Tropical Timber Market Report IV

The EU is stepping up its efforts to ensure implementation of FLEGT, but EU’s wood imports and exports have been on the rise; shortage of raw materials and volatile foreign exchange rates are affecting the wood sector in some Asian countries; while China’s trade is expected to expand further as the result of the “One Belt, One Road” initiative. ITTO tells us more about timber markets around the world.

Malaysia

Shortages of raw materials and skilled workers could hold back furniture export performance

Malaysia’s timber exports are expected to increase five percent this year from the RM23.22 billion in 2017, according to Dr. Jalaluddin Harun, Director General of the Malaysian Timber Industry Board (MTIB). 

His confidence stems from the high demand for Malaysian timber in Japan, the US, member states of the European Union, Australia and India.

Mr Harun reported that Malaysia ships to more than 160 countries but marketing efforts will be focused on those countries with which Malaysia has trade agreements.

The main issues facing the timber sector, said Mr Harun, are shortages of both raw materials and skilled workers and this must be addressed. 

Mr Harun estimated that 80 percent of Malaysian made furniture is of rubberwood and efforts must be made to secure this resource for the domestic industry.

 

Revised fees in Sarawak to impact industry

The Sarawak Forest Department will introduce higher fees for planted forest timber and also higher transportation fees for hardwood timber with effect from 1 March this year.

The fee for planted forest timber will be raised from RM0.50 per cubic metre to RM1.50 per cubic metre and a charge of RM1 per cubic metre will be introduced for natural forest timber to pay for tracking the movement of logs through the issuance of Shipping Pass or Land Transport Pass.

 

Indonesia

Fiscal incentives to boost investment

Sri Mulyani Indrawati, Indonesia’s Minister of Finance, has said the government plans to introduce better tax incentives to attract business investment.

The focus will be on four incentives namely tax allowances, tax holidays, tax deductions for small and medium enterprises and incentives for research and development. The government is also considering expanding the range of business sectors that can benefit from these incentives.

 

Sustainability bond to finance rubber plantations

The UN Environment Programme has announced a partnership with the World Agroforestry Centre, ADM Capital and BNP Paribas for the issuance of a US$95 million Sustainability Bond to help finance sustainable natural rubber plantations on heavily degraded land in two provinces in Indonesia.

The UNEP web site says the project involves collaboration with WWF, which has worked with Michelin and RLU to set aside remaining High Carbon Stock (HCS) and High Carbon Value (HCV) forest in the RLU concessions, as well as conservation of wildlife and riparian areas. 

Out of a concession area of 88,000 hectares, roughly 45,000 hectares will be set aside for community livelihoods and conservation.

 

Satellite imagery to identify fire risk areas

The UK government, through the International Partnership Programme (IPP) will provide grant support for efforts in Indonesia and Malaysia to address the problem of forest fires.

Sam Gymah, the UK’s Minister of State for Universities and Science, said the project would be overseen by a British company utilising satellite imagery to record water levels on peat lands where forest fires often occur to provide an early warning system of areas at risk.

 

Myanmar

Teak plantation harvests planned

News is circulating that the Forest Department is planning to allow harvesting of some mature (over 30-year-old) commercial teak plantations to partially compensate for the logging ban in the Bago Mountain Range. 

Analysts write that the quality of plantation teak will not satisfy quality requirements in international markets. As it is not clear what natural teak harvest levels will be in 2018-19 it is difficult to assess how this will impact industry.

Myanmar is said to have around 2.2 million acres of forest plantations about half of which are of commercial value according to the Ministry of Natural Resources and Environmental Conservation.

There are approximately 1.2 million acres of forest commercial plantations in Myanmar (approximately 50 percent of the total) a further 30 percent are plantations in catchment areas and around 16 percent are for other uses. 

In addition, there are nearly 450,000 acres of firewood plantations and 6,480 acres of mangrove plantations. However, the accuracy of these figures cannot be confirmed as some plantations have been badly managed or illegally cut.

 

Export earnings well down on previous years

U Khin Maung Kyi, the Deputy Permanent Secretary of Ministry of Natural Resources and Environmental Conservation, has been quoted as saying income from timber exports and domestic trade will exceed the US$90 million in fiscal 2017-18 target which ends 31 March 2018.

