This year, almost 200 international delegates from 15 countries, as well as Chinese delegates, gathered at the luxurious Qingdao Shangri-la Hotel to hear a range of Chinese and international speakers from industry, associations and government discuss and debate the opportunities and constraints facing China’s expanding wood products sectors. Delegates were provided with a well-rounded programme which included local industry tours, table-top product displays from export-ready Chinese producers and opportunities to network. Among the range of relevant issues covered at the conference were the Chinese economy, housing, wood imports, wood products exports, US and Europe market reviews, Russian supply dynamics, US millwork markets, the Chinese millwork industry and the current and future role of Chinese forest plantations.
Chinese plywood was the topic of choice of four speakers at the conference, and is our focus here. Plywood is China’s largest wood panel sector, representing almost 40% of its total wood based panel production. Output reached 27.3 million m3 in 2006, with exports accounting for 30% (figure 1). Although the domestic plywood industry faces a threat of substitution from MDF and particleboard in furniture and interior decor applications, production growth has been largely unhindered due to overall domestic demand growth, surging exports and significant expansion in engineered flooring manufacture (for domestic consumption and export).
China’s low production costs and fierce price-competitiveness have translated into a powerful advantage for Chinese plywood, both at home and abroad. In fact, China is the world’s largest plywood manufacturer (eclipsing the US in 2003), the world’s largest plywood exporter (surpassing Malaysia and Indonesia in 2004), and now the largest consumer of plywood in the world (surpassing even the US).
The four conference speakers concentrating on plywood addressed the specific issues of China’s plywood resource situation, as well as its fit in international markets, competitiveness and future outlook.
According to Shengfu Wu, of the China National Forest Products Industry Association, the undisputed driver behind the ascent of Chinese plywood production over the last decade has been the emergence of poplar plantations. Now covering over three million hectares, and supplying the plywood industry with more than 70% of its log requirements, poplar’s popularity is predicated (in addition to its fast growth and suitability for plywood) on the fact that it is one of the most profitable crops to grow – over six times better than wheat, four times greater than peanuts and about 40%-plus more profitable than cotton or water melon.
As Mr Wu pointed out, poplar is not an inexpensive wood. Strong demand has driven up the price for a 4m, 30cm-diameter log to an amazing 1,150 yuan/m3 (US$153/m3). However, much of the industry uses smaller logs with diameters as low as six centimetres in spindle-less production operations (resulting in just three centimetre cores), costing only 520 yuan/m3.
However, it is labour that is China’s greatest industrial asset, providing a disciplined, diligent and efficient workforce for a typical wage of less than US$250/month. With more than 100 million idle labourers in the countryside, cheap labour in China is likely to be the norm for some time to come.
Mr Mike Jahraus, vice president, IWMG, discussed the six key reasons why Chinese plywood is so competitive in export markets:
* Access to highly suitable raw material (poplar plantations)
* Many producers, low barriers to entry (ie fierce domestic competition)
* High recovery rates (cheap labour, allowing for high fibre utilisation)
* Low costs, both overhead and variable
* Low technology production techniques (simple equipment and air-drying)
* Access to large markets, both domestic and international
Although labour is used abundantly in Chinese plants, it accounts for just 5-8% of total input costs. Energy costs are also relatively low at 3-5%, as a result of air-drying, running lathes at night when electricity is cheaper and burning waste for energy. China further excels in fixed costs, with overhead and capital costs usually just a fraction of those in developed countries.
Continued product/market diversification has been integral to the success of Chinese plywood exports. Ongoing, spectacular growth has occurred through a shift away from commodity fancy plywood and lower-grade plywood into film-faced, container flooring, engineered flooring substrate, LVL and other plywood products, together with a diversification away from North America to markets such as Europe (up by almost 100% in 2006) and the Middle East.
Exports hit 8.3 million m3 in 2006 (up by 50% in value on 2006 and 59% on 2005) and should top 10 million m3 in 2007.
