July - September 2013
Turmoil in the Middle East creates a lumber buying buffet for China
By: David Stallcop - Vanport International, Inc
Traditionally one of the main shipping destinations for Russian and European low grade lumber, Egypt's Arab Spring, and the subsequent turmoil and chaos that have affected the country, has reduced lumber imports into the port of Alexandria to less than a third of what they were only a few years ago. Syria was also a major destination for low grade lumber until the current civil war overtookthe country. Can you imagine going into a bank in Damascus or Alexandria and asking for a loan to buy lumber? It just isn't happening. A tremendous amount of commerce is being put on hold in that entire region because of uncertainty and fear.
Russia alone was shipping close to 4 million cubic meters of lumber annually into Egypt. This year that volume may be a little less than 1.5 million cubic meters if the current trends hold true.
I have had many industry colleagues ask why Egypt consumes so much lumber. My answer, based on my travels in the region and through conversations with traders in these markets is that Egypt has traditionally been a shipping point to trans load lumber throughout the Middle East and Northern Africa. With many dozens of respected, trusted import distributors and trans loaders, and decades of experience and connections, Egypt now has only a handful that have survived the chaos and turmoil of the past few years.
Other countries with main shipping ports such as the United Arab Emirates, Pakistan and Slovenia are trying to fill the vacuum of Egypt's declining lumber trade in the region. However, building a strong business relationship over new sales routes take time. You can visit the ports of Dubai, Karachi and Koper today where you can see lumber for use in reels, concrete forming, pallet, crating materials, and general construction from pretty much every major sawmill in Scandinavia, Central and Eastern Europe and Russia.
The total volume of lumber being sold into the region as a whole however is down dramatically.
What you are seeing now are sawmills or groups of sawmills which used to ship entire break bulk vessels to Egypt now shipping dramatically less into the region overall and looking to China as an alternative market. Russian sawmills are now making headway into China as well. American and Canadian lumber suppliers are visiting customers in China and finding that they are suddenly competing against Russian and European lumber products.
The only issue that is holding Chinese buyers from increasing their purchases out of Europe is the fact that transit times compared to North American suppliers are 2 to 3 times longer and there are few common sizes produced in Europe. In North America there are 5 main sizes of 2 inch dimension lumber. Chinese buyers have figured out how to use these in a myriad of applications. In Europe, some mills produce hundreds of different sizes because there is no building standard. Every city or region in Europe uses different sized lumber for different construction applications. So, it would take some creativity on the side of the Chinese buyers to reinvent how they use wood fiber from what they have become accustomed to using out of North America.
Some in the industry have asked me, "what if the Middle East stabilizes - will the Russians and Europeans switch back to selling into that region again?" Absolutely, but it also depends a lot on price. If the Chinese buyers can figure out how to use the different sizes of lumber found in Europe and are willing to pay for that fiber then the Europeans may be able to keep a following and their newfound customers in China may be able to pay more than lumber out of North America. In my opinion though, it all depends on quality and price and the recovery the Chinese buyers can get out of that fiber supply. The buyers in China are very savvy. They even take into consideration which species wear down their saws the fastest. As an example, a sawmill in the US Pacific Northwest may have to change their saws halfway through a shift when running Douglas-fir, but with hemlock they can make it through an entire shift before they need to change the saws. Chinese buyers have figured this out themselves as well. As they become more savvy about the multiple species and grades as well of sizes available to them, they will over time become more selective and will pay for what they want. The days of China buying any species and any grade of lumber as long as it is cheap are a memory soon to be forgotten.
One last note to ponder, if and/or when the lumber "super cycle" hits, China may have no other option to satiate their demand for wood fiber than to look to Europe and Russia for additional lumber supply. In my humble opinion, from what I have observed and researched, when we reach 1.2 million housing starts the US will need 100% of the volume of lumber that is heading to China out of North America. The Chinese buyers will have no other option but to look elsewhere for lumber supplies as well as many switching to importing logs and sawing them themselves, changing from lumber import distributors to sawmill distributors. Will North American sawmills continue to try to stay in the export markets to stay diversified for when the next market correction occurs? Or as domestic demand increases will they look at export markets as only spot based sales markets?