The geo-political map in the US and Europe has been shaken and more uncertainty may follow with important elections in France and Germany this year. The Trans-Pacific Partnership (TPP) appears to have no chance of progress without the USat least for the moment with the new US President.
The potential of interest rate rises and therefore, investment prospects are now in question. Growth in the essential Chinese economy is constantly—and perhaps unreasonably—being questioned by the pessimistic international media. But most concerning of all, for every industry relying on exports, is the threat of trade restrictions or even a trade war. In the end, the very future of globalisation may be in question.
Raw Material Issues In Asia
The explosion in furniture manufacturing in Asia in the last 20 years has given rise to massive demand for low grade, cheap hardwood and some softwood material for frames, and edge-glued panels for veneering and painting or staining. The exotic, high value species, while still very important, represent a relatively small element in the equation.
The Asia Pacific region, including India, Korea and Japan, in 2015 accounted for 55percent of global furniture production, compared to 26percent in Europe and 14percent in the North America, according to research specialists CSIL in Milan, Italy.
Looking from an Asian perspective, for the wood working industries, one of the key issues focusing the minds of manufacturers is the question of raw material supplies. The future supply and demand for wood material in Asia has become a hotter topic than ever before.
To say there is a crisis might sound over the top, but that is exactly how a group of furniture associations in Vietnam described their hastily arranged meeting in Saigon in December for their members. The ‘crisis’ has many elements, but its focus is on the increasingly important forest plantation resources available to Asian furniture manufacturers as well as its paper companies.
As the natural forests of Asia have become less and less commercially available, most countries have increased their planting and dependence on rubberwood, acacia and several other species. Teak and rubberwood plantations have been around a long time, but other species, particularly acacia in large volumes, are relatively new and some still experimental.
China is at the heart of this issue. The growth of its consumer demand, by urbanisation, increased standard of living, population boom and expanding middle class is well documented.
Now that China has effectively closed down the harvesting of its natural forests, and there is some strategic resistance to the use of Russian logs, the country has embarked upon a massive planting programme.
Meanwhile, as China remains dependent on plantation species from the region and elsewhere such as New Zealand, traders have been scooping up all they can buy—in Thailand, Malaysia and Vietnam, leaving those countries short of material and facing higher costs.
It does not need statistical analysis to predict that China will have a national wood material deficit in both high and low value species for the foreseeable future.
SE Asian Concerns
The Handicraft and Wood Industry Association of Ho Chi Minh City (HAWA) has projected exports of wooden products to reach US$7.2 billion in 2016, up from $6.9 billion in 2015.
Speaking at the association’s 7thcongress in Ho Chi Minh City,Chairman Nguyễn Quốc Khanh said,“ despite difficulties the wood processing and handicrafts industry has enjoyed steady growth to make the country the largest wood products exporter in ASEAN; and the trend is expected to continue.”
Vietnam is the second largest export market, after China, for US hardwood exports outside North America (which includes Mexico), but it still depends on regional forest material. Malaysia by contrast appears well supplied with material from its natural forests, much of which has been certified by MTCC/PEFC for years.
Indonesia still has massive natural forest resources and plantations, with the added advantage now of its recent acceptance by the EU of its export licencing SVLK scheme for wood and wood products to comply with the EUTR. Both countries are expected to increase wood product exports, albeit slowly.
Thailand, by contrast, has banned the export of logs – but has apparently classified rubberwood as ‘vegetable’ to facilitate exports to China.
American & European Supplies
So the question arises as to whether the USA, with its abundant and underutilised hardwood forest species (according to the UN/ECE Timber Committee in Geneva) can come further to the rescue of furniture manufacturers in Southeast Asia.
The answer would appear to be a qualified yes. American hardwoods are popular and suitable for middle and high-end furniture production. They are sustainable, proven legal and regarded as environmentally acceptable and include such highly fashionable species, such as walnut and oak, ranging to the increasingly useable and competitive Tulipwood (also known as yellow poplar).
US’ National Hardwood Lumber Association (NHLA) grading rules give the unique advantage of reliable grading based in a yield prediction system for American hardwoods. Meanwhile, the European hardwood exporters have upped their game in Asia with increased promotional activities, improved sales and also modifications to their traditional specifications and grading to accommodate Asian buyers.
Taking account of the fact that oak is the most important temperate hardwood in international consumer markets, as well as domestic markets in Asia, 2016 has raised some issues as to the long-term availability of oak.
Recent months have seen reported shortages of oak sawn lumber and rising prices which have not been matched by most other competing hardwoods. The strong demand for oak has numerous facets. It is fit for many purposes and is a familiar local species to the whole of the northern world—growing naturally in the forests of North America, Europe, Russia, China, Japan and Korea. People partly like oak because they know it, just as the people of Myanmar, Thailand and India know teak.
