Wrapping up factory visits in China and South East Asia requires one to conclude that buyers should quickly change their historic perspective of the plywood business. The division between exporting country and manufacturing country is blurring. Plywood mills source logs and core material overseas and traditional Chinese/Malaysian exporters start supplying products manufactured in Indonesia or Vietnam. The question: “Is it Chinese/Malaysian/Indonesian plywood”, becomes more difficult to answer.
Malaysian Plywood supply chains to Middle East are drying up
A multiyear sharp decline of tropical hardwood supply reduced plywood production capacity drastically. It is unlikely to reverse; there are no sustainable plantations for raw materials. Factories import Vietnamese core plies and Australian Eucalypt logs to supplement dwindling domestic supply. Consequently, the higher cost makes factories optimize their output to high-quality panels serving Japan, Korea, USA and Mexico. Middle East exports are being pushed away. If thin panels for USA fetch $900/cbm FOB, which factory is interested to produce low quality at $550? Even Malaysian plywood traders revert to Indonesian(Falcata) and Vietnamese(Eucalypt) sources. Both countries have sustainable plantations and can maintain supply, yet Middle East’s buyers’ preference for price over quality is becoming a weakness with supply lines becoming supplier driven. Buyers are advised to be open for new sources, new type of products and higher prices if they value reliable supply.
Chinese Plywood supply lingers in uncertainty
Factories are shut or in start-stop mode. In Linyi area 400 factories were permanently closed, likely 1,000 next year. A recent one-month full closure in Linyi, caused all production to stop everywhere, as Linyi is the only source for face and back veneer. In Pizhou area the local government has banned all production of repair core film faced plywood, making exporters struggle to replace orders elsewhere. There are no reliable assessments how much capacity is lost, but many exporters supplying 6-months old orders, with others cancelling them altogether. Factories refuse earlier agreed orders claiming force majeure and divert their lesser output to more lucrative higher priced markets, cutting out Middle East. The plywood industry undergoes the challenge of two government directives: ”Blue Sky” and "Made in China 2025", an initiative to comprehensively upgrade the entire Chinese industry to high standards. Chinese plywood exporting companies already start sourcing plywood from Indonesia and Vietnam even making manufacturing investments.
In general, production standards and qualities from Vietnam and Indonesia were higher than China already. Since Chinese prices for lower quality products increased Vietnamese and Indonesian plywood becomes a viable choice and partially replaces Chinese supply. Recently we saw a similar trend in the MDF industry where gradually Chinese MDF virtually disappeared from the export markets.
Vietnamese plywood becoming viable alternative for Middle East
Already many years producing, Vietnam was shunned by the Middle East market: too good quality (100% hardwood), too high price, but mainly because it was unknown. Although quality and prices have largely remained the same, it may now become the best offer available for Middle East buyers willing to accept the price/quality combination. Vietnamese plywood mills have been happily supplying to Japan, Korea, Taiwan, Singapore and are unlikely to give up these markets if Middle East buyers push for lower prices and lower qualities. Getting into the supply chain first and become a steady reliable buyer is the advisable strategy. Plantation based raw material seem sustainable, but plywood production capacity is still relatively small, meaning manufacturers can pick and choose who to work with. Most core material is kiln dried and full plies, repair core is not in their playbook. Thickness 5mm-30mm full hardwood only. The cores are Eucalypt or Acacia, with MATPLY (no veneers) or Bintangor/Okume veneers.
March 15th, 2018, The Dubai Woodshow 2018 was again a glaring success. Defenitely our favorite regional gathering for all parties relevant to our industry. Customers, manufacturers, machine suppliers and shipping lines mingle, conduct business and develop future opportunities. We are again happy to host anybody in our booth to facilitate introductions, hold meetings and close deals. Welcome back next year 2019 !
Continuing our earlier report regarding this subject in October 2017, our recent visit in the Plywood manufacturing region, learned the situation developed more rapidly than we anticipated. In a radius of 1,000km around Beijing, factories are permanently restricted in their output. 95% of China’s plywood production is dependent on this area, with Linyi, Shandong being the center. Under the ‘Blue Sky’ initiative, the government plans to move all plywood and MDF manufacturing capacity outside this area to other (more remote) provinces. While in transition, factories work alternate days or alternate weeks only. Some mills were closed for one month, due to environmental restrictions or lack of raw material. The whole supply chain is affected. Plywood factories are sitting on a large backlog of orders they are unable to deliver before Chinese New Year. Factories are not interested to take new orders fearing at time of delivery they will produce these at a loss, as is the case for their current backlog orders. Some smaller factories even refuse to attend ‘old’ orders confirmed before the new policy took effect.
Small being replaced by big.
