F2M Market Watch

Pacific Northwest Exports to China
Posted on February 08, 2012 by Gordon Culbertson

After soaring log prices buoyed by Chinese appetite for forest products, exports from the Pacific Northwest have retreated.

It shouldn’t come as a surprise, since the breathless rise in price and volume couldn’t be sustained over the long haul. We predicted early last year that the combination of events creating the euphoric atmosphere over Chinese hunger for wood could only be temporary. Of course, China will continue to be an important customer for Northwest wood, but economic realism will rule the day.

A series of compounding events set the table for a hearty round of business to China:

1. The Chinese Government initiated a 5-year plan to urbanize 51% of their citizenry. This required a major building campaign for affordable housing, primarily apartment towers in Chinese cities. Chinese construction practices rely heavily on form lumber to support the pouring of concrete.
2. At the same time, Russia (China’s largest wood supplier) sought to encourage domestic milling of logs to lumber by increasing their tariffs on raw logs exported outside their borders and then threatening to impose even steeper tariffs.
3. While all of this was playing out across the Pacific, in spring of 2009 the beleaguered US housing market forced  sawmill log prices in Oregon and Washington to the lowest levels since the early 1980’s. Coastal region hem-fir logs sold at $300 per MBF feet or less.

These three things came together when Chinese traders, concerned about the reliability of Russian log supply, saw US logs were a bargain and aggressively set about securing this favorable source of wood to support their housing boom.

Because of this perfect storm of events, prices for logs destined to China from western ports trended up for eighteen months, eventually skyrocketing in early 2011. The run up of prices peaked in May of 2011, with coastal hem-fir export logs averaging $636 per thousand board feet (see figure below).That’s more than a 100% increase over the period. The healthy appetite for western logs extended to Douglas fir as well, driving prices up across the board.  Trading companies raced to capture market share, eagerly supported by Chinese buyers. This over stimulated buying led to jam-packed Chinese port facilities, which were bulging with costly logs.

The impact of Chinese exports in 2011 was very significant for the western forest industry. Break bulk cargo shipments of logs to China from Oregon and Washington ports amounted to 733,000 MBF for 2011, more than double 2010 totals. A high number indeed. The last time shipments to China came close to this number was in 1986 when the region exported 597,000 MBF.

It’s noteworthy that the 1986 exports to China amounted to about 4% of Oregon and Washington total timber harvest.  In 2011, Chinese exports accounted for over 10% of logs harvested in Oregon and Washington combined.

The exuberance of a year ago has moderated considerably as wood products inventories in China remain quite high. Shipments to China have waned over recent months, and hem-fir export log prices have retreated to about $500 per MBF at year end, falling more than 20% in the six months from the peak recorded in spring 2011.

We should be thankful the sudden flurry of business for wood to China came along when it did. Had it not, the depths of the business decline of 2009 would have been much more protracted and even more painful. Business with China floored languishing log and lumber prices, enhanced wood chip availability and supported much needed work for contract loggers and truckers.

The outlook for log exports to China will be dependent on the outcome of these factors:

1. China is closing in on its goal for urbanization.  The housing boom there has slowed and concerns that the country has created a real estate bubble of its own have increased. One sign of this bubble--falling home values—is already threatening the Chinese economy.
2. Later this year the reigns of Chinese power are likely to be turned over to Xi Jinping, China’s Vice President. How will Mr. Xi bolster China’s slowing economy? Is he reform minded, or will he continue the policies of Hu Jintao?
3. How will Russia, which was accepted into the World Trade Organization (WTO) in December 2011, make the transition into the world trade system? Though the Russians agreed to tariff reductions prior to gaining membership into the WTO, compliance is likely to be a point of controversy going forward.

As 2012 dawns, slack US demand for forest products continues. When the US housing market recovery takes shape, the resulting domestic demand—coupled with some measure of demand from China—will have a significant influence on Northwest markets. Though it will be awhile before the perfect storm of events like those we have just been through will cause prices to escalate, China’s rising economic power will be party to future upsurges in Northwest log prices. As a result, China will persist as an important customer for Northwest wood products.