Analyst Discusses Changes in the Global Forest Products Industry
Customers and competitors alike used to be just a short drive away. All business was local. But the entire world has changed over the last twenty years thanks to globalization. The forest products industry is no stranger to this trend. What has taken place abroad, especially in Asia, has forever impacted the business landscape in North America. Although the furniture industry and some other large wood users have primarily moved offshore, there remain some bright spots for the future of America’s forest products industry.
Hakan Ekstrom, president of Wood Resources International LLC (WRI), agreed to discuss with the TimberLine recent developments in the global wood market. As a leading consultant and publisher of market reports, Ekstrom keeps tabs on international markets. His expertise includes on-site evaluations of forest resources, raw material flows (logs and wood chips), forest products trade, wood cost outlook (pulpwood prices and sawlog prices) and forest industry developments worldwide.
WRI has successfully completed more than 200 consulting assignments in over 35 countries. WRI publishes two quarterly timber price reports The North American Wood Fiber Review and the Wood Resource Quarterly.
Ekstrom talked about some of the most pressing issues facing the global forest products industry and shared a surprisingly optimistic view of America’s position in the market.
TIMBERLINE: Russia has announced that it will impose stiff tariffs next year on exported logs in an effort to encourage more domestic production of finished wood products. How will this impact the global market given the vast forest reserves that Russia holds?
Ekstrom: If we assume that there won’t be any changes in the new tariffs, then there will be a lot less logs coming out of Russia. Small hardwood logs are exempt from the higher tariffs, but large Birch logs mainly going for plywood in Finland and all softwood logs will stay in Russia after January 2009.
Countries that are currently importing these logs (mainly Finland, China and Japan), have to look elsewhere for softwood logs if they want to continue to supply their industry. Indirectly this may increase competition for logs coming from other parts of the world. This will lead to higher log costs in some markets. Some businesses and even countries will have to evaluate whether or not they want to scale back production or keep current levels in place.
The Russian situation will lead to increased opportunities for raw logs coming from the United States and Canada. This trend has already started as more Hemlock on the West Coast is being sent to Korea. I believe that some companies are not waiting until January to start looking for alternative sources of material. Companies in Finland are looking at Sweden and the Baltic states for additional logs. The global flow of logs has already started to change, and we will see more of that in the near future. In the long term, we may see more countries decide to import more finished products and process fewer logs.
TIMBERLINE: Newspapers are filled with reports about illegal logging taking place around the globe. Will efforts to encourage certification and cut down on illegal logging really make much of a difference?
Ekstrom: If we talk about Russia, which is the country that exports the most illegal logs, obviously the export tax won’t have an impact since those logs are illegal. A lot of those volumes are going to China for material that doesn’t have to be certified anyway. It will take a long time before certification will have a big impact on illegal logs from Russia.
The impact of certification on tropical wood will move a little bit faster. Most of that material or finished goods are going to Europe, and they are starting to be tougher on making sure that wood is not illegally cut and has some kind of certification stamp on it. If you are talking about tropical wood going into Japan or China, they care less about certification. Those cutting forests in Brazil or Africa may just decide to ship the material to Asia instead of Europe if they are concerned about certification. As long as you have a market for those products, it will be hard to eliminate much of the illegal logging taking place in some countries.
Then there are some countries like Malaysia that stand out as a producer of certified tropical wood. They are major exporters of tropical wood products. And they are really trying to do a good job and develop an image that they only export products that come from legal sources and have certification stamps.
TIMBERLINE: American hardwoods have a strong reputation around the world. How will U.S. producers fare in the future? What will be the key drivers that will enable or limit success?
Ekstrom: Smaller hardwood logs in the southern U.S. are going primarily into the pulp market. That industry is pretty competitive. If you look at the cost of the raw material going into pulp mills in the South compared to the rest of the world, it looks pretty good. I believe the pulp industry in the South will remain fairly competitive, which should fuel strong demand for small hardwood logs.
Larger hardwood logs and the demand for American hardwood products will do fairly well in the future for a couple of reasons. The raw material is fairly steady. You have a good market working with lots of buyers and sellers. Right now and probably over the next 3-5 years, maybe longer, the weak U.S. dollar makes it easier for exports to compete. Over time demand for tropical wood products will decline as consumers begin to look for a stamp that indicates the wood came from a legal source and was managed in a sustainable way. Certification is something that U.S. companies can deliver on in the future.
