By Sue Putnam
American Hardwood Export Council Executive Director Michael Snow recently delivered a mid-year market report webinar outlining how 2020’s Coronavirus COVID-19 pandemic has dramatically impacted global lumber markets.
No country, no continent’s economy or lumber market has escaped adverse impacts by the global reach of this virus. Snow acknowledged it is difficult to draw major conclusions from what we as an industry have seen during the first six months of this year. He added, “For the reason that, obviously, we are going through something that was completely unpredictable and we’re not really sure where it is going to go – not only here in the U.S. but overseas – and obviously it is going to have impact moving forward beyond our ability to really influence.”
Snow drew comparisons between exports this year, last year and even into 2018. Yet the big question is: where do exports stand now – months into COVID – and what “silver linings” are emerging in the industry. There are a few. First, though, Snow provided context.
He noted, “The United States again remains comfortably the largest exporter. China not surprisingly is again, by far the largest single importer of hardwood lumber than anywhere in the world. If you take the EU together, they are next, if you are looking at individual countries, Vietnam follows, and actually the U.S. is the fourth largest importer in the world of hardwood lumber.
“But specifically if we look at our exports, the U.S. exports to the world as does China, Canada, Mexico and Vietnam, followed by the European Union. The export volume kind of trails off from there – Japan, and some Southeast Asian countries. When considering the six months through June of 2020 and beginning in 2015 running through this summer, East Asia, which is not only China but also Hong Kong, Taiwan, Japan, and South Korea, there was a fairly large drop in export markets. Almost all of it a reflection of decline to the Chinese market. North America, Canada, and Mexico markets in the first six months dropped as well. Southeast Asia is a smaller drop. In the EU, surprisingly there was a mixed bag during some of the early COVID lock downs, but we are starting to see signs of movement.”
At the time of the webinar, Snow noted that while he would focus mostly on lumber, he acknowledged the market was beginning to see quite a bit of movement of logs. While that activity is significantly down from year-over-year activity the past five years, the uptick in sales bears watching, he said.
Regarding lumber, Snow began with a review of China. He explained that prior to COVID, when the initial tariffs were put in place by the Chinese, “We saw a precipitous drop and a little bit of recovery and then, as we saw about a year ago, the full tariffs were implemented as high as 25 percent on a lot of U.S. species. As a result we saw a pretty big drop in exports to China. It is starting to come back a little bit. The beginning of the year was very flat as China was shut down earlier than most due to COVID. In February of course, the tariffs came off and we have stayed in a bit of recovery and we are seeing some signs of life in China for the hardwood export industry.”
Due to the 25 percent tariff, however, the North American Oaks saw the largest drops in demand followed by Ash and Cherry and Yellow Poplar. Snow added, “Interestingly, even though the latter is in the 5 percent tariff rate we saw a rather sizable drop in demand, but a lot of that is related to the trade war because Yellow Poplar is used by a lot of Chinese furniture manufacturers. We think that was primarily related to a decline in re-exports of furniture back to the United States as a result of the trade war. The only species showing an upward trend during the trade war was Walnut, which was modest but still a 7 percent increase by volume going into China.”
During the first six months of 2020 North American hardwood exports again took another drop in Red Oak but not nearly as big a drop as during 2019,” commented Snow. He added, “Never the less, it is heading in the wrong direction. Ash and White Oak are remaining about even. So, this is not horrible news considering how bad the pandemic was at the beginning of the year and again, as we get later in the year, we are starting to see business pick slowly up in China after a very slow start. We have to keep in mind as well that we are losing market share in China but the market itself in China has been in decline for a couple of years. From 2017 to 2019 the U.S. went from about a 30 percent of a $4.5 billion hardwood lumber market to only 21 percent of a $3.2 – 3.3 billion hardwood market.”
The good news was that tariffs were removed in February with China, and in fact, said Snow, they were removed in conjunction with COVID Relief efforts in China where they reduced tariffs on medical supplies to aid the battle against the pandemic.
Regarding this, he commented, “So it’s a bit of a surprise to see the hardwood lumber specifically and logs in that announcement at the end of February where the tariffs were gone. They were removed essentially in response to what is known as Phase I Trade Agreement. The Chinese commitments deserve watching because I think that there is no realistic way that China is going to be able to hit its commitments on Phase I. Its Government is doing large amounts of purchases through state owned enterprises. At the time of the webinar they are significantly below the commitments that they made so really this becomes less of an economic issue and more of a political issue of what exactly that is going to mean. At some point the U.S. could very well say, ‘well, China, you are not living up to your commitments and we are going to reinstate tariffs that were removed on Chinese goods as part of Phase I.’ If that happens the Chinese could be very likely to turn around and reimpose tariffs that they lifted. We could find ourselves again in a situation where our hardwood lumber, logs and veneer are facing significant tariffs in China. This is part of the uncertainty that any day it can really change the whole paradigm of what we are seeing in the marketplace right now.”
Snow also examined economic micro indicators of China’s activity that matter so much to hardwood exports. He explained, “In China, for example, for the first half of the year property sales early on took a huge drop. Obviously property sales are very important to our exports as people outfit their homes and businesses and so forth. But it actually has started coming back and now we were seeing property sales higher in June and early July of this year than they were in the same period last year in the pre-coronavirus. So we saw a fairly quick recovery.”
