Selective Cuttings

Will lumber exports to China grow in 2013?

January 10, 2013

After several years of rapid growth, lumber exports to China have slowed down. They fell 1% over the first 10 months of 2012 compared to the same period in 2011, in contrast to the 61% average annual growth between 2004 and 2011. On the face of it, a decline of 1% might seem disappointing, however the gains of the past 7 years have been extremely significant, and the Chinese export market is now of a size where continued growth must come at a more moderate pace. If the current export volumes can even be maintained in the face of returning U.S. demand, the resulting rise in prices will force export values much higher, and the Canadian forest industry will be in a very healthy position.

In China, the current lack of growth can be mostly attributed to a series of Chinese policies designed to control rapidly rising housing prices, and their impact on new construction. With China now Canada’s second largest lumber export market (accounting for 21% of total Canadian exports), China’s macro economic cycle and construction activities level will be increasingly influential on Canada’s lumber industry.

China’s residential floor space: Under construction and newly started (% year to year)

This chart shows the year over year growth rate of China’s residential construction floor space, including both “newly started” and “under construction” from 2005 to 2012. China’s newly started residential floor space recorded robust growth from 2005 to 2008, before dipping to negative growth as the result of the global financial crisis in 2008 and 2009. New housing construction activities boomed in 2010 and 2011. However, growth in China’s newly started residential floor space has been declining since 2012, which has also led to the flattening of the growth rate of total floor space under construction.

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As shown in the figure above, China’s newly started residential floor space (a proxy for housing starts) recorded robust growth from 2005 to 2008, before dipping to negative growth as the result of the global financial crisis. With the help of the Chinese government’s US$600 billion fiscal stimulus, new housing construction activities boomed in 2010 and 2011. However, China’s newly started residential floor space has been declining since the beginning of 2012, resulting in the flattening of the growth rate of total floor space under construction.

Nonetheless, there are encouraging signs indicating that China’s housing market started to rebound in recent months after the central bank twice cut its benchmark interest rate. Reports show housing prices, real residential investment and newly started residential floor space increased in November. The increase in lumber trade may reflect the recovery in China’s housing market: Canada’s lumber exports to China were up 29% in October.

China’s 2012 Central Economic Work Conference suggests that economic growth may be focussed more on domestic consumption and improved efficiency. Moderate economic growth and an improved housing market in 2013, particularly given new leadership, is widely expected. As a result, we will likely see small, but positive growth of Canadian lumber exports to China in 2013.  More importantly, coupled with the U.S. housing recovery, strong stable lumber demand in China will likely provide a further support for already high softwood lumber prices.