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Final Report: Analysis of the Russian-Asian Timber Market (3)

Analysis of the Russian-Asian Timber Market (3)

Timber Export To North East Asia

In a span of just ten years, Russia timber exports to Northeast Asia (China, Japan, and South Korea) have more than quadrupled, from 6.9 million cu. m in 1993 to 26.6 million cu. m by 2002 (see figure 8).

Figure 8. Russian Timber Export to NE Asia
Source: FAO Stat, 2003.

This timber comes almost entirely from the southern Russian Far East and Eastern Siberia. While Korea and Japan have both steadily increased imports, the primary reason for the dramatic rise in timber export is China. Massive flooding in China in 1998 - attributed to the widespread deforestation of upper river watersheds led to the government to pass the National Forest Protection Plan. This plan has strictly limited timber harvest to protect the few remaining natural forests, to control water levels, and to prevent soil erosion. But these harvest restrictions, combined with rapid economic growth, has led to skyrocketing Chinese imports. Chinese imports of wood products have almost tripled since 1998, from 12 million cu. m to 36 million cu. m in 2003, catapulting China past Japan to become the world's second largest importer of forest products. Russia now provides about 45% of this total, making it by far the most important source [9] (see fig. 9).

Figure 9. Top Timber Exporters to China, by volume, 1993-2003
Source: Ziufang, S., Meeting Chinese Demand For Forest Products. 2004, Forest Trends: Washington, DC

For both Japan and China, Russia has emerged as the primary source of roundwood, which is a major shift. Russian logs are 61% of China total log imports, up from 21% in 1997. While, in 2002, Russian logs represent of about 40% of total Japanese log imports. This shift clearly indicates that both countries see Russia as a long-term supplier of raw materials, while Russian lumber exports to both countries remain negligible in comparison. Despite concerted efforts by some regional governments to encourage processed wood exports- the Khabarovsk administration being the prime example - roundwood continues to be by far the largest component of the export mix. In fact, the market share (by percentage) of roundwood has remained essentially the same for both Japan and South Korea. In 1997, roundwood was 95% of all timber export to South Korea and in 2002, the figure was 94%. For the Japan, the figures are 88% and 86% respectively. While in China, the percentage has actually increased, from 74% in 1997 to 90% in export has actually increased rather than declined.

By 2025, according to the Center for International Trade in Forest Products, an industry think tank at the University of Washington, China may face a deficit of 200 million cu. m of wood per year. At 2003 rates (45% of the total import), Russia may therefore be expected to provide China with 90 million cu. m of timber by 2025. This is more than three times the total reported yearly harvest in both the RFE and Eastern Siberia! Given the growing localization of logging to the southern regions and the already significant impacts to biodiverse forests such as the Ussuri, coupled with the widespread corruption and illegality, these forests simply cannot handle a threefold expansion in the logging rate.

Below are some brief country studies of the three major export markets, included within each summary is a projection of future trends.

China

Virtually, all Russian timber is exported to China from forests in either Eastern Siberia (about two-thirds) or the RFE (one-third). China imports primarily Siberian pine (Pinus sibirica) and larch logs from Eastern Siberia, and ash, larch, fir, Korea pine, and spruce from the southern RFE. The timber is exported primarily through three main railroad routes. The largest route - about 6.8 million cu. m of timber in 2002 - is from Primorsky Krai's Gorodekova (Pogranichnoe) to the Chinese city of Suifenhe, located just 100 km from Russia's Ussuriisk, a city of 250,000 and a center for the Russian-Chinese trade. The second largest route - about 6.8 million cu. m of timber in 2002 - is by the Russian-built Chinese Eastern Railroad, which cuts through Manchuria from the Eastern Siberian border of Zabaikalsk, runs southeast of Lake Baikal to Manzhouli in China and then on to Harbin, a Russian-built city, major timber center, and the current capital of China's Heilongjiang Province (For information on Zabaikalsk-Manzhouli, see FSF-6) [10]. The third of the major supply routes - about 2.1 million cu. m of timber in 2002 - by railroad from Naushki, just south of Lake Baikal in the Republic of Buryatia, to the Mongolian town of Erlianhot, on to Ulaanbaatar, and finally towards Beijing. Illegally logging pine from Northern Mongolia is mixed with Russian timber shipments bound for China on the Russian-Mongolian rail route, according to one Chinese forestry expert. There are a number of other overland routes (Blagoveshchensk, Leninskoe, Khabarovsk, Poltavka, and Kraskino) but these are relatively small by comparison.

