Logs, Lumber and Woodchips

Forestry Trends in a Global Marketplace: Logs, Lumber and Woodchips

Forest Resources Association Annual Meeting New Orleans, Louisiana April 17, 2018

Bob Flynn Director, International Timber RISI Email: [email protected] Phone: 360‐471‐6578

• China’s imports of softwood logs and lumber: historical summary and RISI’s new forecast, outlook by supply source (speed version) • International woodchip markets: . Looming supply shortage in the Asian hardwood chip market . New export terminals for North American woodchips • Update on US‐China trade in forest products

© Copyright 2018 RISI, Inc. | Proprietary Information 2 Over the past 20 years, China’s total need for imported wood has grown 14% annually, with the pulp and paper sector accounting for half of demand 250 China's Growing Timber Deficit Woodchips

Pulp 200 Wood Panels

Lumber 150 Logs

100

Million Cubic Meters, Equivalent Roundwood 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

© Copyright 2018 RISI, Inc. | Proprietary Information 3 Since 2000, imports of softwood logs have grown 11% (CAGR) while softwood lumber imports have increased 26% 80 China: Total Softwood Log and Lumber (RWE) Imports 70

60 Logs Lumber RWE

50 Meters

40 Cubic 30

Million 20

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

© Copyright 2018 RISI, Inc. | Proprietary Information 4 Drivers of Chinese softwood timber imports • Demand in China . Domestic construction . Production of products for export • Supply – Availability of . Softwood logs . Softwood lumber • Demand in competing countries, e.g. India, USA • Other factors . Government regulations (e.g. log export restrictions) . Freight rates . Exchange rates

© Copyright 2018 RISI, Inc. | Proprietary Information 5 China Demand Outlook • Wood products exports: no longer such an important driver for log and lumber imports, due to . Rising labor rates and raw material costs . Trade barriers and other government policies • Construction activity: major correction and slowing of activity, due to: . Demographic factors . Rapidly growing debt levels, including shadow banking sector . Anti‐corruption campaign . Major new efforts to control pollution

16 China's Exports of Wood Products 14

6 Billions of US Dollars 4

0 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Rate of Change in China's Population 6.0% 15‐64 65+ 5.0%

4.0%

3.0%

2.0%

Percent Change 1.0%

0.0%

‐1.0%

© Copyright 2018 RISI, Inc. | Proprietary Information 10 Corruption at local and provincial levels has fostered excessive construction activity, but will reduce • Why do government officials promote wasteful construction projects? . Efforts to boost local GDP figures . Grandiose government buildings to boost prestige . But mainly corruption, because construction projects offer numerous ways to increase an official’s private bank account: • Taking land and selling to developers • Facilitating building permits, regardless of underlying demand, or need to protect the environment • Encouraging local banks to finance projects • Future will be different: in 2017, 530,000 people in China were “punished” due to anti‐corruption campaign, including 58 at provincial or central government level.

© Copyright 2018 RISI, Inc. | Proprietary Information 11 After years of talking, the Chinese government has been seriously cracking down on environmental polluters • Impacts on wood products industry include: . Closure (temporary?) of half the plywood mills in China last year, until investments are made in emissions control equipment. . Relocating sawmills/wood‐working industry farther from major cities, e.g. Taicang. . Problems trying to get air quality permits to run dry kilns near ports, which is likely to encourage greater imports of kiln‐dried lumber . Sprawl of cities may be somewhat more controlled, due to efforts to preserve natural areas but more importantly to preserve farmland.

