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					          THE TROPICAL FOREST TRUST




      China Wood Products Supply Chain Analysis


Helping Chinese Wood Producers achieve market demands
             for legal and sustainable timber.

                      Funded by
                       DEFRA
             WSSD Implementation Fund

                     March 2007
CONTENTS



1        SUMMARY.....................................................................................................................................1
2        CURRENT SITUATION AND SUPPLY ISSUES...........................................................................2
2.1      Background ....................................................................................................................................2
2.2      Wood Distribution in China.............................................................................................................3
2.3      China Wood Processing Industry...................................................................................................3
3        TROPICAL HARDWOOD SUPPLY ..............................................................................................5
3.1      Logs................................................................................................................................................5
3.2      Sawnwood......................................................................................................................................5
4        CHINA’S PLYWOOD INDUSTRY .................................................................................................6
4.1      Overview ........................................................................................................................................6
4.2      Production Models..........................................................................................................................6
4.3      Raw Material Supply Chain (Core).................................................................................................7
4.4      Raw Material Supply Chain (Face/Back - F/B) ..............................................................................7
5        CHINA’S FLOORING INDUSTRY .................................................................................................9
5.1      Overview ........................................................................................................................................9
5.2      Flooring – Production and Raw Material Usage ............................................................................9
5.3      Raw Material Supply Chain............................................................................................................9
6        ESTABLISHING LEGALITY IN CHINA’S WOOD SUPPLY .......................................................11
7        CONCLUSION .............................................................................................................................12


Annex 1           MAP OF CHINA .................................................................................................................13


REFERENCES .......................................................................................................................................14
1   SUMMARY

    Proving without a doubt the legality of raw materials in China-produced plywood or flooring is
    an extremely problematic and contentious prospect, not just for tropical wood products but also
    for those utilizing materials sourced from the Russian Far East. The challenges are numerous:

       • the opacity of supply systems in overseas markets;
       • the nature of China’s domestic wood distribution systems, with individual farmers, small
         traders, and small manufacturers all prominent players;
       • the number of ‘hands’ through which a single piece of wood may transit, both for
         domestic and overseas resources;
       • the lack of capability within Chinese firms, or an ignorance of the need, to monitor or
         track their wood resource supply chain;
       • the cost for Chinese firms to implement a wood control system and to source legal
         material from overseas; and
       • the lack of incentives/demand from overseas customers to require documents attesting
         to the legality or sustainability of raw materials used.

    While these issues do not in themselves mean that Chinese plywood or flooring is
    manufactured with illegally harvested materials, they do mean that documentary evidence for a
    transaction chain will sometimes be unavailable, contain gaps, or indeed may be falsified. And
    even in cases where raw materials being imported from overseas have necessary export
    documentation, the weakness of the governing institutions in exporting countries means that
    ‘legal’ product can be anything but.

    In the near term, China itself is unlikely to be able to implement control systems to ensure
    legality of product entering its wood processing industry, for reasons including bureaucratic
    indifference; local protectionism of manufacturing and jobs; tax and revenue demands; cost
    competition within not only the domestic industry but also from other wood production centers;
    and difficulties in implementing and enforcing a nation-wide system.

    Considering all issues, the task of establishing legal/sustainable supply chains within the
    Chinese wood processing industry will be a challenge. However, one of the key characteristics
    of Chinese manufacturers is that they are extremely adaptable as well as shameless imitators.
    Faced with economic incentives (or disincentives) to change, they will. It only takes a few
    examples of ‘first movers’ who are seen to be gaining an advantage by changing the way they
    operate for more companies to move in that direction. The best potential for progress on this
    front is to identify and work with companies already active in sourcing overseas, those who are
    better funded, managed, and modern in their outlook, and also more reliant upon overseas
    markets for their sales. These companies will have a more immediate understanding of the
    benefits, both in terms of their own costs and also market access that improving their supply
    chain can bring. But it is incumbent, for these efforts to be successful, that customers and
    supply sources are incorporated into the process.




