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NEW MARKETS

Looking to Expand 

in China

A Canadian company has opened a new particleboard mill in china and plans to expand further in this huge market.

By Paul MacDonald

With the entry of China into the World Trade Organization (WTO) only a few months ago, this country of 1.2 billion people is now bound to be of higher interest for Canadian forest companies in the future. That higher level of interest will be there in terms of an expanded potential market for Canadian forest products and-possibly-as plant locations to manufacture forest products to further tap into the huge Chinese and Asian markets. 

For Ontario-based Sino-Forest Corporation, however, that time has already arrived. The publicly traded company (listed on the Toronto Stock Exchange) has been involved in China for close to a decade. It now expects operations and revenue there to grow at a faster clip over the next few years, especially with the country's entry into the WTO, which should open up a number of trade doors. 

Particleboard from the Sino-Forest plant is going mostly to the domestic market, notably to many Japanese firms now operating in China.

Sino-Forest says it intends to be a full participant in the commercialization of China's vast forestry resources, and a major Asian forestry company, but will still be based in Canada. Some might be skeptical about such great aspirations for a relatively small company with its Canadian office in Mississauga, a suburb of Toronto (its head office is in Hong Kong). 

But Sino-Forest has already taken a significant step towards this ambitious goal-a year ago it opened its first manufacturing operation in China, a US$25-million particleboard mill in Guangdong Province. Guangdong is a major region for furniture manufacturing in southern China. The new mill has a production capacity of 100,000 cubic metres of particleboard a year. While it may sound small by North American standards, it is the largest particleboard mill in all of China. 

Perhaps just as importantly-considering the steps the country is taking to curtail logging in the wilderness-it is one of the largest forest product plants in the country to use only plantation wood. This strategy of using plantation wood and expanding into manufacturing has been a goal from the start for Sino-Forest. 

It is currently involved in five co-operative forestry joint ventures-with government bodies-in three provinces of southern China, amounting to 603,000 hectares of timberlands. Sino-Forest chief executive officer Allen Chan, who is based in Hong Kong, explained that the company has been pushing forward with its business plan to get involved in manufacturing for the last several years. 

Its main focus had been using its forest base to supply wood chips to pulp and paper plants. "We wanted to take things further," he explains. "We want to increase the value of our trees and get into manufacturing." The company's decision to enter into joint ventures and set up plantations was deliberate and well-planned, says Chan. "Even back in 1994, we had foreseen that China would be forced to take some environmental measures and use fibre drawn from plantations, rather than the natural forest. " Nature moved that policy along. Following devastating floods in 1998, the Chinese government introduced the Natural Forest Protection Program aimed at strictly prohibiting the logging of natural forests in critical watersheds.

The mill uses a combination of Eucapultus and pine for its feedstock.  The wood is relatively small, with diameters from 15 - 20 centimetres.

"Last year, the government made it clear that only the plantations in the southern and eastern areas of China will be commercialized," says Chan. "All other areas will be set aside for ecological reasons. What that means is that the plantations we are in are in the areas to be commercialized." In the bigger picture, this essentially means that the supply of domestic wood is going to shrink at a time when China-with its entry into the WTO and fast-growing economy-is going to need wood more than ever. 

"In the next 10 years, the domestic wood deficit is expected to be about 50 per cent," says Chan. "That's a great opportunity for us with our plantations. The key is to turn our plantation fibre into multi-wood products to meet the needs of the market." The Asian economic crisis of 1998 delayed and changed their plans. Rather than move ahead with several mills, they decided to focus on one mill, the Guangdong particleboard mill. "The opening of the particleboard mill is the first step of our whole tree utilization and value-added processing that will expand our operations from plantation, harvesting and processing to include finished engineered wood products," says Chan. 

Setting up the mill was not without its challenges. But the company, says Chan, had solid on-the-ground construction people and now has good operational staff. "The key formula is to have good operational people in China and international experts to function as consultants and advisors," he adds. In their case, this means using Finnish forestry and engineering consultants Jaako Poyry. The main equipment for the mill is reconditioned, from a Joensuu, Finland particleboard mill which was shut down in 1990. 

It was engineered to produce four foot- wide by 18-foot-long panels. While details on the equipment configuration at Guangdong were not available, some additional production equipment for the mill was supplied by Finnish equipment company UPM-Kymmene, with Germany's Siemens supplying the automation system. The mill employs standard technology, using conventional particleboard manufacturing equipment, says Chan. "It's a regular mill. It's different only in that it is now the largest particleboard mill in China. But by Western standards, we are not that large." 

They are combining eucalyptus and pine for the mill feedstock. "We are the first mill in China to use eucalyptus in particleboard production." The Australians, Chan notes, have been using eucalyptus in particleboard for years, but the Chinese were skeptical. "We've proved to them that this is the right path to take. This represents a quantum leap up the value chain from the pulp which eucalyptus is normally used for." 

But the wood is relatively small, Chan says, with diameters from 15 to 20 centimetres. "They are much smaller than Canadian trees." The set-up is a bit different, as well. In North America, particleboard mills are often tied together with sawmill operations, with residue from the sawmill providing fibre for the particleboard plant. 

The Sino-Forest mill, however, is a stand-alone operation. The new mill will serve as the company's manufacturing base in southern China, a strategic move since Guangdong province is a major centre for Chinese furniture making, both for domestic consumption and export It's a fairly major industry, with healthy growth rates. According to the company, China is the world's ninth largest furniture maker in terms of production value and seventh largest for furniture exports. 

Production from the Sino-Forest plant is going mostly to the domestic market right now. Their customers include many foreign companies-notably Japanese firms-operating in China. This could provide a good link to supplying these companies' other operations outside of China. "They are trying us out," says Chan. "If we meet their standards, then it opens the door to exporting our particleboard to their other operations and entering the export market." Before they can export to some markets, such as Japan for example, they require Forest Stewardship Council certification. This is in the works now-Chan expects certification to be completed in 2002. 

Sino-Forest has already obtained ISO 9002 Quality Management System certification for its Guangxi plantation operation. To feed the particleboard mill-and the other mills the company has plans for-as well as supplying chips for pulp mills, Sino- Forest has a mix of prime eucalyptus, aspen/poplar and pine plantations in various provinces. Its joint venture agreements are with various state-owned forestry bureaus in the three southern Chinese provinces of Guangxi, Jiangxi and Guangdong. 

These bureaus provide planting, maintenance and harvesting services. Sino-Forest provides the capital to plant and manage the plantations. The agreements include 50-year plantation leases that give Sino-Forest the right to 70 per cent of the timber and first right of refusal on the remaining 30 per cent. 

With barely a year behind it with the new plant, Sino-Forest is already planning to make additions, with lamination capabilities. Once financing with the World Bank is finalized, they will be adding melamine and veneer lines, at a cost of about US$5 million, to take their product further up the value chain. 

And with the country's move towards more of a market economy, Chan feels the prospects for Canadian and other foreign companies in China are positive. "China is much more eager now to open doors for foreign companies," he says. Government officials are now much more business-minded. "The people in government are very realistic and business oriented. If what you are proposing makes sense, they will support you." 

China's entry into the World Trade Organization could be a watershed for this huge country in terms of trade and economic development-and it could open new opportunities for Canadian companies. Chan says having local knowledge is key for Canadian companies looking to get involved in China. But also important is a realization that the China of 2002 is not the China of the 1980s or even 1990s. "You need to have a real understanding of China as it is now and the way it is moving, not the way it was," he says. "There have been a lot of changes since then."

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