Now More Than Ever

We need offshore markets. With events in the United States going from bad to almost unbelievably worse, demand for Canadian wood exports into the American housing sector is looking dire. A glance at export shipment trends belies the fact that Canadian shipments of SPF lumber into the US are at lows not seen in over a decade. A third lower than 2007 volumes and 41% lower than 2006.

The financial and economic crisis spawned in the US also raises concerns about the potential for long-term decline of our largest customer. Consumers and government are excessively indebted and underlying employment and credit fundamentals look too iffy to enable recovery back to anything resembling the 'bubble' period of the last decade. The future is likely to look very different and we will look back on two million housing starts per year as an aberration.

Seen against this depressing backdrop - compounded in BC by a press of post mountain pine beetle wood - market diversification is an industry essential. In 1980, 15% of Canadian SPF lumber was exported offshore; principally Europe, the Middle East and Asia. By 2005 this had contracted to 5%. (Please refer to chart 1 below)

Rationale for commercial focus on the North American market during the two and a half intervening decades was compelling and shareholders had cause to be happy. But those days are over. Moreover the commitment to one market came at great expense: that of industry flexibility and adaptiveness.

Now it is critical to rebuild export markets. Not in haphazard fashion, but in a strategic approach which seeks to match customer needs with Canadian supply. Mutually supporting networks of global customers need to be assembled. Assemblages with the capacity to absorb the range and breadth of Canadian products while maximizing value.

Retrenchment in the American market created a creeping vulnerability for Canadian industry which materialized in recent days with alarming speed. Attaining market balance will require all the ingenuity and resourcefulness that industry, associations and governments can muster. But we must succeed. Now more than ever.

Chart 1

Japan Economic Overview Q3 2008: “So Much for De-Coupling? Global Downturn Advancing Recessionary Pressures on Japan”

The deepening global financial crisis has put an abrupt end to the decoupling theory that Japan’s growing trade with developing economies in Asia would insulate it from the impacts of the U.S. housing and sub-prime meltdown. Most benchmarks pointed to a deterioration in the world’s second largest economy in the third quarter. Since early June the Nikkei stock index fell from the 14,000 level to under 10,500 in early October. The fall has been prompted by the deepening global financial crisis, declining exports and capital investment and reduced consumer spending. As a result of souring auto sales to U.S. and Europe, Japan’s auto manufacturers have been scaling back domestic production. As operating cash flow fell by 37% at Japan’s top 750 listed companies between April and June, investment in new plants and machinery has fallen by over 30%.

Real GDP fell 3.0% between April and June. Corporate bankruptcies surged an average of 9.5% between June and August. The darkening macro-economic picture is manifesting itself in employment numbers, consumer spending and business confidence. The jobless rate has now risen to 4.2% and the jobs to applicants ratio has fallen to 86 positions for each 100 applicants. Real wages are also down, retreating 2% in July. Not surprisingly, household spending fell 4% in August. In the corporate sector, the Bank of Japan “Tankan” survey, measuring business confidence amongst Japan’s top manufacturers, dipped to minus 3, entering negative territory for the first time in 5 years on bearish projections of capital spending and exports. Japan’s housing market offered a mixed picture.

Total wood frame construction recovered from the impact of the BSL revisions in 2007, rising year over year by 20% and 41% in July and August. However, compared with 2006, total wooden starts fell by 7%. The robust rental housing market sustained 2x4 starts in July and August to be on par with 2006 results. Steady 2x4 starts have held SPF exports to Japan to within 1% of 2006 results in the first seven months of 2007 despite widespread mill curtailments in Canada. In the non-wooden segment, unsold inventory of condos rose 40% compared with July of 2007: this despite anemic building starts in this segment over the past year. The prospects for this sector are poor as the global credit crunch has cut off foreign investment into Japanese REITs. Insolvency at Japan’s large general contractors is becoming a prime concern as developers such as Shidagumi are filing for bankruptcy protection. Like the rest of the world, Japan enters the fourth quarter buffeted by strong headwinds.

