Hardwood forestland owners have had the benefit of a geographically wide and diverse marketplace for hardwood timber for quite some time.  The two main sectors – domestic markets and international markets – have often been able to counter-balance each other over the years, providing a depth that has reduced overall dependence on any specific demand concentration.

There have been times when both major sectors were doing well, and markets were deep and robust.  There have also been times when either one of the major sectors has suffered, but prices had been buoyed up by the other.  And of course, there have been times when the entire global economy has suffered and the counterbalancing effect is disturbed, but still – the fact that there are now many “baskets” to put one’s “eggs” in does provide a sound benefit.

Domestic markets for hardwood are tied to a variety of things, which include demand for “industrial” uses (i.e. pallets and containers) and “consumer” uses such as millwork and flooring, kitchen cabinets and furniture, and a variety of other secondary products.   International markets have been tied to much the same uses, and as more countries “discover” and import our hardwood lumber and logs, our landowners are gaining a shored-up baseline for markets that are relied on to not only provide financial returns, but also provide a terrific outlet to conduct responsible, sustainable forestry practices.

Canada and Mexico have always provided significant international demand for our hardwoods, and though specifics in the new USMCA Agreement between the US and these two countries don’t seem to directly address forest products trade in terms of measurable consumption, the Agreement does suggest that there needs to be an increase in the promotion of sustainable forest management as  well as a need to promote “legal trade in forest products.”  This is being considered as a “positive” advancement in continued forest products trading with our two neighboring countries.

Of course, over a decade ago, China became the largest international consumer of our hardwood exports and, despite various ebbs and flows, it remains the powerhouse international trading partner.  Recent disruptions (most notably the trade/tariff discussions and subsequent COVID circumstances) have awakened a renewed concern about how much our hardwood outlets have come to depend on China. Though its been very recently reported that we are once again on a projected upward path with hardwood exports (logs and lumber) to China, it’s also been good news to see that another southeast Asian country has been making its mark in our international marketplace – that country is Vietnam.

For some time now, Vietnam has improved and increased its capacity to utilize our hardwood resources and, maybe surprisingly to many, has become only second to China in both overall lumber and log purchasing (in terms of total dollars) from the US.  Though Chinese demand has outpaced Vietnam’s demand by a factor of approximately 6 in terms of total export value in lumber and 7 in terms of logs, the continuing development of markets in Vietnam is a very welcome occurrence, and certainly one that bodes well for international market growth.

A recent editorial from the Hardwood Review Weekly provides a good overall synopsis of Vietnam’s positive effects on our hardwood export markets.  Though still suffering now from COVID recovery, to hear that Vietnam is making progress in opening back up is a very welcome circumstance.

Pain Now, Gains Later for U.S. Hardwood Lumber Exports

Editorial (by Tony Burbeck); July 17, 2020, Vol. 35, Issue 44
Vietnam’s Wood Processing Industry

U.S. hardwood lumber exports to Vietnam, the second largest market behind China, fell for the fourth consecutive month in May, reconfirming the market’s slow recovery from the pandemic, relative to China (Figure 1).  Because China was hit by the virus first, it has been the first to recover.  Vietnam had a second wave of the virus hit in spring, which kept the country largely shut down until mid-April, resulting in approximately 8 million lost or furloughed jobs, according to the Vietnamese government.

However, Vietnam’s economy was humming before the virus hit, and U.S. exports of hardwood lumber to Vietnam were up 2% year-to-date through March, coming off 3% annual growth in 2019 and 12% in 2018.  By May 2020, however, U.S. hardwood lumber exports to Vietnam were 13% behind the 2019 pace, on a 7% decline in Poplar shipments and a 33% decline in White Oak—the two species which together accounted for 67% of total U.S. hardwood lumber shipments to the country through May.  Exports of U.S. Hickory, Hard Maple, Soft Maple and “other” hardwood lumber rose to Vietnam in May, by a combined 50 container loads, offsetting 62% of the decline in Poplar and White Oak exports.  [Note: the virus isn’t likely responsible for all of the 2020 reduction in U.S. hardwood lumber exports to Vietnam; some may be due to some manufacturing activity shifting back to China following the end of the U.S.-China trade war.]

