Forestry's Green Warrior
China's Market Potential Is Tantalizing
Summary: Canadian firms looking at China have to wonder if its growing economy will result in reduced import controls and increased demand for wood products. Analysts are divided on the answer.
By Reg Barclay
China has always held a fascination for the western world, with its size, ancient culture and social upheavals. For business, fascination with China centres on its rapid economic growth, inferring a mammoth increase in purchasing power and a need for western products. This has caused visions of sugar plums to dance in the minds of export-oriented western businessmen.
China, with a population of 1.2 billion, is growing at a now-stabilized rate of 1.3 per cent per year; population will increase another 100 million by the year 2000. For western business, access to this huge market can take years of intense effort, working through the system. An "open door policy" was initiated in 1978, to modernize the country by encouraging foreign investment and trade. The result is a slowly changing hybrid structure in which strategic commodities and industries are controlled by the state, while other industries, as well as the commercial and private sectors, are governed by a market-orientated system.
Openness has had dramatic results for China. It has been the worlds' fastest-growing economy, averaging in excess of nine per cent annually over the past 15 years. Growth is expected to continue despite problems such as inflation, currently about 15 per cent, from an overheated economy and growing foreign debt. Exports have increased steadily since 1985 from $20 billion to $155 billion US, permitting imports to increase. Foreign exchange reserves have continued to build and are currently $60 billion. Nevertheless, imports are tightly controlled and prioritized, to conserve foreign exchange reserves.
Economic growth has resulted in a higher living standard for the Chinese population, although benefits are uneven, accruing mostly to those in urban areas. Seventy per cent of the population still lives in rural settings; the urban population is 360 million. GDP per capita is increasing, with an estimated 48 million in China with incomes of $18,000 US. By the year 2000, this group will increase in size to 150 million, an increase similar in size to the total population of Japan.
As with consumer goods in general, the opportunity for imported wood products has been limited by tight import controls. Imports have represented less than 10 per cent of wood products consumption since the early 1980s.
China has preferred logs to lumber and panel products in a ratio of 10 to one. In the past five years, log exports from Southeast Asia and the US West Coast have been severely curtailed. As a result, timber imports by China, reaching a peak of 10 million m3 in 1988, have dropped to less than 5 million m3 currently.
Canadian lumber people from BC, led by Clive Roberts of Seaboard, and Charles Widman of Widman Management worked hard in the early 1980s to develop a market for softwood lumber in China, and ultimately saw some reward. While China is not a major market for BC lumber, it has shown potential, with annual shipments since 1985 varying between 20 million and 120 million fbm. Attempts to build the business further relative to the market potential, have not been successful to date.
There are a number of problems. One is the lack of an effective wood products distribution network. Another is the low per-capita consumption of wood products, as lumber and panel products are not used in construction in China, as they are in the western world. A further problem is that housing does not appear to be a priority of the government, despite a severe shortage. For example, in the past decade, 110 million people moved from rural to urban settings, and yet construction in China has grown only modestly. The construction that has taken place has been of the large, multi-family concrete buildings typical of socialist countries.
In many developing Asian countries, economic growth has resulted in increased demand for housing and wood products. It is expected that as purchasing power increases in China, the same trend will happen. This situation and the potential size of the market have intrigued western wood product exporters for many years.
A key question is, if demand increases, can China's domestic wood products industry respond? It seems clear, from the meager information available, that except for pulp and paper, the answer, at least in the short term, would be no. China's forest industry has many problems and, while corrective action is being taken, increased supply will certainly be longer term. Forest land in the country has been steadily eroded through centuries of exploitation, devastation by war and conversion to agriculture. Today, fully stocked natural and plantation forests cover about 120 million hectares or 13 per cent of the land area of the country. About double that land area is suitable for commercial forest. China's goal is to expand the forest cover to 20 per cent of the land area by 2000. As well, the government is keenly interested in improving productivity of the forest and ensuring the harvest is sustainable.
About 75 per cent of the forest area in China is natural and the balance is plantation. Most of the natural forest, consisting of pine, spruce and mixed hardwoods including birch, poplar and oak, is located in the northeast of China, where the winter climate is severe. The second largest standing wood volume is in the semi- tropical southwest, containing both mixed forests, as well as bamboo. Key to increasing wood supply longer term is increasing the size of the commercial plantation forest, but not much is known about its development.
The roundwood harvest is estimated to be 250 to 300 million m3 by the Council of Forest Industries Report "World Timber Resources Outlook". About 150 million m3 of the harvest is used for fuelwood. The balance of 90 to 100 million m3 is for industrial use which is divided 65 per cent softwood and 35 per cent hardwood. In China, it should be remembered that all of the biomass from felling is utilized.