                                              1
2   CURRENT SITUATION AND SUPPLY ISSUES

    2.1   Background

    The growth of China’s wood processing industries over the past decade has transformed the
    face of the international wood products industry. From a net importer of many wood products in
    the 1990s, China is now a leading exporter of furniture, plywood, and flooring, and is rapidly
                                            moving up the ranks in doors, windows, and mouldings.
                                            However, this progress has not been fueled by
                                            domestic resources; the industry is heavily reliant upon
                                            imported raw materials to fuel its raw material
                                            requirements. While Russia is by far the largest supplier
                                            of logs and sawnwood to China, this is softwood or
                                            temperate hardwood. For tropical wood, SE Asia is the
                                            dominant supplier, with China estimated to account for
                                            approximately 70% of the region’s hardwood exports, in
                                            addition to increasing volumes originating from Central
                                            Africa. Overall, it is estimated that more than 46% of
                                            China’s wood fibre requirements comes from imported
                                                     1
                                            sources - and in the export-oriented plywood, flooring
                                            and furniture sectors, this proportion is much higher,
                                            with tropical species particularly prominent in each.

      Figure 1: Eucalyptus plantation ©TFT   While China has in recent years emphasized its growth
                                             in domestic wood resources via plantation development
                                             (China has the world’s largest plantation acreage), much
                                             of this is fast-growing, high yield species including
                                             poplar, paulownia, fir, cedar, eucalyptus and pine that is
                                             used for lower end products and/or pulp and paper. For
                                             higher end and/or export oriented products, those
                                             requiring solid wood or solid wood veneers, China is a
                                             huge consumer of imported logs and lumber. This
                                             situation is only expected to worsen in the coming years;
                                             it is estimated that by 2015, China’s total wood fibre
                                                                                     3 2
                                             deficit will reach between 190 million m .

                                            In this lies one of the major challenges in sourcing
                                            products made with legal, sustainably managed forestry
                                            resources from China. While the Chinese Academy of
                                            Forestry (CAF) has submitted a draft forestry
                                            certification standard; has begun work on a Chain of
      Figure 2: Forest stand harvesting     Custody standard; and begun work on a ‘green’
      ©TFT                                  procurement policy for wood products that covers the
                                            resource as well as production processes, the fact
    remains that the authorities have largely turned a blind eye to the legality of wood coming into
    China from overseas markets, stating that ‘China does not knowingly import illegal logs’ and
    placing reliance on exporting countries’ to police any illegal trade. China is also careful to call
    attention to the ‘complicity’ of developed country (US, EU, Japan) consumers as the driving
    force in demand for tropical hardwood products, emphasizing that Chinese producers are only
    responding to the market.

    Even if a more robust national system emerged that attempted to strictly monitor and document
    the legality of China’s wood raw materials, the economic interests of this industry at the local
    level mean that implementation and enforcement across the country would be extremely
    challenging, not unlike that seen in each and every Chinese industrial sector. The fact remains
    that China is, and will remain, heavily reliant upon imported fibre for its processing requirements
    into the extended future.



                                                 2
2.2   Wood Distribution in China

During China’s Communist past, wood importing and exporting was controlled by a limited
number of state-approved monopoly companies, who then sold either directly to manufacturers,
or to smaller regional/provincial/local trading houses. With China’s economy opening up in the
early 1990s, more companies could source directly, and China’s timber distribution network
evolved into a system of local timber distribution markets populated by many small traders who
rented space to sell small volumes to local manufacturers.

In recent years, however, the system has undergone dramatic change as private companies
have become more prevalent, with greater direct access to overseas suppliers. In addition, the
emergence of specialty wood distribution markets that provide higher levels of service and
more modern facilities plus the entry of home center chains has resulted in a gradual reduction
in the importance of the traditional ‘booth renting’ timber markets. It is anticipated that over
time, traditional wood markets, the newer specialty markets, and home center chains will each
command one-third of the domestic timber trade (exclusive of direct imports).

For both cost and quality control considerations, a greater number of Chinese firms are looking
to shorten their supply chain, and source directly from overseas sources. The flooring industry
has been more successful in this regard, at least larger processors, but most companies still
must go through agents or traders from the supplying country, therefore leaving less control
over that leg of the supply chain. China’s plywood industry is further behind; perhaps owing to
the smaller scale and more domestic nature of the manufacturers (flooring companies generally
have more foreign investment, while plywood producers are more likely to be domestic
companies). This said, we are aware of some plywood manufacturing operations in
Shandong/Henan Province that are working to exert greater control over its poplar core supply
chain by sourcing directly from individual farmers. However, they still remain captive to the
existing supply networks for their Face & Back veneers.

