Kerstin Canby Forest Trends Beijing, July 2006

1. China and the Global Market for Forest Products: Look at Russia and Africa Kerstin Canby Forest Trends Beijing, July 2006

2. Basic Dynamics of Supply and Demand • Varying projections of domestic production and China’s ability to be self-sufficient by 2015. NDRC 2006: 150 million m3 gap between domestic supply of industrial roundwood and demand (domestic consumption + exports). • This gap to be addressed by: • imports • improvements in domestic production • substitution • greater efficiency

3. Global Context: Increasing Imports World’s Top Industrial Roundwood Importers 30 25 20 Million m3 15 10 5 0 2000 2001 2002 2003 2004 Canada S. Korea Austria Sweden Japan Finland China Source: FAOstat and China Customs

4. 50 45 Logs 40 Sawn wood 35 Wood chips 30 Fiberboard 25 Imports(million cubic meters RWE) Plywood 20 Particleboard 15 Veneer 10 Other 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 China’s Timber Imports by Product Type Logs & sawnwood up * Plywood & veneer down

5. Drivers of Demand Exports vs. Domestic Consumption Total consumption of wood products has grown rapidly over the past decade. Adapted from Figure 17 of Fuller, Bernard. 2006. China's Rapidly Expanding Wood Products Market: Are they Sustainable? Bedford, Massachusetts: Resource Information Systems Incorporated (RISI).

6. Finland USA Austria Sweden Belgium Canada Denmark Netherlands Germany New Zealand Australia UK Japan 1980-2000 Italy France Singapore Rep. of Korea Spain Portugal Ireland Greece Malaysia South Africa Mexico China Argentina Brazil Turkey Venezuela Russia India Drivers of Demand: Domestic Consumption GDP per capita and Paper Consumption USA China

7. Drivers of Demand: International Demand Imports Exports 44.6 million m3 RWE 36.1 million m3 RWE China 80% imported volume China's net domestic consumption of timber products is quite low compared to its timber product tradePulp and paper different story: only 11% is re-exported Russian timber different story: majority stays in China itself Mainly tropical timber processed into furniture, plywood that are exported

8. logs lumber wood chips particleboard veneer fiberboard plywood wood furniture other* 0 5 10 15 20 25 30 million m3 RWE China’s Growth as a Wood Processing Center Export – led growth

9. Major Destinations of Chinese exports US +800% Japan +200% Others +600% ** EU +700% Hong Kong 20%

10. Major Destinations: Plywood 1000% increase US and “others”

11. Largest Exporters of Wood Products to China (2005) Largest Exporters of Wood Products to China (2004) Largest Exporters of Wood Products to China (2004) Largest Exporter of Wood Products to China Timber Products Logs Lumber 1. Russia1 49% 2. Malaysia 8% 3. Indonesia 6% 4. Thailand 5% 5. PNG 4% 1 26.4 million m3 1. Russia1 68% 2. Malaysia 6% 3. PNG 6% 4. Myanmar 4% 5. Gabon 3% 1 20 million m3 1. Russia 18% 2. USA 14% 3. Thailand 13% 4. Indonesia 12% 5. Malaysia 8% Plywood Wood Pulp Paper 1. Indonesia 65% 2. Malaysia 21% 3. Russia 3% 4. Japan 2% 5. Hong Kong 3% 1. Canada 27% 2. Indonesia 18% 3. Russia 13 % 4. Chile 10% 5. US 10% 1. Taiwan 16% 2. USA 13% 3. S. Korea 12% 4. Japan 8% 5. Indonesia 7%

12. Importance of Russian – Chinese Trade Overall Trade China : Russia’s 4th largest trade partner Russia: China’s 8th largest trade partner Average annual growth rate of 30%Forest Products Trade 10% of overall trade between the two countries Russia: #1 forest products supplier to China China: Most important market for Russian timber 40 fold increase in log trade between 1996 – 2005Clearly important trade relationship to both countries

13. Drivers of Russian – China Forest Trade • similarity of wood species in the Russian Far East and northeast China (China’s traditional timber base); • low prices and China’s decision to reduce tariffs (0% log import tariff); • convenience in border trade and rail links between Russia and the neighboring Chinese provinces of Heilongjiang and Inner Mongolia; • favorable tax policies for border trade; and • Russia’s resumption of maritime shipping of timber products in 2001, enabling Russia’s timber to be directly shipped to the major timber consuming regions on China’s eastern coast

14. Rapid Growth of RU-CN Timber Imports China’s Timber Imports (RWE) 40,000 Russia great increase MY, Indonesia relatively stable 2000: China replaced Japan as largest market for Russian timber Logs: 1996: 500,000 m3 2005: 20 million m3 77% of timber imports 87% are softwood 90% of log exports go to China 35,000 30,000 25,000 Imports (RWE 1,000 m3) 20,000 15,000 10,000 5,000 0 1997 1998 1999 2000 2001 2002 Gabon Germany Indonesia Malaysia New Zealand Russia Thailand United States Others

