I’d like to thank the MPA for inviting me to be part of this distinguished panel…a panel that boasts the world’s largest eucalyptus pulp supplier, Russia’s largest softwood pulp supplier and, of course, Weyerhaeuser, the world’s largest producer of softwood pulp. This clearly is a group interested in China, and we’re pleased to be part of today’s discussion.
There are many approaches I could take today.
I could dazzle you with facts and figures about China. I could expound on the market potential it offers. I could tantalize you with stories of success. I could even outline business scenarios and then let you guess which approach Weyerhaeuser is taking.
All are interesting, and all are appropriate. But today, I want to do something a little different.
I want to start by playing off the opening lines of the original Star Trek television series. Anyone who watched TV in 1966 remembers the words “space, the final frontier.”
With those four words, Star Trek transported us into a universe filled with imaginary possibilities. We became voyagers on the Starship Enterprise as it traveled through a realm that could not be reduced to a single word or adjective.
Today, we face similar opportunities right here on Earth. The place is China.
So I want to alter the Star Trek opening just a bit to “China, the final frontier.” Those four words also lift us into a world of possibilities because China truly is “the final frontier” for business in general and our industry. No other country in the world harbors as much potential.
But like the space we saw depicted in Star Trek, China is not one dimensional.
There are opportunities and there are challenges. What appears promising can be disappointing, while success may be found where least expected.
In a country with 1.3 billion people, one need not look far to find opportunities. But people are only part of the equation. The Chinese economy is the real story.
Today, China is the world’s sixth largest economy.
At its present growth rate, China will surpass the United States as the largest economy in the world in 2040.
This shift will affect every industry, even ours.
China is already accountable for 76 percent of the growth in world demand for pulp. In a few short years, it has evolved into one of the largest consumers of chemical pulp. Not surprising, China is a closely observed bellwether of the pulp market.
But this is just the beginning. Paper consumption in China will hit 80 million tons by 2010 and 100 million by 2015. To meet this need, the Chinese plan to increase paper and board production to an estimated 22.3 million tons in 2005. It will do this with “New China” machines that are newer, larger and run predominantly on imported fibers.
The good news for those of us in this room is that the Chinese currently lack the capacity to produce enough pulp from higher quality wood fibers to meet their needs.
Since 1980, pulp imports into China have increased from half a million tons to almost six million last year. Such a growth rate is unparalleled in our industry.
For the short term, then, we have an opportunity to help the Chinese meet their demand for pulp.
Because for all of the upside China represents, there is a downside.
Just last week, news of a slowing Chinese economy sent a tremor through the stock market.
To someone who was out on the road to sell 14.5 million shares of common stock, that tremor felt more like the mythical 10.5 earthquake dramatized on TV earlier this week.
But whether it was a tremor or an earthquake of impossible proportions is immaterial.
The important thing is that it signaled that the Chinese economy is subject to the laws of economic gravity. What goes up, must, at some point, come down.
This point is not lost on the Chinese government. It is keenly aware of the looming risks of an overheated economic engine.
Recently, the government took steps to eliminate uneven growth due to over-investment in some steel, aluminum, luxury housing and auto production. The concern is that over investment will produce a dot.com like collapse in the Chinese economy.
Such an event would undercut foreign investor confidence and slow further investment.
There is also growing concern for banks overburdened by bad debt.
The Chinese need look no further than Japan to see the consequences of growing bad debt.
This is not to say China isn’t a force that will continue to transform the world economy. Nor does this mean our industry shouldn’t partner with China to help that transformation.
But what are our responsibilities in such a partnership?
First, we must maintain our focus on safety.
No opportunity, no matter how enormous, should place the safety of workers at risk. Let us commit to operating as safe – or safer – in any operation in China.
Second, we must maintain our focus on the environment.
We must serve the needs of the emerging Chinese economy in a responsible manner that preserves the forests for future generations in the countries that supply pulp to China.
These countries include Indonesia, Russia, Canada, the United States, Chile and Brazil. The forestry practices in these countries reflect on the entire industry. When forests are stripped bare and not replanted, we all share the blame.
At Weyerhaeuser, we not only operate in a sustainable manner, we also are actively engaged in a technical exchange with the Chinese Academy of Forestry to help meet the goal of responsible, constructive forestry practices. I would encourage others to join us in similar efforts.
Third, when we do invest, we must invest wisely.
We need to build a partnership with China with an eye looking five to 10 years into the future. We cannot be swayed by month-to-month swings in demand. Investments must be made with the long-term in mind.
Recently, we have seen a shift of pulp imports toward mechanical pulps and unbleached kraft reflecting expansions in board capacity.
We have also seen the Chinese buyers relying more heavily on Russian and Chilean producers. This has been attributed to these countries’ record of reliable on-time shipments and low cost fiber. Do these changes reflect permanent shifts or short term opportunistic trends? Understanding the structural shifts from short term market maneuvering is one of the many challenges of our industry.
Fourth, all parties involved in a trade relationship – including the Chinese – must agree to communicate openly and clearly with stakeholders. We must talk about and live the principles of free trade.
All too often, we’ve seen trade relationships hampered by selfish legislation designed to benefit one group at the expense of others. We must use our trade associations wisely and ensure that they support free trade approaches. Open communication extends as well to direct communication with our customers. Wherever possible, the Weyerhaeuser Pulp Business has striven to work as directly as possible with our customers, to the point of opening a major pulp sales office in Hong Kong and relocating technical support people to Taiwan. We will continue to push for more direct involvement with the people who use our product rather than tolerate indirect, circuitous, arms-length relationships.
Fifth, we must remain open to change. China is a new opportunity and like the frontier of space, it will cause us to rethink some of our cherished suppositions. We are seeing a movement away from annual fibers toward wood fibers in the production of high quality paper and board. We are seeing Chinese customers moving more toward direct relationships with their suppliers. We are seeing more direct selling which means less cyclicality in buying patterns.
These are all changes which require us to adapt our business practices to new models.
What we’re witnessing in China is an economic miracle of historic proportions. It truly is “the next frontier.” We must travel through that frontier as partners with China. We must preserve those things that have made us great while remaining open to change.
If we do, then we too will accomplish something historic. Thank you.