Rising land and materials costs are also leading to sluggishness in the building sector. Land appreciation in Tokyo’s 23 wards is pushing the value of new homes beyond the reach of the average salaryman. The average price of a new condominium in Tokyo is 63.49 million yen (Approx Cdn $616,000) and is 8 times the salary of an average worker. Affordability is deemed reasonable if the price of the new home is under 5 times the average salary. Even in Tokyo’s suburbs the average price of a new condo is 41.89 million yen or 5.2 times the average income. On the other hand, current average annual wages have remained stagnant since 2003. Declining affordability is cooling new home sales – new condo sales fell by 30% in May. Appreciation in land values now appears to be losing steam as a result. In an MLIT survey of 100 locations across Japan, only 41% showed increasing land prices in the first quarter of 2008, compared with 87% the year prior. It appears that land values will need to fall significantly further before a more robust housing market can return.

(Sources: The Nikkei Weekly, The Nihon Keizai Shimbun, The Japan Times)

1) Leading the Way: COFI Obtains a New MLIT Ministerial Approval of 2x4 Staggered Stud Wall as a High Sound Insulation Partition Wall

The Ministry of Land, Infrastructure and Transport (MLIT) approved a 2x4 partition wall with staggered studs as an assembly with high sound insulation performance.  This approval was given to COFI and the Japan 2x4 Home Builders Association on July 28th.   

2x4 partition wall with staggered studs as an assembly with high sound insulation performance recently approved by Ministry of Land, Infrastructure and Transport (MLIT).

This approval was    granted as a result of acoustical testing that COFI and the 2x4 Association  conducted at the Centre for Better Living.  Designers can now use this particular staggered stud partition wall for multifamily units with high sound insulation that MLIT approves.  The  partition wall is the only assembly that MLIT approves its acoustic performance in Building Standard Law; i.e. floor assembly is the out of scope of the approval system.  Fire tests on the same partition wall also had been conducted with successful results.  COFI and 2x4 Association are now waiting for the certificate of fireproof approval for this specification in addition to the currently approved single stud partition walls.

2) WFC Proves Superiority: Shake Table Test Weathers 200% of the Kobe Earthquake

On September 25th Canada Wood conducted a full scale shake table test of a 3 storey post and beam house featuring the use of Canada Tsuga and Canadian OSB structural lumber and sheathing. Conducted at the Public Works Research Institute in Tsukuba City, the event was a culmination of joint research between Japan’s Building Research Institute and the University of British Columbia’s wood sciences department.

Proof of WFC safety and structural superiority, wooden structure remains 200% Kobe earthquake intact.

The test proved to be an outstanding success as the test specimen was subjected to 150% of the 1995 Kobe JMA earthquake and survived with only minor damage.

The test specimen was then subjected to 200% of the Kobe earthquake and despite some structural damage to the first floor, the house remained intact, demonstrating the superior seismic performance of Canadian structural materials.

The test established a new performance benchmark as 200% of the Kobe earthquake had never before been attempted at the Public Works Research Institute.

The test also proved helpful in validating seismic performance simulation software developed by Dr. Frank Lam and his team at the University of British Columbia. (The graph below contrasts the seismic performance of the structure forecasted by the computer modelling software in the broken gray line, with the actual test results in the orange line) .

The event was widely attended by over 170 Japan industry representatives and media. The test has drawn extensive media coverage and has already led to a series of new inquiries for Canada Tsuga from builders aiming to build structures with high seismic performance. As Japanese home buyers rate seismic performance as the number one attribute when considering a home purchase, this test will provide a valuable tool in the marketing of Canada Tsuga and Canadian OSB in Japan.

3) Primed for Growth: Wooden Senior Facilities Gaining Interest

After sponsoring seven seminars across Japan beginning in February, COFI SPF Group received ten inquires related to construction of　senior citizen care projects, kindergartens and hospitals. One inquiry was from an architect planning to build a large 6,500 m² senior citizen care facility in Sagamiyara City, Kanagawa Prefecture. On September 7, COFI SPF Group, Takenaka Corporation, Misawa Home, and Nikkei Health Care co-sponsored the Senior Living Seminar that was attended by 207 senior citizen healthcare professionals from across Japan.

In addition to the seminars, COFI SPF Group placed four advertorials in the Nikkei Health Care Magazine from May to August. These advertorials featured the Meiji-Seiryuen Elderly Care Facility, the largest 2x4 structure (4,469 m²) in Japan.

Nursing Home Harukazae in Beppu City, Oita Prefecture (Yoshitaka Architects Engineering & Consultants).

