Global recovery from the depths of the Great Recession has been led by the developing world, particularly China, with full support from other parts of Asia and from South America.
China’s ability to absorb huge quantities of raw materials as it builds a 21st century economy has stimulated demand for foodstuffs, metal ores, chemicals and fuel. Beneficiaries of this economic activity are to be found in disparate places around the globe, from Australian iron ore miners to West African timber producers. Latin America has also enjoyed dining at China’s table, whether the guests have been Chilean copper producers, Argentine soy growers or Brazilian pulp companies.
As a result of China’s largesse, economic growth in major South American countries jumped in 2010, after stalling or retreating late in 2008 and early in 2009. The continent’s largest country, Brazil, will enjoy GDP growth of close to 8% in 2010 after declining 0.2% in 2009.
Growth in Argentina will approach 7% in 2010 (despite often dysfunctional government policies) after growing less than 1% in 2009.
In Chile, 2009 saw the economy contract by 1.5% and, despite the devastating earthquake in February, it is expected to see a climb to a respectable 4.8% for the whole of 2010
Other South American countries, such as Peru and Colombia, are also enjoying strong expansions in 2010 and Mexico’s economy rebounded sharply in the first half of this year.
While Latin American growth has been supported as China sucks huge quantities of raw materials into its economy, there has also been healthy domestic economic growth within South America.
The rapid growth of a dynamic middle class is not just a Chinese phenomenon, but, for example, is also being experienced in Brazil. Expanding home ownership and increasing incomes have fueled consumer spending on a whole range of goods which has boosted demand for wood based panels in furniture, cabinets and construction-related activities.
Even the tragic Chilean earthquake has proved beneficial to wood product consumption within Chile, as well as creating demand for panels produced in Brazil and Uruguay, to help in reconstruction.
So while 2010 is set to report good growth in industrial production (up 8-12% in Argentina and Brazil) and GDP, the outlook for 2011 is looking somewhat less positive.
Concern about China
The biggest concern has to be what happens in China. Growth there is already decelerating as policy makers wrestle with issues of inflation and property bubbles. China’s economy continues to reflect massive imbalances; too little consumer spending and too much capital investment.
While China will continue to need to upgrade its physical infrastructure, this process will largely be completed within a generation. Long-term economic growth in China cannot be based on mercantilist policies supporting export-based industries, but will require stronger domestic consumption supported by further improvements in living standards.
These imbalances in China will not be acute in the near-term, but will be a factor in slowing overall global economic growth in 2011. Ultimately, the global economy needs more than just one locomotive (China); the US, Europe, Japan, India and others are all needed to help pull the global economic train if recovery is to be sustained.
Given this prognosis about China (along with further weakness in the US and Europe), a slowdown in economic growth for most South American countries seems inevitable in 2011. We look for Brazilian industrial production to climb just 5.3% in 2011 and GDP to increase 4.9% as the 2009-10 government stimulus and pre-election boosts to the economy are ended.
In Argentina, presidential elections in 2011 are likely to boost economic growth above levels that would otherwise prevail. Even so, GDP growth of 5.5% in 2011 will be lower than in 2010. Only in Chile will industrial production and GDP grow faster in 2011 than in 2010 and this will be entirely due to the post-earthquake rebuilding, which will continue for several more years. At 5.8%, Chile’s forecast GDP growth in 2011 will outpace both Argentina and Brazil.
How have these economic developments been reflected in the wood based panel industries of Brazil and Chile?
The year 2009 witnessed year-on-year declines in total panel production in both countries, largely because of extreme weakness early in 2009; by the second half of that year, improvement was being reported.
In Brazil, while production of MDP (medium density particleboard), MDF, hardboard and plywood combined dropped from 7.79 million m3 in 2008 to 7.48 million in 2009, output of MDF alone actually increased 15% from 2.07 million m3 to 2.40 million m3. It was the declines in MDP, hardboard and plywood that brought down the total.
For 2010, total Brazilian panel production is expected to climb 6% to 7.91 million m3 and to rise another 4% in 2011 to 8.21 million m3. These increases are moderate and reflect little or no growth in softwood plywood output and further declines in production of both hardboard and hardwood plywood. It will be the 10% growth in MDP production, 2009-2011 to 2.74 million m3, but especially the 22% jump in MDF production to 2.92 million m3, that will drive the overall growth.
MDF expected to exceed MDP
As of 2010, Brazilian MDF production is expected to slightly exceed MDP, and this spread is expected to widen further in 2011 and beyond. Put another way, MDF’s share of Brazilian panel production in 2011 will reach 36%, up from just 19% in 2005.
The production share of MDP will be 33% in 2011, also up significantly from 27% in 2005. These gains will be largely at the expense of plywood (whose share dropped from 48% in 2005 to 27% in 2011) and hardboard (a decline from 7% to 5%).
For Chile, final data for 2008-9 are yet to be published, but CFPA estimates that Chilean panel production slipped another 4% in 2009 after dropping 8% in 2008. At 1.97 million m3, total production of MDF, HDF, OSB, particleboard and plywood were 13% below the 2006 peak of 2.26 million m3. Despite the severe damage caused by the February earthquake, most Chilean panel mills quickly resumed production and by midyear were generally running close to normal. With the boost provided to panel demand in order to provide temporary accommodation, and to sustain several years of rebuilding, we look for 2010 total panel production in Chile to be up 7% over 2009 levels and to jump another 11% in 2011 to 2.33 million m3 (although slowing export markets could moderate this overall growth to a greater extent than now assumed).
As with Brazil, the drop in Chile’s production in 2009 was not evenly distributed across all panel types. We estimate that while plywood production edged higher (largely because of the 2008 start-up of the new CMPC operation), output of other panel types declined. However, in 2010-2011 we look for production increases to be recorded across all panel types in Chile, with particleboard production up 15%, 2009-11, MDF/HDF output rising 17%, plywood production 16% higher and OSB jumping 46%.
Chile’s panel producers, with a domestic market of approximately 17 million people, will continue to be more dependent on export markets for their long-term growth than their Brazilian counterparts, who are close to a domestic market of close to 200 million. (A similar pattern to that in Chile will also hold for plywood and MDF producers in Uruguay.)
Exports to lead growth in Chile
While post-earthquake reconstruction will boost Chile’s domestic panel consumption for several years, the long-term growth opportunities for its panel production will remain with exports, whether of plywood to North America, Europe and Mexico, or of MDF/HDF products to North America, and within South and Central America.
Asia will offer some opportunities too, but Chinese competition is liable to be intense.
In contrast, Brazil’s panel producers will continue to be focused mostly on their large domestic market and its long-term potential. Only softwood plywood producers in Brazil are export-dependent (90% of plywood was exported in 2009), although hardboard producers also export a significant portion of their output (30% in 2009).
Excess MDF and MDP capacity in the short-run will force Brazilian producers to look outside their own borders, but as soon as domestic market growth catches up with this capacity, then the focus will again be largely centred on the Brazilian market.
