While our forecast last year may have been as much luck as judgment, many of the concerns that we had about the Chinese economy in early 2012 are still in-place early in 2013.

Export-led economic growth is highly difficult to maintain as long as much of Europe is in recession and the US struggles to grow faster than a modest 2% annually – and becomes increasingly more competitive in manufacturing, making it less profitable to manufacture in China and export to North America.

Meanwhile, the largest Latin American economy, Brazil, is also struggling to keep GDP growth in positive territory and India’s growth has decelerated sharply over the past two years and faces an uncertain near-term future.

Markets in the Middle East and Africa offer long-term growth opportunities for China, but the ‘Arab Spring’ and on-going political tensions in the Persian Gulf region have hampered strong sustained economic growth in those regions.

More importantly, these developing markets remain relatively small. So, even if there are healthy growth rates for Chinese exports to these regions, these will be insufficient to offset weakness in the far larger developed markets in Europe and North America, at least over the next few years. In CFPA’s estimation, global economic growth in 2012 will be reported at around 3% (down from consensus estimates close to 4% a year ago), but will hopefully increase moderately to 3.2% in 2013, providing Europe and China both grow faster, at least in the second half of this year.

We still hold out for over 4% global growth rates in 2014 as most major economic regions enjoy simultaneously accelerating economic activity. However, risks to this outlook are high and this assessment will be monitored and revised as the year progresses. So, from China’s perspective, reaccelerating economic growth in 2013 will be largely dependent on strength in its domestic, rather than export, markets. A rapidly growing Chinese middle class has supported a shift in the economic mix underpinning China’s economic growth away from exports over the past several years. This transition has a long way to run, but it will continue for the next two decades or more.

However, consumption-led economic growth is not a painless and smooth path. Cyclical concerns will come more into play as China’s economy makes this transition. For example, recent property bubbles have resulted in policy changes to defuse a potentially harmful situation for credit markets and overall economic health. The result over the past 18 months has been a significant slowdown in overall housing activity, despite significant government investment in low-cost public housing.

The excess supply of residential construction built up in 2010-11 was run down during 2012, but some overhang remains early in 2013 and will likely take several more months to fully work off.

On a recent visit to China, the author found it hard to find anyone in the forest products industry sufficiently positive to predict improved construction activity, at least early in 2013. Traders in forest products have brought down their inventories of logs and lumber to more manageable levels (and in the case of lumber, ordering picked up in Q4, 2012 as inventories finally needed to be replenished).

Nevertheless, it seems at this point that no one is looking to take an inventory position in logs and lumber in the expectation that accelerating economic growth would justify the costs and exposure associated with such an aggressive stock position. As regards furniture producers, most of their focus is on supplying growth in domestic markets, as well as cost controls, as competition remains fierce.

Assuming that China’s economy is indeed in full recovery mode by the second half of the year as modest stimulus spending, further growth in domestic consumption, and some recovery in export markets all gather momentum, then growth in China’s GDP is forecast to re-accelerate in both 2013 and 2014, albeit not reaching rates as rapid as in the recent past.

Table 1 summarises recent historical data for China GDP, Industrial Production, Furniture Production and Housing Construction. It should be noted that 2012 China GDP growth (estimated at 7.7%), while high by European or North American standards, was the slowest since 1999.

Similarly, while growth rates were still positive in key wood products end-use markets such as construction and furniture, they were among the slowest in a decade. For 2013-14, the forecast calls for GDP growth to again climb above 8% and to approach 9%, while furniture production jumps 11-16% per year as consumer spending climbs further.

Wood panel markets and production So what does this mean for the consumption and production of wood based panels in China? Well, here we need to shift into a separate discussion of data sources and their reliability.

In past articles we have indicated our concerns about the quality and accuracy of China’s reported production data for wood products (lumber and panels). The hope was that one year’s seemingly high numbers were simply a statistical aberration and that the reported data would return to a more believable trend the next year. However, instead of improving, it seems China’s panel production data have become less and less credible.

For 2011, China’s State Forestry Administration (SFA) reported total wood based panel production (plywood, blockboard, fibreboard and particleboard) jumped to 200.3 million m3, a 39% increase over 2010. This enormous increase was led by a greater than 100% leap in particleboard production to 25.6 million m3 and a 38% jump in plywood output to 98.7 million m3 (Table 2).