This represents a considerable decline from past years. The value of wood product exports before the 2014 log export ban averaged over US$500 million annually. 

In fiscal 2013-14, exports were close to US$1 billion according to Ministry of Commerce data. In the following year exports declined to just US$93 million. Between April and December 2017 timber export were said to be around US$162 million.

In the latest projected export earnings from the Ministry it is not clear whether US$90 million is MTE earnings from log sales to the Industry or the export value since the Ministry of Commerce has reported earnings of US$162 million for the first nine months of 2017.

 

EU paying special attention to teak imports

The domestic media (News Watch Weekly) has quoted an Extractive Industries Transparency Initiative (EITI) member, Aung Phyoe Kyaw, as saying that timber exports to the EU have been temporarily suspended because of the strict implementation of the FLEGT licensing system.

Analysts write that this is not correct and that timber exports to the EU have not been suspended but that the Competent Authorities of EU Member States which are responsible to verify due diligence by importers are paying special attention to imports of Myanmar teak.

 

India

Manufacturing output climbs and business confidence rises

The good news on December industrial production, particularly manufacturing output and a dip in retail inflation, has been interpreted as signaling that the economy is stabilising leading analysts to be optimistic on third quarter 2017 GDP.

In another signal that economic sentiment may be improving, the quarterly Business Confidence Index, released separately on Monday by the Delhi-based economic think tank National Council of Applied Economic Research (NCAER), registered a growth of 9.1 percent in January, after declining for two consecutive quarters.

 

Despite living longer with parents millennials aspire to own a home

A recent survey, the results of which are presented in a press release from CREDAI, has found that over 80 percent Indian millennials still live with their parents but that a majority aspire to own a quality home.

The survey for this report was conducted by the CREDAI Youth Wing in association its partner the Los Angeles based CBRE, one of the largest commercial real estate services and investment company in the world.

The report highlights the major trends created and driven by millennials, addresses issues such as why millennials live with their parents longer and how millennial consumers spend, save and play.

CREDAI says the report challenges common perceptions and serves as one of the most authoritative studies ever undertaken on such a demographic.

 

Big plans to expand forest cover

At the opening of the Commonwealth Forestry Conference in Dehradun, Ajay Narayan Jha, from the Ministry of Environment and Forests, reported that India has a 24 percent forest cover and that the government plans to increase this to raise the carbon sink to 2.5 to 3 billion tonnes in 2030.

The focus will be on planting trees outside the forests and in the agro-forestry sector according to the former Forestry Director General SS Negi, also present at the conference.

In related news, the government has announced its plans for managing its compensatory afforestation fund created from deposits by agencies when forest land was utilized for non-forest purposes such as industrial development or infrastructure.

 

Japan

Growth hits a wall

Japan’s economy has grown for eight consecutive quarters, the best performance since a period between 1986 and 1989 during the ‘bubble economy’.

But now growth has hit a wall, the combination of much slower growth in two years and the stronger yen in more than twelve months is underlining how difficult it is to revive inflation in Japan, even when other countries are seeing improvements.

Despite this setback, a short term phenomena according to the Bank of Japan, the government is maintaining the view that steadily expanding industrial output and increased capital expenditure will serve to correct any downturn.

The biggest problem is in the labour market where shortages are emerging but not translating into higher wages as yet. Only when this happens will a solid foundation for inflation be established.

 

Exports support economy but growth at risk from strengthening yen

The latest data on Japan’s core machinery orders shows a decline in December. 

Core machinery orders are regarded as an indicator of capital investment and in a recent government survey it was found that companies expect orders to rise only marginally in the first quarter of this year which risks undoing the recent improvements in spending.

While the yen is competitive against other currencies it is exports that are supporting economic expansion not consumer spending.

 

Yen volatility of growing concern

From ending 2017 at 112/US$ the yen had strengthened by around five percent by the end of February to around 106/US$. 

The abrupt volatility in the yen dollar exchange rate has been put down to three main converging factors, expectations that the Bank of Japan (BoJ) will begin to unwind its monetary easing policy, pessimism on the US dollar and demand driven by traders looking for a safe haven in the yen.

