- Growing interest in biomass energy contributes to supporting the demand for wood
- Increasing demand from emerging countries
- Material is valued due to the expansion of sustainable construction, aimed at limiting environmental risks
- Dependence on the construction and paper sector
- Efforts by the sector’s players to adapt to stricter regulation of wood harvesting in order to preserve forests
- Sector is highly exposed to the vagaries of the climate and the trade tensions
The wood sector is highly dependent on construction. The latter uses large quantities of wood as an input. Because of the global economic slowdown forecast at 2.4% in 2020 after 3.2% in 2018 and 2.5% in 2019, construction in some parts of the world is expected to slacken somewhat this year, thus reducing demand for wood. However, lumber prices in the United States in 2019 are down -23% year-on-year over the first eleven months. This could partially limit the decline in demand. In addition, increasing environmental concerns leading to enthusiasm for more sustainable materials, such as wood in the construction sector, should also help support demand. Wood demand should therefore remain strong overall, driven by major infrastructure construction projects and strong demand from developing countries. Wood production for heating and energy will remain dependent on oil price fluctuations. Coface forecasts Brent oil to trade at an average of USD 60 in 2020. For its part, the price of raw lumber should be stable in real terms until 2030 according to the World Bank.
In addition, the sector should continue to benefit this year from the increasing use of wood to generate biomass energy. The sector should also benefit from the standards aimed at both achieving “carbon neutrality” in the construction sector by 2050, which promote the use of “sustainable” material such as wood. This will be the case although the industry players will also have to adapt to the commitments made by a majority of governments around the world to preserve forests under the Paris 2020 Agreement signed in 2015.
Overall, the emergence of substantial new producers in China and Brazil, for example, are gaining market shares historically held by the countries of the United Nations Economic Commission for Europe (UNECE). Combined with the changes in demand mentioned above, this is likely to transform the market. The sector is impacted by the protectionist environment in general, and the trade tensions between the United States and China in particular. In addition, the sector will continue to be vulnerable to new developments in the paper sector. Coface expects a difficult overall outlook for the paper sector worldwide. This could have a negative impact on the wood sector, as it is one of its main ‘client sectors’, along with construction. Moreover, wood production is penalized by global warming. The higher temperatures and droughts encourage the spread of forest fires, thus limiting wood production.
Sector Economic Insights
The wood sector faces both structural and cyclical challenges
At this stage, the sector remains impacted by the protectionist environment. In particular, it is marked by the trade tensions between the United States and China on the one hand and the United States and the rest of the world on the other. China and the United States imposed 25% customs duties on imports of wood and wood-based products respectively. The American timber sector is being particularly hard-hit, with 60% of its exports going to China. Between 2017 and 2018, US wood exports to China fell from USD 1.7 billion to USD 1 billion. This was mainly due to a decline in hardwood, accounting for the largest share of US wood exports to China. Furthermore, the customs duties imposed by the United States on imports of softwood lumber from Canada strongly affect the Canadian lumber industry, with Canada selling 70% of its softwood lumber exports to the United States. Construction in the United States should prove resilient following the lowering of the FED’s key interest rate from 2.5% to 1.75% between January and July 2019 and thus support wood demand. Moreover, Brexit creates uncertainty about the sector in Europe. The United Kingdom imports the majority of its timber from the European Union. A Brexit without an agreement could therefore intensify the competitiveness of countries outside the European Union, to the detriment of the Member States. From a structural point of view, the actors in the sector must face a more constraining environment with regard to timber operations, with a firming up at world level of the standards that aim to limit the use of rare woods and preserve forests, implemented by many States, in particular within the framework of the commitments made during the Paris Agreements on climate signed in 2015, which the Trump administration decided to leave.
2020 is likely to be a difficult year for the sector despite a number of positive developments
The global wood sector should be adversely affected in 2020 by an economic downturn. However, the production and consumption of wood pellets for energy production is expected to increase.
China has gained in importance in the wood sector. It is now the world’s largest importer of wood and wood-based products. The health of the construction sector being the main use of wood products, its well-being will strongly influence the wood sector in the country. Demand for wood in China is expected to be impacted by any downturn in the housing market caused both by an economic slowdown and by the effects of the government’s measures to address the housing bubble. Concerning the specific factors that should contribute to supporting wood demand in China, there are infrastructure projects that remain significant, particularly as part of the Chinese government’s measures to address environmental risks and promote more sustainable construction production with the authorities’ strategic plan in this regard i.e. the “13th Five Year Plan for Building Energy Efficiency and Green Building Development”.
Japan is one of the world’s largest importers of wood. It manages to import wood of good quality and cheaper in general than that produced in the country. Thus, changes in wood demand in Japan have an impact on many countries, particularly the United States, Canada, Russia, Malaysia, Indonesia, Australia, and Chile. Indeed, approximately one third of the wood exported from Malaysia and Russia, plywood from Indonesia and lumber from Chile goes to Japan. Almost all wood chips exported from Australia, the United States, and Chile are also sent to Japan. Although the construction of the infrastructure required for the 2020 Olympic Games provides opportunities for wood in Japan this year, demand should be negatively impacted by the economic slowdown in the country. Coface’s estimate of economic growth in Japan in 2020 is for 0.2% after 0.8% in 2018 and 2019.
In North America, the sector will continue to be negatively impacted by tariffs, whether they are related to the trade tensions between the United States and China or imposed by the United States on Canadian timber. The economic slowdown in the region should weigh on the demand addressed to companies in the sector. Growth should be 1.3% in 2020 after 2.2% in 2019 and 2.9% in 2018 for the United States and it is forecasted at 1.3% in 2020 after 1.5% in 2019 and 1.9% in 2018 for Canada.
In Europe, the sector should suffer from the uncertainties surrounding Brexit, on the one hand, and on the other from the difficulties encountered by the construction sector in certain countries such as Great Britain and Italy. However, consumption and production of wood pellets, mainly for heating and energy production, increased in 2019 by 2.5%. It is expected to continue to grow in the coming years due to the growing interest in biofuels, especially in Europe. In Germany, the sector is under pressure due to the economic slowdown on the one hand and the deterioration of forests on the other. The climate is too hot and dry to maintain the health of the trees. Forests regenerate less well after hot and dry summers. Forest fires are now more frequent. In addition, the bark beetle, a “pest” insect causing tree death, is destroying large spruce forests.
In Latin America, the sector had a difficult year in 2019. The production of wood and wood-based products decreased in the region’s largest economies. However, it should benefit from the economic recovery in 2020. Coface forecasts economic growth to reach 1% in 2020 in the region after -0.1% in 2019. The developments in the wood sectors in Brazil, Argentina, and Mexico illustrate the difficulties faced by the sector in the region last year. In Brazil, wood product manufacturing fell by 5% between January and September 2019 compared to the previous year. The sector should nevertheless benefit from an increase in economic growth in 2020, forecasted at 1.5% after 0.9% in 2019. In Argentina, production of wood and wood-and-cork products fell by 1.7% year-on-year between January and October 2019. In Mexico, the fires of 2019 had a strong adverse impact on the wood industry’s production. Domestic demand was penalized by unfavourable economic conditions with a marked economic slowdown in the country. Economic growth fell to 0% in 2019 from 2% in 2018.
Note for the reader: Wood pellets are products mainly derived from sawmill wood residues. They are used for energy production and heating.
Last update : February 2020