Since the Chinese wood consumption boom began more than a decade ago, China has become the U.S. hardwood sector’s largest foreign customer. One in four boards produced by U.S. hardwood sawmills went to China in recent years. And now much of that volume is now in jeopardy as the trade war between the United States and China continues to heat up.
In early May, the Trump administration raised tariffs on $200 billion worth of Chinese goods, and the Chinese have responded with higher tariffs of their own on a wide variety of U.S. products including hardwood and softwood lumber and logs. U.S. tariffs jumped from 10% to 25%.
According to Tom Inman of the Appalachian Hardwood Manufacturers Inc., the new tariffs on U.S. hardwoods logs and lumber will be 25% for oak species, 20% for cherry and ash, and the tariffs will re main the same (5%) for walnut hard maple, poplar and alder. The Southern Forest Product Association stated, “Southern pine lumber exports to China will face a 20% import tariff, rising from the current 10%, effective June 1st.”
The Hardwood Federation recently issued a press release warning about the dire consequence for the U.S. hardwood sector if the trade war lingers. Dana Lee Cole, the executive director of the Hardwood Federation, stated, “The U.S. Hardwood Lumber industry has a heavy reliance on export markets for its survival, and is being devastated by the ongoing trade dispute with China. Domestic mills have suffered sharp declines in export sales. Operations have been shuttered. Jobs lost. Communities, reliant on good paying hardwood jobs, ruined.”
In 2018, U.S. hardwood producers shipped products worth $3.9 billion to global markets; $1.9 billion to Greater China, including Hong Kong and Macau. As a result of the impacts of tariffs imposed in the fall of 2018, the U.S. had a trade surplus of $1.293 billion in hardwood lumber, down from $1.475 billion in 2017.
Over the last three quarters, hardwood exporters lost $153 million per quarter, as a result of the 10% tariffs imposed by China. When the current tariffs increase to 25%, a steep acceleration of loses is expected. Clearly, dependable, long-term export markets are essential to the sustainability of the hardwood industry.
According to the Hardwood Federation, the U.S. hardwood products industry is an important contributor to the U.S. economy, adding $348 billion to the economy, overall. Additionally, hardwood producers and manufacturers directly support more than 685,000 jobs in 25,000 facilities, generating $35 billion in annual income.
Cole warned, “If these tariffs continue in this current application, our logging and sawmill production will disappear as an industry sector, and the secondary jobs and manufacturing companies depending on loggers and sawmill operations will quickly follow.”
The hardwood industry recently sought inclusion in agricultural assistance offered by the U.S. government for farmers affected by slumping exports to China due to the tariffs. But the U.S. Department of Agriculture decided not to include forest products despite a serious push from the industry. Hardwood officials said they would keep seeking assistance.
CNN recently ran a report on the impacts of the trade war and interviewed hardwood producers Baillie Lumber Co. and Wagner Lumber Co.
Mike Snow, executive director of the American Hardwood Export Council (AHEC), recently commented, “We saw a 45% drop in U.S. hardwood exports to China in the first three months of 2019 compared to 2018.” That was with a much lower tariff than the new higher ones recently announced. Keep in mind that the beginning of 2018 marked robust deliveries to China.
Snow forecasted that if the higher tariff rates drags on for months, some U.S. sawmills will close. He stated, “It’s going to be extremely painful for the U.S. hardwood sector.”
There is no end in sight though for the dispute as both sides have trenched in their positions. The Chinese reportedly have backtracked on earlier commitments to change laws over intellectual property and trade secrets, competition policy, and currency manipulation. The United States has imposed stronger tariffs in response as well as restricting access to the U.S. market of Huawei, a major Chinese technology company. Both countries continue to talk, but there are no signs of any significant progress.
Some believe the Chinese want to outlast Trump hoping for a different president in 2020. President Trump is determined to not back down in this fight, and this has been a longstanding policy priority for his administration. Given these realities and what is at stake for the future of global commerce, don’t look for either side to back down soon. I would expect this current situation to linger well beyond the 2020 election.
What does this mean for the U.S. hardwood sector? Bad times for sure. Unfortunately, there is no other domestic or international market that can make up for the loss of significant volume from China’s grade market. And if the grade market suffers, hardwood production will likely be curtailed further. This could reduce the amount of low-grade material on the market as plants shut down or scale back production. Once capacity is lost, it may not come back for a long time.
This trade dispute may have lasting impacts on the U.S. hardwood sector. It could lead to more pallets being produced using softwood as hardwood becomes harder to find. In the short run, there may even be some extra hardwood on the market in some areas as sawmills try to keep workers busy producing industrial grade material. But hardwood mills can only do that for so long before they can’t afford to stay in business.
Although tariffs cover both hardwood and softwood exports from the United States, the big difference is that China is a much bigger share of the total U.S. hardwood sector. Softwood has more domestic markets.
Many pallet companies have already transitioned some customers to softwood. More are likely to follow suit if the trade wars drags on for months or even a year or more. Be warned the crazy hardwood market we have seen over the last year may continue to be very precarious. To keep up on the latest developments, contact the staff of the Pallet Profile Weekly report at 804-550-0323 or email rick@palletprofile.com for more information.