The Japanese government does not want to see the yen strengthen and this played a role in the decision to reappoint the Governor of the BoJ and at the same time introduced a new deputy who has a reputation for bolder views on monetary easing.

A government spokesperson is quoted as saying “We (Japan) agreed at the Group of Seven and the Group of 20 that excessive foreign exchange moves are undesirable because they can harm the economy. Foreign exchange stability is extremely important.”

 

Bad winter weather and slower bank lending eats into housing starts

Housing starts have been falling since the end of 2016 and while the bad winter weather has disrupted building activity more than usual there does seem to be a correction underway.

Data is showing that real estate financing rates have fallen with 2017 seeing an over five percent decline. Analysts put this down largely to the decision by banks in Japan to cut back on easy term lending rates for apartment construction.

 

China approves use of Japanese species for housing

The China Wood Structural Design Standard will be revised in August to allow use of Japanese species of cedar, cypress and larch for post and beam construction in China. 

Discussion has been held for more than seven years between the Wood Export Promotion Association of Japan (WEPA) and the Housing Construction department of China for use of Japanese wood for Chinese wooden housing.

WEPA stipulates cedar, cypress and larch lumber as structural material so that they can be used to build Japanese style post and beam construction in China. With the revision, Japan now is able to export value added precut lumber for China market.

WEPA has been eagerly promoting Japanese wood for housing and built model house, held seminar and manual of wooden house building in China. There is no accurate statistics for housing starts in China but according to WEPA’s estimate, annual starts in urban area is Chinese gives high evaluation to the Japanese style expose use of wood but for actual construction, it is necessary to train Chinese architects for design and carpenters for construction. Canada’s 2x4 housing was authorised back in 1998.

 

China

Foreign trade up 14.2 percent in 2017

It has been reported by the General Administration of Customs (GAC) that the value of China's 2017 foreign trade rose 14.2 percent year-on-year to RMB27.79 trillion (USD4.28 trillion) bringing to an end the previous two yearly consecutive declines.

China's exports increased 10.8 percent to RMB 15.33 trillion while imports surged 18.7 percent to RMB12.46 trillion in 2017.

The trade surplus continued to narrow last year, shrinking 14 percent to RMB 2.87 trillion compared to the 9 percent reduction registered in 2016.

Analysts attributed improved exports to growth in the global economy as well as steady domestic economic expansion, rising commodity prices and increased trade with countries along the Belt and Road routes.

The European Union, the US and ASEAN are the top three trading partners and 2017 exports to the United States rose 15 percent year-on-year. 

 

Chinese private enterprises now play a bigger role in trade.

Expanding trade along the ‘Belt and Road’ routes

China’s foreign trade with countries along the route of the ‘Belt and Road’ in 2017 rose 18 percent to RMB7.37 trillion, up 3.6 percent over growth of total national foreign trade. 

Trade to these markets now accounts for 26.5 percent of the national total value of foreign trade.

According to a GAC spokesperson, the ‘Belt and Road’ initiative countries have shared in the benefits in five areas; policy coordination, connectivity, unimpeded trade, financial integration and people-to-people bonds.

It is expected that China’s trade with countries along ‘Belt and Road’ will continue to be the highlight and growth point of China's foreign trade.

 

Diversification of trade partners

China’s trade partners have become more diversified in recent years. 

In 2017, China’s trade with traditional markets such as Europe, the US and Japan rose 15 percent year-on-year. However, emerging markets such as Latin America and Africa grew 22 percent and 17.3 percent respectively.

Bilateral trade between China and Australia has been increasing rapidly in recent years. The total value of foreign trade between China and Australia surged 29 percent to RMB92,341 billion, some 15 percent higher than the national growth rate. 

Of the total, the value of exports to Australia rose 1.39 percent to RMB280.56 billion while imports from Australia increased 37 percent in 2017.

 

Port handling charges cut

According to China National Development and Reform Commission from 1 February 2018 container handling charges at Dalian Ports, Guangzhou Ports and Shenzhen Ports have been reduced. 

