By?Bob Flynn, Director, International Timber, RISI
SEATTLE, WA, July 30, 2012 (RISI) - I recently participated as the sole forest products sector representative at an event organized by Euromoney in Beijing, the "China-Canada Investors Forum." Not surprisingly, almost all the attention was fixed on the energy and mining sectors, despite the fact that in 2011 the largest category of exports from Canada to China was wood pulp. Wood products (primarily lumber, but also a considerable quantity of logs) was either the second or third largest export category to China, depending on how you lump various ore exports. In total, forest products accounted for 24% of all Canadian exports to China in 2011. Canada has been China's largest supplier of wood pulp for a number of years. It is also China's largest supplier of softwood lumber (accounting for 47% of imports in 2012 through May) and the fourth largest supplier of softwood logs (about 10% in 2012). Canada's lumber exports to China increased at an amazing compound annual rate of 83% between 2006 and 2011, and even in the relatively weak construction markets in China in 2012, imports of both logs and lumber from Canada have increased through the end of May (by 15% and 9%, respectively, compared with the first five months of 2011).
Despite the large flow of timber and wood products from Canada to China, other than my comments during the "natural resources" discussion panel, the only mention of the forest sector in Canada at this meeting was by He Zhenwei, Vice Secretary General of the China Industrial Overseas Development and Planning Association. Mr. He mentioned that one problem Chinese companies face in investing overseas is politically motivated opposition, and an example he gave was when CITIC (Chinese International Trust and Investment Corporation) invested in the Celgar pulp mill in British Columbia. According to Mr. He, CITIC was led to believe that the company had a stable wood supply, but NGO opposition to timber harvesting was so fierce that eventually the project "failed." This was a lesson, warned Mr. He, that Chinese companies need to be very careful, and that environmental concerns like this case in Canada could ruin an investment project if not properly understood.
I was a bit stunned by Mr. He's reference, because it seemed to me like ancient history. CITIC invested in the Celgar mill in (I believe) 1987, which was a time when the forest industry in western Canada (and the US Pacific Northwest) was facing growing opposition from environmental groups over timber harvesting practices. However, when Stone Container pushed the company into bankruptcy protection in 1998, it blamed "poor market conditions," which made it unable to service its heavy debt obligations (no doubt exacerbated by the $800 million renovation of the mill completed in 1993).
But regardless of the reasons that CITIC's investment in the Celgar mill was unsuccessful1, Mr. He's comments bring to mind a couple of points about China's growing wave of outward foreign investment2. The first, obviously, is that the Chinese have long memories, and past failures can color investor's perceptions for a very long time. But the second point is that it's interesting that Mr. He chose to focus on an environmental matter. China's 12th Five-Year Plan (2011-2015) emphasized support for the "green economy," and there has been an increasing focus by Chinese authorities (and many public pronouncements) on the need to pay attention to "sustainability" and taking care of the environment. As China's outward foreign direct investment has accelerated rapidly in the past several years (see below), a major focus has been on securing raw materials, including forests. But to date, the only document that the State Forest Administration in China has released regarding overseas investment in forestry is the 2009 "A Guide on Sustainable Management and Utilization of Overseas Forest by Chinese Enterprises." This document, which seems to use the word "sustainable" in every paragraph, stresses that "Chinese enterprises shall contribute to sustainable development of local forests, and safeguard local ecological and environmental security while managing and utilizing the forest resources in foreign countries." Whatever one thinks about the sincerity of the Chinese government's commitment to protecting the environment, it is obvious that much more attention is being paid to this theme than in the past and projects targeting investment from Chinese organizations should keep this in mind.
This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service. Sign in to view full story. Not a subscriber? Try it free!
Bob Flynn, Director, International Timber, is the co-author of the Global Tree Farm Economics Review as well as the International Pulpwood Trade Review. He can be reached at rflynn@risi.com or 253-565-4846.
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