Although the vast majority of the timber is exported by the three rail routes, the last few years have witnessed a sharp increase in export by ship from two major ports in the Russian Far East: Nakhodka (1.4 million cu. m in 2002) and Vanino (1.2 million cu. m). This may be due to increased competition with crude oil exports from Western Siberia along the rail routes as China has greatly increased imports from Russia to meet energy shortfalls. But also with increased use of Russian timber in parts of China other than Manchuria, it is now cost efficient to export timber by ship to the more southerly locations. Major import ports are Dalian, Najing, and Tsinqdao. One can expect this trend to continue as more and more Chinese companies use Russian timber.

There has been some increase in processed Russian wood products, although as discussed earlier, this represents just a small fraction (10%) of total Chinese imports and the increase is not nearly as significant as round wood imports. Pulp imports have grown from 706,000 cu. m in 1997 to 3.6 million in 2002, while paper imports have slight more than doubled during the same period, totaling 800,000 cu. m in 2002. Most pulp and paper goes via the Zabaikalsk-Manzhouli route, originating primarily from the pulp mills near Lake Baikal. Lumber imports grew from about 16,000 cu. m in 1997 to 730,000 cu. m by 2002. This was predominantly softwood lumber and 391,000 cu. m meters of the total lumber came via the same route. Softwood lumber comes primarily from facilities in Irkutsk Oblast (196,000 cu. m), Chita Oblast (118,000 cu. m), and Buryatia (51,000 cu. m). Hardwood lumber comes from Primorsky Krai (60,000 cu. m) and Khabarovsk (16,000 cu. m).

There is a paucity of data on exactly where and how Russian wood is used in China. One analyst estimates that at least half of all the logs imported by China are distributed and processed in three provinces of Northern China: Heilongjiang, Jilin, and Inner Mongolia [11]. Of this total, Heilongjiang processes about 80%. Part of the reason for China's reliance on Russian wood is that the forest species in the Russian Far East and Eastern Siberia are similar to those in northeastern China. The 1998 logging ban brought severe harvest restrictions to many parts of China, particularly the Northeast. From 1991 to 2001, timber harvest in Heilongjiang shrunk by half to about 4.2 million cu m. The hundreds of Manchurian sawmills and processing facilities quickly found themselves in short supply of raw material, but now have found the similar species across the border eminently suitable.

A Chinese government development strategy appears to develop wood manufacturing center in Northeastern China, by modernizing existing facilities and spurring the creation of new ones. Most of the existing facilities remain under the control of provincial and municipal state forest management units even though many they have been largely converted from wholly state-owned enterprises to joint-stock companies - often with controlling interest help by the state. The provincial governments and Chinese forestry agencies have also been instrumental in setting up the mushrooming timber processing mills that have appeared along the Chinese side of the Russia-China border. Finally, the Chinese government has adopted a new state program to modernize existing large pulp and paper factories throughout Northern China. All of these efforts are clearly designed to take advantage of the inexpensive Russian wood.

One of the major reasons why Russian wood is so hard to track is due to the complex Chinese distribution system of the logs and lumber. Most Chinese timber importers are situated in Manzhouli, Earlianhot, or Suifenhe and almost all are intermediaries or traders. Of the 500 importing companies listed in Russian customs statistics, less than twenty are direct users of the wood. Despite the large number of traders, many are related, reducing the number considerably. According to one estimate, about 60 trading companies control over 80% of the Russian-Chinese trade [12]. Most of the larger trading companies are either wholly or partially owned by provincial and prefectural governments. But the loose arrangements between the smaller entities and the larger companies make it not only extremely difficult to determine who owns whom but also greatly complicates effort to determine who is buying wood from where.