Charges per container have been reduced to RMB510 from RMB642 at Dalian, to RMB490 from RMB668 at Guangzhou Ports and to RMB980 from

RMB1400 at Shenzhen Ports.

It is estimated that these changes will lower logistic costs at these ports by around RMB 950 million per year. The decision on reduced charges came after suspected monopoly. 

In addition, the National Development and Reform Commission stresses that operating fees in dock should be adjusted to a reasonable level as soon as possible.

The National Development and Reform Commission suspected violation of the "Anti-monopoly Law" in the operation of port enterprises.

 

Europe

Recovery in EU wood imports continues in 2017

The total value of EU imports of wood products was €18.17 billion in 2017, 2.4 percent more than in 2016. 

This followed an increase of 1.3 percent to €17.74 billion in 2016. In 2017, EU import value was at the highest level since 2008 just before the global financial crises.

Imports into the EU were boosted in 2017 by stronger economic growth. According to Eurostat, the EU economy grew at its fastest rate in 10 years in 2017, registering a 2.5 percent increase on the year before. That is the highest annual growth since 2007, when the economy expanded by 2.7 percent.

The bloc of 28 countries put in a strong performance in the final quarter of the year, growing 0.6 percent, mainly driven by good economic results from Germany, Spain and France.

Good economic growth fed through into a rise in the value of the €last year, which strengthened against the US dollar by around 15 percent during 2017.

For importers in the eurozone, this helped offset the general rise in global prices for timber products resulting from strong demand in other regions including China, North America and the Middle East.

Considering individual products, the value of EU imports of wood furniture increased by 7.3 percent to €6.29 billion in 2017 after a slight dip in 2016. EU imports of wood furniture increased from all the main supply regions last year, including China and Southeast Asia.

However, the strongest growth in EU furniture imports in 2017 was from European countries outside the EU. This forms part of general trend of increasing EU dependence on wood furniture manufactured in central and Eastern Europe.

The value EU imports of sawnwood (including softwoods and hardwoods) was unchanged in 2017, at €3.2 billion, ending the rising trend which began in 2013. There was a particularly significant 21 percent decline in the value of EU sawn wood imports from Africa in 2017 which offset a 12 percent rise in imports from the CIS countries.

EU imports of sawn wood from Russia and other CIS countries continue to benefit from the relative weakness of currencies in the region.

EU imports of panels (mainly plywood) increased nine percent to €2.79 billion in 2017. This follows a three percent rise in 2016 and an 11 percent increase in 2015. Most of this gain was due to a rise in plywood imports from Russia and other Eastern European countries. The value of EU plywood imports from China and tropical countries was generally stable or declining in 2017.

The long-term rise in EU imports of energy wood continued in 2017 with annual import value exceeding €2.01 billion for the first time. This was only three percent more than in 2016, a slower pace of increase compared to average annual growth of 11 percent in the previous five years.

EU imports of energy wood (now dominated by pellets) increased sharply from the CIS region last year. Imports from the US, still by far the largest external supplier to the EU, were stable in 2017.

Following a 22 percent increase in 2015 and four percent increase in 2016, EU imports of other joinery products (mainly doors and laminated wood for window frames) declined one percent to €690 million in 2017.

Imports of joinery products from Russia and Ukraine continued to rise last year, while imports from the tropics and China lost ground (although China is still the single largest external supplier).

EU imports of wood flooring were stable at €550 million in 2017, after falling back nine percent in 2016. Flooring imports from China, by far the largest external supplier, were flat in 2017, while imports from the CIS region increased 12 percent, helping to offset a decline in imports from Southeast Asia and South America.

The value of EU imports of wood products from tropical countries decreased 1.8 percent to €3.78 billion in 2017. This follows a one percent fall the previous year. The share of tropical countries in the total value of EU wood product imports declined from 22 percent in 2016 to 21 percent in 2017. This is a resumption of a long- term trend in declining share of tropical countries in total EU imports after a brief rebound in 2015.

China’s share in total EU imports of wood products fell from 30.5 percent in 2015 to 28.9 percent last year, the lowest level since 2008. Meanwhile the share of Russia and other CIS countries increased from 19.3 percent to 21.1 percent.

