Huge growth potential and softwood opportunities – Softwood is gaining market share over hardwood in the Indian market, assisted in part by limited volumes of renewable or certified hardwood fibre. A variety of initiatives are pointing to huge future increases in Indian wood products demand, with the country poised to become the third- largest economy in the world by 2030.
India is a difficult market to access for most major log/lumber export-ing countries. New Zealand is its most dominant softwood country supplier, accounting for 70% of total softwood log and lumber imports; Malaysia is the country’s largest hardwood supplier. Rapidly depleting global hardwood supply and huge consumption growth anticipated in India mean that the demand for imported softwood will only expand. One forecast is for massive softwood expansion: from approximately 2.5 million m3 in 2017 to over 65 million m3 by 2027.
The Indian log market has reached China price parity with ‘A’ longs now selling for USD 159-160/JASm3. While volumes delivered to this market are 14% down year on year to May 2018, it has been a steady market and exporters still expect an increase in demand in Q4.
There is an increased schedule of ship arrivals from NZ over the next six weeks, so this will be a good test of this market. Containers of logs are also arriving from Germany, South Africa and southern yellow pine from the USA.
The labour shortage mentioned in previous Wood Matters continues, but some labour has returned to the mills from agricultural work. Log stocks are about 120,000m3 in Kandla and 30,000m3 in Tuticorin. The cash flow of log buyers is still tight after the introduction of GST and the increased scrutiny on bank lending compounding the weakening of the Indian Rupee against the US dollar.
Bonded areas could provide shelter for manufacturers hit by US tariffs – if China can convince its southern neighbour to get the plan moving.
A spiralling trade conflict between Beijing and Washington is an unwelcome development for China, but officials in Guangxi – where seven “cross-border trade zones” with Vietnam are planned – see an opportunity.
The border has sheltered Vietnamese nationalists trying to overthrow the French in the 1930s, and Ho Chi Minh’s guerilla soldiers fighting the US army in the ’60s. Parts of the 1,300km frontier became battlefields in a brief yet bloody war between China and Vietnam in 1979. Four decades on, it could be about to play a role in a very different kind of war.
Washington and Beijing on Friday fired the opening shots in a trade row that looks set to escalate, slapping 25 per cent tariffs on US$34 billion of each other’s goods.
In the Guangxi region, home to museums dedicated to late Vietnamese communist leader Ho, officials are now touting with renewed vigour the idea of the cross-border zones, where exporters from China could assemble products and label them as “made in Vietnam”. The bonded zones are part of a wider cooperation plan signed by Beijing and Hanoi last year, under China’s belt and road trade and infrastructure strategy. If they go ahead, they could provide shelter for manufacturers hit by US President Donald Trump’s tariffs.
One of the zones is in the border town of Pingxiang, administered by the city of Chongzuo. The city’s deputy mayor, Lu Hui, said they wanted to create a cooperation zone with Vietnam that had “a free flow of workers, capital and materials”. Lu, promoting the plan to media on a government-organised tour, said products made in the zone could be labelled either as “originating in Vietnam” or “originating in China”. Wang Fanghong, the Communist Party boss of Pingxiang, also said the dispute with Washington could give the trade zones plan a boost. It “could be a chance” for his small town to speed up development, Wang said.
Exporters trying to ship products made in China “will find it difficult to send them to the US directly, and some will be transported via Asean members”, he said. Wang suggested places on the border with Vietnam like Pingxiang could go the extra mile and turn this “transfer trade” into “local processing and manufacturing”.
Officials trying to sell the plan to export-oriented businesses in the country’s manufacturing heartland, Guangdong province, and the Yangtze River Delta say it will give them access to cheap labour from Vietnam and a wide range of preferential policies offered by both sides of the border. Those policies, according to the promotional materials for the zones plan, would reduce logistics, staffing and tax costs.
Significant savings could be made on wages, according to the Chinese officials, who said local manufacturing workers were paid about a third of the salary of those in the Pearl River Delta. Factory workers in Shenzhen and Guangdong are paid an average wage of 5,000 yuan a month (US$750), compared to a daily average of 80 to 100 yuan (US$12 to US$15) earned by those in northern Vietnam. Factories in the cross-border zones would also be shielded from the regular threat of protests and strikes faced by Chinese businesses operating in Vietnam, the officials said.