This wooden facility demonstrates how to construct and run environmentally friendly healthcare care facilities for Japan’s senior citizens.  The owner and president of Yoshitaka Architects Engineering & Consultants, Mr. Yoshitaka – who designed and managed the construction of the Meiji-Seiryuen Elderly Care Facility – has begun to construct his second large 2x4 senior citizen care facility in Beppu City, Oita Prefecture. The Nursing Home Harukazae (2,094 m²) is scheduled to be completed by March, 2009.

Economic Update

The South Korean economy expanded at the same pace as earlier estimated in the second quarter (April-June period) as exports remained brisk amid sluggish domestic demand. Korea’s Gross Domestic Growth grew 4.8% in the second quarter from a year earlier, and 0.8%, compared with the previous quarter.

Exports of goods in the second quarter, which accounted for a record high 64.9% of GDP, rose 4.3% on-quarter, higher than an estimate of a 3.7% gain. In contrast, private spending, one of the main growth engines of the Korean economy, accounted for only 48.3% of GDP in the same quarter, a record low level, and declined 0.2% from the preceding quarter. Heavy reliance on exports and weak domestic demand put the nation into a more vulnerable position in the slowing global economy and eroded suststainable growth.

Domestic financial markets have tumbled recently due to fallout from the U.S. financial turmoil. Annual consumer prices slowed to 5.6% in August from a 10-year high of 5.9% in July, as oil and commodity prices showed signs of stabilization. But the local currency’s recent steep loss against the U.S. dollar is putting upward pressure on inflation as it makes imports more expensive.

The won plunged to a 5-1/2 year low against U.S. dollar due to distrust on the Wall Street rescue plan and the growing current account deficit in Korea. The won declined to 1,395 per 1 U.S. dollar as of October 8, compared with 1,043 won at the end of May 2008 and 938 won at the end of 2007. Korean government is making every effort to overcome the dollar shortage problem in the foreign exchange market.

Korea’s unemployment rate in June has held steady at a seasonally adjusted 3.2% since April from 3.1% in March.

(Source: The Bank of Korea / The National Statistical Office)

Housing Market Update:

The Korean construction sector is experiencing a worse-than-expected quarterly performance. The construction industry declined 2.4% in the second quarter, the lowest since the fourth quarter of 2001.

As a part of the government’s efforts to boost up the slowing economy and to revive confidence in the lackluster housing market, both the MLTM(Ministry of Land, Transport and Maritime Affairs) and MOSF(Ministry of Strategy and Finance) announced two new deregulation policies: 1) “Housing Market Stimulus Package” - that outlined increasing housing supply and easing restrictions on apartment resale and housing construction permits and 2) “Property Tax Cut Plan” - that outlined increasing the base for the comprehensive real estate holding tax from the current 600 million won to 900 million won.

About 132,000 new homes (5,962 buildings) were built in the first half of this year nationwide, which is down 32.4% from the average for the same six-month period in the last five years. In an effort to increase the supply of houses and therefore to stabilize the country’s housing market, the MLTM announced the latest master plan which calls for building 5 million new homes in the next 10 years. Further the MLTM decided to lift development restrictions on green belt areas by releasing a total 308.5 km² of green belt land across the country.

Despite the overall slumping housing market, the number of wood building permits rose for the first seven months of 2008 remarkably 10.4% and 16.3% (5,718 buildings and 4,606 buildings) respectively compared with the same period of 2007. This was due factors such as the healthy well-being trend, design flexibility of WFC and the relative competitive price competitiveness of wood over concrete and steel.

(Table: Number of WFC building permits and stats for 6 years)

Wood Market Update:

Korean imports of logs for the first eight months of 2008 compared with the same period of 2007 decreased 7.3% to US$ 582,280,000. Of this total, Canadian log imports also decreased 11.1% to US$ 43,611,000 accounting for a 7.48% share in the total Korean log import market. New Zealand continued as the number one log export country to Korea though it’s log imports decreased 7.4% to US$ 246,531,000 accounting for a 42.34% share, followed by the United States (a 21.61% share) and Russia (a 13.63% share).

Korean softwood lumber imports for the first eight months of 2008, compared with the same period of 2007, considerably increased 15% to US$ 116,421,000. Of this total, Canadian softwood lumber imports also increased 10.4% to US$ 31,963,000, accounting for a 27.5% share in the total Korean softwood lumber import market. Canada continued to lead as the number one softwood lumber import country, with the noteable exception of August, in which a considerable decrease of 45.4% to US$ 2,753,000 was recorded.

