The Rising Influence of Rising Affluence

[DewDiligence]

Chinese Demand Lifts U.S. Wood Exports

[PCL noted on its 4Q10 CC (#msg-59470485, #msg-59586020) that nearly every customer of its northwestern US timber is now engaged in exports to China. As the owner of the timberland assets, PCL realizes the lion’s share of the economic benefit stemming from increasing Chinese demand.]

http://online.wsj.com/article/SB10001424052748703507804576130464080584434.html

›FEBRUARY 8, 2011
By JIM CARLTON

Much of the $30 billion U.S. timber industry is still depressed because of weakness in the housing market, but some companies have found relief in a nontraditional customer: China.

U.S. timber exports to China are suddenly surging, especially from mills around the Pacific Northwest, giving a boost to companies like Weyerhaeuser Co. and Plum Creek Timber Co. Helping to spur the increase: One of China's biggest timber sources—Russia—increased tariffs on its wood exports in 2007, leading Chinese buyers to turn increasingly to the U.S. and Canada for wood amid the country's construction boom.

"Everybody in the Northwest is talking about China," said Dan Fulton, chief executive of Weyerhaeuser, a timber company in Federal Way, Wash.

On Friday, Weyerhaeuser said it had swung to a fourth-quarter profit from a loss a year earlier. It noted that a tripling of its Chinese log exports in 2010 helped offset a 10% drop in its total logging volume in the same period.

Mr. Fulton said the Chinese are mostly using wood for nonresidential purposes such as crates and pallets. [I’ll make the reason for this a quiz. Does anyone care to guess?]

The export surge to China comes at a critical time for the U.S. timber industry. After being fueled by the nationwide housing boom for much of the last decade, it was hit by the property bust in 2008.

U.S. lumber production peaked at 40.5 billion board feet in 2005 and plunged to 23.4 billion in 2009, according to Western Wood Products Association and Southern Forest Products Association estimates.

To cope with the decline in domestic demand, many timber companies slashed costs by closing mills, among other moves. In all, roughly 35% of the U.S. timber industry's lumber mills remain closed, said Stephen Atkinson, a forest-products analyst at the Bank of Montreal.

While exports to China aren't a long-term solution for the U.S. timber industry—the trend hasn't spurred many mills to hire new workers or expand capacity—they are a bright spot that is helping to stave off further declines and cuts.

"It's a step in the right direction," said Steve Chercover, an analyst at D.A. Davidson & Co. in Portland, Ore.

Timber demand from China began rising in 2007 when Russia imposed higher tariffs on its logs, and demand was particularly strong last year, said Hakan Ekstrom, president of the research firm Wood Resources International LLC.

Overall, the number of U.S. logs shipped to China shot up more than 10 times from 256,000 cubic meters in 2007—or less than 1% of the total logs produced in the region—to an estimated 2.4 million in 2010, or about 7% of the region's total log production, according to Wood Resources.

And prices for wood products are continuing to climb. Prices for hemlock logs destined for sawmills in the U.S. Northwest jumped 43% to $66 a board foot in 2010 from $46 in 2009, according to Wood Resources. The export surge also doesn't include wood from other regions. Prices for southern pine, for example, rose just 4.8% in the period, to $65 from $62.

The benefits are greatest for U.S. timber companies with operations in the Pacific Northwest, where the access to China is easiest [duh].

The West, including Washington, Oregon, Idaho and California, accounted for 44% of all U.S. timber production in 2009, compared with 50% for the South, according to estimates by the Western Wood Products Association and the Southern Forest Products Association.

In addition to Weyerhaeuser, Plum Creek and Rayonier Inc. have large operations in the Northwest. At Jacksonville, Fla.-based Rayonier, officials said they plan to increase their harvest level for logs "10% to 15%" this year from 2010 because of continued strong export demand driven mainly by China.

And Seattle-based Plum Creek said it expects that 7% of the logs destined for sawmills from its forests in Oregon during the first quarter will be exported to China, up from "nominal" volume in the fourth quarter.

"As you start to see a return to housing demand in the future," there is likely to continue to be an export opportunity, added David Lambert, Plum Creek's chief financial officer. Last week, the company reported that earnings more than doubled in the fourth quarter on a 38% jump in revenue. It also cited a firming of lumber prices, starting in December on the West Coast, as a sign the company's prospects will continue to improve in 2011.‹