Reduced demand for lumber and shifting demand for pulp and paper will make China a challenging market for B.C. producers of forest products in 2016, analysts say.
The prospects for pulp are perhaps more promising, with producers reporting that exports that have edged off in line with seasonal demands. They still have hopes for the market as a longer-term play.
Homebuilding, however, has declined about 17 per cent in China this year due to a growing supply of vacant housing units, said analyst Russ Taylor, which has meant a decline in Canadian lumber exports to the country.
B.C.’s lumber shipments to China to the end of September were down by 14 per cent to 4.9 million cubic metres compared with the same period a year ago, Canadian trade statistics show. Taylor said 2016 might see further declines.
“(Trade is) not going to be terrible, but it’s going to be slow,” Taylor said. “And that means flat at best.”
Two of B.C.’s biggest lumber producers, West Fraser Timber Co. Ltd. and Canfor Corp., pointed to weakening demand for lumber in China in their latest financial reports.
West Fraser’s lumber operations experienced a $9-million operating loss in the third quarter, the company reported, which CEO Ted Seraphim said reflected “continued oversupply in key markets, which was exacerbated by a sharp drop in demand from China late in the quarter.”
Canfor said in its report that North American lumber demand remained relatively stable in the third quarter, but the weaker demand in China and oversupply pushed prices down “to levels not seen since early 2012.”
Taylor said the U.S. market looks more attractive to Canadian lumber producers, but the difficulty is that with markets in Europe, the Middle East and Asia slowing, all producing countries are trying to sell their products stateside.
“All the suppliers are trying to increase production two, three, five per cent, and consumption is growing at about one to two per cent,” Taylor said.
And while U.S. housing starts — the key driver of its lumber demand — are growing steadily, they are doing so “painfully slowly.”
Through regular visits to China, Taylor has watched the trend in falling exports to the country since late last year, with prices declining to $190 US per cubic metre, the unit used to measure volumes, in November compared with a peak of $290 per cubic metre in February 2014.
Pulp and paper look to be stable, Taylor said, because unlike China’s over-built housing market, demand for paper products has been increasing along with the country’s gross domestic product.
But trends within China’s pulp-and-paper market are changing, according to a recent report by the Boston-based research firm RISI.
Its research points to China’s paper industry “transitioning into a slow-growth phase,” which will pose challenges to suppliers, RISI said in a news release.
B.C. pulp producers saw their global exports, along with prices, edge down in the third quarter of 2015.
“Global softwood pulp markets weakened slightly through the third quarter of 2015, reflecting a seasonal slowdown in shipments through the summer months,” Canfor Pulp Producers Inc. said in its third-quarter report.
And the decrease “primarily reflected lower shipments to China,” Canfor said in its financial report.
RISI found that the consumption of graphic paper, the grade used for printed materials, isn’t keeping pace with rising income levels.
Paper and cardboard have seen steep declines in the growth of demand for the products since 2012, the report said, now averaging about three per cent compared with an 11-per-cent rate of growth between 2002 and 2012, the so-called “golden age” for the paper market.
However, the demand for tissue and packaging paper grades are humming along with growth in the economy, the report said, and consumption is strong.
“For investors in pulp market projects around the world, the challenge will be projecting where future demand will come from,” said Kurt Schaefer, lead author of the study and RISI’s vice-president of fibre.