By R. Bruce Striegler
Increasing fibre demand in the developing world
In the final of its fall Web series examining key U.S. economic drivers, the Journal of Commerce turned to forest products, presented by Rodney Young, Chief Economic Advisor at RISI. Founded in 1985 as Resource Information Systems Inc. (RISI), RISI soon established itself as an independent source of global economic analysis for the forest products industry. Mr. Young is a former Chief Executive of RISI, and has 32 years of experience tracking and reporting on global pulp and paper markets.
Opening with an overview of the forest products trade relative to total trade for the U.S., Mr. Young says, “While forest products account for 25 percent of the volume of containerized U.S. exports, they represented just less than three per cent of U.S. merchandise exports in 2011 on a value basis.” He noted that recovered paper is largest in tonnage, but has a low value, relative to the number of containers it is shipped in. “The other two large categories of forest products that we ship are wood pulp and containerboard, the paper used to make corrugated boxes.”
Rod Young says forest products represent an even a smaller import value, accounting for only 1.5 percent of United States imports. ”About two thirds of imported forest product come from Canada, mainly lumber, pulp and printing papers, while overseas tonnage makes up the other third, consisting mainly of wood pulp from Brazil and some panel products from Chile.”
Young says exports of forest products will continue to expand due to demand in the developing world for fibre, mainly to make paper, and that China will lead that growth. He predicts that the U.S. will continue to export more waste paper, wood pulp and container board. “The U.S. has available a huge amount of fibre, both waste paper and virgin fibre that the world needs. The dollar is relatively low right now, and the real trade-weighted value of the dollar puts it at its lowest level in 20 years.”
The share of forest products in U.S. trade, on a value basis, shows both exports and imports trending down, with imports dropping faster. Mr. Young suggests the reason for the faster drop in imports is due to falling American demand for newsprint and other printing paper, including copy paper and coated magazine stock, combined with a large percentage of these papers supplied by Canada.
Recovered paper largest export category
“Recovered paper, used to produce recycled paper products, is the biggest export category, with substantial demand from the developing world, especially China. The Chinese paper industry is growing rapidly and much of the new capacity being built in China uses waste paper as its fibre source.” Young says the main reason for that is the abundance of waste paper, particularly from the developed world, and that, from a Chinese perspective, it’s much cheaper to put in a waste paper reprocessing line at a new paper mill than a wood pulp mill. “Although recovered paper has been increasing in price, compared to virgin fibre over the last ten years, it is still lower cost.”
Also leading to higher recovered paper usage are improvements in paper-making technology and Mr. Young explains that it is now possible to produce container board grade from recovered fibre. “Finally what we’re seeing in many countries, including China, is lack of indigenous fibre resources, meaning they have to import a significant amount of their fibre whether recovered or virgin.” He notes that the U.S. has been able to capture a sizeable export portion of recovered fibre due to the large amount of paper and board consumed in America, and available for recycling. Despite the fact that the total amount of paper and board is flat or declining, it is still large, relative to other countries in the world.
An industry sponsored organization provided a snapshot of uses of the 50 million tonnes of recovered fibre in 2009, showing 41 percent was available for export, with another 41 percent used for containerboard and recycled boxboard and less than 6 percent used for printing and writing grades of paper.
“At the same time, we’re seeing falling domestic usage of recovered paper which is leaving more for the export market. This decline is offset by our continued import of Chinese packaged goods, since a large part of our exported recovered paper becomes packaging for Chinese goods shipped back to the U.S.” He points to Chinese demand which has risen from slightly under 20 million tonnes in 2000 to about 75 million tonnes this year and he anticipates it will hit about 80 million tonnes within two years, adding that the majority of recovered fibre originates from California.
Wood pulp number two in forest products exports
Wood pulp is the second-largest U.S. forest products export category, and Young says that rising fibre demand in China is again a factor so the growth in this market is on specialty paper grades. He says that while wood pulp is used mainly to make paper, it also is used to make hygiene products including disposable diapers or for cellulose derivatives such as rayon, cellulose acetate for cigarette filters, cellulosic ethers for additives to paint, pharmaceuticals and food products.
“Fluff pulp from softwoods is growing about four per cent per year worldwide and dissolving pulp mainly to produce rayon is growing at about seven or eight per cent. U.S. producers are well-positioned to meet that demand for these grades.” He says export growth will come from the Southern U.S. where there is abundant low-cost Southern pine with high absorbency characteristics. “Out of a total fluff pulp market of about five million tonnes worldwide, Southern U.S. pulp producers’ supply about 85 percent, and opportunities exist to upgrade mills to dissolving pulp from paper-grade pulp, allowing for continuing growth of exports of that product too.”
On the hardwood pulp side there are no specialty markets and there is strong competition, especially from Brazil. Rod Young says the market is seeing a decline in hardwood pulp exports and a rise in hardwood pulp imports. Growth of U.S. wood pulp exports is on a slow but steady rate of increase, expected to continue through 2014 when it will reach about seven million tonnes annually, and about 80 to 85 percent of that growth will come from the U.S. South.
