Analysis and New Developments on the Chinese Hardwood Market

1. Analysis and New Developments on the Chinese Hardwood Market Prepared For European Hardwood Conference November 3-4, 2005 Paris - France Li Hongfan China Wood International, Inc Beijing, China

2. Presentation Outline • Market overview of the last 5 years on hardwood lumbers and logs: consumption and imports • Hardwood Consumption in China by geography • Chinese import duty for log import • Reasons and analysis for the beech decreased consumption in China • Reasons and analysis for increased in tropical woods • Reasons for increased in Oak wood • User industry of Hardwood • Actual and future trends in the market depending on industry user

3. Part 1: Market overview of the last 5 years on hardwood lumbers and logs: consumption and imports

4. China Hardwood Logs Domestic Consumption & Import during last five years.

5. China Hardwood Lumbers Domestic Consumption & Import during last five years.

6. China had 26% of global hardwood log imports in 2004, & 2005 will be a new record YTD 2005: Malaysia -25% Russia +25% PNG +42% Myanmar +28% Gabon +8.5% Solomon Is +42% Germany +44% China: Hardwood Log Imports by Source, 1995 - 2005 forecast 7000 Africa Southeast Asia 6000 Europe North America Russia Other 5000 4000 1,000 cubic meters 3000 2000 1000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005e • YTD 2005, Russia has surpassed Malaysia to become the leading supplier. • African supply -6%, but imports from USA +30% and Europe +67%.

7. China’s imports of hardwood logs are mostly birch Chinese import data do not separate out birch, but this represents the bulk of the “other” category.

8. China: hardwood lumber imports have stagnated, but softwood continues to grow From 2000 – 2005e, softwood lumber imports increased by 1.5 million m3, while hardwood lumber imports have increased by just 1.0 million m3. Hardwood still accounts for 68% of lumber imports in China in 2005 YTD, down from 87% in 2000.

9. China: World’s largest market for hardwood lumber, with 21% of global imports in 2004 Leading Hardwood suppliers – 2005e YTD 2005 % change in Volume Myanmar +50% Indonesia - 24% USA +7% Russia - 6% Malaysia +5% Brazil - 22%

10. Part 2: China Main Timber Consumption by geography;

11. Hebei Shandong Jiangsu Zhejiang Guangdong

12. Demand from Domestic Consumption • vInshore Area • (1) Economic developed areas, higher living standard and governable incomes; • (2） Less infrastructural investment, more housing construction; • (3) Large demand on value-added building materials, especially in kitchen cabinets, etc; • Middle & West area (1) Expectation to getting more support from government policy for further development, while existing living level and governable income is lower than inshore areas; • (2) Expectation to large infrastructural investment; • Because of logging forbidden, some lumber producers were short of getting raw material.; • Increased demand on decoration materials, while only for low cost material; • Beijing 2008 Olympic Games & Shanghai 2010 World Expo

13. Demand from Increasing wood products exports from China to International markets： • Furniture, flooring, wooden toys and giftware are the sectors dominated by Chinese manufactures. • Plywood, finger-jointed and edge-laminated non-structural lumber, structural laminated posts and beams; wood windows shutters and blinds, decorative mouldings and millwork are the sectors with rapidly expanding chinese exports; • Solid engineered stile and rail doors, solid panel and louvered bi-fold doors, solid and finger-jointed, primed and painted mouldings, and outdoor garden furniture are sectors with emerging Chinese exports;

14. Solid Wood Production Centers： (1) The North China Wood industrial areas centered on Beijing, Tianjin, Hebei, and Shandong provinces. The companies in these areas are normally relative large scales and enjoy the good domestic markets in that region. (2) The South China wood industrial center located in Guangdong and Fujian provinces, primarily Guangzhou, Dongguan, Shenzhen, Zhongshan and Shunde cities. The companies there have better products quality and are good at branding. (3) The East China industrial area, mainly in Jiangsu, Zhejiang provinces and in Shanghai. Normally the companies in that areas are good at products quality and managements. (4) The Northeast China industrial areas in Shenyang and Dalian cities. The strength in those areas is manufactures have good industry background and raw material resource.

15. Part 3: Chinese Import duty rules for log and lumber import;

16. Logs and Lumber Zero Import duty makes China more logs and lumber import while not prefer to processed products. • The policy of having zero import duties on logs and lumber while maintaining import duties on more processed products like plywood, moulding, etc. While these duties have been lowered in the past few years, log and lumber imports are still favored. • Heavy investment in infrastructure to facilitate imports. The most notable example of this has been investment in additional tracks and reloading facilities at the major rail crossings from Russia into China. • Imported wood products used to produce furniture or wood products for export are also exempt from VAT for producers operating in a tax-free zone, and for other companies who may apply for this benefit. • Opening up the import trade so that there are now probably one thousand companies or more involved in importing logs and lumber. There are reportedly 800 companies importing from Russia alone. This surge in importers has meant heavy competition, which has increased efficiency in the system.