The weak market conditions caused by the global economic crisis and declined value of the Korean won against U.S. and Canadian dollars, on top of the increasingly bad reputation (see my article below) of Canadian dimension lumber quality, makes the outlook for Canadian softwood lumber export to Korea worse than ever.

(Source: Korea Customs Service)

Canadian SPF Shipments

SPF Shipments to Korea for the first seven months of 2008 considerably increased to 34.2% to 38,986 MFBM compared with the same period of 2007.

(Source: Statistics Canada Computer Data))
(* Canada Wood Group office was established in Korea in 2006.)

Though the Year-to-Date total of SPF shipments to Korea from January ~ July 2008 increased compared with the same period of 2007, the forecast on SPF shipments to Korea for the second half of 2008 is not so optimistic due to the latest gloomy economic conditions and other unfavorable factors.

Canadian SPF market share is at risk and is eroding in South Korea. From the beginning of the second quarter, the Canadian SPF market is facing significant pressure on several fronts.

The global financial debacle is quickly spilling over into the real economy and increasing won-dollar exchange loss making the economy decline rapidly - especially for Korea which heavily relies on exports. Both Korean lumber importers and Canadian SPF shippers in Korea are suffering from 15 ~ 20% won-dollar exchange loss each month whenever they purchase Canadian SPF.

Due to the sluggish demand from the United States and Japanese housing markets, most Canadian SPF manufacturers are keeping their eye on the Korean market although they can’t make satisfactory profits here either because it is fiercely competitive by nature. Therefore, the recent Canadian SPF market in Korea looks like a battlefield among Canadian SPF manufacturers. “We are fighting each other to survive in this limited Korean lumber market” said one of the exclusive agents of Canadian SPF shippers into Korea. “To make things worse, a recent bankruptcy of Setzer International, one of the biggest Korean lumber importers, caused the market to decline more rapidly. We have to compete once more with the Korean lumber distributors who have obtained low priced lumber from Setzer’s dumping sales to clear up inventories right after bankruptcy. Nevertheless the WFC housing starts in Korea increased remarkably under the current overall housing market crisis. Lastly, the burden to compete with low priced lumber forces us to cancel Canadian SPF orders and this keeps weakening the market situation.”

The impact on Canadian SPF shipments to Korea will be considerable with continuing low lumber prices, unavoidable skyrocketing day-by-day won-dollar exchange losses, internal price competition among Canadian SPF manufacturers and the gloomy situation of the Korean real economy.

Lower prices have put downward pressure on profits for companies and consequently the Canadian SPF shippers would hold their placement of order until the market is stabilized. “Our lumber inventories begin to bare its bottom from August but we are afraid of placing orders. This may continue until the end of 2008.”

Lastly, Canada Wood staff have been receiving persistent and increasing complaints in Korea about Canadian dimensional lumber quality. One of the Korean lumber distributors said “I had to return No. 2 & BTR grade Canadian lumber to the Canadian shipper and get reimbursement. The lumber quality is too bad to sell to my customers. Too much wane! Even we found strange bugs from the package.”

Canadian lumber manufacturers are advised to listen closely to their agents and market representatives. If we don’t wake up now, our honorable title as the number one softwood lumber import country in Korea will soon fade away.

Sunny Kim brings over 15 years of wood industry experience to the Canada Wood Team.

At last the second e-newsletter from Canada Wood Korea was mailed out to the Korean industry…behind the scenes was Sunny. She keeps a busy schedule, continually collecting data, editing articles, and coordinating photos with production staff for the finished edition…it takes a tremendous team effort to put out every issue and Sunny is pleased to be at the heart of it all. She feels her efforts are rewarded when she receives compliments and encouragement from readers, industry and staff.  It’s wonderful to hear the positive feedback and feel a sense of pride, especially when much of it is coming from an appreciative industry audience who often say,  “It was very helpful, thank you.”

Sunny was first exposed to wood frame constrution in the early 1990’s,  when she joined an architectural firm and began her career as a designer of 2x4 wood framed homes. She developed many key contacts with the wood industry in Korea and became an accomplished industry professional. She had worked for 8 years there not only as a designer but also as a field inspector and was involved in numerous 2x4 wood framed housing projects at Ilsan New Town and Bundang New Town.

