Chinese housing bubble, Russian taxes cloud future

By MATEUSZ PERKOWSKI

Capital Press

PORTLAND -- Changes in China's housing market and the prospect of increased competition from Russia have created uncertainty in the outlook for U.S. log exports.

Even so, experts say the long-term trend for softwood log exports to China from the Pacific Northwest remains positive because housing in that country is still inadequate for its growing middle class.

For this reason, any "correction" to a housing bubble in China would most likely be short, said Bill Conerly, an economics consultant, at a recent Western Forestry and Conservation Association workshop in Portland.

Although the country is expanding hardwood plantations, its homegrown supplies of softwood are expected to keep falling, so the domestic shortage of logs will worsen, said Bob Flynn, director of international timber for the RISI market analysis firm.

China's demand for softwood logs and lumber has exploded in recent years, with the country surpassing Japan as the largest Asian importer of these products, Flynn said.

However, the meteoric rate at which its demand for wood has increased was unsustainable, he said. "If China kept growing at this rate, we'd all run out of wood to supply them in a short period."

U.S. exports of softwood logs to China peaked during the summer of 2011, reaching about 700,000 cubic meters a month in July, Flynn said.

Since then, monthly exports have plummeted to an estimated 250,000 cubic meters in November, he said.

Buyers have reduced orders as they've seen logs pile up at Chinese ports, Flynn said. "It's very obvious to the buyers when there's too much inventory."

The fluctuation is largely the result of Chinese buyers becoming "overly exuberant" in early 2011, said Gorbon Culbertson, Pacific Northwest regional manager for the Forest2Market analysis firm.

"Probably the business got a little overheated," he said.

The forecast for Chinese log demand is clouded by the dynamics of its housing market, which has been buoyed by private investment in real estate by the wealthy, Flynn said.

There has been overbuilding in more expensive apartments for people who can afford them and often buy several units, even as housing for the poor has been insufficient, he said.

"That was causing a lot of discontent, which the Chinese government doesn't want," Flynn said.

The government has responded by tamping down on private, speculative building through higher credit requirements and restrictions on the number of homes people can buy in some cities, he said.

At the same time, China is trying to build more publicly subsidized housing for the poor, Flynn said. "It's a balancing act."

Russian log tariffs further complicate the U.S. log export picture. The country's government has significantly increased taxes on its log exports in recent years to promote investment in domestic milling facilities.

Russia may cut those taxes as part of its accession to the World Trade Organization, though details remain murky, Flynn said. "There hasn't been a lot of clear direction."

At this point, though, lower taxes may not substantially revive Russian log exports to China because many sawmills along the border of the two countries have shut down, said Xiangwei Zhang, a vice president at Power Dekor, a Chinese flooring company that buys wood.

"It's very difficult for the sawmills to recover," he said.

The export tax reductions aren't expected to be substantial enough to affect Chinese mills, which have largely relocated to coastal ports, Flynn said. "They're not going to move back for a 5 percent price differential."