Last month, demonstrators set fire to police vehicles, defaced government buildings and brought Chinese-owned factories to a standstill across Vietnam. It was the worst flare-up of anti-Chinese sentiment since 2014, as workers protested over the government’s plan to set up three new special economic zones where investors will be able to lease land for up to 99 years. Demonstrators fear they will be dominated by Chinese interests. These zones are separate to the ones planned on the border with China, but this growing unease over the country’s powerful northern neighbour is one of many hurdles the Chinese officials will have to overcome. Another is convincing Beijing to give them greater autonomy in trade zones like the one in Pingxiang, under a “two countries, one free-trade zone” special administrative set-up.
“Even in very difficult political times with China, still we export to them. This is why there is a great need for officials from the neighbouring Chinese region of Guangxi and officials from Vietnam to sit down and talk more about how to cooperate, especially about trade and how it will benefit both sides,” Nguyen said.
Roger Chau also said there was opposition to the cross-border zones on the Vietnamese side. “Many Vietnamese are concerned about the growing number of Chinese investments in the country. They see Chinese factories as bringing serious pollution, they worry about bribes and problems with the land,” Chau said.
The cross-border zones could be a good testing ground for export-oriented businesses wanting to ship through other countries, or even to relocate their operations elsewhere in the region.
But the problem is, whether the Vietnamese government says yes.
India’s wood products market continues to expand rapidly. Today, softwood is gaining market share over hardwood, assisted in part by limited volumes of renewable or certified hardwood fibre. At the same time, a variety of initiatives are pointing to huge future increases in Indian wood products demand: India’s goal of growing the share of manufacturing in its GDP to 25% by 2022; proposed massive infrastructure investments (e.g., 500 new cities, 50 subways and 250 airports by 2030); and a backlog in housing construction (up to 65 million units).
There is a “Make in India” campaign that is well on its way to making the nation a haven for investment and a propeller of economic growth. On the threshold of major reforms and poised to become the third-largest economy in the world by 2030, Make in India has announced a variety of initiatives that will facilitate the indigenous manufacturing of furniture, and ease the way for doing business in India.
Indian dynamics are somewhat like China’s were some 10 years ago: constrained domestic production and a likely eventual surge in imports to meet domestic demand. Despite notable differences, India compares favourably to China and the U.S. Ranked as one of the top three most attractive investment destinations in the world, India is also one of the fastest-growing global economies. According to a study by the World Bank, India’s organized furniture industry is expected to grow by 20% per annum over the next few years, crossing the US$32 billion threshold by 2019.
Foreign direct investment in India’s real estate sector, the government’s “Housing For All by 2022” initiative, and development of 100 smart cities to accommodate a growing urban population are some of the growth drivers reviving the real estate and construction sector. The anticipated increase in the tourism, hospitality, retail and hospital sectors is also expected to spur furniture demand in the country. The rise in demand for residential realty is a huge 20%, and the home furniture market should witness the fastest growth of all sectors in the next five years, followed by the office and institutional segments.
According to a World Bank study, the Asian market is thought to be the biggest consumer of furniture worldwide, and India holds a major slice of the pie. The foreign direct investment enterprise under Make in India has already resulted in 60% growth in inflows, and it is this government campaign, along with the objective of high standards of quality, that is steadily attracting international capital and technological investment in the country, facilitating local production.
With rapidly depleting global hardwood supply and huge consumption growth anticipated in India, the demand for imported softwood will only expand. One forecast is calling for massive softwood expansion: from ~2.5 million m3 in 2017 to over 65 million m3 in 2027. There are several developments that support this type of growth rate projection. For one, government and consumer perceptions around sustainable supplies (as opposed to illegally sourced lumber) are starting to change (India is currently considered the third-largest world market for illegal timber, following China and Vietnam). There is also the so-called “Ikea effect” that is allowing more consumers to be exposed to the look and use of softwood furniture. In fact, Ikea is planning to open 25 stores in India in next five years, with about 30% of the business volume to be sourced locally.
“Is India the new China?” That’s a question that continues to be asked and the answer, simply put, is yes. It is only a matter of time. Many game-changers support this premise:
- India has a young population, with a median age of 30 from now until 2050;
- 100 million students graduate every year;
- India has the fastest-growing GDP (7.4 %), surpassing even China;
- The country is the world’s largest democracy, led by a growth-oriented leader with a majority government;
- For the first time in India, corruption is being dealt with decisively;
- There is a robust and transparent financial sector in the country;
- India is leapfrogging to a digital economy, with almost 1 billion people now having biometric identification and 300 million smartphones;
- The domestic construction industry in India is US$1 trillion in scale;
- The country has industrial corridors and smart cities; and
- India’s real estate market permits direct foreign investment.
As a result of all of the factors noted above, India will continue to be a softwood market to be watched. As of now, its growth prospects look mammoth!