National Hardwood Magazine - October 2020

GLOBAL MARKET Continued

GLOBAL MARKET Continued to the United States as a result of the trade war. The only species showing an upward trend during continued 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 .5 billion Hardwood lumber market to only 21 percent of a .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 deserves 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 prepandemic 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.” Regarding Mexico and Vietnam, the origins of their value-added products makes a big difference, Snow said. 4 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. 32 OCTOBER 2020 n NATIONAL HARDWOOD MAGAZINE

Record YOY Growth in Vietnam Paused During Early 2020, Still 2nd Largest Market by Volume Markets outside of China: Watch Mexico and 3 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.” 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 Please turn the page OCTOBER 2020 n NATIONAL HARDWOOD MAGAZINE 33