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Clarky's Comment - November, What Happens in China Matters

Peter Clark, CEO, PF Olsen Ltd

What Happens in China Matters

This month’s comment follows a recent trip to China by four senior PF Olsen staff, including Clarky. Recent log market developments are of immediate interest to New Zealand and Australian pine forest owners and are dealt with elsewhere in this edition. My comment is about trends in China that could impact on NZ and Australian forest owner fortunes and behaviour well beyond the current or next year.

Top leaders gathered in Beijing in late October at a session of the Communist Party of China Central Committee to formulate proposals for the 13th Five-Year Plan (2016-2020). While some economists are questioning the correctness of China’s official statistics on GDP growth in 2015, we should remember that by and large China has a good track record at actually delivering on the key planks of its past 5-year plans. Key themes that are relevant to the forestry sector are:

  1. A moderately prosperous nation. The plan calls for 6.5% increase in GDP compound per annum for the full 5 years. This would increase average per capital incomes from US$7,000 to $12,000/annum. Per capita wood consumption tends to rise with increasing prosperity.

  2. Speeding up the urbanisation process, especially in the middle, western and north-eastern China. This means infrastructure and apartment construction in these lesser developed regions, despite some current over-supply in places at present. Wood consumption in China, especially industrial grade Radiata pine is closely linked to housing and infrastructure development.

  3. Environment protection to pursue sustainable development, reduce pollution and improve the ecological system. This policy has a number of impacts for the forestry and wood sectors. Already there has been announcements to stop harvesting all natural forests in China, increase plantations and promote wooden housing.

While in China we saw evidence of wood processing plants being forced to move from coal-fired drying kilns to wood waste, and of labour cost increases and labour now emerging as a major constraint to increased wood processing in some regions. These trends favour processing in NZ or Australia.

Although NZ winning the World Cup may have taken centre stage in the NZ and Australian media, more or less at the same time China announced the universal lifting of the one child policy, now permitting two children for any couple. While infant formula and the manufacturers of wooden baby cots may be the big winners in nine months’ time, eventually this leads to increased housing demand.

Also while in China, President Xi met with visiting French President Francois Hollande. China, the most populous country and the biggest emitter of climate-warming greenhouse gases in the world, has promised it will try to cap its rising emissions before 2030 as part of its national pledge ahead of the Paris conference. Hollande said he intends to launch a bilateral appeal with Chinese President Xi Jinping “to make the climate conference a success.” Strong leadership in climate change by China, along with Europe, the USA, and now most likely also from Canada, really leaves NZ and Australia with no option but to strengthen our own climate change policies in favour of reducing net emissions at home.