Oram: Feeding China’s insatiable appetite for logs
Each year New Zealand sends millions of logs to China, most of which are only used for concrete formwork or exported back here as timber for our construction industry. Rod Oram looks at why it is proving so challenging to build up our own domestic processing industry instead.
In 2017, New Zealand was the largest source of imported logs for the Chinese wood processing industry. We exported 14 million cubic metres of them, plus only 400,000 m3 of sawn timber, the first modest step up the value chain.
In September, Minister of Forests and Regional Economic Development Shane Jones led a trade delegation to China for our latest attempt to crack the decades-old mystery of how to break free from the commodity log trap.
The industry and government members of the mission came back with plenty of insights into the burgeoning opportunities and potential ways to ease the impediments to more processing here. But their task is getting even harder because of changing dynamics in global supply of timber and in Chinese demand.
On the supply side, we are the last major supplier to allow unfettered exports of logs. Russia, for example, has imposed a 20 percent tariff on log exports, with a timetable to raise it to 100 percent. This is stimulating heavy investment in processing there. Likewise, the US, Canada and Scandinavian countries use various means to help domestic processors compete for logs against export traders or in other ways to foster downstream activity at home.
On the demand side, China’s appetite for logs is insatiable. They bought 75 percent of our export logs last year, which met 14 percent of their import needs. With our harvests increasing, and sources elsewhere in the world becoming more restrictive, we can expect China to buy more of our logs and take an even greater share of those exports.
Some curious distortions are already well-developed in these exports. For example, for the past 18 months the wholesale price of New Zealand logs landed in China has been higher than the retail price there. Currently they are about US$135 a tonne versus US$120. The trade mission was given various explanations, but none made much economic sense.
An even greater mystery is how timber suppliers to the construction industry here in New Zealand are importing increasing volumes of timber processed in China from New Zealand logs, and at prices that undercut domestic processors. Arguing that Chinese processors are just phenomenally cost-effective only begs questions about the incentives they benefit from in their economy.
Crucially, one player is becoming ever more dominant in the New Zealand log trade. It is China Forestry Group, a massive state-owned enterprise formed in 1996 to build an integrated forestry sector from planting and harvesting domestic forests and sourcing imported timber, through processing to the very top of the value chain.
With government direction like this, China has become, for example, the world’s largest maker of pulp and paper even though it relies heavily on imports of logs and fibre to do so. Last year, it outstripped the US, the number two producer, by 30 percent.
When some of the trade mission members asked senior China Forestry executives why their company was expanding its role in the market, they replied it was to bring more stability to supply by dampening the boom bust cycle in the volatile commodity market.
That, though, glosses over China Forestry’s stated strategy. A corporate video it posted six months ago, which begins with scenes of logging in New Zealand, has some plain messages: “From the corners of the earth to one destination – China. In 2017, China imported US$200 billion of timber, 108m m3 in volume. By 2020, volume will rise to 700m m3. From the port of arrival to nearby industrial parks…from logs to products in one location. We have five industrial parks and another eight coming.”
China Forestry is one example of the SOEs given new strategic importance and greater political support under the economic plans of President Xi. In a number of sectors, China is becoming less of a market economy not more.
China Forestry has also quickly become a globally integrated company with forestry and timber sourcing businesses in a number of countries. It made its first investment here in 2013 by buying some North Island plantation blocks from the NZ Superannuation Fund.
In China, timber companies across the scale from giants such as China Forestry down to small local processors are benefitting from government incentives at the central, provincial and local level, according to extensive studies by the US, Australian and other governments in recent years.
Our Ministry of Foreign Affairs and Trade released mid-year a brief, preliminary study which came to similar, broad conclusions. As a result of the findings of the recent trade mission, the Government and some industry members are delving deeper into the issues.
When trade mission members asked some pointed questions in China, the responses varied. To paraphrase, the replies ranged from the benign (we just follow your rules, if you change the rules on logs, we will comply) to the aggressive (we’ll build processing plants in New Zealand and put you out of business).
Thus, in the face of China’s deeply ingrained industrial and raw material strategies, the New Zealand forest sector faces a Herculean task to persuade domestic and foreign investors to build substantial processing plants here.
There is a good case for New Zealand processing. The best argument is logs are often compromised in the shipping to China. Some arrive sap-stained, making them unfit for good timber. This is particularly true for ones harvested in hill country which can delay their anti-staining treatment. Thus, the biggest use of New Zealand logs in China is for concrete formwork, the ultimate low-value product.
If, though, they were quickly sawn and dried here, the timber could be more valuable to us while still leaving plenty of opportunities for downstream processing into more valuable products there. Moreover, a modern large-scale plant here, particular those with access to geothermal power, are high capital, low labour, high efficiency plants.
One indication of the merit of this argument is the approval this past week by the Overseas Investment Office of a $100 m investment in a particle board plant at Kawerau by Guangxi Fenglin Wood Industry Group.
But for this strategy to work at large scale – some members of the trade mission are suggesting an ultimate goal of a 50/50 split between log and processed exports – it needs to win over forest owners here who are happy with the current high log prices, and with processors in China who are making money all the way up the value chain.
Forestry Minister Jones doesn’t underestimate the challenge. “We’re trying to invert a model that’s 30-35 years old,” he said in an interview for this column.
The elements of that are well-known. The heart of it has been the boom-bust cycle of log exports because of variable supply and demand here and abroad. The cycle discouraged investment in processing here, which only increased the volume of logs exported and the market’s volatility; the cycle also caused highly variable workloads which has made it harder for logging companies to invest in technology and training to deliver reliable employment and good incomes; and the sale in the 1980s and 1990s of a large proportion of our plantation forests to overseas institutional investors who are happy to ride out the boom-bust cycle in log exports to capture good prices when they can has only contributed to the volatility.
But it looks as though that model is becoming even more disadvantageous for New Zealand. With countries such as Russia clamping down on log exports, we’ve become the last, large, easy and plentiful source. Thus, Chinese companies from China Forestry on down in scale are evermore eager to secure supply here to help feed their processing plants in China.
The optimistic view in our forestry sector is that China wants to establish trading relationships based on a better sharing of value created to counteract the “you lose-we win” trade war President Trump is waging on them.
Let’s hope that is the case. The alternative of relying on international trade law and bodies to ensure our forestry trade is fair and truly free is fading fast because of Trump’s assault on the system.
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