2.3   China Wood Processing Industry

One of the most important transformations in China’s wood processing industry over recent
years is the great increase in the number and percentage of private enterprises, among all
sectors. In some areas, 80-90% of the enterprises are private, particularly in the furniture,
flooring and plywood arena. This has been accompanied by the emergence of industry
‘clusters’, areas of the country that have attracted large numbers of producers of similar
products. Linyi and Pizhou are prime examples of this trend in the plywood industry, while in
flooring it is seen in and around Shanghai and in Guangdong Province near Dongguan.

A key issue facing the Chinese wood processing
industry, regardless of sector, is the country’s
reliance upon imported raw materials, not only for
higher-end, export oriented production but also
domestic market production (80% of China’s
plywood production is for the domestic market).
Looking specifically at the plywood and flooring
industries, both segments could be characterized
as being in a state of ‘perfect competition’. There
are thousands of processors, and very few have
any type of scale (for example, average annual
production for 90% of Chinese plywood
                                                 3 3
producers      is     less    than     10,000m ).
Overproduction and excess capacity is rife, giving
producers little pricing power particularly in the
                                                       Figure 3: Imported logs used for fancy veneer
price-sensitive domestic market. Entry, and exit,      ©TFT
is easy, and there is very little differentiation or




                                             3
branding for the products manufactured by most companies. Substitution of similar products
from other plywood suppliers, whether Chinese or from other international producers, is easily
accomplished.

While some flooring manufacturers have been able to establish overseas sourcing arms, a
significant proportion of the trade still goes through Chinese wood traders, and in the case of
plywood raw materials, nearly all does. Increased scarcity of raw materials, whether poplar
veneers or imported hardwoods, combined with the sheer number of producers seeking raw
material supplies, has caused raw material prices to rise steadily, eroding margins and/or
forcing producers out of the market (for example, from solid wood to engineered wood flooring).
In fact, without China’s value added tax rebate, the situation would be even more dire for many
companies. A further demonstration was in 2006 when the Chinese government imposed a
10% export tax on hardwood flooring. The industry was thrown into turmoil because this tax
would remove any cost advantage and leave no profit. Eventually, the government quietly
backed down and rescinded the tax.

                                                       Whereas the Chinese industry’s main competitive
                                                       advantage and the reason for its rise in world
                                                       markets has been its price advantage, on an
                                                       individual company level many Chinese
                                                       manufacturers face tough conditions and are
                                                       largely at the mercy of the market – from both a
                                                       customer and supplier perspective. With
                                                       increased import duties in both the US and EU
                                                       markets, and looming anti-dumping and WTO
                                                       actions in both markets, Chinese producers look
                                                       set to face a difficult road ahead.


  Figure 4: Log truck arriving at a peeling mill
  ©TFT




                                                   4
3   TROPICAL HARDWOOD SUPPLY

    3.1   Logs

    While Russia is overwhelmingly the leading supplier of logs to China, most of this is softwood
    with some temperate hardwood logs. Tropical hardwood log sourcing is much more diverse,
    with Malaysia, Papua New Guinea, Myanmar, and a number of African countries accounting for
    nearly all of China’s tropical log imports. That said, despite Indonesia’s ban on log exports,
    most outside observers believe some of the log imports from PNG and Malaysia were likely
    sourced from Indonesia, and represent illegal logs going into China.

    Legal export of logs is permitted by Papua New Guinea and many companies are using
    Bintangor and red Canarium for F/B veneers. However, Forest Trends commented this year
    that “The majority of forestry operations cannot credibly be characterized as complying with
    national laws and regulations and are therefore ‘unlawful’.” Issues cited by Greenpeace in July
    2006 against the use of Bintangor and Red Canarium in the report “Repeat Offender: How Tony
    Blair’s Government Continues to Trash the
    World’s Rainforests” will apply also to any
    wider use of species from Papua New
    Guinea.

    Log exports from Sabah and Sarawak in
    Malaysia are legal. However, allegations,
    particularly in Sarawak, of cross border
    logging in Kalimantan, Indonesia and lack of
    application of back-to-stump traceability
    make it difficult or impossible to establish
    whether these logs are in fact of legal origin.