The key thing is that the industry needs to invest and be more efficient. Companies should not try to cut back even if times are hard but rather increase investments in scanners, optimizers and other equipment to be competitive now and in the future.
TIMBERLINE: What are major competitors around the globe to the U.S. hardwood industry when it comes to log and lumber exports? How do you think this will change in the future?
Ekstrom: On the tropical side, major competitors are Latin America, Asia and Africa. But we will assume that the supply coming from regions will decline. When you talk about temperate hardwoods, there are not that many places out there – primarily Germany and France. If you look at Russia, it has Birch, Oak and Ash that could be competitive in the future. They are not competitive now because they don’t have a working industry.
More Eucalyptus will come on the market as more sawmills figure out how to use it to produce lumber, furniture and components. Eucalyptus is fast growing and cheap. You are starting to see Eucalyptus for cabinet doors and flooring. You can stain it to make the material look like Cherry or other hardwoods. There will definitely be applications for Eucalyptus. IKEA, the furniture company, is looking into using more Eucalyptus in the future.
TIMBERLINE: What do you see taking place right now in the low grade markets in this country? What impact will these trends have on prices?
Ekstrom: It all depends if you are a buyer or a seller. It looks pretty good if you are in the South and are a buyer of logs and lumber. Competition is not as strong for material as it was a couple of years ago. If you go back two years, you may have had competition for the same log from a sawmill, an OSB plant and pulp mill. Right now, it is mostly the pulp mills competing for the low grade material because the OSB plants and sawmills have curved production. It is always difficult to generalize for the Southern U.S. because it is such a big market. There are some places where landowners are less eager to harvest timber because they are starting to use more land for recreation and other purposes. Generally, in the South you see less pressure on the resource in 2008. Therefore, prices for logs have started to come down. However, this downward trend will change when lumber markets improve in 2009 or 2010.
On the West Coast, the market is shifting a little bit the other way. There is more pressure on the round wood resources. Sawmills have been cutting back production so there are fewer residual wood chips. Pulp mills are forced to go out and look for round wood instead of chips, which results in more competition and higher costs. This is a good thing if you are a landowner, but a bad thing if you are buying logs for pallets or other uses.
Looking ahead as long as the housing starts stay where they are and lumber production is down, I don’t see any major changes that will impact prices of logs in the U.S. market.
TIMBERLINE: Asia is a huge consumer of the world’s wood supply. Do you believe there will be huge opportunities for American exports to continue to grow in this region?
Ekstrom: Japan is the big consumer of lumber. They are the big importers of softwood logs. There are opportunities for the U.S. to export more logs to Japan and long term to China as well. It’s just that in China they don’t build houses the same way that the Japanese do. They don’t need as much lumber. They are two very different markets.
When it comes to hardwood, there will be import opportunities of both logs and lumber because domestic consumption is rising and the manufacturing of wood products for export continues to go up because it is cheaper to do a lot of things in China than North America or Europe. Neither China nor Japan have large forest reserves so much of their raw material has to be shipped in from other parts of the world.
TIMBERLINE: How is the rise in energy costs impacting finished good producers in Asia that have to buy raw material from other countries? Could high fuel prices cause some of those jobs to come back to North America?
Ekstrom: Even though energy costs have gone up significantly, it is still a fairly small share of the total cost of producing items, such as furniture. Their labor costs are so much lower than our costs. Higher energy costs are affecting their margins. But it will not have any major impact on the trade of logs or lumber.
A little more logs are shifting into Vietnam than China just because it is slightly cheaper to produce in Vietnam than China. But you won’t see a shift back to the U.S. again. We have to accept that Asian countries will continue to do the more labor intensive things while American companies will have to do more sophisticated things requiring automation.
TIMBERLINE: Timber production from Latin America has boomed over the past decade. Do you believe this trend will continue? Why?
Ekstrom: Yes, they will continue to expand plantations in Brazil. They will continue to grow more on every acre five years from now than they do today. You see the same in Uruguay. This could also happen in Venezuela, Colombia, or Nicaragua. It all depends on what happens with the politics in those countries. As a continent, Latin America can certainly boost its production capacity. Trees grow faster down there than in more temperate climates, and they have a lot of land that is not used for anything.