For wood flooring, oak dominates the markets in US, Europe and China for its combination of technical suitability and aesthetics; and finally it varies in colour and grain, according to its provenance, so offering choices to consumers.
On the supply side, there is a fundamental difference between the volume of oak trees growing, of which there is no shortage, and the availability of dry lumber ready to use. Firstly the climate and temperate seasons can affect harvesting levels and secondly oak takes time to saw, dry, prepare and ship; thus causing a time lag between log harvest and lumber consumption. At best that can be up to six months with kiln dried lumber and in extreme cases, where air drying is still used, it takes years.
In the forests of the US and Canada, oak forestry is managed sustainably by selective harvesting and natural regeneration. In countries such as France it has been planted for generations and in others it may be a combination of the two. In China, shortages of domestic raw material have led to a great increase in imports across the 3,000 km border with the Russian Far East.
Although one simple answer may just be the temporary imbalance between supply and demand that can, and does, occur in any year. Another suggestion centres on the idea that the lack of investment in sawmilling, since the financial and other crises, has sapped the industry of new innovative capacity now needed.
Meanwhile, the markets, based on gradually improving property markets, have cautiously increased demand for flooring, furniture and doors—all needing oak; but confidence in forest industries by the banks has been low and is now inadequate as demand strengthens.
There have been many other suggestions, some plausible and some maybe wide of the mark. For example, the consumption of whisky and wine in China has grown hugely, creating strong demand for barrels in the US and Europe, which require high quality American white or European oak.
In the US, where red oak has been the traditional interior hardwood since the European settlers arrived, the domestic market appears to have rather suddenly taken an increased liking for white oak, especially for flooring, which competes with exports to Europe, China and Vietnam—now the second largest global market for American white oak lumber.
There has been an increase in oak rail sleepers (rail ties) and in road mats for oil fracking, which has absorbed greater volumes in the US.
Another issue focuses on the flow of Russian oak into China, which may now be challenged by environmental issues of sustainability and legality, especially where processing is intended ultimately for European markets, governed by the EU Timber Regulations (EUTR). The effect may be a reduced flow of Russian oak logs to China, where also there are questions of sustainability.
As long ago as 2005, one report suggested, even then, there was evidence that the long term sustainable supply of oak in Russia was already jeopardized by unregulated harvesting activity, particularly to supply the market in China.
Turning back to the global oak forest resource, what do we know about the growing stock and its sustainability?
Certainly China does not have enough and will need to import oak so long as the species remains popular. The volume available from Russia is indeterminate and unsure, for the reasons given.
The Europe oak resource is huge, especially in Eastern European forests, but Europe itself is likely to consume much of its own production domestically as recent trade exhibitions have demonstrated. That leaves North America.
In the US, the latest data (2014) from the US Forest Service shows that about 33 percent of the US hardwood forest resource is oak. Data shows that in every one of 37 Eastern States growing hardwood, the annual growth volume exceeds the annual harvest.
The conclusion for international oak markets is that industrial processing of oak is the main bottleneck causing today’s shortages and price increases of dry lumber ready to ship, influenced by lack of investment in sawmilling. Taken overall there is no current global shortage of standing oak trees, although the global resource is distributed unevenly, leaving the US with the greatest long-term potential to supply.
Consumption In 2017
Future demand predictions raise as many questions as the supply issues discussed.
Will the new Trump administration stimulate US investment, employment and therefore consumption? Will the US Dollar value keep rising making Asian-made furniture more competitive in the US? Will China’s economy continue to slow down or not? Will the European markets finally lift off? How will ASEAN economies fare? What will really be the effects of Brexit in UK and also in Europe? Will the world stop fighting?
All of these issues will affect the market outlook. However, some signs are not too bad, since the world’s population continues to grow, the middle classes are increasing their capacity to improve standards of living and stock markets have not collapsed with the turbulent events of 2016.
The oil and commodity prices appear to have finally bottomed out and that could bring back wealth and spending in many countries. What is now badly needed is confidence and stability—always an engine of market growth.
It is a brave analyst who predicts that stability for 2017, but the solid wood and panel processors must simply hope.
Oak is one of the most diverse species, of which there are thought to be around 600, not all commercially available; for example, there are sixteen ‘commercial’ species of red and white oak in North America and two main species in Europe. American red and white oaks are different in grain and colour from European oak. Mongolian oak (Quercus Mongolia) is the only commercially significant oak species in the Russian Far East and China although in appearance it is somewhat like the oak grown in Hokkaido, northern Japan. In fact, China has about 100 oak species, but in very low volumes and therefore uncommercial.