- Growing interest in biomass energy helps to sustain the demand for wood
- Increasing demand from emerging countries
- Material is valued due to the expansion of sustainable construction, aimed at limiting environmental risks
- Dependent on the construction and paper sectors
- Impacted by the COVID-19 crisis
- Efforts by sector participants to adapt to stricter regulation of wood harvesting in order to preserve forests
- Highly exposed to climatic hazards and ongoing trade tensions
Risk Analysis Synthesis
The wood sector is highly dependent on the construction industry, which uses large amounts of wood as inputs. The COVID-19 pandemic had a severe impact on construction, as worksites were abruptly shut down in several regions of the world, particularly in the first half of 2020. The wood sector is likely to follow the same gradual and contrasting recovery as in the construction sector. Wood is also highly dependent on the paper sector, which has benefited from a surge in packaging demand due to the rise of e-commerce. This in turn has been good for the wood sector.
After an unprecedented GDP contraction in 2020 (-4.8% according to Coface), world economic growth should pick up again in 2021 (+4.4%, again according to Coface). A differentiated recovery is expected for the wood sector.
The sector is still facing profound transformations. The industry continues to suffer from protectionist tensions, notably the customs duties imposed by the United States on Canadian lumber since 2017, and the trade war between China and the United States, which have imposed 25% customs duties on imports of each other’s wood and wood-based products. In Europe, Brexit poses a significant risk as the UK has indicated its intention to impose stricter regulations post-Brexit on the sector. Moreover, at the global level, participants are facing an increasingly restrictive regulatory framework due to environmental issues and government measures aimed at preserving forests.
Sector Economic Insights
An already fragile sector’s difficulties have been exacerbated by the COVID-19 crisis
Even before the emergence of the COVID-19 crisis, the wood sector was already suffering from the global economic downturn due to weaker demand and its dependence on the construction and paper sectors, which were themselves being by undermined the slower pace of economic growth.
The health crisis had a severe impact on construction, which is the wood sector’s primary client. The abrupt shutdown of worksites due to the lockdown measures rolled out in many regions in the second half of 2020 caused demand for wood to plummet. Coface anticipates that the wood sector will follow the contrasting trajectory of the construction sector in its recovery. Fairly strong demand from the infrastructure segment of the construction sector is likely to boost demand for lumber. Meanwhile, Coface expects weaker demand on the real estate market (private and commercial properties) to cause a drop in demand for lumber in this market and the furniture segment.
The wood sector is also dependent on the paper sector, whose packaging paper segment benefited from strong demand as e-commerce activity increased due to the mobility crisis caused by the COVID-19 pandemic and the need to limit physical contact. This latter development and higher demand for packaging paper stimulated demand for wood. However, as e-commerce has not developed to the same extent everywhere, for instance it is not widely used in Latin America, not all regions benefited from the increased demand. Wood pulp* prices rose in 2017 and 2018, but dropped in 2019, with the St. Louis Fed’s lumber price index collapsing by 34% between January and December 2019 (see Chart). Trends over most of 2020 show that prices stopped falling but did not move upwards, due, in particular, to supply chain disruptions and timid global demand. Pulp prices are thus expected to recover in 2021.
Different rates of recovery across regions
In Europe, activity in the sector remains impacted by the second wave of coronavirus that occurred during H2 2020 and the measures taken to slow the virus’ spread. In the wake of the health crisis, activity collapsed during the second quarter of 2020. In France, production fell during the lockdown, contracting by 32% in April year-on-year; it rebounded thereafter and by September was 2% below the previous year’s level. In Germany, sales of wood and wood-based products stood up well to the crisis: despite declining in April and May, they increased by 2% year-on-year in the January-September period.
Uncertainty remains over the recovery of the Japanese wood sector. Japan is a special case because it is one of the world's largest importers of wood. For instance, almost all wood chips exported by Australia, the United States and Chile are sent to Japan. Japanese demand is vital to the sector and impacts virtually all wood-exporting countries. Japanese wood imports plummeted because of the health crisis and supply chain disruptions. This had a significant impact on the wood sector globally. Japanese demand is expected to recover gradually but the increase is not expected to make up for the losses in the first half of 2020.
In China, much of the sector's demand comes from the real estate market, which cooled sharply and slowed due to the effects of the pandemic during H2 2020. The gradual economic recovery underway in China since the third quarter of 2020 is likely to boost the country's construction sector, despite its difficulties. This should benefit the wood sector. Regarding exports, for the moment no bilateral agreement has been signed with the European Union certifying that China’s products comply with EU sustainability rules. This could depress the sector and negatively impact the anticipated recovery.
The Americas are also struggling to recover. In Latin America, Coface expects that several factors will make it harder for the sector to pick up again. First, production of furniture decreased by 21% in H1 2020 year-on-year in Argentina as demand waned in the country because of economic difficulties. Second, lumber manufacturing in Brazil fell by 11.8% in H1 2020 year-on-year. A short-term pickup is not expected due to rock-bottom demand. In North America, Coface expects that the sector will also find it tough to recover. Profitability has taken a hit in Canada following the implementation of U.S. tariffs on Canadian lumber in 2017, forest fires and pine beetle epidemics, which are destroying pine forests. This has led to plant closures and layoffs. U.S. wood production has contracted sharply due to plant closures because of the COVID crisis. Falling demand in construction and furniture is also expected to weigh on the sector. Meanwhile, the United States is expected to see a very gradual recovery, with demand remaining lacklustre, particularly in certain segments of the construction sector, such as commercial and private real estate, against the backdrop of an economic crisis and an increase in precautionary savings. This is expected to hamper the wood sector’s recovery.
Ongoing transformations in the sector are expected to continue.
The sector remains impacted at this stage by the protectionist environment, notably featuring trade tensions between China and the United States, which imposed 25% customs duties on imports of each other’s wood and wood-based products. The U.S. wood sector is particularly affected, with 60% of its exports going to China. Between 2017 and 2018, U.S. wood exports to China fell from USD 1.7 billion to USD 1 billion, mainly due to a decline in hardwood, which accounts for the largest share of U.S. wood exports to China. The U.S./China trade war has intensified and tensions between the two countries have increased. This could continue to have a negative impact on the wood sector.
Brexit is creating uncertainty for the sector in Europe, with the UK importing the majority of its wood from the EU. Moreover, the UK has indicated its intention to implement a UK Timber Regulation and its own Forest Law Enforcement, Governance and Trade (FLEGT) programme with significant requirements in terms of standards to be met by participants. This poses a risk to short-term profitability due to the significant investment required for firms to comply.
Note for the reader:
Wood pulp: paper pulp; pulp for the manufacture of paper and cardboard
Last update : December 2020