When it comes to plantations and developing the right tree clones, Latin America countries are probably ahead of the rest of the world. If we want to learn something about fast growing Eucalyptus, we have to go down to Brazil.
Brazil has become a large producer of hardwood pulp to the world. Brazil and Uruguay have invested the most money in this technology over the past five years and have the most modern pulp mills in the world.
TIMBERLINE: Is Latin America a major competitor for U.S. raw wood exports? Please explain the competitive tension between these two regions.
Ekstrom: No, the U.S. doesn’t really export lots of logs outside of North America. Its exports are limited to Canada, Japan, Korea and China. And in terms of lumber, a lot of that material is unique species, Doug Fir, Cedar, Oak, Beach, Red Alder, and you don’t have those species down in Brazil. What they produce down there on plantations is fast growing pine. Some markets that the South sells into with SYP may experience competition from Brazil. That is probably the only area where Brazil would compete in an export market against the U.S. sawmills.
Russia, not Latin America, is the largest exporter of raw logs around the globe.
TIMBERLINE: Since Russia is such a big player in the export market, won’t its recent tariff decisions increase opportunities for U.S. exports?
Ekstrom: It is definitely going to change how things are done in some areas, especially Japan and China. There are not a lot of places they can go for softwood material. They can source from New Zealand, Australia, Canada and the U.S. They have to decide if they want to buy logs or lumber.
Some exporters in North America are looking into the prospects of putting lumber, logs and even wood chips into cargo containers for return trips back to Asian countries.
With favorable exchange rates, there could definitely be good opportunities for U.S. companies to export both logs and lumber to Asia. The U.S. has the resources and now a pretty competitive cost structure. Asia is where the demand is increasing for all different kind of forest products. The next step is to see if American companies can find the right distribution channels and understand the markets in Asia.
International Wood Market Research Services
Wood Resources International, an internationally recognized forest industry consulting firm, specializes in pulp and sawlog prices and monitors global developments in the forest products industry.
Primary regions of focus include North America, Europe, Russia, China and the plantation forestry sector in the Southern Hemisphere.
For the last 20 years, Wood Resource Quarterly has been the source for global wood price data and market information. Each report includes sawlog, pulplog, wood chip prices and market information from all major regions of the world.
Benefits of subscribing to the Wood Resource Quarterly (WRQ):
The regions covered by the Wood Resource Quarterly account for almost 90% of the world’s wood-based pulp production capacity.
In addition to wood prices and market commentary for 22 global markets each quarter, the reports also include updates on timberland investments, forest plantations worldwide, pulp prices and market trends, biomass markets in Europe and North America, and global sawlog market developments. Each report also features a country profile that presents the latest information regarding the forest resources and forest industry in a region of interest.
The North American Wood Fiber Review has tracked wood fiber prices in the United States and Canada for almost two decades. In addition to following wood fiber prices in all major regions in North America, the report also tracks all major wood fiber markets around the Pacific Rim. This is the only publication that consistently provides comparable updates of conifer and non-conifer prices, average and range, for all major markets in North America and the Pacific Rim. The report is a vital information source for everyone that needs to track wood fiber costs, chip trade and fiber consumption by the pulp industry in the most active market in the world.
To subscribe to either report, visit www.woodprices.com or or e-mail firstname.lastname@example.org.
WRI is one of the organizers to the third international pulpwood conference later this year. The event will be held in Singapore on October 19-21 with an optional 3-day field trip to Vietnam.
The two previous conferences brought together several hundred delegates from more then 20 countries, primarily focused on global plantation resource development and the international trade in woodchips and woody biofuels (Chips and pellets).
The Conference will focus on:
• Wood resource availability in Latin America, Asia, Oceania and Africa
• Forest timber investment trends
• Global biomass market developments
• Outlook for wood chip supply and potential new resources
• Impact of record high ocean freight costs on fiber trade logistics
• Global pulpwood price trends
• Wood fiber markets in Europe and Japan
• China plantation forest resources & potential woodchip import market
• Potential benefits of post-Kyoto carbon market developments for investors in native forests and plantations
For more information, visit www.pulpwoodconference.com.