The fact that China is the biggest buyer of U.S. Treasury securities is well recognized. But a lesser known detail is that China is also the biggest buyer of lumber produced in the United States and Canada. According to a recent report in The Wall Street Journal, the dragon seems to be leading the $30-billion U.S. timber industry, hit by a weak domestic housing market, out of the woods. China, which had traditionally relied on Russia for its timber requirements, turned West to the U.S. and Canada when Russia hiked duties on timber exports in 2007. Russia’s loss, as they say, has proved to be United States’ gain.
Timber imports from the U.S. and Canada to China have surged during 2010, if the statistics are anything to go by. According to the Shanghai Timber Association, imports from the United States zoomed 162% in the first three quarters of 2010 from the levels seen in the same period a year ago, second only to Canada in volumes. Thanks to the demand, the price of a unit of timber also increased 29% from 2009 rates. China is the major market for hardwood exports from the U.S., totaling $454 million during January to August 2010. But unlike in the United States, wood is used mainly for nonresidential use in China. Though the Chinese have recently started using hardwood for floors, wood is now used mainly for crates and pallets. The reliance of the U.S. timber industry on demand from China is well documented through the number of logs exported to the country from the U.S., a figure clocked at a more than ten-fold increase during the three-year period between 2007 and 2010. The mounting demand also reflected in the price for hemlock logs, which shot up 43% to $66 a cubic meter compared to $46 recorded in 2009. Hemlock, a softwood which hardens with age, is predominantly used in various construction applications such as framing and flooring, and for dry-heat saunas and window sash material. The wood has also become popular in recent years as a low-cost substitute for hardwoods in the making of furniture.
Possibly, the relatively new-found demand from China may be just the beginning of a turnaround for the domestic timber industry. A recovery in the U.S. housing sector is likely to boost demand for lumber as well as improve profits and prices. The U.S. timber industry, which boasts big names such as Weyerhaeuser Co. and Plum Creek Timber, has been reeling under the effects of falling home prices and lower sales of existing homes in the country. The domestic timber industry had logged profits for most of the last decade, thanks to the housing boom. However, the bursting of the bubble in 2008 had the industry gasping for breath. Lumber production plunged from 40.5 billion board feet in 2005 to 23.4 billion feet in 2009, according to statistics from Western Wood Products Association and Southern Forest Products Association. Falling domestic demand forced many timber companies to cut corners by closing mills and reducing the number of employees.
Understandably, Weyerhaeuser’s wood products unit, which sells timber and processed wood, has continued to post losses for successive quarters. The expiry of tax credits for first-time U.S. homebuyers also has put pressure on timber companies, which depend on demand from homebuilders. However, Weyerhaeuser recently said it had returned to a profit in the fourth quarter of 2010, thanks to Chinese log exports which tripled during the year. And Weyerhaeuser may not be the only company basking in the Chinese glory, as competitor Plum Creek too reported a more than 100% jump in its fourth-quarter earnings.
Big U.S. timber companies such as Weyerhaeuser, Rayonier, and Plum Creek have the bulk of their operations based out of the Pacific Northwest region of the United States. Apart from being the largest timber producing region in the United States, the West also enjoys the logistical advantage of offering the easiest passage to China.
Despite the Chinese bonanza, U.S. timber companies seem to know too well that good times won’t last forever. Still, about 35% of the lumber mills in the United States remain closed and companies have been reluctant to add new jobs or expand capacity. But for now, though, both China and the U.S. seem to be enjoying each other’s company.
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