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 sources1 - and in the export-oriented plywood, flooring and furniture sectors, this proportion is much higher, with tropical species particularly prominent in each.

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 deficit will reach between 190 million m3.2

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 Custody standard; and begun work on a ‘green’ 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.

Figure 1: Eucalyptus plantation ©TFT

Figure 2: Forest stand harvesting ©TFT

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 producers is less than 10,000m3).3 Overproduction and excess capacity is rife, giving producers little pricing power particularly in the price-sensitive domestic market. Entry, and exit, is easy, and there is very little differentiation or

Figure 3: Imported logs used for fancy veneer ©TFT

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 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

Figure 6: Core veneer drying ©TFT

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/ Township harvest

trees

Delivery to village log yard (private)

Logs trucked to central log yard (Pizhou/Linyi)

Veneer peelers purchase logs

Veneer shipped to plywood mill

Mill buyers arrange veneer sales

Logs peeled into veneers

Logs trucked to 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 provide the required tax receipts.

Figure 7: Fancy veneer cutting ©TFT

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.

Forest Concessionaire

(small)

Plywood Mill PRC Agent -Importer (logs)

Other PRC plywood mills

Forest Concessionaire

(large)

Exporting Country Agent

Veneer Processor

Veneer Processor

Other veneer mills and/or processors

Other PRC agents

Veneer Processor

Log buyer

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

Company A sawmill (Russia)

Company A sawmill (Brazil)

Local sawmills SE Asia/

South America

External Customers

Company A Factory

Forest Concession

Company A

Local log trader/

producer

Local log trader/

producer

Local log trader/

producer

Raw Materials (sawn wood)

Forest Concession

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

Dealer

Dealer

Dealer

Other PRC

Agent

Forest Concession

(small)

Other PRC manufacturers

SE Asia Agent

Forest Concession

(large)

Local log trader/

producer

Sawmill(s)

Company B PRC Agent

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 wood supply chains.

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.

Figure 8: Core veneer sorting and grading ©TFT

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.

12

Annex 1 MAP OF CHINA

13

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

14