Trading with China likely to generate longer-term gains for Canada

Mr. Taylor says that, in the short term, China is a limited market for Canadian wood products. “China is much more of a market for Canadian raw materials, such as pulp, industrial lumber and some panels, and even that could change in the near future as China tends to buy mainly on price.” In the longer term, Canada is likely to export products that are not currently being sold to China in significant volumes.

China will continue to require large amounts of fibre to feed its growing wood sector. Mr. Taylor notes that some observers see this as a huge opportunity for Canada. It is unlikely that China’s own plantations will meet the demand in the short- and mid-term. Also, China’s current imports typically come from countries where illegal logging is rampant. “If international pressures force China to manufacture export products from certified wood, then Canada could offer its certified wood. Still, a very large source of wood—some of it very similar to Canadian wood—can be found much closer to China, in Russia.” However, the delivered log and lumber cost from Russia to China is currently very high.

“Chinese middlemen maintain the wood price that comes from these regions at artificially high levels by siphoning off significant mark-ups on Russian log sales,” says Mr. Taylor. However, the Russian and Chinese governments are trying to resolve these issues. So, unless certified wood becomes an absolute necessity for China, Russian logs could help meet much of China’s fibre needs over the next five to 10 years. Considering that China has also been buying plantations around the world, it is clear that Canada will eventually find it more difficult to export fibre to China.

Canada could help Chinese companies on quality control and value-chain management. Still, Mr. Taylor cautions, this opportunity is slowly fading away. World-class Chinese plants, such as the world’s largest door plant, already produce high-quality export products. “Many offshore importers, agents or traders are already working with Chinese companies on quality control through technology transfer. Few Canadian wood importing companies are active in sourcing Chinese products as compared to dozens of American ones.”

Mr. Taylor says that rationalization in the Chinese wood sector could happen in some sub-sectors, such as furniture and flooring, but that its effect may be limited. Any rationalization will likely remove smaller, higher-cost producers, thus having little impact on overall Chinese exports.

He notes that sawmilling in Canada faces no particular threats or opportunities from China’s development, as Canada already has some of the lowest-cost delivered logs and sawmills in the world. “Canada could certainly make some interesting inroads in niche products such as wood roof trusses that are already being used in China. But until China builds houses out of wood, Canada is more likely to export mostly raw materials to China for reprocessing than for end products.”

Mr. Taylor says that China’s incredible growth may result only in small net gains in Canadian commodity product exports. For instance, China could use Canadian logs or lumber to produce goods that could, in turn, replace similar Canadian products in key markets such as Japan. According to Mr. Taylor, “some products, such as structural lumber, particleboard and OSB [oriented strandboard], could be export growth opportunities for Canadian firms in China. Still, even if China’s industry only meets its own growing needs, it will significantly reduce Canada’s markets in China for these goods.”

For now, says Mr. Taylor, the Chinese finished product exports are likely to have more of an impact in eastern Canada, where more high-value hardwood furniture, flooring and other goods are produced. “Other Canadian commodity sectors, such as softwood and hardwood plywood and even MDF [medium density fibreboard], could also likely feel the impact of planned increased Chinese exports.” In the long term, Mr. Taylor concludes, Canadian firms should consider purchasing strategies centred on a variety of Chinese-manufactured products that fit into their existing product mix and customers in North America.