on Paper and Wood Products

Interrelation of Trends in Three Regions (Asia, Europe, North America) Antti Rytkönen Senior Consultant Jaakko Pöyry Consulting Oy   International Trade of Forest Products Grows Faster than Production The international trade of forest products has grown fast in the last decades, measured by its volume. When one weighs together both wood raw materials and the products, the aggregate trade volume has grown 2.5 times during the period 1970-95. Inside this aggregate there are very different patterns of behaviour, however. The internationally traded share of the total production varies widely, mostly according to the technical and economic transportability. The share of world trade out of the total production volume has changed as follows during 25 years: (%) 1970 1995 fuelwood 0.2 0.3 industrial roundwood 7.3 6.9 sawnwood 13.6 22.9 wood based panels 14.4 25.6 wood pulp 16.3 19.1 paper and paperboard 18.0 24.8 The share of trade out of production of industrially processed forest products has averaged over 20 % during the past decade, and is now approaching one quarter. However, the internationally traded share has not increased lately as fast as in the past decades. This may be a symptom that anticipates stabilisation of the traded share. The development is still going on and is not homogenous over the product categories. The industrial roundwood is (together with fuelwood) the only product group where the traded share has not increased. If one compares the roundwood trade to the total use of wood raw material, including the by-products of the mechanical processes, then the relative development of roundwood trade is even slower. Primary Forest Industry Seeks its Way to Resources Looked from a different angle, the relative slowness of the development of roundwood trade is because the primary processing is developing close to the resource base. The regions that used to be raw material sources have started their own primary processing industries based on the raw material supply that was previously available for exports in rough form. One such example has been the fast development of the Indonesian plywood trade. A variety of policy instruments have been in use to support such developments, including export bans on roundwood and less processed products. In the past decades the fast domestic economic growth, such as in many Asian countries, has supported the development of the local industrial capacity. Most of the trade gets absorbed close to its origins and inside each region. However, differences especially in forestry conditions do mean that there are needs to balance the local demand vs. supply gaps through inter-regional trade flows. To a certain degree there exists cross-haulage between regions at least on the aggregate forest products level. This implies on one hand that there are inter-regional differences in competitiveness by product, on the other hand it just implies that for large regions local logistics allow for trade flow reversals. There is Tendency to Cover More Area by Less Wood Fibre At the same time as the new capacities have been created close to the raw material base, the traditional producers have rapidly increased the efficiency of the wood utilisation by, among other things, utilising more of the by-products of mechanical wood processing and more of recycled fibre. The increased efficiency in the use of wood fibre, together with improving productivity of other factors of production, has further strengthened the position of these processed goods in the market place. There is less and less of primary wood in several successful products. The new types of mechanical wood products often provide more of square meters of sheltering per cubic metre of primary wood consumed. The same is true for papers: new paper grades tend to produce the same capabilities with lower grammages, literally spreading the resource thinner. This is achieved among other things with higher use of minerals and recycled fibre. In many cases the improved performance vs. weight ratio has improved the physical transportability of the wood based products. Technological Innovation Is Continuing Source of Change In parallel with the higher fibre productivity (through thinner products), the technological change is contributing to the improving economic efficiency through lower production cost. The improving performance vs. cost ratio, together with the product innovations, has improved the competitiveness of new wood based products against traditional ones, and on the other hand against other substitutes. In the mechanical wood processing, a new group of laminated products has emerged in between sawnwood and plywood. In between traditional compressed and non-compressed fibreboard has emerged medium density fibreboard (MDF) with its excellent processing properties. Alongside the traditional particle board has emerged oriented strand board (OSB) with excellent cost competitiveness and mechanical properties. In chemical wood processing, kraft pulp from short fibre hardwood has been successful in broadening the raw material base of wood pulp. It has been very competitive in terms of production cost, and been an excellent complement to the long fibre softwood pulp in terms of paper-making properties. Recycled fibre based newsprint competes successfully against the traditional newsprint that is made mostly of virgin mechanical virgin pulp. Further, mechanical pulp based printing and writing papers compete successfully against more traditional woodfree paper grades. The above mentioned examples are among those innovations which have kept the international markets of wood based products competitive and expanding. At the same time many of these have had primary wood saving effect in the wood raw material markets. Paper and Board make almost one half of forest product trade In the case of paper and board, both the growth of production and the increased traded portion have contributed towards their increasing role in the overall trade in forest products. Another factor is the relatively high unit value compared to other forest products. Paper and paperboard had a share of about one third in the trade of forest products in the 1960's and 70's, but in the 1990's it has already passed 45 %. One of the basic driving forces behind the improved economic