January 2001 - Logging and Sawmilling Journal -

The Japanese economy is sending mixed signals, but there may still be some opportunities for Canadian lumber producers.

The good news/bad news scenario just doesn't seem to end in Japan. The Japanese economy enjoys three consecutive quarters of good growth and then this past September the Sogo Department Store goes bankrupt, followed closely by Chiyoda, a major life insurance company. Deflationary fears have all but disappeared and the Japanese economy is poised to grow between 1.9 and 2.3 per cent in the current financial year, the Bank of Japan reports in its most recent economic assessment. But that's just not so, says the Japanese government, which has an official forecast of 1.5 per cent growth and fears deflation is a growing threat. Housing starts fell 3.1 per cent in the most recent report for 2000, which is better than market expectations, but it still represents a trend of year on year declines. Does any of this really matter? To Canada, it does. Japan is still far and away the largest economy in Asia and even if it were on "life support" which it isn't it still represents a huge export opportunity for British Columbia.

It might be time for the Canadian forest industry to take a chapter from its own history of establishing Japan's 2x4 housing market and return to the basics of market development, including tours of Canadian mills and market focused development of wood products.

That opportunity is in both the traditional "rocks and logs" we send to Japan as well as in higher value exports. But the pull of NAFTA and the bad news headlines about Japan have reduced BC's focus on the country, allowing competitors into the market, much to our peril. Between 1987 and 1997, BC exports to Japan of lumber and panel products grew from $800 million to $2.7 billion, more than offsetting the parallel decline in exports to Europe. But since 1997, those same exports have been on a precipitous decline. The Asian financial meltdown and Japan's recession were blamed. This is true, to some extent, but other factors were also at play. BC, once the world's predominant exporter of wood products, is losing its competitive position and the world's demand for wood and supply sources of wood products is also changing.

There are a number of factors at work: the United States imposed log export restrictions on mainly old growth timber in federal and state forests; the USSR source of the world's greatest standing timber reserves collapsed, leaving distribution in a shambles; Europe has moved toward self-sufficiency and become a lumber exporter; plantation forests in the southern hemisphere have come on stream; and various softwood lumber disputes with the US (there have been three in the 19861997 time frame) have also had an impact on trade patterns.

Add to this mix a domestic and demographic challenge: Japanese housing starts that averaged 1.5 million per year from 19871997 are now closer to 1.2 million and will fall to under one million over the coming decade as the older segment of the population begins to decline. So where is the good news in this bleak scenario? Well, Japan still remains the second largest wood housing market after the US it is a huge consumer of forest products in all forms and will continue to be a major market for the foreseeable future. BC wood products enjoy strong positions in the Japanese market and have the opportunity to grow further. Based on the primary products' beachhead, there continue to be markets for higher value wood based building components but it will not be easy.

The biggest challenge facing BC exporters will be how to turn around the Japanese hemlock market. This market segment was largely responsible for the exponential export growth of the late 1980s and early 1990s and, equally, has been the reason for the sharp drop off in export numbers since 1997. Like most developed markets, green structural lumber has given way to kiln dried materials in Japan. Reasons vary from market to market, but the result has been the same. How many houses in Canada are built with green lumber today? In Japan, the traditional post and beam housing industry has been fighting for survival as the craft based skill level of carpenters decline. Machines were developed in the mid1980s that could replace some of the mortise and tenon joints required in this building system.

Initial growth was slow, at least partly because the machines jammed frequently on their diet of "wet wood." Then, supplies of "dry" or "drier" lumber began to show up in the market, the machining technology improved and the combination of these two elements saw Japanese "precut" factories expand rapidly. Today, it would be hard to find a building site that did not include "precut" components. Most sites look like a wood version of "Meccano" stockyards. The raw materials used in these operations are 100 per cent kiln dried lumber and/or laminated lumber. In the early 1990s, there was an opportunity and this opening may still be there if cost benefits can be demonstrated to work with this growing industry to determine the optimum moisture content required to keep the precut machinery operating smoothly. But this came in the midst of a booming lumber market (virtually all green) and the BC coastal industry didn't show much interest. With hindsight, it seems likely that a market might have been preserved for "drier" wood somewhere in the 20 to 30 per cent range.