Part of the plan is to have small factories merge with bigger factories, able to adhere to higher standards of product quality and business conduct. The same is aimed at for trading companies, with small trading companies pressurized to merge or close all together. The campaign is clearly a long-term objective of the government to achieve better living standards, higher and predictable quality standards and a better balance between demand and supply.
Market prices rising quickly adapting to reality.
Prices continue to rise with the full effect of these initiatives settling into the daily reality. We have experienced already plywood price increases of 10-15%. Film Faced Plywood is likely harder hit, as factories are converting to commercial plywood which is more lucrative to produce. Additionally, after Chinese New Year freight rates tend to go up and the ongoing strength of the Chinese RMB reduces the likelihood for any reduction in market prices. Cost factors change so fast, that confused suppliers are running after the facts.
Buyers be aware, particularly in the Middle East. There is a tendency for protracted negotiations to lower prices, but other than before, taking negotiation time is more likely to lead to higher prices as factories have the opportunity to transfer higher costing into the price as long as the order is not confirmed.
Chinese MDF exports are practically history
For Chinese MDF exports the situation has drastically changed. Chinese MDF exports have virtually ceased as more competitive and higher quality material can be obtained from SE Asia. Given the underlying long-term policies, this is permanent not seasonal. Only for high value added MDF products (veneer, fancy design melamine, high gloss, UV) Chinese MDF exports may continue for a while.
White Wood supplies to region cannot fulfill demand
In a follow up on earlier reports for shortages of construction ‘White Wood’ in August, matters have not changed for the better. This we learned from this month’s visit to sawmills in Romania, Ukraine, Austria, Croatia and Bosnia. With winter season in Europe started, access to frozen forests will be reduced and thus the supply of logs. Moreover, many of the supply country governments have successfully tightened control on cutting to curb illegal logging. Sawmills now must bid at government auctions on logs and stronger competition cuts some mills out.
Suppliers reduce taking forward orders
Dubai suppliers for ‘White Wood’ are sourcing wider than the traditional countries to sustain supply volumes. Many suppliers sharply reduced taking forward orders as the volatility of currency and freight rates cannot be hedged with so much supply uncertainty. Larger suppliers have open orders for standard sizes with multiple sawmills and then offer the goods only to customers once shipped and with a secure arrival date in destination port. The model seems to be working for everyone. This way, importers are at least certain what they order gets delivered, rather than waiting longer and longer and still being unsure what is going to be delivered and when.
Local stocks dwindling
Given the supply/demand imbalance, not many local stocks build up, as generally all arriving goods are immediately delivered via distributers to end-users. Signs of panic emerge, with some large importers asking sourcing companies to supply them with “everything they can get their hands on”. Prices at the mill have been rising constantly. Although the import markets have accepted higher prices, there is still resistance to accept price reality. Markets seem to adopt lower cutting sizes only to maintain local price stability.
Reduced supply during European winter months and brisker “White Wood” demand in the region for new projects early 2018 spell further tightness of the market.
Oct. 2nd, 2017
The Chinese Government has imposed strict regulations for environmental protection and pollution reduction on Chinese Plywood mills. By central edict almost 50% of the plywood factories have been immediately closed. It effects plywood factories in all provinces, Shandong, Jiangsu, Zhejiang, Hebei and factories in South China as well. The numbers are mind boggling, a total of 5,000 factories are closed.
Environment and Product standards
The government’s purpose is twofold, not only give a boost to environmental protection, but also reducing overcapacity in the market. The latter has caused a fight to the bottom between the factories for both quality and prices, with the environment bearing the brunt of the cost. Particularly the smaller mills flouted standards and they are likely to be closed forever. Industry experts expect exports to be affected, but over time reliability and quality standards of the plywood will reach a permanently higher level.
Lower quality plywood (e.g. repair core) is already much harder to get and might vanish totally once the new standards are fully implemented. Suppliers are struggling to deliver backorders and some see no possibility to fulfill their commitments.
The supply-demand balance has changed drastically and permanently.
Permanently higher prices
Prices have already risen $ 20/cbm or more. Initially customers stayed at the sidelines unsure to accept this shock increase, yet slowly but surely reality is sinking in and buyers are coming back to place orders. It is clear higher prices are here to stay and customers, when in need, wisely should not postpone their purchases. Further delay may lead to even higher levels. With Chinese New Year coming up mid-February 2018 there are about 3 months left for production and shipping before factories close for their annual holidays. Whatever happens after Chinese New Year is anybody’s guess, but history shows prices normally move up, driven by seasonal higher freight rates and raw material cost.
Markets in the Middle East might be most affected by these changes, as they were buying the vast majority of the lower quality goods. Customers need to get used to permanently higher prices and quality standards. More sophisticated markets already buying higher quality at higher prices have quickly adopted to the new situation and are getting back to normal. Particularly the USA market is very strong at present and importers buy as much as they can. It leaves the reduced number of factories little space to produce lower grades for other markets.
