3. DEMAND FOR TROPICAL TIMBER PRODUCTS

3.1 Forecasting Product Consumption
3.2 Substitution

The study of forest industry structure and trade - as well as consideration of how these aspects of the sector might evolve - requires an understanding of how the region's consumers respond to price changes in tropical timber products; of how the availability and prices of substitute products will change; and of how these responses might change over time.

3.1 Forecasting Product Consumption

Consumer demand for a product usually varies inversely with its price; the relationship between the quantity consumed and its price is the demand schedule, or curve. The demand curve for a product in a region is characterized by its own-price elasticity, which quantifies the change in demand relative to a change in price. This curve may shift over time in response to income growth or other factors. An end-use elasticity quantifies the rate of shift as a function of these variables. Changes in the prices of substitute goods also shift the demand curve.

Each timber product in each region is described in the ITTO Trade Model by a demand curve, characterized by an own-price elasticity (Table 5, next page). The current version of the model projects demand shifts according to a schedule of end-use growth and assumes an end-use elasticity of 1.0. Beyond 2000, growth in most countries is assumed to slow as their economies mature. A description of the reasoning underlying the schedule of end-use growth and the source of the own-price elasticities used in the model can be found in ITTO (1993) and ITTO (1995). Product substitution is modelled exogenously (see the following section) rather than incorporated directly in the demand function.

Note that in Table 5, all the own-price elasticities for sawnwood and plywood are less than 1 (in absolute value) and the elasticities for Japan and the Republic of Korea, both major consumers of tropical timber products, are quite low (e.g., 0.18 for plywood in Japan). Empirical studies suggest that the own-price elasticities of demand for tropical timber are generally low (i.e., consumers do not respond dramatically to price changes) (Barbier et al. 1994).

To compare aggregate consumption forecasts with other published sources, the countries of the study region were grouped into four categories according to their resource endowment and degree of economic development (Table 4; after Jacques 1996).

Table 4 - Average annual growth of consumption to 2010

Group	Category	Country	Growth rate to 2010 (%)
I	Less developed, importers	China, Hong Kong, Philippines, Singapore, Thailand	4.4
II	Less developed, exporters	Cambodia, Indonesia, Laos, Malaysia, Myanmar, PNG, Solomon Islands, Vietnam	4.0
IV	More developed, importers	Japan, Korea, Taiwan Province of China	1.15

Country assignments as per Jacques (1996). No category III countries (more developed, exporters) are located in the region.

The aggregate annual growth rate estimated for the Asia-Pacific region is 2.8%. Globally, for wood products, Jacques (1996) forecasts 1.7%, and the FAO (1995) forecasts 2.7%.

Table 5 - End-use growth and elasticity assumptions for plywood/veneer and sawnwood demand

	Growth rate (%)			Own-price elasticity
	1995-2000	2001-05	2006-10
Producer countries
Plywood/Veneer
Cambodia	2.0	4.0	4.0	-0.75
Indonesia	6.0	5.0	4.0	-0.48
Laos	2.0	4.0	4.0	-0.75
Myanmar	1.0	1.0	1.0	-0.75
Pen. Malaysia	3.0	4.0	3.0	-0.62
Philippines	4.0	5.0	4.0	-0.61
Papua New Guinea	3.0	3.0	2.0	-0.75
Sabah	5.0	5.0	4.0	-0.27
Sarawak	5.0	5.0	4.0	-0.27
Solomon Isl.	3.0	3.0	2.0	-0.75
Vietnam	5.0	5.0	4.0	-0.75
Sawnwood
Cambodia	2.0	4.0	4.0	-0.75
Indonesia	4.0	5.0	5.0	-0.26
Laos	2.0	4.0	4.0	-0.75
Myanmar	1.0	1.0	1.0	-0.75
Pen. Malaysia	4.0	4.0	3.0	-0.53
Philippines	4.0	5.0	4.0	-0.61
Papua New Guinea	3.0	3.0	2.0	-0.75
Sabah	5.0	5.0	4.0	-0.41
Sarawak	5.0	5.0	4.0	-0.41
Solomon Isl.	3.0	3.0	2.0	-0.75
Vietnam	5.0	5.0	4.0	-0.75
Consumer countries
Plywood/Veneer
China	5.0	4.0	4.0	-0.90
Hong Kong	5.0	5.0	3.0	-0.90
Japan	0.5	0.5	0.5	-0.18
Rep. Of Korea	4.5	4.5	3.0	-0.64
Singapore	5.0	5.0	3.0	-0.90
Taiwan	5.0	4.0	3.0	-0.90
Thailand	5.0	5.0	4.0	-0.97
Sawnwood
China	5.0	5.0	5.0	-0.90
Hong Kong	5.0	5.0	3.0	-0.90
Japan	0.5	0.5	0.5	-0.65
Rep. Of Korea	4.5	3.0	3.0	-0.47
Singapore	5.0	3.0	3.0	-0.90
Taiwan	5.0	3.0	3.0	-0.90
Thailand	5.0	4.0	4.0	-0.97

3.2 Substitution

Tropical timbers and their products have three broad categories of substitutes:

· raw materials that supply the same or equivalent products

The incremental sources of supply identified in the first section of this paper (plantation logs, logs resulting from improved utilization and low-impact harvesting technology, estate crops, and conifers) are substituted raw materials.

· raw materials that will provide fibre for substitute products

Fibre for substitute products is also available from small-log supply components of plantations, estate crops, thinnings, and improved utilization. Reconstituted boards and panels are the most relevant substitute product from this category.

· substitute products

Substitute products include softwood lumber and veneer, reconstituted panel products, and non-wood products. Reconstituted panel products are of growing interest in the region.

Oriented strand board (OSB) is a potential substitute for some grades of structural plywood.

Medium-density fibreboard (MDF) is accepted in Asia with many plants using rubberwood and plantation species. MDF can substitute for plywood and can also replace sawnwood in applications such as mouldings, door parts, and various interior millwork items.

Particleboard is widely used in Europe for many applications such as furniture and construction flooring. The focus of new investment in the region is currently on MDF, with the possibility of significant growth in particleboard.

Another substitution process underway in the sector is technological change at the consumer level, where consumers accept - or seek - a new concept or style of structure that serves a traditional function. The structural components may be fabricated with other materials (e.g., steel or concrete), and wood is used only for appearance.

Following ITTO (1995), this study assumes that substitution processes will reduce the demand for traditional products in the region, replacing the consumption of 30.5 roundwood equivalent (RWE) million m³ of plywood and 11.7 RWE million m³ of sawnwood over the study period (1995-2010). This substitution is incorporated into the ITTO Trade Model by reducing demand rather than by modelling the process directly with cross-price elasticities.