On the other hand, Chinese cost-competitiveness is being eroded – by at least 10% in the short-term. This is due to a number of factors, among them an appreciating currency, a reduction in export tax rebates and rising raw material, freight and energy costs.
There is also the looming threat of potential new trade actions by both the US and Europe to address complaints of artificially low prices, fraudulent labelling and alleged widespread use of illegally harvested logs. Finally, proposed new Russian log export taxes (affecting imports of birch, poplar and pine raw material) could upset log trade and impact future Chinese exports.
Nevertheless, the export outlook remains bullish. Many Chinese manufacturers are quickly stepping up their quality control efforts and larger harvests of poplar are soon expected to reduce the pressure on poplar prices.
Mr Veikko Hoikkala, senior vice president of Finnforest, offered a European perspective on panel markets, as well as insights into the opportunities and challenges faced by Chinese exporters in the EU. He pointed out how plywood production in Europe continues to grow while total consumption has largely stalled, raising serious industry concerns about the rapid growth of Chinese imports into Europe, and shared some startling statistics on the fast growth of Chinese plywood imports into the EU (p53, figure 2).
Other noteworthy highlights included the tripling of Chinese plywood exports to the UK from 2004 to 2006 (primarily for use in lower-end shuttering, packaging, light trailers and joinery) and the fact that China has now established itself as Germany’s largest plywood supplier, surpassing both Finland and Russia in 2006.
Although growth has been nothing short of spectacular, the import of Chinese plywood has not been trouble-free. A number of issues were outlined, but the key areas of concern were quality inconsistency and the Bintangor problem. These issues have resulted in a certain level of ‘mistrust’ of Chinese plywood quality by the EU trade. As a result, many top-level European importers have either limited their import volumes or opted out.
Finally, Jim Aguila, manager of the Substance Evaluation Section of California’s Environmental Protection Agency, gave a detailed technical presentation on California’s Air Resources Board (CARB) pending new Composite Wood Products Formaldehyde Regulation for hardwood plywood, MDF and particleboard.
This new regulation is likely to have a global impact on composite wood products trading, due not only to the large consumption and production base in California, but also to the expected ripple effect from other jurisdictions (both inside and outside the US) already looking to adopt these regulations in whole or in part, plus players in the US that do not want to carry two separate product inventories.
Phase 1 of these regulations goes into effect on January 1, 2009. Between one and three years later, Phase 2 standards will take effect (varying by product). The increase in processing costs at some US mills to ensure compliance is estimated at 10-25% depending on the product and age of the mill.
So what does all this mean for Chinese plywood? Certainly Chinese exporters will be increasingly challenged, especially by market realities such as the new emission standards in the US, and potentially in European markets, amid rising concerns about the use of illegal log supplies.
Quality inconsistency has been the nemesis of many importers of Chinese plywood, with high moisture content, low glue quality and/or poor processing resulting in irregular sizing and defects such as warping and delamination. Growing pressure will be applied by international customers for improvements in overall product quality and consistency – especially since the historical cost advantage enjoyed by Chinese plywood exporters in international markets is, in many cases, narrowing significantly.
On the positive side, many Chinese plywood makers are addressing these competitive pressures through a variety of means:
* Using lower-cost species such as eucalyptus veneers
* Trialing and/or implementing low-emission glues in production
* Investing in veneer operations in Russia to source birch and other veneers
* Implementing Western quality control programmes, as well as CE Marking and ISO certification
There is no doubt Chinese plywood in international markets is here to stay. New market realities should slow the pace of export growth and pose a serious challenge to many low- to medium-end Chinese plywood manufacturers, but these same realities will also provide significant opportunities for those able to step up their operations and differentiate themselves.
Ongoing consolidation in the Chinese plywood sector will mean that soon there will be fewer, bigger and better exporters. With rising quality and rapid market/
product diversification, China has the potential to have an even bigger impact on global plywood markets in coming years…good news or bad, depending on whether you are a customer or a competitor.