    There are also widespread allegations of
    illegal logging in equatorial regions of Africa,
    the source of Okoume.                              Figure 5: Imports of African logs at Zhangjiagang port
                                                       ©TFT

    3.2   Sawnwood

    China is the world’s largest market for hardwood lumber, with demand in 2005/6 approximately
    4 million m3, of which 70% was tropical species. Major tropical sawnwood supply sources are
    Malaysia, Indonesia, Thailand, and Brazil, with these countries accounting for more than 80%
    of China’s tropical sawnwood imports. 4




                                                 5
4     CHINA’S PLYWOOD INDUSTRY

      4.1      Overview

      China’s plywood industry is estimated to have over 6,000 producers. For plywood producers
      using tropical hardwood logs, location close to one of the major log ports has been a key aspect
      in the industry’s development, resulting in the development of industry in and around the ports
      of Zhangjiagang, Shanghai, Shenzhen, Lianyungang, and Nanjing, where logs are unloaded at
      the port and then reloaded onto barges for transport along canals to mills.

      While production is spread throughout the country, there are large concentrations of plywood
      producers in the following areas:

                                                       • Zhejiang Province, centered on Jiashan
                                                         County, has more than 300 companies and
                                                         reportedly produces close to one third of
                                                         China’s plywood;
                                                       • Wen’an is the most important plywood
                                                         production center in north China, located in
                                                         Hebei Province, around the town of
                                                         Zuogezhuang. These are mostly very small
                                                         producers, including a large number of
                                                         companies producing only poplar veneer
                                                         for sale to local plywood producers;
                                                       • Linyi, in Shandong Province, is one of the
                                                         most important plywood centers in China,
                                                         with approximately 2,600 producers in the
                                                         area; and
                                                       • Pizhou, in Jiangsu Province, has more
                                                          than 1,500 plywood companies and 400
    Figure 6: Core veneer drying ©TFT                    veneer producers. The majority of plywood
                                                         produced in this region is for export.
                                                         Estimates are that 40% of Chinese export
                                                         plywood originates from this area, much of
                                                         it destined for the US market.

      In 2006, China’s plywood exports grew to 8.3 million m3, valued at US$2.9 billion, up 49% and
      55%, respectively, over 2005. The US was by far China’s largest market, accounting for 26% of
      its plywood exports. 5

      4.2      Production Models

      There are three predominant models for plywood production in China, differentiated by core
      and face and back (F/B) veneer supply chains:

            • Both core and F/B sourced externally. This is the predominant model used in the poplar
              based areas of Pizhou and Linyi, and is normally seen in lower grades of plywood.
            • Core sourced externally, F/B produced in-house. This model yields a mid to high grade
              product, and is more often seen in southern China (Guangzhou) producers, as they have
              better direct access to logs. Core is eucalyptus, not poplar.
            • Core and F/B produced in-house, with some F/B supplemented by external sources.
              Product is higher quality, with many producers in proximity to Nantong (near Shanghai)
              because of direct access to incoming tropical logs at the Zhangjiagang port.




                                                  6
4.3      Raw Material Supply Chain (Core)

In the Yellow River basin area of Shandong, Henan and Northern Jiangsu provinces, plywood
cores are nearly always plantation poplar. This supply chain, from field to end production, can
involve up to 7-8 ‘movements’ and a number of middlemen. Previously, many of the plantations
were set up and managed by plywood mills in order to ensure raw material supply, but because
of uncertainties regarding land use policy and investment risk, most mills have exited the
plantation business and the majority of supply comes from private farmers. This has led to raw
material scarcity for poplar core, with prices rising 20-25% since early 2006.

A ‘typical’ poplar core veneer supply chain follows, for both mill and non-mill organized
plantations:

      Farmers/Village/      Delivery to village        Logs trucked to             Veneer peelers
      Township harvest           log yard              central log yard            purchase logs
           trees                 (private)              (Pizhou/Linyi)




      Veneer shipped to     Mill buyers arrange       Logs peeled into             Logs trucked to
        plywood mill            veneer sales             veneers                   veneer peelers




Note: In this model, the mill buyer sourcing veneers will be a middleman, not a mill employee,
and will be working on behalf of a number of plywood factories. In addition, there could be 2-3
additional transactions or product movements in the chain before it reaches the mill.

In Southern China (Fujian, Hunan, Jiangxi Provinces), the supply chain is much the same as in
Shandong, with the exception that the cores will be
eucalyptus or pine, with the face tropical hardwood,
domestic pine and/or Chinese fir/cedar.

