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China Trip Report

12 to 18 January 2009

Background

PF Olsen is constantly being approached by log buyers to supply logs directly into Asian markets. Usually these approaches are forwarded onto the established log traders such as Pacific Forest Products who have done a good job serving the sector for some time. PF Olsen's interest in direct China trade stemmed from an approach from a particular consortium or log processors who were actively seeking to establish a more direct supply line from NZ forest owners to their sawmills. The objective is to create a more efficient supply chain, lowering their cost of logs, whilst at the same time increasing NZ forest owner returns and reducing price volatility. So far, container log trade, and half a break-bulk shipment has been made to this group. The severe market downturn late last year presented several challenges for the new project and it is still early days, but the model still has the potential to provide a valuable alternative for PF Olsen harvesting clients.

Visit to Meet the Buying Group

Peter Clark (PF Olsen CEO) and Peter Weblin (PF Olsen Marketing Manager) headed off into the cold China winter for eight days in January to learn more about the market and the buying group. The following is a mix of highlights of the trip, impressions, and key information gathered during the trip.

Chinese Log Market like a Fish Market

Despite a relatively high level of sophistication in the harvesting and shipping part of log supply to China, the sale of, distribution and processing of logs in China is low-tech. Logs are discharged at Chinese ports and stored by grade in various lots on the wharf. Each lot has an identification number and a mobile phone number posted on a log (see photo below).

Log buyers then inspect the logs and when they see a lot they like, they call the mobile phone number and arrange to pay for the logs (usually cash). They then get a release form that authorises them to load the logs into (usually) beat-up old dump trucks (see photo below) and transport the logs to their mill. They are pretty relaxed about what we would consider gross over-loading!

One of the noticeable aspects of walking around log stocks at Chinese log ports is difference in visual appearance of Russian log supply vs NZ Radiata. The photos below show Russian larch (left) and NZ Radiata pine (right). Despite the obvious size difference (noting that the Chinese preferred size range is 20cm-30cm which are easy to handle with the manual bench band saws) Russian larch typically has much better form, much tighter growth rings, smaller knots and less surface defects. These different qualities result in Russian logs trading at a premium of between US$10 and US$30/JAS m3.

Processing

Much of the NZ Radiata stills goes into relatively low-value temporary construction uses (albeit a burgeoning market in China, at least up until last year). The predominant dimension is 4cm x 9cm, rough sawn, and usually air dried. A typical sawmill comprises simple manual bench band saws operated by about six people (see photo below).

Each person is paid about NZ$15/day (10 hour shift) and the band saw unit cuts around 25m3 of timber per day. This equates to a labour cost of $3.60/m3. We were told that total green-sawing costs are NZ$10/m3. When compared to about $85/m3 green-sawing costs in NZ, you can see why it is so hard to compete in the sawn-timber market in China.

We met several log processors cutting and treating NZ Radiata for railway sleepers for Africa. Radiata was considered a particularly good species for this use as it doesn't shatter and took up treatment well.

Workers accommodation is modest, often on the mill site, and if fortunate enough to have family with them, the worker's children's playground is the log yard (see photo below).

It is staggering to think that a high proportion of the around 35 million cubic metres of logs China imports (and much of its own domestic log supply) is processed this way. That's a lot of little sawmills!

Searching for Clearwood Opportunities

Finding high-value markets for increasing volumes of pruned/clear Radiata pine is of primary importance to any owner of pruned log resource. Therefore, part of the trip involved discussing opportunities to find markets for high quality clear sawn, kiln-dried Radiata.

Radiata logs are prone to sapstain and it is difficult to consistently supply sapstain-free logs to export markets even with debarking and anti-sapstain treatment. In summer logs for export need to be debarked and anti-sapstain sprayed within 48 hours of felling to prevent logs being infiltrated with the sapstain fungus' mycelium which continues to develop inside the log during storage and shipping (despite have a prophylactic treatment on the exterior surface). This is difficult to achieve from ground-based operations and nigh on impossible from cable hauler operations.

