Radical changes and trends in china's timber and wood products industry and its distribution system seems set to continue

July 23, 2004 -- China's timber and wood products industry and its distribution system are changing so rapidly, and on so many levels, that it almost overwhelms any analysis of the situation. Just when one feels that they have an understanding of how the whole system works, it then seems to be changing almost as we watch! The following report is but a snapshot in time, and undoubtedly the situation will look much different next year. However, we hope that this report does at least provide a good picture of where this industry and wood products market is trending.

On a macro-level there are major changes occurring in distribution in China, partly as a result of commitments made by China upon entering the WTO. Previously, import and export was strictly controlled by a few large state-owned companies. Distribution within the country was highly fractured because of provincial protectionism and the restrictions on foreign participation. State-owned companies also tightly controlled distribution, and the many layers involved simply added to the inefficiencies of the system.

Today the system has changed radically. Import and export licenses have been liberalized over the past several years so that almost any company that wants to engage in trade can do so. By the end of this year, restrictions on foreign participation in distribution will be totally lifted, and foreign companies have already been positioning themselves in China for this change. Within the country, it seems that restrictions on distribution have been largely removed and at least in the wood products business independent traders are charging ahead and transforming the system.

Domestic timber harvests have been greatly reduced in China since 1998. While this policy was largely attributed to the need to "protect the environment" because of the severe flooding in 1998, the policy was also convenient for other reasons. Over-cutting of the domestic forest had greatly reduced the average size of tree available for harvest, and some experts claim that China had little choice in reducing harvest due to reduced availability of timber supply. Also, reducing domestic harvests meant that the state-owned enterprises which had previously relied on this timber had to try to compete with private companies in buying imported timber. This competition has accelerated the shift from state-owned to private enterprise within the forest industry, which was also a goal of the Chinese government.

Demand for imported wood increased sharply after 1998 because of the decline in domestic harvest, because of an increase in domestic demand, and especially because of an expansion in the industry generated by a boom in exports of wood products. Wooden furniture exports have increased rapidly, to an estimated US$2.7 billion in 2003, and exports of plywood and other finished wood products have also soared in recent years. This trade has been made possible because of China's policy of liberalizing import and export licenses, which has both facilitated the import of high quality raw materials (required to produce products for export) and the export of the finished wood products.

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