During the last 1-2 years, changes in Chinese
agricultural tax policy have led to many reductions in
agricultural taxes for farmers. One specific change
made ‘agricultural’ products tax free, but left standing a
cutting tax on ‘forestry’ products. As such, farmers have
tried to characterize their trees as ‘agricultural’
products, and mills have looked to source directly in
order to lower costs. Problems have occurred,
however, when tax authorities conducted audits, and
documentation for tax and value added tax rebates did
not exist. As a result, the mills have largely reverted to
the original model using intermediaries who can                Figure 7: Fancy veneer cutting ©TFT
provide the required tax receipts.

4.4      Raw Material Supply Chain (Face/Back - F/B)

China’s plywood industry is highly reliant on imports for F/B veneers. The most common
species are okoume from West Africa, meranti, bintangor, red canarium and other tropical
hardwoods from SE Asia, birch and larch from Russia, beech from Europe, and various North
American hardwoods such as oak and cherry. For the most part, wood from Africa, SE Asia,
and Russia arrives as logs, and is peeled or sliced in China. For North American hardwoods,
the situation is a bit different. While China imports a growing quantity of hardwood logs from



                                                  7
North America, with most of these peeled or sliced to produce veneer, it also imports large
volumes of hardwood veneer from the US, China’s largest veneer supplier.

The typical supply chain for F/B tropical veneers involves logs shipped in directly from Africa,
PNG, or other SE Asian locations. For poplar based plywood with okoume face coming out of
Africa, a good bit of this trade is controlled by China’s large petrochemical companies –
PetroChina and Sinopec. Logs will be shipped in directly to veneer peelers, many of whom are
located in the Linyi area in Shandong province. Interestingly, the end customers – the plywood
mills - will have been required to pay upfront for the logs prior to shipment from their source, as
well as handling all customs clearance. Some Chinese plywood companies have begun to
establish operations in the major African supplying countries, where they source and peel logs.




                          Veneer                                  Log buyer             Forest
                         Processor                                                   Concessionaire
                                                                                        (small)




   Plywood Mill           Veneer             PRC Agent -          Exporting             Forest
                         Processor          Importer (logs)     Country Agent        Concessionaire
                                                                                        (large)




                          Veneer                                  Other PRC
                         Processor                                  agents




   Other PRC                                Other veneer
  plywood mills                             mills and/or
                                             processors




For smaller producers, there could be several more steps in the process, as materials pass
through other local traders and/or processors.

The nature of this supply chain for both core and F/B veneers, with the numerous farmers,
traders, shippers, and processors, means that it is virtually impossible for any Chinese plywood
manufacturer to provide complete documentation for legality, or to attest that the product is
sustainably managed, and account for each step in the supply chain. In fact, at present most
plywood producers do not possess the internal capability, whether in the form of Wood Control
Systems, procurement policies, or internal control procedures, to even begin to monitor their
raw material supply chain. Even the Chinese authorities themselves experience difficulties in
regulating domestic wood supply chains; although cutting quotas are established for each
province, each year, China’s State Forestry Administration has admitted that actual cutting is
likely 30-50% above official quotas. That said, official quotas do not incorporate the activities of
the millions of small farmers who harvest their own land, while the actual cutting totals do, a
contradiction that skews the picture of what is ‘legal’ or ‘illegal’ wood. This situation is especially
pronounced in the plywood industry, where poplar core is largely sourced from individual, small
farmers.




                                              8
5   CHINA’S FLOORING INDUSTRY

    5.1      Overview

    The most recent production numbers on China’s wood flooring industry (2005) place annual
    output at approximately 290 million m2, with two thirds of that consisting of engineered
    flooring. 6 Over the past few years, production of solid wood flooring has declined, while
    composite (engineered) flooring, including 3-layer and multi-layer products utilizing hardwood
    veneers, has grown in response to growing raw material scarcity and rising prices for
    hardwoods, particularly tropical species. Today, solid wood and engineered floor production
    each account for approximately half of all hardwood flooring production, with estimates that
    90% of hardwood raw materials consumed are imported (both tropical and temperate species.)
    Engineered floor producers use domestic poplar plywood or plywood from China’s northeast,
    which utilizes Russian pine, for core material, and it is openly accepted that a significant
    percentage of China’s imports from Russia originate from questionable sources.