Regarding indicators for China that haven’t bounced back to normal yet are a couple of segments of note, particularly in the hospitality industry, restaurant spending and hotels, which similarly remain nearly 50 percent below pre-pandemic levels. “These segments are slowly coming back but there are still drags on the economy,” said Snow. “But by and large the Chinese have shown that there is light at the end of the tunnel if the pandemic can be contained.
“But there are still challenges on the horizon and one of them is we have an awful lot of displaced workers in China right now. I think there is no question that China is dealing with significant unemployment problems right now and they are going to be hard pressed to deal with, and there are China’s state-owned enterprises that are being favored by the Government. They are being given access to capital that a lot of the private companies are not.”
Markets outside of China: Watch Mexico and Vietnam
Turning to the largest markets outside of China and Canada, there are Vietnam and Mexico. Snow commented, “If we look at the global supply chain for re-exports – or in other words, bringing in immediate goods and exporting finished goods – we have seen both Mexico and Vietnam increase very rapidly. I think a lot of people are surprised to see how much larger Mexico’s export numbers really are than Vietnam’s. Both of those economies are becoming very important players in the global supply chains and that is likely to increase and there are several reasons for that. Prior to COVID, if we look at where U.S. imports of furniture came from we have seen a 10 percent drop between 2017 and 2019 from China and a slight increase from Mexico and about a 7 to 8 percent increase from Southeast Asia. We are starting to see a shift in where the re-exports are coming from and where some of the products made with American hardwoods are being made and exported from. One reason for that is this: If you look at our manufacturing costs over the last several years, China now is significantly more expensive on an hourly basis, particularly the coastal areas of China, than wages in Mexico and certainly much more than wages in Vietnam. For some of the labor-intensive products, that cost is going to have significant impacts. I think that goes a long way in explaining why we are starting to see so much movement from particularly Mexico and Vietnam in the global supply chains.”
Regarding Mexico and Vietnam, the origins of their value-added products makes a big difference, Snow said. He added, “In other words, where the materials come from that they used to produce their export, matters. For Mexico 34 percent – more than 1/3 – of the imports that go into Mexico’s exports come from the United States. So, again, the more that Mexico grows the better it is for our raw material suppliers. With the new NAFTA – the USMCA – I think we are looking at a pretty stable trading environment over the next couple of years if Mexico can get COVID under control and if they can make some significant strides in increasing particularly their infrastructure in Mexico. I think there is real potential for Mexico and that would be good news for us because we would dominate the material supply to them. Now compare it to Vietnam – the U.S. was 6th in supplying components for Vietnamese re-exports. There again, that market was dominated by China and local Japanese and essentially Asian suppliers. For those reasons Mexico remains extremely important moving forward for us.”
Another country to watch: Vietnam, which has weathered the storm relatively well regarding COVID, Snow observed. “Regardless of the absolute numbers, I think overall they handled it pretty well and I was speaking the other day with (AHEC’s) John Chan and some of his contacts in Vietnam and they are very optimistic beginning now in the third quarter of the year. In the first half of the year we saw a slight decline in the lumber buying and manufacturing. We are seeing factories now beginning to ramp back up there and we are cautiously optimistic that Vietnam will have some economic growth. Vietnam is never going to compare to China. It doesn’t have anywhere near the population to begin with and we harp on it, but a main reason why China was so important for us isn’t so much the re-export manufacturing. It’s the Chinese consumption of the furniture, and the flooring, and the finished products made with the American hardwoods. I think when we start looking at Vietnam there is room for growth. We only have about a 13 percent market share, which includes both tempered and both hardwood and softwood.”
Take North America, Mexico, Canada, China, Vietnam – the four biggest out of the equation – and the next market is Japan, said Snow. However, they are seeing an economic slowdown currently like the rest of the world. The next market to consider is the UK, commented Snow. “The UK has really exploded since 2013. In 2020 for the first half of the year, of course, the UK has been one of the harder hit countries from the pandemic. But we are seeing some optimism with the timber trade in the UK. Elsewhere, in Germany the first half of the year we actually saw an increase which is interesting, and we saw an increase in Denmark as well. Spain, we saw a little bit of an increase this year.”
“So again – in Europe – it is kind of a mixed bag,” Snow explained. “Another relatively good news story is Australia. The trajectory overall has been very positive. But what is surprising I think given COVID’s impact is that we are seeing an almost 20 percent increase by volume of other American hardwoods and almost all of that is because of an increase or spike in Red Oak.”
Snow also addressed the markets in South Africa, the Middle East and Brazil. “It’s a different situation in South Africa,” he said. “I know it is a very small market volume-wise, but they have absolutely been handicapped by the pandemic. Additionally, over in the Middle East, they have been devastated by the pandemic.
“Brazil – as I am sure everyone is aware of – along with the United States and probably India, is the country that is suffering the most right now from the pandemic, which is having the most impact on its economy and it is not just lumber. When we look at what they buy in South America, Brazil – besides being an important lumber market or the largest in South America – it is a fairly significant veneer market as well. Brazil is really the main game in South America.
“Lastly, India, unfortunately in 2020 so far I think all bets in a market there are pretty much off because of the impact the pandemic is having on the Indian economy,” Snow surmised.
Snow wrapped up the webinar by reviewing for members remaining activities AHEC will undertake this year.
The American Hardwood Export Council is the leading international trade association for the U.S. Hardwood industry, representing the committed U.S. hardwood exporters and the major U.S. hardwood product trade associations. From Washington, DC and six overseas offices, strategically located near key hardwood markets, AHEC conducts a worldwide promotion program with activities in more than 35 countries. Learn more at www.ahec.org.