Pruned logs supplied to local sawmills, on the other hand, can be more confidently supplied with (more or less) sapstain-free logs so long as logs are delivered within four to 14 days depending on weather conditions.

It is this limitation on the export of pruned logs that makes it all the more important to develop new markets for sawn and kiln-dried pruned/clear Radiata pine. In addition, the US Mouldings and Millwork market (traditionally a big market for us) is very soft with low prices and weak demand.

Unfortunately, however, it soon became apparent that at the present time, there were limited opportunities for this product in China, because:

  • There is still sufficient supply of SE Asian hardwood logs at reasonable prices. In the future, this supply is expected to reduce substantially and prices rise as the unsustainably managed resource is depleted, environmental certification increases and illegal logging is curtailed.
  • Low sawing costs in China are very hard to compete against.
  • Interior fit-outs are dominated by cut stone (such as marble) and appearance metal trim.
  • Ready non-wood substitution: on close inspection of what appeared to be wood trim we found it was often synthetic (such and vinyl with a wood finish). Wood look-a-like vinyl flooring strips and tiles were common in new construction.

Lanshan

Lanshan village and port is about 150km south of Qingdao City (at the bottom of the Shangdong province) and a five hour drive north from Shanghai. Lanshan Port has recently been significantly upgraded and expanded to increase the handling of imported logs (see photo below).

Log storage has been developed just off-port, a few kms inland. We arrived at Lanshan early evening after a hair-raisingly fast car trip from Shangahai and stepped out of the car into a minus 4°C twilight, with a stiff breeze to boot. When we there, authorities told us that 250,000 JAS m3 was in stock in the yard and 95% was Radiata pine from NZ. This was nearly maximum capacity for the yard. Lanshan was chosen for this development because of its good port, availability of lower-cost industrial land and central position/transport hub attributes. All around the port are timber processing plants, with many of the band mills described above. We were told of significant expansion plans. It was positive to see this type of investment and particularly the high market share of NZ Radiata.

Very little is wasted in China. We spotted these girls collecting sawmilling waste in one of the Lanshan processing yards (see photo below). We were told NZ$80/tonne is the price for this material for use manufacturing reconstituted panel products such as particle board.

Market Hits a "Perfect Storm"

Our visit was during the start of the Chinese New Year holiday. This in China's one really big holiday and despite New Year being 26 January, the holiday starts early to mid January and runs through to early February. We were told that the usual practice was for sawmills to purchase log stocks prior to Chinese New Year in order to have stock immediately available for processing when operations commenced after the holiday. This year, however, Chinese New Year coincided with the global financial crisis and the announcement of the deferral of the final steps of the Russian log tariff. Consequently many log processing plants stopped production early (many sites were idle when we visited during the week 12-17 January) and log stocks at the mills were run down to very low levels. Because log prices were almost in a free-fall, saw millers wanted to stand back and pick up bargains in the New Year. Because there was destocking at the saw mills (no processing demand), log stocks at the ports ballooned, accentuating the perception of a very weak market. This created a market distortion and demand has started to come back into the market in the past few weeks. There is evidence of considerable activity related to restoration of earthquake affected areas in the north and infrastructure projects. At this stage it is unclear whether this demand will be sufficient to offset the big drops in demand related to export activity such as furniture manufacture.

Big Investment in Transport Infrastructure

A noticeable and positive aspect of China is its huge investment in a range of transport infrastructure. Whilst Shanghai was frustratingly slow to get around in taxis, this is more a function of 20 million people crammed into one city - motorways criss-cross the City frequently . Travelling from Shangahai to Yantai, however, was on multi-lane, well constructed Expressways for all of the 700 kms. The highlight of over-land travelling was taking the Mag-Lev train from Shanghai airport to the City centre. This 36km trip takes just 7 minutes in the train (one hour in a taxi) and reaches speeds of 431 km per hour. It feels like low flying! For proof, see photo below of the speedo which in prominently displayed in each passenger car.