By Reg Barclay
Is there an opportunity for Canadian lumber and plywood in the growing Mexican market? The fifth anniversary of Mexico joining the NAFTA agreement is upon us and for Canada, the results have been nothing to shout about. Canadian exports to Mexico have increased 47 per cent since 1993 to $1.1 billion, but Mexican exports to Canada have doubled to $7 billion over that same period of time.
Canadian lumber and plywood products, a major export sector for Canada, are an interesting case in point. There have been no reported export shipments to Mexico from Canada in 10 years. There have been relatively small annual pulp and paperboard exports to Mexico of between $30 million and $50 million, but from well before 1990 there is no evident growth trend.
This does not mean that NAFTA is not worthwhile, but it appears that Canada has not yet found a ready market for its wood products in Mexico. Perhaps "ready" is the key word. While there was interest by Canadian exporters just prior to NAFTA, it may be that not enough effort has been put into developing this market since then. We are talking about an economy emerging from years of protectionism and a market not knowledgeable about wood use in construction and without an established wood products distribution system. To develop such a market requires a commitment of time and resources. An opportunistic approach has doubtful value.
The Vancouver-based Council of Forest Industries of BC (COFI) first looked at this market in 1985, according to industry consultant David Cartwright. Representing BC lumber and plywood producers, COFI was a joint participant with the Canadian government in the World Forestry Congress in Mexico City. Presentations were made and there was a booth at the trade fair. Some interest was generated, but nothing developed, perhaps because of a peso devaluation that occurred around the same time.
A further assessment was undertaken in 1991 by Cartwright for COFI, in response to a visit by executives from Mexican construction companies. Similarly, nothing developed. At that time, industry interest was narrowly focused on the US and Asia, as they were readily accessible wood using markets that were just beginning to boom after the 1990 recession.
The COFI assessment, on the other hand, showed that Mexico was going to be a difficult market to crack. Cartwright pointed out that Mexico tended to be a low-price, low-grade market, and BC wood product grades, sizes and uses were largely unknown. Housing, a main demand segment for BC construction-grade lumber and plywood, was also of mainly cement and concrete block construction.
At the same time, Cartwright noted that support was waning for the generic type of timber frame promotion, in which COFI had excelled, which was very appropriate for the needs of the Mexican market. This overseas promotion was funded jointly by industry and provincial/ federal governments under the COMDP trade development program.
On the industry side, consolidation had fostered larger, more independent-minded companies, who preferred to do their own marketing and promotion. Subsequently, COFI was restructured by its members to focus on market access and drop overseas promotion.
Meanwhile, the United States had a very different view of the Mexican market. Total US exports in 1996 were US $75 billion, 75 times larger than Canadas. To be fair, this probably reflects the historic close association between the two countries.
But there was also more US interest, notably in the forest industry. For wood products, several US lumber and plywood industry trade associations were active as far back as 1991 with offices in Mexico City promoting southern pine, west coast soft-woods and east coast hardwoods.
Through US promotion, softwood exports increased steadily from 1985 to reach a peak in 1992 of 400 million board feet for lumber and 225 million square feet (3/8-inch basis) for plywood. Volumes have declined since, however; a stronger US dollar and higher prices in the US market have combined to make American products more expensive in Mexico.
Hardwood lumber and plywood have shown a steady growth trend to the present. These products are used in the furniture industry, with much of its production exported to the US. Higher lumber prices are not as big a factor, particularly when the alternative domestic hardwood supply is relatively small and of generally lower quality. Also showing a recent growth trend are OSB and MDF, relatively new panel products to the market.
Despite US success with exports, the question still remains for Canadian lumber and plywood exporters: Is there a market opportunity of sufficient size to warrant the promotion effort required?
In economic terms, Mexico has come a long way since the early market assessment by COFI in 1991. The country has become increasingly open for trade as tariff and non-tariff barriers are gradually lowered or eliminated.
The Mexican gross domestic product is US $365 billion, making it one of the 15 largest economies in the world. The Mexican economy has grown in a range of two to seven per cent each year over the past decade, except for the recession year of 1995. Inflation has been reduced to about 12 per cent currently.
Consumer demand holds great potential. Mexico has a population of 95 million, with 45 per cent below the age of 16. However, per-capita income is still low on average and middle-class wealth has been hit hard by two devaluations. Nevertheless, as the economy strengthens, disposable income will increase.
There is a large backlog of demand for housing. The government priority so far has been to low-cost housing projects, with cement and concrete block being the common construction materials. According to the Canada Mortgage and Housing Corporation, 650,000 housing units per year will be built over the next few years in Mexico.
A 1998 US government market report states there is an opportunity for roof rafters, floor joists, beams and posts in residential and non-residential construction. There is also potential for plywood for roof sheathing and for battens, as tiles are commonly used for roofing.
The same report points out there is a good demand for softwood plywood and lumber in concrete forming, as the commercial and institutional construction sector in Mexico is growing rapidly, at 10 per cent per year. There is a need for education on the savings from greater panel re-use from overlaid panels. There is also an opportunity for plywood in making pallets for use in agriculture, which is stronger and more durable.
A small proportion of housing is timber frame construction, generally for more expensive homes. The University of Morelia, near Mexico City, offers a program in timber frame construction, and many of the higher- value homes in Morelia are timber frame. This is likely repeated in other centres.
There is competition to consider. US soft-wood lumber and plywood exports to Mexico are predominantly from the southern pine region and are trucked to the border area. However, the shipment trend shows that US products have lost their competitive edge. The domestic softwood sawmill industry is typified by many small, scattered, poorly equipped plants. Production is 80 per cent pine, the main softwood species found in Mexico. The better grades of shop and clear are sawn into boards for millwork use and the lower grades for pallet manufacture.
Use of remanufactured wood for moulding, shelving, windows and doors is well developed in Mexico, indicating a demand potential for Canadian clear and shop grades, and for reman items. The US government report of 1998 states that domestic lumber is in short supply as it is increasingly exported to the US for the higher values obtainable there. This has resulted in higher domestic prices.
Clearly, Mexico appears to be worth further investigation by the Canadian wood products industry, particularly as the lower-valued Canadian dollar provides a competitive advantage over US exports. Break bulk shipments to ports such as Manzinillo, with good connecting rail and road links to the Mexico City-Guadalajara metropolis provide the best economic route. There is good container service from Vancouver to Mexican west coast ports for smaller-volume, high-value products. Truck and rail shipments are more costly, and there is still a problem at the Mexican border requiring transfer to Mexican transport, although this is changing.
Mexico also represents an investment opportunity, already recognized by two Canadian wood product firms. MacMillan Bloedel has a joint-venture integrated wood products operation in Durango, and Premdor has built a large steel and wood door plant in Monterrey. It is reported that at least 15 US wood products companies have operations in Mexico.
Is Mexico worth the effort? It would seem prudent to consider the market further. Dependence on the Asian market, with no alternatives, carries a high risk, as evident with the current Asian recession, which has hit BC particularly hard. "The potential is there, but the reality is that perceptions based on tradition need to be changed, which requires a commitment over a period of time of education and promotion," says consultant David Cartwright. With a $6-billion trade deficit with Mexico, perhaps the Canadian government can be persuaded to assist with promotion.
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