China’s Softwood Market: The real demand drivers and implications for investment and trade

Imported softwood log prices have declined significantly since March 2014, due to a downturn in demand from the construction sector that has driven up log inventories at major Chinese ports.

In 2013, New Zealand became China’s largest softwood log supplier. 

However, New Zealand export log prices have seen a sharp decline of about USD30 40/m3 (approximately 25%). The price decline was due in part to a high dependence on the temporary construction market where softly logs are mostly used in concrete formwork. 

China’s slowing construction sector also affected Canadian and Russian exports of lumber and logs, but to a lesser extent. Lumber from these countries is mostly of higher quality and is used in a wider range of end-use segments such as interior decoration, furniture, packaging and outdoor decking. 

Higher-grade New Zealand logs and lumber, such as pruned material, are also accepted for furniture and appearance applications although the furniture sector in China remains dominated by hardwoods. Unlike China, Australia only exports approximately 3% of its annual softwood harvest, but around 90% of this volume is destined for the Chinese market.

Imports of logs and lumber rely heavily on China’s construction industry and development. Construction growth in China has averaged 22% per annum for the last 10 years, driving the importation of softwood lumber from New Zealand. 

In the first half of 2014, softwood demand slowed as a result of excess housing inventory, specifically a threefold increase in national supply since 2008. Growth began to decline following various government measures introduced in late 2010 and early 2011 to moderate the overheated housing market, which is the largest sector of China’s construction industry.

The housing inventory is unequally distributed, with larger inventory in China’s third and fourth-tier cities (the interior Provinces). 

Of concern to many suppliers, there is debate as to how long it might take for the inventory to clear. It is equally clear the variable inventory will ultimately be absorbed progressively and at different paces across the regions.

Despite the current oversupply, the longer-term strategic fundamentals underpinning Chinese demand remain in place. 

One hundred million more people are destined to move to Chinese cities over the next six years. For this reason, Pöyry believes China will continue to dominate the Pacific Rim softwood market for the foreseeable future. 

As Chinese domestic supply is forecast to remain flat, incremental demand will need to be met by increasing imports. Based on Pöyry’s analysis, options for incremental regional supply are limited, implying that the cost curve will need to shift upwards to access more distant resources and to pay for higher logistic costs. This will have implications for regional manufacturing and trade and could itself impact upon demand.

In its latest market insight report “China Softwood Market: The Real demand drivers and implications for investment and trade” Pöyry puts Chinese softwood demand under the microscope. The report will be of wide interest in the softwood sector: growers, investors, traders, processors and infrastructure operators.

To learn more about Pöyry’s report click here.