In 2017, there was a slight increase in share of EU imports from non-EU European countries (from 10.9 percent to 11 percent) and North America (from 11.5 percent to 11.7 percent).

The slight decline in the total value of EU wood product imports from the tropics in 2017 hides variations between products groups.

Last year, there was a sharp 13 percent decline in EU imports of sawn wood from tropical countries, from €1,026 million to €896 million. There was also a continuing decline in EU imports of tropical flooring, by 12 percent to €68 million, and tropical logs, by 29 percent to €53 million.

However, these declines were offset by rising EU imports of tropical furniture, up five percent to €1.62 billion, panels (mainly plywood), up seven percent to €480 million, and energy wood (notably charcoal), up two percent to €143 million.

 

EU wood products exports at record level in 2017

In 2017, the EU exported wood products with a total value of €21.8 billion, five percent more than in 2016 and overtaking the previous record level of €20.51 billion in 2015.

The EU increased exports of a wide range of wood products last year, but there was particularly strong growth in sawnwood, logs, energy wood, and panels. The increased exports were mainly destined for North America, China and other Asian countries.

Last year, the rate of EU export growth exceeded the rate of import growth, resulting in an increase in the EU’s timber product trade surplus with the rest of the world, from €2.97 billion in 2016 to €3.62 billion in 2017.

 

Brexit to significantly impact EU trade balance

Looking to the future, the EU trade data highlights the extent to which Brexit will impact on the EU trade balance.

The UK is consistently the largest EU importer of timber products from outside the bloc, due partly to the country’s limited domestic forest resources, partly to the UK’s coastal position and traditional trade links with many countries in other parts of the world, and partly to the UK’s relatively concentrated timber distribution and retailing sectors which has been more accessible to external suppliers, particularly in China and Asia.

The UK’s share of total EU imports of timber products from outside the bloc increased sharply from 19 percent in 2011 to 28 percent in 2015. The UK’s share of total EU timber product imports declined slightly in 2016 and 2017, but only to a little under 27 perfcent.

During this time the UK was recovering from the financial crises, driving a strong increase in imports from outside the EU, particularly wood furniture and plywood from China, and wood furniture from Vietnam.

There was also a big increase in UK imports of wood pellets during this period, mainly from the US, driven by the UK’s climate change commitments which encouraged some large energy suppliers to switch from coal to biomass.

Without the UK, in terms of global trade, the EU becomes more relevant as an exporter, and less relevant as an importer of timber products. This is because the UK is not only a large importer of timber products from outside the EU, but also a large importer from other EU countries, and only a small exporter to all parts of the world.

In 2017, the value of the timber trade surplus of the EU excluding the UK was €12.69 billion, more than three times the €3.62 billion surplus with the UK included.

Last year, the EU27 (i.e. excluding the UK) imported €13.91 billion (compared to €18.17 billion for the EU28) and exported €26.60 billion (compared to 21.79 €for the EU28).

 

UK pledges to retain FLEGT commitment after Brexit 

In relation to policy initiatives like FLEGT, the decline in the relative significance of the EU as an importer of timber products after Brexit will be mitigated by the commitment of the UK government and timber trade to continue to support the VPA process and EUTR.

Speaking at a meeting organised by the UK Confederation of Timber Industries in February, Therese Coffey, parliamentary under-secretary of state at the Department for Environment, Food and Rural Affairs (DEFRA), stated that: “When the UK leaves the EU, the Withdrawal Bill will make sure the whole body of European environmental law continues to have effect in UK law. That [includes] two regulations that the UK timber sector played a great role in shaping: the European Union Timber Regulation and the Forest Law Environment Governance and Trade Regulation”.

She went on to state that: “We are committed to supporting sustainable and legal timber and forest industries and recognise the value of the EUTR and the EU FLEGT initiative in assuring this."

This was believed to be the first time that a UK minister had made a definitive statement of this kind and was welcomed by the audience of forestry and timber sector representatives and leading businesses.

“The UK timber sector was at the forefront in the development of the EUTR and the EU FLEGT initiative and the vast majority of our members support their retention post-Brexit,” said David Hopkins, UK TTF MD, and Director of the CTI.