    5.2      Flooring – Production and Raw Material Usage

    China’s major flooring production areas are centered in Southern China (Guangdong province)
    and in the region surrounding Shanghai (Shanghai, Jiangsu province, and Zhejiang province).
    One of the most important flooring production centers in China is Nanxun, in Zhejiang Province,
    with approximately 280 wood flooring manufactures in this region, with 50 considered large
    scale. While the size of the industry and number of manufacturers makes it impossible to
    provide an all encompassing view of the industry, there are some generalizations on the supply
    chain and product differences between the two areas:

          1. Supply chains for both plywood and flooring manufacturers are very similar for tropical
             raw materials with raw materials going through several middlemen before export. But,
             while plywood manufacturers, regardless of size, will generally be forced to go through
             local Chinese intermediaries for their tropical raw materials, larger flooring producers are
             more likely to purchase directly from source country traders (small to medium size
             flooring manufacturers will source from a local wood trader located near to their
             production location, traders who do their own overseas sourcing, or who buy from other,
             larger PRC trading companies). In both instances the opacity and complexity of the
             originating country system means that tracking raw materials is nearly impossible.

          2. Southern China, in general, is more a base for tropical wood flooring producers (primarily
             SE Asia and South America), owing to market preferences among consumers, while one
             is more likely to see flooring producers using North American/temperate species (oak,
             cherry, walnut, etc) in the Shanghai region. This said, there are many producers using
             tropical wood in the Yangtze region, and vice versa in southern China.

    5.3      Raw Material Supply Chain

    In contrast to the plywood industry, where raw materials flow from many sources and through
    many hands within China, flooring manufacturers, save smaller producers, are better able to
    exert some degree of control over their raw material supply chains, sourcing directly from
    overseas suppliers or traders.

    Flooring manufacturers in China pursue different raw material sourcing strategies depending on
    their size and overseas capabilities. The following diagrams represent two different examples of
    lumber sourcing approaches. Company B is more commonly seen among smaller producers in
    China, while Company A is a larger producer and has its own overseas sawmill and buying
    operations thus eliminating local China agents.




                                                   9
                               External                Company A                  Local log                 Forest
                              Customers                  sawmill                   trader/                Concession
                                                        (Russia)                  producer




   Company A                Raw Materials              Company A                  Local log                 Forest
                            (sawn wood)                 sawmill                    trader/                Concession
                                                         (Brazil)                 producer




                             Company A               Local sawmills               Local log
                              Factory                  SE Asia/                    trader/
                                                     South America                producer



---------------------------------------------------------------------------------------------------------------------------


   Company B                 PRC Agent                    Dealer                  Local log                 Forest
                                                                                   trader/                Concession
                                                                                  producer                  (small)




   Other PRC                SE Asia Agent                 Dealer                 Sawmill(s)
  manufacturers




                              Other PRC                   Dealer                                            Forest
                                Agent                                                                     Concession
                                                                                                            (large)




Even in the case of Company A, determining legality of raw materials can be problematic, as its
supply chain involves buying from sources where it cannot track product. However,
implementing a wood control system for product originating from its concession areas could
potentially enable the company to verify origin and legality for that portion of the supply chain.

A number of North American-based hardwood producers have established representative
offices in China, but their function is purely marketing and order taking, shipping full container
loads but not keeping product on the ground in China.




                                                         10
6   ESTABLISHING LEGALITY IN CHINA’S WOOD SUPPLY

                                                The challenge of establishing legal and/or sustainable
                                                supply chains for China’s wood resource supply cannot
                                                be underestimated. Chinese manufacturers not only
                                                face strong competition in international markets, but in
                                                many cases, the domestic market is as daunting, if not
                                                more so. These pressures, combined with a business
                                                culture where imitation, copying, and ‘creative’
                                                accounting are widely practiced, leads many
                                                manufacturers to cut corners when and where they can.
                                                If able to secure cheaper or more desirable raw
                                                materials from ‘questionable’ sources, then they will.