Peter Drake, Senior Consultant for the Simons Consulting Group, has estimated sawnwood production to be 29 million m3. This seems low relative to the population. In North America, lumber consumption is four times higher with a population one fifth the size. In addition to being low, sawnwood production has shown little growth over the past decade, despite the rapid pace of GNP growth.
Drake estimates that panel production, including plywood, particleboard and MDF, has increased by a factor of three over the past decade. Total production is estimated at 3 million m3 per year, which again is low when compared to Canada's panel production of 5.5 million m3. Plywood is mostly birch and poplar, in thinner thicknesses. Within the fibreboard category, there are now 10 relatively small MDF plants with a combined capacity of 350,000 m3.
China's paper and board consumption is low relative to the world average, but demand is expected to increase 25 per cent or more by 2000. Only 1.5 million tons of the 10 million tons of pulp produced uses solid wood fibre. The balance is made from bagasse, rice and wheat straw, bamboo and waste paper. In 1989, China imported 3.3 million tons of waste paper. It is apparent that government favours paper production, as 16 mills are under construction and 12 more are in the planning stage. What impact this expansion will have on the available forest fibre is unknown, but most mills are located in the southwest.
The Forest District of Langxiang is a good example of how China is dealing with its forestry problems. Langxiang is located in Heilongjiang Province in the extreme northeast of China in the heart of China's natural forest area.
The Langxiang Forest Bureau, typical of many in China, administrates a forestry complex of 265,000 hectares, of which 228,000 hectares is forest, and includes logging operations, silviculture treatment and production plants for lumber, plywood, veneer, particleboard, as well as several specialty operations for flooring, furniture and chopsticks. Most of the population of Langxiang, about 80,000, rely on forestry for their livelihood.
In 1985, the Canadian Industrial Development Agency [CIDA] and Ministry of Forests in Beijing, agreed to a joint 10-year project, to assist China in introducing advanced methods of forest management and upgrading production technology. The Langxiang Forest Bureau was selected for the project, to be a role model for other forest bureaus. CIDA financed the Canadian technical expertise to be supplied by a consortium of two consulting firms, T.M.Thomson, a division of Sandwell Inc., and Reid Collins, a division of H. A. Simons.
The project objective, to develop a forest management plan, to improve the productivity and ensure sustainability of the forest, has been achieved. Studies assessing wood products manufacture and nursery practice were undertaken, which have resulted in a new sawmill, using Canadian technology, and a new containerized stock nursery. A key component of the project was to provide technical and administrative training for the staff at Langxiang.
The annual merchantable harvest in the early 90s was 400,000m3. As a result of the new forest management plan, the cut was reduced to 307,000m3 in 1995. To achieve sustainability, the plan recommends dropping the harvest further to 208,000m3 for the next 20 years. Beyond that, the cut can increase back up to 568,000m3. Reduced harvest volumes will create a hardship for the people in Langxiang because of their dependency on forestry.
Shelterwood and selection methods are the basic harvesting systems used. Clearcutting has been reduced each year and the target for 1996 is five per cent of the harvest area. Regeneration is accomplished through planting. Logging is undertaken in the winter when the ground is frozen. The production complex has difficult problems. Except for the sawmill, plants are small, outdated and inefficient; product quality is inconsistent. Management is responsible for achieving production targets but has little decision-making responsibility. Too many people are involved in decisions, many of them in distant, central locations. Overstaffing results in duplication of effort and overlapping functions, making accountability for results nearly impossible to achieve.
Government policy is to provide full employment regardless of the economic considerations. This is called the "iron bowl syndrome", where livelihood is linked to state paternalism rather than productivity. Workers do not relate production output with standard of living and this negates their attitude toward improved productivity.
Carol Charland, a BC Registered Forester who has been the coordinator of the consortium activities, says this attitude is changing. The Ministry of Forestry recently adopted a policy of decentralization. Forestry Bureaus such as Langxiang, after years of relying on central authority to allocate logs and product, must now take on that responsibility. For the first time a sales and marketing plan will be needed, outlining who and where the customers are and to set prices at a profitable level.
Charland says there is "good reason to believe that the industry will cope despite this very difficult transitional period, as other sectors have managed successfully. In fact, this development represents an opportunity for joint ventures, and we have had some success already in developing interest. Since we started on this project, there has been a significant change in attitude by Chinese management - to become much more open to new ideas, and to change."
The Langxiang project illustrates that China is moving to upgrade the domestic wood products industry. It remains to be seen whether this will result in increased supply, given the need to reduce the harvest to avoid overcutting, and the capital required to develop a commercial plantation forest.
Key questions remain on the demand side. Will improving income levels result, as in other Asian countries, in a demand for improved housing? Will import controls be eased for wood products? Opinions vary. The Simons Consulting Group, in their report "Global Timber Supply to 2020", predict that China is a zero-sum game for wood products. Others forecast that imports could increase up to 45 million m3. The answer is probably somewhere in between.
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