A devastating earthquake struck the Kobe area in 1995. Most of the housing in the area was traditional post and beam and most of the housing that collapsed was post and beam. This led to some leaps of judgement that were poorly founded but did damage to the image of this building system. In an attempt at damage control, major builders announced that they would move to the exclusive use of "engineered wood products." Generally, this meant laminated lumber but it also grew to include most "nongreen" lumber components. Since then, green hemlock lumber exports from BC have been on a steady decline. One other element has to be looked at as a cause for decline. BC exports to Japan or, inversely, Japanese purchases of BC lumber are heavily concentrated in the hands of a few buyers, large Japanese trading companies.

These companies are often intermediaries and business may be conducted between the BC exporter and the Japanese distributor, but the trading company handles many of the logistics and the financing, including risk. This business provides a relatively low return to the trading companies so it must be a "safe" business. "Safe" today means a product that will be easy to turn over, even if the intended end purchaser cannot complete the buy. And that, in most cases, means a dry lumber product. The "trading houses" are also the most sensitive group to the "green campaigns" of the environmental movement. The primary beneficiary of this change in buying patterns has been northern Europe. Ironically, the Europeans started by taking over a market that was already moving from a green BC coastal supply to kiln dried BC Interior and Alberta SPF product. When the US market heated up in 1993, Canadian SPF mills shifted from supplying Japan to exporting more wood to the US.

The Europeans moved into this vacuum and have steadily expanded their exports to Japan since. They have moved well beyond their original low margin business of remanufacturing blanks to laminated lumber and, increasingly, into the western Canadian SPF preserve of dimension lumber for the Japanese 2x4 housing market. None of this spells automatic doom for the BC coastal lumber industry but there are some serious challenges ahead. First, the "green" lumber market of the past where the wood came off the ship dripping wet is not ever going to come back. If anything, what's left of this business will continue to decline. Second, whatever the BC industry does, it is facing new competitive forces.

The Europeans are already there with their low Euro priced wood and they show every sign of expanding their business. The Japanese domestic forest industry also continues to be heavily subsidized and discretely favoured in many government financed building projects. To date, southern hemisphere supply has not made a major impact except at the lower end of the value chain. This is likely to change as price driven demand for lower cost engineered wood products pushes the competitive position of solid wood. And to keep New Zealand, Chilean and Australian suppliers honest, the Japanese are investing in laminating plants in Siberia. BC's primary advantage in this scenario is proximity to market, combined with established distribution routes. The low risk advantages of market proximity must be maximized to counter some of the pure cost advantages of other suppliers, however. Perhaps its time for the BC industry to take a chapter from its own history of establishing Japan's 2x4 housing market and return to the basics of market development.

The possible means of doing this include market focused product development, in country quality control specialists, mill tours, joint research projects and demonstration housing projects that combine some of the competitive and performance advantages of 2x4 housing with the traditional post and beam building system. Every Japanese importer and builder is thoroughly familiar with BC's hemlock, warts and all. What they need to know is how they can use this strong and durable material to produce a housing unit that meets changing market demands and gives both the buyer and seller a fair return.

A return to the basics, with a strong acknowledgement of how the market has changed, would look to be the best strategy for the Canadian industry. John Powles has spent 31 years in Japan. He grew up in Japan and has worked there for the Canadian government and the Council of Forest Industries of BC. He was the first no Japanese to receive the Minister of Construction award for contributions to Japanese housing. Since 1998, he has run a Vancouver based consulting company pacific bizlinks trade consultants specializing in business planning and export development.

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Mixed Signals