.1 million m3 by 2013 (a 25% increase).

The second largest panel product will remain MDF/HDF, consumption of which will climb 30% in 2010-2013, from 43.9 million m3 to over 56 million m3, somewhat closing the gap with plywood.

Meanwhile, particleboard volumes are expected to jump from 12.9 million m3 to 18.9 million m3 over the 2010-2013 period (a 46% increase), but this will occur only if this product’s acceptance as a furniture panel grows rapidly over the next few years.

Potentially, particleboard growth could be a lot more limited than projected here.

Meanwhile, blockboard consumption is expected to record an increase from 16.5 million m3 to 21.4 million m3 over the same period (+30%).

Our overall forecast for panels continues to be conservative and we would not be surprised to see significantly higher consumption than projected.

Nevertheless, as the Chinese economy matures, it has to be expected that the extended string of back-to-back years of double-digit increases in wood based panel consumption will be broken. Growth rates will moderate, reflecting, in turn, flattening growth rates in construction and furniture markets in particular.

Nevertheless, in the near- to medium-term, China’s wood based panel markets will indeed fly higher, breaking still more records. And the bulk of this growth will be fed by domestic  panel producers either converting domestic logs or consuming residuals derived from both imported and domestic logs.

Consequently, China’s wood fibre markets will remain very tight, keeping upward pressure on panel producer manufacturing costs for years to come. But that is another story to be told elsewhere!