"Virtually every lumber customer we have in the state of Oregon is now cutting for the Chinese market."
That quote comes straight from Rick Holley, CEO of Plum Creek Timber (NYSE: PCL), the biggest timberland owner in the U.S.
The benchmark commodity index (CRB) has been on a tear lately – up more than 33% since last summer. Finding bargains in the commodity space is getting harder. That's why Rick Holley's comment jumped out at me. China has already moved to snap up supplies of natural gas, oil, coal, and even uranium.
Now China is moving into the North American timber market.
According to industry consultant Wood Resources International, U.S. log exports to China went from 256,000 cubic meters (m^3) in 2007 to 2.4 million m^3 in 2010. That's nearly a 10-fold increase in just three years.
Canada is seeing similar growth. British Columbia is Canada's biggest timber-producing province. Take a look at the growth in lumber exports over the last 10 years…
Since 2000, British Columbia's exports to China are up more than 5,800%. And this growth hasn't slowed at all in recent years. Over the past four years, the amount of lumber Canada has exported to China has grown steadily at an annual rate between 78% and 117%. In terms of value in Canadian dollars, exports to China more than doubled in 2010 – the biggest jump in the past 10 years.
The U.S. and Canada can thank Russia for at least part of the increase. In 1997, Russia – China's main lumber source – imposed a tariff on log exports. But China is ramping its lumber imports from ANYONE who has the resources. Despite the tariff, China's lumber imports from Russia rose 40% in 2010. Lumber imports from the U.S. and Canada rose 54% and 65%, respectively.
In 2010, China imported a total of 34.3 million m^3 of logs – up 22% vs. 2009. Lumber imports rose a huge 49% to 14.7 million m^3.
We're seeing such big numbers because China has to turn to the international market for lumber supply. In the late 1950s, untold acres of China's forestland were chopped down to help fuel so-called "backyard steel furnaces." During the 1990s, efforts to expand agricultural production led to more deforestation.
I visited China last summer, and saw firsthand a nation that is still in the early stages of modernizing. Beijing and Shanghai are as modern as European cities, but it could take decades before even half of China catches up to developed nations. That will mean much more building, which will mean much more lumber demand.
(Also, the Financial Times recently noted that Chinese officials are touting the need for more houses to be made out of wood following the 2008 Sichuan earthquake, which killed 68,000 people.)
Limited supply coupled with increasing use of lumber in houses and furniture should ensure China remains a big importer of lumber for decades. And it's not just China. Government data from British Columbia also show exports to India, the Middle East, and southeast Asia hit all-time highs during 2010.
My favorite safe way to benefit from a long-term bull market in lumber is a big, land-rich real estate investment trust like Plum Creek Timber. Shares of Plum Creek haven't been completely left behind by the big commodity rally. They're up about 20% in the past six months. But the 4% dividend and its valuable land assets make it an attractive long-term holding.
Plum Creek and its peers are still in the process of recovering from the effects of the housing collapse. I don't expect a jump in U.S. housing demand soon. But big growth in demand from China will give these companies a decades-long tailwind.
Disclosure: The author does not hold positions in any of the stocks mentioned