efficiency and subsequent trade performance, especially in the pulp and paper industry, has been increasing economies of scale. The resulting bigger units of production mean a need for larger market areas as well. Improving cost competitiveness has made it possible to capture more distant market shares. Real price of most forest products has gone down in 25 years The above mentioned developments, together with gradual elimination of barriers to trade, have lead to increasing competition. The competition again has forced the producers to shift a large portion of the reduced cost to prices. Especially the paper consumers that are exposed to the international market have gained from this development. The growth of paper consumption that we have globally experienced has been a result from both the economic growth and the reduced paper price level. Amongst the large groups of forest industry products only sawnwood has had a trend of increasing real prices in the period 1970-95. One of the underlying questions is when the markets of a particular product are truly global or at least internationally competitive in a broad sense. There are some forest industry products whose markets largely resemble the markets of a homogenous commodity: the product is defined well enough, the products of various producers are technically similar enough, and the competition is relatively open. Only some forest product markets behave truly globally In such commodity type markets as described above the cyclical developments and the price movements are quite synchronous. Examples include bleached market pulp and newsprint and also sawn softwood. Of course, even in these categories there are lots of important local quality features. On the other hand, wood raw materials fit badly the definition of a homogenous commodity. In addition, the physical and economic transportability is often low. The wood raw material markets are characterised by a group of parallel and partially connected local markets. In addition to economic fundamentals, product characteristics and industrial structure, the markets of forest products are influenced by a number of market imperfections of different nature. These include policy interventions such as customs duties which have had trend-wise smaller influence. In some cases there are technical standards which act as barriers to trade. Also certification and labelling can cause such friction, if misused. Asia is net importer and Japan is junction of large inter-regional markets The most important country case is Japan, which is the worlds largest importer of forest products and at the same time a point of junction of continental markets. Japan absorbs some wood based exports from other Asian countries, but acts as an important gateway for other regions' trade to Asia. The value of Japan's imports of forest products was USD 15.4 billion (109) in the year 1996, which is over 10 % of the global value of forest product trade. Japan's imports included 15.3 million m3 of coniferous industrial roundwood with volumes of 8.1, 4.5 and 2.1 million m3 from USA, Russia and New Zealand, respectively. In addition there was 6.2 million m3 of industrial hardwood with a flow of 3.6 million m3 from Malaysia and 1.7 million m3 from Papua New Guinea. Further, Japan imported 26.5 million m3 of chips and particles with 8.0, 6.5 and 5.5 million m3 from Australia, USA and Chile, respectively; but the chip trade included even such flows as 1.5 million m3 from China and 2.1 million m3 from South Africa. In processed products Japan imported 10.6 million m3 of sawn softwood, mainly from Canada (6.1 million m3) and USA (2.0 million m3). Further items included 4.7 million of plywood, mainly from Indonesia and Malaysia. North America is major wood fibre basket for global trade The difference between gross and net trade flow volumes can be substantial both in intra-regional and in inter-regional trade. To take the North American example in 1996: Canadian trade value in forest products to USA was USD 17.9 billion (109). The USA exports was at USD 2.8 billion in the same period. The total volume of cross border trade was USD 20.7 billion. The net trade value was thus at USD 15.1 with balance being positive for Canada. To continue the above example, both North American countries were active traders in forest products with third parties. Naturally, the trade composition and partners were quite different. USA gross trade value in forest products to third party countries (excluding Canada) was at USD 14.2 billion in 1996. The corresponding imports were at USD 4.3 billion. Trade balance with third parties in forest products was positive by USD 9.9 billion. Canada's gross exports of forest products to third parties were at USD 7.5 billion. With the corresponding imports at just USD 0.3 billion, the trade balance with third parties was positive for Canada at USD 7.2 billion. Calculating the overall country level balance leaves Canada positive at USD 22.3 billion and USA negative at USD - 5.2 billion. The region of North America (Canada + USA) had a positive trade balance in forest products of USD 17.1 billion. With this positive trade balance North America is by far the most important wood fibre basket for the world trade. The global net trade balance in forest products in the year 1996 was as follows:   billion (109) US$ North America + 17.1 Western Europe - 7.6 Asia - 22.1 Rest of World + 12.6 l What can we say about forest product trade in future? The international trade of forest products comprises a group of important material and value flows which successfully cross the borderlines of various trade unions and local markets. It is foreseen that the basic differences in the demands are so big, and resource endowments are so slow to radically change, that the flows at least in terms of wood raw material equivalent are there to stay for long. The trend of lower prices is still continuing and will allow a longer market reach for competitive producers. This optimistically assumes that the openness of markets will improve and risks of barriers to trade are avoided. In such a future the trade of forest products will still grow faster than the production. Developments by product and region are further elaborated in the main report.

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