“The EUTR is a business friendly, flexible regulation to ensure goods are sourced responsibly, protecting the environment and business reputation. Abandoning the regulation [and support for the EU FLEGT initiative] now would cause unnecessary upheaval and market confusion. I would like to thank the Minister for this commitment and giving us the certainty our sector needs.”

 

North America

Only China saw US plywood imports slip in 2017

Hardwood plywood imports totalled 2.95 million cubic metres in 2017 valued at US$1.77 billion. The import volume declined six percent from 2016, while the value of imports was down two percent.

The decline from the previous year was entirely in imports from China, which fell 27 percent compared to 2016. Imports from China were down significantly from June onwards after the US imposed antidumping and countervailing duties on plywood from China.

All other major plywood suppliers increased exports to the US in 2017. The largest growth was in imports from Malaysia (104,408 cubic metres, +60 percent), Cambodia (94,086 cubic metres, +379 percent), and Vietnam (61,029 cubic metres, +179 percent).

Cambodia and Vietnam, in particular, have become alternate sources for US plywood importers after the duties on Chinese plywood came into effect.

 

Mixed import performance for joinery and flooring

Imports of most processed wood products (except veneers) were higher in 2017 supported by growth in US housing construction, renovation and remodelling.

Solid hardwood flooring imports increased while engineered/laminate flooring imports decreased nine percent from 2016. Laminate flooring in particular has strong competition in non-wood products such as vinyl plank flooring.

Hardwood flooring imports from China and Brazil expanded in 2017 but Malaysia and Indonesia shipped less hardwood flooring last year to the US than in 2016.

Hardwood moulding imports were slightly higher than in 2016, but moulding imports from Brazil and Malaysia declined in 2017.

 

Strong growth in wooden furniture imports from Vietnam and India

The US imported US$18.5 billion worth of wooden furniture in 2017, 11 percent more than in 2016. Imports from all key supplier countries increased. China accounted for 47 percent of all wooden furniture imports in 2017, followed by Vietnam with 20 percent. The strongest growth rate was in imports from Vietnam and India.

US imports of all types of furniture increased in 2017. The strongest growth was in imports of kitchen furniture, upholstered seating and office furniture.

Retail sales at furniture stores were almost unchanged in the last two months of 2017 according to US Census figures. The advance retail estimate for January 2018 indicates retail sales of furniture and home furnishings to be five percent higher than in January 2017.

The latest Smith Leonard survey of US residential furniture manufacturers and distributors reports the following growth figures for November 2017: New furniture orders increased 11 percent compared to November 2016. Furniture shipments were up 4 percent year-to-date from November last year.

Both the furniture industry and wood product manufacturing reported contraction in January, according the Institute for Supply Management. Most other US manufacturing industries reported growth during the period.

US kitchen cabinet manufacturers reported a 2.9 percent increase in sales in 2017, according to the Kitchen Cabinet Manufacturers Association’s monthly Trend of Business Survey. Participating cabinet manufacturers reported total sales of US$6.9 billion for 2017. Participants in the business survey represent about 70 percent of the U.S. cabinet market.

 

Strong gains in residential construction

Housing starts in January were at a seasonally adjusted annual rate of 1.33 million according to the US Census Bureau and the US Department of Housing and Urban Development. January starts increased 10 percent from December with much of the gain being in multi-family construction (+24 percent) but single-family house construction also increased (+4 percent). 

The National Association of Home Builders association forecasts a 2.7 percent annual growth in housing starts to 1.25 million units in 2018.

 

Court rejects deadline extension for formaldehyde emissions rule

A federal court ruled that the US Environmental Protection Agency had no authority to delay compliance with formaldehyde emission standards. The ruling was in favour of two environmental groups who challenged the delay.

The extension would have given manufacturers and importers an additional year before having to comply with the Formaldehyde Emission Standards for Composite Wood Products. The original compliance deadline was December 12, 2017.

Several US industry associations filed briefs with the court in support of the deadline extension, including the Composite Panel Association and the International Wood Products Association who represents importers. Parties have until March 9 now to confer on an alternative compliance date for the formaldehyde emissions rule.

 

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