This is further complicated by the fact that these trading companies sell approximately half of the timber they import in large timber exchanges to domestic wood wholesalers. These wood wholesalers may sell directly to a processing company or they may resell to the over thousand other timber exchanges located throughout China. It is also not uncommon for this timber to be sold two or three times before it is ultimately consumer by the end-user. To still add to the complexity, Russia wood can be mixed with domestically produced timber once it enters China.

For international retailers (and for the Chinese companies that supply them) who have promised their consumers sustainably produced timber or even transparent custody chains this proves to be a thorny problem and one that can only be resolved by either processing timber close to where it was sourced or at least directly linking Russian producers with Chinese processors.

Japan

Barring significant restrictions of a Japanese housing market collapse, Russian log imports will remain steady at about 5 to 7 million cu. m per year. Unlike with the China trade, exporters ship wood to Japan from a great number of locations, although many of them are small. Nakodka port alone handles about one-third with annual trade. The timber is primarily Siberian pine from Eastern Siberia and to a lesser degree larch from Amur Oblast. The ports of Vladivostok and Vostochny (in southern Primorsky) annually export from 600,000 to 700,000 cu.m and from 400,000 to 500,000 cu. m respectively. About half of this timber comes from Eastern Siberia and half from the southern RFE. Timber exported from Vanino (700,000 cu. m to 1,000,000 cu. m) comes mainly from Khabarovsk Krai and Amur Oblast. Then there are the smaller coastal ports in Khabarovsk, Sakhalin, and Primorsky region, which almost exclusively export timber logged from nearby forests. Among the largest in Khabarovsk are Nikolaevsk-on-Amur (300,000 to 400,000 cu. m) and De-Kastri (250,000 to 300,000 cu. m) and in Primorsky are Plastun (400,000 to 500,000 cu. m) and Olga (100,000 cu. m). Sakhalin ports, including Korsakov, Poronaisk, and Kholmsk, export a total of 400,000 to 500,000 cu. m per year.

Although Japan's import of Russian timber has recently been foreshadowed by China, the impact the country has on the region, particularly the Primorsky and Khabarovsky regions, should not be underestimated. Much of the timber logged in the biodiverse Sikhote-Alin region, particularly along the eastern coast, is for the Japanese market. Terneiles' current plan to log the entire Samarga River watershed is to supply the Japanese, not the Chinese market. Japanese demand for quality has necessitated logging of only the largest diameter timber, which grows primarily in the Sikhote-Alin region (and to a lesser degree in Irkutsk Oblast). Therefore, the localized impact of Japanese consumption is very significant. Finally, Chinese sawnwood, plywood, semi-processed housing materials, and furniture exports to Japan are increasing. A good portion of these products are made with Russian wood. Japanese impact on Russian forests, therefore, extends beyond direct Russian-Japanese trade.

South Korea

South Korea imports about 90 per cent of its timber products, including about 9 to ten million cu. m of logs each year. Russia has quickly become the country's second largest log supplier, passing Chile two years ago, and now trailing only New Zealand. In 2003, South Korea imported about 1.7 million cu. m of logs, more than triple 1994 imports. Russia ships logs from ports in the RFE to the South Korean ports of Pusan and Inchon. South Korean imports will likely increase, since Russian old-growth timber is higher quality than New Zealand plantation timber but costs about the same. Unlike their Japanese counterparts, Korean timber importers place a premium on price rather than quality. Demand for medium- and pulp-grade logs, therefore, is high: Korean manufacturers often convert larch pulp logs into sawn timber, for example. About half of the timber export to South Korea comes from ports in Khabarovsk (Vanino, Sovetskaya Gavan, Nikolaevsk-on-Amur, and De-Kastri), with much of it coming from nearby forests. About 10 to 20 per cent of the timber is shipped from Sakhalin ports, perhaps reflecting the close business relationship between South Korean companies and the large local Korean community in Sakhalin.