Industry contact comments suggest not much changed in June or early July.  “Vietnam is slowly opening back up,” an exporter said in June, “but volumes are not back to December levels.”  For context, U.S. hardwood lumber exports to Vietnam in December were easily among the lowest in five years.  In other words, June exports to Vietnam more closely resembled holiday season shipments than the stronger volumes more typical in summer.  Contacts have cited lower demand from Vietnam for causing slight declines in KD 4/4 #2 Common White Oak prices—and relatively steeper declines in KD 4/4 #2 Common Poplar—over the last few months (Figure 2).  Contacts also describe lumber prices to Vietnam as “under pressure” and “dirt cheap,” with few expectations for improvement in the short term.

The decline in hardwood lumber volumes and prices to Vietnam came after Vietnam had grown to become the most viable large-market option for U.S. hardwood lumber exports during the U.S.-China trade war.  Though the stronger shipments to Vietnam in 2018 and 2019 didn’t come close to offsetting losses to China, exporters were happy to take advantage of growth in Vietnam’s hardwood products manufacturing sector and ride that wave as long as possible.  That wave came crashing down with the spread of COVID-19, as it did globally, unfortunately.

Though facing myriad difficulties stemming from the virus, Vietnam’s economy has a thriving wood processing sector that is heavily dependent on imports of U.S. hardwood lumber.  Additionally, Vietnam’s wood processing industry is poised for long-term growth, post-COVID-19, according to a June report from the U.S Foreign Agricultural Service Global Agricultural Information Network (GAIN).  The highlights of that report are below, with additional analysis by the Hardwood Review.

Figure 1. Hardwood lumber exports to China and Vietnam (Hardwood Review/USITC).

Figure 1.  Hardwood lumber exports to China and Vietnam (Hardwood Review/USITC).

Figure 2. Prevailing KD 4/4 #2 Common White Oak and Poplar prices (Hardwood Review).

Figure 2.  Prevailing KD 4/4 #2 Common White Oak and Poplar prices (Hardwood Review).

 

Market Overview

The wood processing industry has become one of Vietnam’s top industries over the last decade, significantly contributing to the country’s GDP growth and providing jobs for approximately 500,000 workers.  Vietnam’s wood processing export revenues grew from $1 billion in 2004 to over $10 billion in 2019, driven largely by stronger exports of furniture, wood chips, other wooden products and wood panels (Figure 3).

Figure 3. Value of Vietnam’s exported wood products (Vietnam Customs and Trade Associations).

Figure 3.  Value of Vietnam’s exported wood products (Vietnam Customs and Trade Associations).

Strong Growth Forecasts Before the Pandemic

Vietnam’s Ministry of Agriculture and Rural Development predicted 20% growth in the value of exported furniture and wood products in 2020.  That forecast, however, was based on strong pre-pandemic demand from Vietnam’s largest export markets, including the U.S., China, Japan and South Korea.  Growth was also expected in shipments to the European Union under a newly ratified EU-Vietnam Free Trade Agreement, which reduced or eliminated 99% of tariffs on goods traded between Vietnam and the 27-member bloc (Reuters).  However, since the onset of the pandemic, Vietnamese industries have faced reduced, suspended and canceled orders due to lower demand and consumption in major export markets—so much so that there won’t be any growth at all in Vietnam’s furniture and wood products exports in 2020, the GAIN report concluded.

