Faster than expected growth in China’s demand for B.C.’s forest products is running up against unexpected constraints in the province’s Asia-Pacific gateways.
It’s not just an immediate shortage of backhaul containers that’s stumping shippers. Signs indicate a longer-term chronic under-capacity of infrastructure and facilities – if B.C. is to take full advantage of current and longer-term export opportunities to Asia-Pacific markets.
About 50% of the export tonnage passing through Port Metro Vancouver is bulk, and roughly 15% break-bulk. The balance is containers.
Break-bulk refers to cargoes that are different sizes, shapes and have a variety of handling requirements. Bulk and break-bulk exports include coal, grains, petroleum products, chemicals and forest products.
Forest products are exported either in containers or break-bulk. Shipping space for these products depends on the volume of containers arriving (head-hauls) and the willingness of various shipping lines to make calls at gateway ports to pick up export-bound break-bulk cargoes.
With the Great Recession’s overall decline in North American demand for consumer goods from Asia, the in-bound container volume (and correspondingly outbound “empties”) dropped sharply.
It is recovering, but not at a rate that meets the needs of export shippers – both here and on the U.S. west coast. In the past, they have enjoyed a plentiful supply of price-competitive backhauls to ship forest products and other natural resource products to Asia.
The precipitous drop in global trade between 2007 and 2009 also meant that many shipping lines no longer made break-bulk calls at B.C. ports. Again, that activity is recovering, but not at an adequate pace to match the recent surge in pulp, log and lumber shipments to Asia – notably China.
For years, Japan was B.C.’s largest offshore market for forest products. Exports were mostly softwood lumber, with a much lower volume of market pulp. In contrast, B.C.’s forest products trade with China was predominantly market pulp, with much lower volumes of lumber – until recently. A surge in lumber demand from China over the past few years has meant that it now far exceeds Japan as the Asia-Pacific export destination for B.C.’s forest products.
During 2010, a combination of a modest recovery in B.C.’s shipments to Japan along with a surge in shipments to China created intense competition for shipping space. Backhaul containers today are in extremely short supply – and container rates have sky-rocketed from their levels just a few years ago.
In the short term, there is likely to be some dislocation of the Japan trade because of the tragic impacts of the recent earthquake and tsunami.
Reconstruction needs in Japan, however, could lead to a significant boost in the need for B.C.’s building products. This would be good for B.C.’s coastal wood products industry in particular.
It may be tempting, from a B.C. export viewpoint, to conclude that the availability of backhaul containers will “return to normal” when in-bound container traffic responds to an eventual full recovery in North American demand for imported Asian- manufactured products. Under this scenario, pundits argue, there will be a return to the pre-2007 surplus of containers – and low container rates.
The scenario also assumes that higher break-bulk volumes and rates will entice more break-bulk shippers back into B.C. gateway ports – and relieve the pressure on B.C.’s forest product export shippers.
Increasingly, it seems unlikely to be the case.
Even with increased volumes of inbound containers, B.C. forest product exporters to Asia-Pacific markets may be faced with significant competition for the available supply of backhaul containers – notably from U.S. exporters to these areas.
Along with B.C., most of North America is shipping proportionally more, not fewer, primary products offshore. Moreover, this is a trend that’s unlikely to change in the immediate future.
Rapidly growing U.S. commodity exports to China include agri-products, chemicals, metals and minerals – as well as pulp, lumber and log exports. These are putting an additional strain on container and break-bulk export capacity at U.S. west coast ports such as Seattle/Tacoma, Portland and Longview.
Other more subtle, but also export-restricting, factors are at work. For example, heavy and dense cargoes such as pulp and lumber tend to “weight-out” a ship before its nominal carrying capacity is reached.
The same area of precious terminal space is tied up during loadings. More and/or larger vessels will be needed if, as expected, this shift in cargo trends continues.
B.C.’s forest sector has been pro-active in overcoming infrastructural bottlenecks. In a multi-party agreement, including Canadian National and Squamish Terminals as partners, pulp producers Canfor Pulp, West Fraser, Tembec and Daishowa have taken steps to improve the supply chain for pulp shipments through Squamish.
Port Alberni has benefitted from the strong recovery in Asian demand for coastal softwood lumber.
Shipments through Prince Rupert are increasing and could rise substantially over the next decade and beyond – for existing products as well as “new” energy products.
Canada West Foundation has stated that lack of infrastructure is the main barrier to increasing energy trade with Asia-Pacific. Certainly, from the viewpoint of B.C.’s forest sector, the prospects for a sustained business recovery are not market-limited.
Through various Asia-Pacific gateway projects, the governments of B.C. and Canada have made smart decisions in supporting substantial investments in promoting Canada’s offshore trade.
The positive results are being reflected today in improved economic growth rates in the western provinces and in much-needed regional diversification.
If Western Canada’s diversification away from its historical dependence on the United States is to continue – and this is particularly important for a revival of the B.C. coast forest industry and coastal economy – even more corridor and gateway investments will be needed, and soon.
Shipping bottlenecks that prevent access to Pacific Rim markets, and that create excessive competition among exporters, in turn driving up logistical costs, are likely the primary obstacle to market diversification for B.C.’s forest sector, and a coastal recovery.
As the U.S. market recovery gathers momentum – albeit slowly – the temptation among B.C.’s wood products exporters to switch away from Asia-Pacific markets back to traditional North American trading patterns will become very strong. If this happens, sectors such as agriculture, energy, mining, minerals and chemicals will be delighted to pick up the slack. Any available container, bulk and break-bulk space will be snapped up quickly. Even then, there will still be a capacity shortfall.
For B.C.’s coastal forest sector, and for the B.C. coastal economy, the recent surge in growth in markets in China and other Pacific Rim markets is a huge boost.
Federal and provincial government decisions about the timing, pace and form of the next phase of gateway and corridor expansion will be critical.
They will define whether Western Canada will continue to be a major partner or be relegated to a support player role in Asia-Pacific trade expansion over the next decade and beyond.
Peter Woodbridge is president of Woodbridge Associates Inc. (www.woodbridgeassociates.com). His column appears quarterly in Business in Vancouver.