Meanwhile, blockboard and fibreboard production each recorded very healthy increases of 23% (to 20.3 million m3) and 28% (to 55.6 million m3), respectively. CFPA conservatively estimates total panel output reached at least 210 million m3 in 2012, and a final number between 220-230 million m3 is very possible, especially given SFA’s past record of surprising on the upside! The problem for any market analyst is trying to explain where these huge volumes of panels are consumed – and how usage patterns might be changing. We know that exports account for a relatively small proportion of the total reported production (13.2 million m3 in 2011 and an estimated 14.3 million m3 in 2012; 6.6 and 6.8% respectively of total reported production – see Table 3 and Figure 2).

So the bulk of the panels produced in China are consumed in China (albeit in products such as furniture, which may eventually be exported). Domestically, panels in China are consumed largely in construction (either directly in the structure or in interior finishing) and in furniture We know that China’s GDP, total industrial output, furniture production and construction (both housing and nonresidential) each grew more slowly in 2010-12 than the reported increase in panel production in China. Unless there are significant new end-use markets of which the author is unaware, then the reported data (apparent consumption) indicate that usage (ie the use of panels per unit of output, whether m2 of construction or per piece of furniture) jumped strongly over the past several years.

This is not impossible, but we are at a loss to know why such growth would have taken place over the past three years. Was there a technological change in construction requiring more plywood to be consumed per m2 of construction? Did furniture makers switch to thicker MDF or particleboard panels in their product lines? Or did panel products displace substantial volumes of other competing materials? Evidence for such changes in usage is hard to find.

Possibly, recent national data collection by SFA is more complete than in previous years, perhaps indicating that production was previously under-reported. However, in discussions with major producers of fibreboard and particleboard, they are hardpressed to believe that China’s combined production of these two panel products exceeded 50-60 million m3 in 2011 (compared with reported production of over 80 million m3 for these two panels alone).

The higher MDF/HDF and particleboard production numbers are also not supported by the capacity reports published by WBPI. As regards the largest problem sector, plywood, the high fragmentation of this industry makes it difficult to find knowledgeable, realistic ‘guesstimates’ for China’s total production of this type of panel, but the search continues and the author would welcome any information on the subject that readers can provide! Consequently, this observer is led to believe that the reported panel production data for China in recent years are too high. In an effort to resolve this conundrum, the author has made some preliminary revisions to reported panel production to reflect what is known about growth in the major domestic end-use markets. These estimates are presented in Table 4 and in Figures 3-5.

Minor revisions were made, starting in 2009, and more major changes were made for subsequent years. For 2011, the revised total panel production estimate of 143.4 million m3 is 28% lower than the published number, with downward revisions being made to all product categories.

However, the most substantial revision was made to plywood (-43% from 98.7 million m3 to 56.6 million m3 – see Figure 4). Fibreboard production estimates were revised 10% lower from 55.6 million m3 to 50.0 million m3 (Figure 5). A 29% downward revision to particleboard production (from 25.6 million m3 to 18.3 million m3) was in part compensated by upward revisions to estimated particleboard production in both 2010 and 2012, thus smoothing out this highly volatile data set.

Consequently, while the panel share of total wood products production (panels plus lumber) continues to show an increase, the share no longer climbs above 80%, remaining around 77.5% in 2011-12. Lastly, despite these downward revisions, we continue to show double-digit production growth rates of 15% in 2011 for total panel production (Table 4). But this is substantially slower than the reported increase of 39% (Table 2)!

Ideally, China’s government should examine and audit its reported data closely and publish revised and updated data going back at least five years, if only to assist its own industry to better understand the nature and size of the Chinese panel markets and to therefore better plan investments for its future. In particular, the impacts of inflated production data on estimates of wood fibre consumption, and any plans for supplying those needs, will be severe.

Later this year, CFPA, in conjunction with RISI, will publish a new report looking at China’s wood fibre needs over the next decade and a key part of any such appraisal will be the assumptions made about growth in demand for panels and lumber.

The author would gladly welcome comments, suggestions and guidance on what are indeed reasonable assumptions to be made about China’s panel and lumber production levels and what the real size of the Chinese market is for these products. These estimated production revisions are a first cut at this problem, and further refinement is in order as we look in greater depth at the issues involved.

Given these estimated production data, plus our assumptions about China’s overall economic growth through 2014, we estimate that China’s total panel production will climb from 155.3 million m3 in 2012 to 170-175 million m3 in 2013 and 195-200 million m3 in 2014.

Similar growth rates applied to the unrevised panel production data would suggest a panel market in 2014 of 265-275 million m3. This level of panel production would imply severe demand being placed on both domestic and imported supplies of wood fibre, which would have significant global impacts on fibre availability and prices, especially as global demand for commodity resources, such as wood, accelerates.