Containerboard overtaking pulp as second-largest export
Containerboard, which represents the largest part of U.S. paper and board production, is also the largest forest products export category. “We expect that over the next several years containerboard will take over from pulp as the second-largest category of U.S. forest products exports. This will be mostly what we call kraftliner, made from virgin pine fibre which the U.S. South has at a very low cost relative to all other producing regions of the world.”
Mr. Young says containerboard needs more virgin fibre, and there are certain end uses for corrugated boxes which require virgin board due to its strength characteristics. Boxboard is used to make folding cartons for packaging and containers for milk or juices. “These exports have been growing a little but we characterize them as flat to down for the next couple of years due mainly to strong competition from other supplying regions, particularly China.” He notes that China is on a boom in this sector, building too much capacity relative to domestic demand and will soon be in the export market for a number of years before domestic demand will catch up with capacity growth.
Printing paper exports have been rising mainly due to excess capacity in the U.S. as domestic demand falls, but Young says that those exports are likely to plateau over the next couple of years constrained mainly by slowing growth in printing and writing paper demand in overseas markets. “There’s still going to be growth in the consumption of printing paper in the developing world, but there’s also quite a bit of capacity which will offset their need to import.” Total U.S. exports of the principal paper categories show a continued uptrend in total paper and paperboard exports, all due to strength in containerboard, and Young says that the vast majority of containerboard exports will be out of the U.S. South.
Lumber largest export on wood products side
Mr. Young says that lumber is the largest U.S. export component on the wood products side, with the downturn in U.S. housing starts having created a lot of spare capacity. Lumber will account for nearly 4 million cubic metres of exports in 2012. He adds that along with lumber, there are minor export opportunities for wood panels, such as plywood and oriented strandboard, despite a current oversupply of such products in the U.S. He also remarked on a newcomer to the sector, wood pellets, which have risen from negligible amounts in 2007 to just over 2 million tonnes in 2012, but forecast to rise to 4.5 million tonnes by 2014.
“China again has been the main factor leading to higher lumber demand, and this is being met by West Coast producers, especially from Washington and Oregon.” He says that there is strong competition for wood panel products from Chile, Brazil as well as China. “Despite the fact that U.S. housing is now on an upturn, we expect lumber exports to continue growing, due to strong Chinese demand and even though demand is increasing domestically, there is still a huge amount of over-capacity.”
Exports of raw wood in the form of logs or wood chips continue to expand, with logs coming from the West Coast and going to Japan and South Korea, but Young says the growth market is China. Log exports have ranged from approximately nine million cubic metres in 2000 to over twelve million cubic metres in 2011, dropping slightly in 2012 to just under 10 million cubic metres. “One of the reasons that U.S. exports of logs has gone up is that we are seeing higher prices for Russian logs. Russia had been the largest supplier to China, but several years ago, they imposed an export tax on logs because they wanted to develop their domestic processing capacity rather than export just raw logs. This created an opportunity for producers from New Zealand to take share along with U.S. producers.”
Wood chips and wood pellets take on new significance
The U.S. exports wood chips, which currently represent only a small percentage of the raw wood export market, but Young says that could jump over the next few years as lumber production increases. “When you put a stick in the mill, fifty percent of it ends up as lumber and fifty percent of it is wood chips, so as lumber production increases, production of wood chips will too.” He says that part of this production will be soaked up domestically, but a significant amount will go to the export market. In 2012, less than 4 million cubic metres of wood chips were available for export, but that should climb to nearly 13 million cubic metres by 2014.
Exports of wood pellets are expanding rapidly mainly driven by European carbon legislation which has determined that wood is a carbon-neutral fuel source. “Electrical utilities in Western Europe are converting from coal to wood pellets and without enough reasonably priced wood to fire all this, the Europeans are looking to the U.S. and in some degree to Canada to supply industrial wood pellets.” Young adds that while there is some shift from coal to wood pellets for energy demands in Asia, Europe remains the major export market. He says there have been announcements of new U.S. wood pellet operations around the country, but that the main focus of production is the softwood resources in the U.S. South.
Turning to imports, Mr. Young says that they play a relatively small role in the U.S. forest products market. “The biggest share of imports is still in printing papers where it might be about 25 percent of the total, and of that, Canada has 80 percent of the market.” Canada is the largest supplier of almost every one of the grades within the forest products spectrum that is imported, reflecting the extensive availability of wood fibre in Canada and the short shipping distances make Canada an ideal import source.
Decline in wood pulp exports hits Canada
When it comes to wood pulp, Mr. Young says that imports peaked at about six million tonnes in 2007. “This year we expect to be down to a little less than five million tonnes. This is entirely due to Canadian producers losing share of the U.S. market. One of the main reasons Canadian imports have declined is because wood pulp has historically been used for production of printing and writing papers and, with demand and production down, there is less need in the U.S. market.” Some areas of growth in imports include bleached hardwood pulp, mainly from Brazil. He says that this is due to the cost-competitiveness of Brazilian producers, but also because the quality of eucalyptus pulp is better than that of hardwood pulp.
“This product is used for production of consumer grade tissue paper where eucalyptus supplies a softness that U.S. hardwood grades don’t. Tissue paper is one of the growing sectors of the paper industry and that sector is looking for new fibre over time.” Although a relatively small sector, imports of tissue paper from China and Indonesia are a growing. These are products using virgin fibre produced on new large machines going into those two countries.