                                                However, markets are changing, and there are Chinese
                                                manufacturers who are moving to adapt to the new
                                                environment. Over 100 Chinese companies have
                                                obtained FSC COC certification in recent years, and
                                                there are now a number of FSC certified forests in
                                                China. Overseas customers, such as B&Q and now
                                                Home Depot with its recent Chinese acquisition, are
                                                looking to establish legality and sustainability in their
    Figure 8: Core veneer sorting and grading   wood supply chains.
    ©TFT
                                              With organizations such as TFT and buyer cooperation,
    positive actions focused on domestic supply include a group in Shandong/Henan Provinces and
    another company in Guangzhou that are attempting to more directly control their core veneer
    supply chains, poplar and eucalyptus respectively, by working directly with individual farmers or
    the State Forest Administration. In the latter case this involves exploring options for FSC
    certification of state plantations. While one reason is better quality control, more compelling are
    the cost savings that can result by removing the extra ‘hands’ through which the product flows,
    as well as pressure from overseas markets where questions over product legality of the more
    ‘questionable’ wood species have been increasing. However, the working capital requirements
    required to go direct to the farmers are generally beyond the reach of many manufacturers,
    particularly in the plywood sector, and the structure of China’s wood distribution system, with its
    supply ‘cartels’, further works against the vast majority of producers.

    Further actions being taken by progressive manufacturers, with the assistance of TFT, include
    shortening of supply chains by direct linkage with overseas suppliers where full documentation
    can be provided to establish origin and legality. Others are exploring the use of less
    controversial species for F/B veneer including the possibility of using a number of locally grown
    plantation species. Such action requires the encouragement of buyers to ensure markets and to
    provide support that will drive the necessary changes.




                                                   11
7   CONCLUSION

    China’s rise as a global player in the international wood products trade has resulted in profound
    changes in the international wood products industry. From once being a net importer of both
    raw materials and finished products, China has within less than a decade moved to command a
    dominant position in the trade of many wood-based products. This trend is unlikely to change.

    These developments have also had a profound impact on tropical wood supply chains. Not only
    has China become a major player in tropical wood-based product production (flooring, furniture,
    plywood), with seemingly insatiable demand for tropical hardwood raw materials to fuel its ever-
    expanding export processing industries. Moreover, the growing affluence among domestic
    consumers, combined with a widespread lack of attention to and accountability for the legality
    of supply sources into China, have led to concerns for the sustainability of the world’s tropical
    forests.

    While there has been some recognition of the issue among China’s authorities, and preliminary
    steps taken by official or semi-official bodies within China to address it, implementation of
    measures to monitor and/or control illegal supply sources, much less adoption by the industry,
    has been nearly non-existent. Without providing the Chinese industry with the tools and
    incentives to develop not only the capability but also the supply networks to establish supply
    chains for sustainable and legal wood will be difficult.

    Overcoming these challenges is not impossible, as growing environmental concerns in China
    combined with external pressure from governments, NGOs, and customers, has begun to
    create greater awareness within China, the government and industry that this is an issue that
    must be addressed. One only has to look at recent anti-dumping filings in both the EU and US
    against Chinese plywood exports, actions that focus on quality and subsidy issues but more
    widely on the subject of legal raw material supply for the industry, to understand that the
    industry must address these questions.

    If progress is going to be made to establish legal/sustainable supply chains among Chinese
    processors, it will need to be done both from the bottom up, working with manufacturing
    companies and their customers on an individual basis. Given industry structure and distribution
    systems in both the plywood and flooring industries, it is more likely that progress could be
    made first in the flooring sector. At the same time, educating and informing the relevant
    Chinese authorities of regulatory developments, market requirements, and demand trends in
    both supplying and consuming countries will have the effect of fostering transparency and
    promoting cooperation on this issue.




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Annex 1   MAP OF CHINA




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REFERENCES

1
 China Timber Distribution Association; 28 October 2006 presentation; China International Wood
Products Summit; Shanghai, China.
2
 China’s Furniture Industry: The Demand and Supply of Wood Materials; Xu Meiqi; Shanghai
Furniture Research Institute; 28 October 2006 presentation; China International Wood Products
Summit; Shanghai, China.
3
    Beijing Xiangfei Market Investigation Co., China Plywood Market Report, 2006.
4
 SCRP Consulting; 28 October 2006 presentation; China International Wood Products Summit;
Shanghai, China. China Customs data.
5
    China Customs data
6
 American Hardwood Export Council; 28 October 2006 presentation; China International Wood
Products Summit; Shanghai, China




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