Gains in Foreign Investment

We previously reported on the manufacturing exodus from China to Vietnam, with some Chinese wood furniture and wood products manufacturers seeking lower labor costs while still maintaining easy access to large shipping ports.  [Note: Hourly factory worker wages in China have roughly doubled over the last decade, making labor costs notably more expensive than in Vietnam, though the minimum wage in Vietnam rose an average of 5.5% at the start of 2020 (linkedin.com).]  In 2019, there were 966 foreign direct investment (FDI) enterprises in Vietnam’s wood processing sector, with a 2019 annual investment of $6 billion.  In 2019 alone, Vietnam’s wood processing industry welcomed 99 new investment projects, totaling $726 million, a 48% increase in the number of projects and a 170% increase in investment capital over the previous year.  Exports of furniture and wood products by foreign direct investment enterprises were valued at roughly $5 billion in 2019, a 25% increase over 2018, accounting for nearly half of Vietnam’s total wood and furniture exports.  The five largest foreign direct investment players in Vietnam’s wood processing industry in 2019—by the amount of investment dollars—were Taiwan, Hong Kong, British Virgin Islands, mainland China and South Korea.  Most new wood products manufacturing plants are opening in Vietnam’s southern provinces.

Thousands of small, non-FDI companies also constitute Vietnam’s wood processing industry, and are similarly facing difficulties with the COVID-19 crisis.  According to a survey conducted by local trade associations of 124 furniture producing members, at least 50% have reduced operations or have shut down temporarily due to the virus.  If the pandemic continues for an extended amount of time in the U.S. and other large markets, a large number of Vietnam’s small and medium-sized furniture companies may face bankruptcy and job losses.

Vietnam’s Largest Wood Materials Suppliers

The U.S. has been Vietnam’s leading supplier of forest products for almost a decade, the GAIN report said.  In 2019, U.S. exports of forest products to Vietnam reached $350 million, of which 86% ($300 million) was hardwood logs and lumber.  That’s a 50% jump in hardwood shipments since 2016.  White Oak, Ash, Walnut, Red Oak and Poplar continue to be the most-shipped log species to Vietnam, while Poplar, White Oak, Alder, Red Oak and Walnut are the most-shipped lumber species.  The U.S. faces competition to supply Vietnam’s wood manufacturing industry mainly from the EU, Cameroon, Angola, the Democratic Republic of Congo, Chile and Brazil.

Opportunities

Despite the downturn due to the pandemic, GAIN analysts predict Vietnam’s wood processing industry will continue to grow in the medium and long-term, offering more opportunities for producers of U.S. hardwood logs and lumber.  That growth will be sustainable due to strong capital investment, Vietnam’s improving infrastructure, and the country’s large workforce.  Additionally, Vietnam is party to the Comprehensive and Progressive Trans-Pacific Partnership, and the value of Vietnam’s wood products exports to CPTPP members rose 14% in 2019, to $1.1 billion.  Likewise, the EU-Vietnam trade deal could increase furniture export values by $1 billion annually, according to the Handicraft and Wood Industry Association of Ho Chi Minh City.

Vietnam’s GDP grew at an annualized rate of 1.81% in the first half of 2020, the lowest since 2011, and well below the government’s 6.8% target growth rate.  However, analysts predict a second-half rebound, with total growth finishing at 3-4% in 2020 (vnexpress.net) and 7% in 2021 (statista.com).  Vietnam was the 44th largest global economy before the virus hit, up from the 50th largest in 2015 (countryeconomy.com).  An emerging middle class has worked to keep U.S. hardwood demand strong in China (excluding the trade war and pandemic), and the same thing is occurring in Vietnam, though on a smaller scale.  The World Bank predicts Vietnam’s middle class will account for 26% of the country’s population by 2026, up from the current 13%, portending stronger hardwood product demand.  An early sign of positivity after a rough spring is the increase in the IHS Markit Vietnam Purchasing Managers Index—a snapshot of the prevailing direction of economic trends in the manufacturing and services sector.  At 51.1, the index was the strongest in five months in June, and was up from 32.7 in March (anything below 50 suggest decline, while anything above 50 suggests improvement).  Vietnam’s wood processing sector will rebound from the pandemic and expand over time, but it will be a slow and bumpy ride for U.S. hardwood producers in the short term, and, with China coming back stronger, Vietnam may not hold the same relative importance as it did in 2018 and 2019.

Tony Burbeck

Editor

Permission to Reprint Granted by the writer to FORECON Inc.

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