China: Softwood Log and Lumber Imports 90

80 Lumber RWE Logs 70

30 Million Cubic Meters 20

40 Other China: Softwood Log Imports By Source 36 Canada 32 Australia United States 28 New Zealand 24 Russia

12 Millions of Cubic Meters 8

0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

USA: Softwood Log Exports to Asia 10 Taiwan & 9 Vietnam South Korea

8 Japan

7 China

3 Millions of Cubic Meters 2

7 USA: Softwood Log Exports to China, By Region US South 6 Alaska

5 Pacific Northwest 4

3 Millions of Cubic Meters 2

0 2010 2011 2012 2013 2014 2015 2016 2017

US South: Log Exports to Asia 160,000

140,000 China India Vietnam

120,000

100,000 Meters

80,000

60,000 Cubic

40,000

20,000

0 14 14 14 15 15 15 16 16 16 17 17 17 14 14 14 15 15 15 16 16 16 17 17 17 18 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Jul Jul Jul Jul Jan Jan Jan Jan Jan Sep Sep Sep Sep Nov Nov Nov Nov Mar Mar Mar Mar May May May May

400 US South: Log Exports to Asia by Port 350

300 2014 250 2015 2016 200 2017

150

Thousands of Cubic Meters 100

0 Savannah Charleston Wilmington Jacksonville Norfolk

18 Other

16 India

14 South Korea

Japan 12 China 10

Millions of Cubic Meters 4

4.5 Other Australia: Softwood Log Exports 4.0 South Korea 3.5 China

3.0

2.5

2.0

1.5

Millions of Cubic Meters 1.0

0.5

0.0

7.0

South 6.0 Korea Japan 5.0 China

4.0

3.0

2.0 Millions of Cubic Meters 1.0

0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

800 China Korea Other 700

600 Meters

500 Cubic

400

300

Thousand 200

100

0 2010 2011 2012 2013 2014 2015 2016 2017

China: Softwood Log Imports from Minor Suppliers

4,000 Uruguay Ukraine Japan Other Europe Other 3,500

3,000

2,500

2,000

1,500

1,000

500

0 2014 2015 2016 2017 J‐F 17 J‐F 18

35 China: Imports of Russian Softwood Logs and Lumber 30 Lumber RWE Logs 25

Millions of Cubic Meters 10

0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

© Copyright 2018 RISI, Inc. | Proprietary Information 24 But total Russian softwood exports have not really increased at all, simply a greater share directed to China Total70 Russian Softwood Log and Lumber Exports 70%

60 Logs Lumber RWE 60% % Lumber to China 50 50%

40 40% Meters

Cubic 30 30%

20 20% Million

10 10%

0 0%

Total Woodchip Imports in the Asia-Pacific Markets 27

24 Japan China South Korea Taiwan 21 India 18

Million BDMT 9

0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E

24 Asia-Pacific Woodchip Imports Softwood 21 Hardwood 18

9 Million BDMT

0 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Eucalyptus Pulp Prices in China 800

750

700

650

600

550

500

450 US Dollars per Tonne, CIF (Average) Tonne, per US Dollars 400

Hardwood Chip Sources in Asia, 2017 Malaysia Indonesia New Zealand 2% Brazil 3% 1% Ecuador 4% 0% Thailand Vietnam 7% 34%

South Africa 7%

Chile 14% Australia 28%

Hardwood Chip Exports from Chile and Australia 7,000

6,000 Chile Australia

5,000

4,000

3,000 Thousand BDMT Thousand 2,000

1,000

Non-Vietnamese Woodchip Exports from Southeast Asia 5,000 4,500 Thailand Indonesia Malaysia Other 4,000 3,500 3,000 2,500 2,000

Thousand BDMT 1,500 1,000 500 0 2012 2013 2014 2015 2016 2017 2018E

Outlook for Woodchip Supply and Demand in the Asia-Pacific Market, 2022 25 Supply 20 Demand

