China's changing supply chain

The log and lumber supply chain to China and Chinese wood markets overall are entering a whole new phase. This is especially evidenced by the dramatic reduction in China’s domestic timber harvest and the Chinese government’s crackdown on polluting mills in a mandated policy to improve air and water quality. What this means is that traditional Chinese industries are being closed or curtailed, slowing demand for logs and expanding the demand for lumber. In response, China’s supply chain is morphing and adapting in a variety of ways to meet the country’s growing demand for wood products. 

It appears the Chinese government has a long-term strategy to ensure that the country’s wood demand continues to be met. Of particular note is the One Belt/One Road initiative, aimed at developing extensive transportation links to key supplying countries around the world. By developing such a supply chain, China is better able to access those countries’ “cheap” raw materials (i.e., inexpensive relative to the high levels to which global log and wood products prices are headed). 

The strategy of the Chinese government may be a simple one: delay harvesting its own timber in favour of expanding domestic plantations. The goal would be to increase its own internal timber supply for use later when it is truly needed (and by which time global supply will have become even more expensive). In short, China is opting to pay global market prices now to purchase its raw materials, transporting its purchases home via its increasingly well-developed and efficient supply chain to the rest of the world. In future, as these raw materials become scarce and/or more expensive, the country will have placed itself in a strong position to make the switch to utilizing its domestic plantations and other internal resources. 

With these goals in mind, Chinese state-owned companies appear to be focused on developing their global supply chain as a means to become highly positioned in offshore countries in the short-term and for the future. Therefore, despite paying higher open-market raw material prices, this highly strategic plan will lead to more efficient logistics. It will also encourage increased offshore production for export to China. 

Also, with this objective in mind, further strategic investments are likely to be made in overseas timberlands and some primary processing plants to supply China via the One Belt/One Road initiative. At the same time, China’s pace and volume of purchases, which will encompass a wide variety of raw materials, will be strategically timed around pricing developments, i.e., the Chinese government will invest what it needs, when it best serves the country, in order to meet its aggressive long-term supply objectives. 

With returns on investment considered less important than having a diversified and accessible forest resource in the future, most of China’s domestic forest plantations feature a mix of eucalyptus, poplar, Chinese fir and masson pine. It will take 20 years to grow coniferous plantations, so any future incremental supplies from these sources will not be ready until 2035 (excluding any new coniferous plantations already established), dictating a need for rising volumes of imported softwood logs and lumber for an indefinite period of time. 

Of further interest are the considerable developments taking place at the major land ports at China’s northern border with Russia. Team members from both FEA Canada and FEA USA have visited these regions as part of the field investigations for a new, upcoming multi-client report — China’s Import Demand for Softwood Logs and Lumber to 2022 (subtitled The Changing Supply Chain in China with a Focus on Russia’s Industry/Export Potential). It has become clear that things are very dynamic in both northern China and Russia. 

First, it has been reported that Chinese banks have up to RMB300 billion (US$50 billion) available to spend on forestry and mill investments in Russia (RMB20 billion, equivalent to US$3 billion, have been spent thus far). Second, there are more block trains being organized from Russian and/or northern Chinese land ports to transport lumber to strategic destinations within China. Third, log and lumber production in Russia (by both Russian and Chinese sawmills) is expanding. 

Other key dynamic include Chinese companies increasing their access to Russian timber by paying for open-market logs (i.e., they can pay more because their sawmilling costs are lower than those of many Russian mills), and Chinese sawmills in Russia increasing their output and sending green lumber to processing plants in northern China — thereby bypassing the Russian log export tax — for extensive value-added processing. These developments have enabled a wider reach of Russian higher-valued lumber or components that can be shipped further in China and are already beginning to cause some displacement of European and radiata furniture grades in southeastern China (with more expected). 

Source: Russ Taylor, Managing Director and Jane Guo, China Office Manager, FEA Holdings – Canada Inc
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