No escape for MDF
A similar fate has befallen the Chinese MDF factories, yet mainly factories using old generation and polluting production lines. Again, the Middle East was the main export market and the reduction of capacity has already driven up prices for MDF and Melamine MDF by $ 20/cbm or more. Also here buyers will have to get used to the new normal. The permanent shift in supply and demand balance leaves no room for price reduction.
Sept. 3rd, 2017 Container rates have been coming down lately, a somewhat unexpected change given sharp increases and short supply of boxes only 6 months ago. MDF prices from SE Asia have been easing a little in line with the reduced rates as suppliers typically pass on these advantages to the buyers. Consequently, the move to breakbulk shipments earlier this year now reverses back to containers. Buyers should still be aware, as although CNF prices with containers might be less, it is not all a blessing. The all-in cost for clearing containers is generally $10/cbm higher than breakbulk. Moreover, many buyers complain of questionable ‘repair’ charges for containers returned to the port. There seems to be an increasing trend for these ‘repairs’. Importers should take all costs into account in choosing between containers and breakbulk.
August 1st , Supplies of ‘White Wood’ have been very constrained during the last months. Particularly the popular Romanian supply is hampered by log shortages causing a big backlog of deliveries. As a result, prices went up sharply with stronger currencies in producing countries adding more fuel to the fire. In the UAE local prices increased more than AED 100/cbm in 2017 alone.
Although container rates came down a little lately, suppliers with forward orders must absorb losses to fulfill their old contracts. Small players have been reported to cancel old contracts, resulting in some buyers scrambling for supply as deliveries they counted on do not materialize.
Buyers and traders have been developing alternate sources from other East European countries, which is bringing some relief, but it is leading to supply challenges there as well. Particularly the popular 3x3 size is running short in some of the Middle East markets. As the markets are returning from the summer slow and building and construction will resume its normal pace more tightening must be expected.
June 6th, 2017 Our team visited Thai MDF suppliers to understand the latest market situation. The rainy season has started, meaning greater difficulty to get raw materials and surely at a higher cost. At least two factories were running at 50% of capacity only. Further there was no relief in the container situation, shippers reporting stable to higher rates against limited supply of boxes. Breakbulk shipments are the most reliable shipping option currently, particularly for the larger volumes. Actual supply is very much dependent on how much behind each factory is on their order backlog.
MDF factories maintaining container shipments only, will experience a bigger challenge to remain price competitive and may have to skip certain ports all together.
All in all an indication CNF prices for MDF will have upside pressure or will remain the same at best.
Breakbulk vessel preparing loading :
Our team was in China this week for a training and education session regarding plywood. While visiting the plywood factories they further learn about plywood construction in all its details and how to test various kinds and qualities of plywood. With our supplier they visit the factories to perform inspections on manufactured goods. Here we see the team performing bending and strength tests of high quality Larch Film Faced Plywood produced against British Standard BS1088.
Encouraging signs for investments in Saudi Arabia's building and construction sector
As a result of increased container rates , but more so because of unavailability of sufficient containers in most SE Asian and Chinese ports, we are converting all shipments to conventional break-bulk vessels. After 3 years of mainly container shipments, many importers might have forgotten, but traditionally this has been the standard way of shipment for wood and timber products to Middle East. Fortunately we have experienced charterers and liners in place ready to provide regular service.
April 5th, 2017, During the 2017 version of The Dubai Woodshow, the Saleh International booth was again the favorite place for customers, suppliers and shipping lines to come together and discuss the state of the business. Existing longterm relations and new prospects are attracted to the buzz in our booth and meet experts in various fields of our industry. Also this year The Dubai Woodshow is the preferred gathering for our industry in this region. We already look foward the the event in 2018 !
Sea Container rates are rapidly increasing and availability of loading slots decrease. Shippers are trying to cope with shipping their order backlogs againts higher freight rates.
October 23rd, 2016, In a continuous effort to strive catering for a wider set of requirements of the supply chain in our industry, Saleh International has secured supply of woodchips for the Middle East region. In a region scarce of natural resources, imports of raw materials are key to keep industries going. Various large investments have been done in the region building MDF and other woodpanel production plants. Although some of the raw materials will be supplied locally, large volumes have eventually to be imported from regions with sustainable supply of plantation wood. Saleh International has established strong working relationships with suppliers of woodchips, specifically for the panel manufacturing industry and are able to supply hundreds of thousand of tons annually sustainably.
July 31st, 2016, Following the October 2015 entry in the woodchip market, Sales International has now also gained access to related supplies of wood pellets, wood shavings and saw dust. The materials are used in a variety of industries and applications from the energy industry to agricultural purposes. The famous Dubai race horses find wood shavings in their stables while resting after training session !
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