15. The Commodity Chain for Russian Softwood Imports to China • Recent rise of processing capacity at “gateway” cities (Suifenhe & Manzhouli) • ~80% consumed domestically, mostly by construction sector • ~20% for export to U.S., EU, Japan– over half from Chinese processors at border. • Complicated supply chain creates challenges for timber tracking Source: Estimatesn from Song, W., B. Cheng, S. Zhang, X. Meng (Beijing Forestry University). Forthcoming Forest Trends “Russian logs in China: The softwood commodity chain and economic development in China”

16. Change Afoot: Russia’s Desire to Increase Value-Added Processing • Proposed log export taxes increasing to 20% of exp value by 2010 • Currently 0.28E / m3; could go as high has 24E / m3 • Incentives for investors in wood processing • No VAT to import processing equipment • 2006: Russian and Chinese officials announce joint forestry venture in Siberia • Long-term lease of 1m ha; joint RU-CN processing enterprises • Many international investors, however, see Russia as a risky investment climate (new & uncertain Forest Code) • CN MofCom recognizes need to ensure legal trade and investment relationships with major trade partners: • Need to combat “China Theory”: fear of Chinese domination in mrktplace • Recognition that small-scale illegal Chinese operations have created a bad reputation for larger operations that would like to invest in Russia

17. Expanding RFE / Siberia production zones?

18. Rise of Chinese Investing Power 2002 2003 2004 2005 0 50 100 150 200 250 Billion US $ China Development Bank vs. World Bank: Outstanding loans Developing countries say China is often prepared to help when traditional donors are not, and will sometimes pay over the odds, to secure natural resources. The west African state of Gabon, for example, after trying unsuccessfully for years to interest American and European investors in extracting its rich iron ore deposits, found China was eager” – Financial Times, Jan. 12, 2007. China Development Bank (converted to dollars at average rate per for year) World Bank (which also disburses some aid in grants) Sources: China Development Bank; World Bank.

19. Africa’s Forest Product Exports to China 4 3 3 2 Million m3 RWE 2 1 1 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year Logs Lumber Pulp & Paper Wastepaper & Recycled Pulp S. Africa & Swaziland (99% p & p) Source: Chinese Customs data

20. African Timber Exports to China (with / without Liberia) 3000000 Liberia 2500000 2000000 m3 1500000 Rest of Africa 1000000 500000 0 1997 1999 2001 2003 2005

21. Top 5 African Log Suppliers to China (2005) 2,500 2,000 1,500 Thousands m3 RWE 1,000 500 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 * Important forest producing nations in West Africa do not export to China: Ivory Coast, Ghana (0.2%) Gabon (2.7%) Cameroon (1.5%) Equatorial Guinea (1%) Congo Mozambique (0.4%) Source: Chinese Customs data

22. Africa’s Share of CN’s Timber Imports 50 20% 45 18% 40 16% 35 14% 30 12% Million m3 RWE 25 10% 20 8% 15 6% 10 4% 5 2% 0 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 Year Total Timber Products African Timber Products Africa's Share • Three African countries (Gabon, Rep. of Congo, Eq. Guinea) supply almost 21% of China’s tropical hardwood logs. • Source: Chinese Customs data • Logs 2nd largest category of African exports to China (4.9%), following oil (62.2%) • Source: UN COMTRADE SITC Revision 2, cited in Boardman, G. 2006. “Africa’s Silk Road.” Washington D.C.: World Bank.

23. China’s Importance to Africa 1,400 100% 1,200 80% 1,000 60% 800 600 40% Thousand m3 RWE 400 20% 200 0 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 Logs Wood chips Lumber Veneer Other Share to China 120 100% 100 80% 80 60% 60 40% 40 Thousand m3 RWE 20% 20 0 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 Share of Country Timber Exports to China Gabon Mozambique

24. China’s Importance to Africa: Natural Tropical Exports e China Rest of the World EU 2.5 2.0 ) 1.5 Estimated RWE (million m3) 1.0 0.5 0.0 Ivory Congo Equatorial Gabon Cameroon Ghana Others Coast (Brazzaville) Guinea Source: J. Hewitt/COMTRADE

25. China’s Forest Product Exports to Africa 1,000 900 800 700 600 500 Thousands m3 RWE 400 300 200 100 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 Plywood Wooden Furniture Fiberboard Paper Pulp Other Forest Products • Africa importing Chinese plywood, paper, fiberboard, furniture • African countries exporting forest products to China import very little processed timber products • Most Chinese products go to Egypt (25%) and non-SSA countries • Of SSA countries: S. Africa (0.35%), Nigeria (0.11%), Ghana (0.06%), etc. Source: Chinese Customs data

26. A Work in Progress Thank you