10 Million BDMT 5

0 Softwood Hardwood

US South: Hardwood Chip Exports 3,000

2,500

2,000 BDMT 1,500

1,000 Thousand

500

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E

Prices for Softwood Chip Exports to Japan 200

180 Douglas-fir Radiata Pine 160

140

120

US Dollars per BDU, FOB per US Dollars 100

Japan: Imports of Biomass Woodchips by Source, 2017 Vietnam South Africa 7% 15%

USA 30%

Australia 39% Canada 9%

© Copyright 2018 RISI, Inc. | Proprietary Information 35 In March 2018, a vessel of hemlock chips was loaded for China in Port Angeles: the first woodchip exports from this port since 2001 The chip exporter from Port Angeles, a Dutch trading firm called Nollen Trading, believes he will have a sustainable business exporting to China, and plans to begin exports from the port of Bellingham as well Exports from Port Angeles are beginning with minimum investment in port infrastructure, at least for now At the Keystone Terminal in Jacksonville, the Turkish company Kastamonu has made significant investments and improvements in the woodchip handling and loading US Trade With China

US Forest Products Exports to China 8,000

7,000 Wood Products Recovered Paper 6,000 Pulp Paper/Paperboard

5,000 Dollars

4,000 US

3,000 Million 2,000

1,000

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

US Trade in Forest Products with China 8,000 Imports from China Exports to China 7,000

6,000

5,000 Dollars

4,000 US

3,000 Million 2,000

1,000

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

China's Share of US Forest Products Export Value, 2017 60%

50%

40%

30%

20%

10%

0% Wood Products Recovered Paper Wood Pulp Paper/Paperboard

USA: Share of Forest Products Export Value by Market 35% China Canada Mexico 30%

25%

20%

15%

10%

0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

© Copyright 2018 RISI, Inc. | Proprietary Information 44 Historical Comments on Trade • Why do we have the WTO and the current global trade framework? . Dates from 1948 and establishment of GATT; the USA was the leading producer of almost everything (following WWII), and American business did not like having to face protective tariffs that blocked us from many overseas markets. . WTO was established in 1995, following decades of progressively reducing tariffs under the GATT framework. During most of this period, the USA led the effort to rationalize and expand the global trading system. The US government pursued these policies because American business wanted to expand trade opportunities. . Remember the riots in 1999 in Seattle, when extreme leftists/radicals tried to shut down the meeting of the WTO? For decades, opposition to increasing world trade was led by the extreme left, anti‐business lobby. It has only been in the last decade that the Tea Party and Fox News commentators have decided that trade is a bad deal for Americans.

© Copyright 2018 RISI, Inc. | Proprietary Information 45 Why the current situation with China? • Beginning in the late 1980s, both Republicans and Democrats agreed that it would be better to integrate China into the global trading networks (i.e. eventually into WTO) than to isolate the country. Most western China experts believed that as business relationships developed with other countries, as Chinese people learned the truth about living conditions in the West, as incomes increased in China, that over time the Chinese people would force the Communist Party to increase freedoms and democratic reforms. This did not happen, but keep in mind that during most of the past 25 years, it was American businesses who kept promoting the idea that doing business with China was the right course to pursue. • President Trump is absolutely correct that we have many issues to resolve with China regarding trade (as does every other country in the world trading with China). Obama’s strategy was in part the Trans Pacific Partnership, a trade agreement with the 12 leading economies in the Pacific region but specifically excluding China. By aligning most of China’s leading trading partners, it was believed that the TPP could bring enough pressure to force changes from China. After President Trump pulled the US out of the TPP, the other 11 nations finalized the agreement, but only after dropping most of the elements that US trade negotiators had spent years demanding, including protection of intellectual property rights.

• There won’t be a trade war, but negotiations will get much more serious. • The Chinese have read President Trump’s book, in fact they have been practicing The Art of the Deal for about 1,000 years. They understand that they will have to give President Trump a “victory”, some major concession that he can talk about. If they give him a victory prior to the mid‐term elections, it is worth a lot more to him; what would he be willing to give up for this? • While I disagree with President Trump on a lot of things, when it comes to China and their trade practices, he is absolutely correct that if no one holds them to account, they will continue to do what they’ve always done. They will take advantage of any opportunity (example from Lumber Liquidators case).

Join 200+ participants from more than 30 countries and all sectors of the international woodchip and biomass supply chains to discuss business opportunities. Visit conference website at https://events.risiinfo.com/wood‐fiber/