17. More Logs import than Lumber import in China • Because of different dimensions and grades on lumbers between China & overseas suppliers, Chinese company would like to import more logs while not lumber. • Chinese company prefers to import logs for rotary or slice for thinner veneer to produce veneer faced wood products, while not import veneer directly because of different veneer grades, to lower the cost. • ?????

18. Hardwood Log/lumber Import Ports • Zhangjiagang Port, Yangzhou Port and Lanshan Port are main ports in importing hardwood logs; • Hardwood in Zhangjiagang Port is mainly distributed to Jiashan plywood and furniture area, Nanxun flooring area, Suzhou and Changzhou plywood and flooring area; • Because it’s more convenient and cheaper for transportation from port to Pizhou and Linyi which are the two biggest plywood processing center, hardwood import through Zhangjiagang is decreasing, and hardwood import in Yangzhou Port is increasing.

19. New Legislation Impacting Log & Lumber Imports • Importers of logs from bordering countries (e.g. Russia, Myanmar) pay only 50% VAT (8.5%) on value of logs, but have been getting 17% rebate after selling logs. • June 2004: China’s State Administration of Taxation issued Public Notice No. 830, “Forbidding the ‘Double Rebate’ Policy on Border Trade” • However, as of June 2005 it appears that new policy has not yet been implemented. • On January 1, 2005, China’s Ministry of Commerce published new voluntary standard “Commercial Wood & Products Mark.” Expected to become mandatory, this requires proper marking of species name, grade, producer name, moisture content, certification marks, etc.

20. New Timber Quarantine/Processing Facility Opens in Fujian Province • Current Chinese import regulations stipulate that shipments of logs with bark be fumigated with methyl bromide prior to entry and have a phytosanitary certificate.  • Now a new import log quarantine/processing facility in the port of Putian Xiuyu will allow China to import logs and debark and fumigate in China, in Fujian Province. This will give more flexibility to log sourcing: for example, producers in Alaska previously had difficulty meeting China’s phytosanitary requirements.

21. Part 4: Reasons and analysis for Beech & Oak & Tropical Hardwood import changes and future trends in China ;

22. China Oak import increased 72.97% by logs and 45.57% by lumber in first half 2005, compared with the same period of 2004.

23. China Beech Imports decreased 6.78% by logs and 26.09% by lumber in this first half year, compared with 2004.

24. China Tropical Hardwood Log & Lumber Import during 2000-2004 Main suppliers of tropical hardwood logs are Malaysia, PNG, Gabon, Myanmar, and Indonesia, etc; While Indonesia , Malaysia, Brazil, Thailand are the main suppliers of tropical lumber.

25. Market Demand Makes the species import changing ! • Decoration is alike fashion, every year change the style, so species using on panel will be changed according to the market demand. • Increasing demand from domestic consumption and exporting on Oak species, used for Oak flooring and furniture, even for Oak face panel for decoration. • Before 2000, Beech faced panel used for interior decoration was quite popular in China, so plywood factories consumed many Beech logs and veneer, and now the market has happened great change, customers would rather like many types hardwood other than Beech. • One of other reasons is that Beech face panel using for decoration is not good for painting, the color can be changed after years, which makes clients unhappy. • Most wood flooring companies produce flooring with many kinds of hardwood, the species mainly from SE Asia, S. America, Africa, some from Europe and N. America, like Oak, but seldom with Beech, very few manufacturers produce Beech flooring. • After 2000, Chinese customers imported lots of Beech from France for many Beech logs were blew down by hurricane, but the quality is not good, so many users complained to Beech species and changed to utilize other hard species.

26. Part 5: China Furniture & Flooring industry and Its fit for European Hardwood;

27. China Furniture Production & Export • 80% of furniture production in China are made of solid wood and wood-based panel. • Wood furniture shares 30% of total China furniture export • During last 8 years, China wood furniture export increased 19% every year in volume, and 28% in value.

28. China is largest wood flooring producers & consumers • China’s flooring production shares 50% of total production volume in the world. • There are 4000 solid wood flooring manufactures and it’s expected sales will be increased by 50%-80% annually. • There are more than 100 engineered flooring manufactures in China.

29. Part 6: Conclusions & Suggestions

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31. Thanks! Mr Hongfan Li Add: A-1806 Jinqiuzhichun, No 6 Zhichun Rd Haidian Dist, Beijng 100088 Tel: 86-10-8235 7166 / 8779 Fax: 86-10-82358546 E-mail: hongfan@chinawood.org