Next, she worked for a Marvin Windows & Door company that  imported wood building materials and was in  charge of CAD design and details. “The rare opportunity to meet with high-end luxurious housing industry offered me very interesting and amusing experiences,” Sunny recalls. Design work of high-end Marvin Windows & Doors led her to come in frequent contact with the high-end luxury housing industry in Korea. Her project, at Pangyo New town, was home to many celebrities. The long commute to participate in planning meetings and working with builders was well worth it as she also had direct meetings with the renowned movie stars.

Another memorable project for Sunny, was "Herman House," the first Korean town house development project by Samsung Heavy Industry inside Paju publication complex. Thanks to the participation in  the "Herman House" project as a window and door designer, she learned many valuable lessons about town house development which she was unfamiliar with.

Herman-House project: Sunny designed windows and doors for this landmark structure: The first town house project in Korea.

Sunny also broadened her experiences by participating in many trade fairs and visiting architect offices and construction sites. “Over the past 15 years, many work experiences related to the wood industry helps my new career at CW Korea as a Program Manager to organize, prepare and conduct activities such as seminars, trade fairs, missions, training programs, and CAD drawings for fire and acoustical tests…”

Sunny has a great interest in the arts and enjoys watching movies. It’s likely you’ll catch her at a museum or watching the latest performance on the stage.

For the past three years, Canada Wood /COFI has been working closely with Korean big builders and developers to develop WFC code and standards and increase wooden town house and low rise multi-family residential projects. According to the WFC market surveys on the consumers’ preference for construction types in single and low rise housing sectors, the popularity of WFC is continuing to increase in many areas such as changing lifestyles towards health and well-being.

The big builders in Korea known as “Chaebol” groups have become aware of these new consumer demands from the domestic housing market for low density residences and greener buildings. Big builders are now eager to learn about green buildings, materials and systems - in particular, the Canadian-style design concept on low-rise residential projects. Although the established and profitable methods of building high rise apartment projects with concrete and steel remain, Chaebol groups are turning in a different direction from high rise to low rise, from concrete and steel to other types of green materials such as “WOOD”.

The mission group leader, Mr. Ki Dae Sung, Senior Vice President of Halla E&C said “The concept and technology of wood frame construction is quite new to us but we, Koreans, naturally know that wood is green and wood is good. And that is why I joined this mission to learn about Canadian wood frame construction which is being widely used for the townhouse and multi-family residential projects and to gain confidence on the high quality of Canadian wood products.”

This Developer/Big Builder Mission was held from September 6 to 12, 2008 with a total of 18 members from 5 Chaebol groups, 3 developers, 1 architectural firm and 2 WFC builders. The 5 Chaebol groups include: LIG E&C, Daewoo E&C, Amco Asset Management Co., Ltd., Halla E&C and Shinsegae E&C. They are ranked atop the biggest construction companies in Korea and the member companies of the Korea Housing Association (www.housing.or.kr/eng/index.asp).

During the one week stay in Canada, the group visited wood frame developments in Victoria, Vancouver, Surrey and Coquitlam and met with Canadian architectural firms, builders and developers. The group also visited nursery, managed forests, lumber mill and building product manufacturers in Prince George to experience the full spectrum of the Canadian wood industry: from the forest resource, and sustainably managed forests to lumber manufacturing, and green buildings.

This latest mission was an opportunity to showcase Canadian green building technology , products and know-how. We gained valuable insight into the psyche of Korean big builders and developers who are considering WFC for their future townhouse and low rise multi-family residential development projects. CW Korea will continue to develop this important market.

CW Korea helped secure the accreditation of 3 load-bearing wood frame wall assemblies during the August 2008 pilot fire test at the Fire Insures Laboratories Korea.

In 2007, Canada Wood Group Korea in cooperation with local associations and industries has successfully concluded the accreditation of 3 load-bearing wood frame wall assemblies. These assemblies were all constructed with gypsum wall board alone on both sides. Even though these wall assemblies can be used both for interior and exterior wall applications, without incorporating wood structural panels such as OSB or plywood, the assemblies’ resistance to racking can be rather limited for the construction of multi-storey multi-family building in severe conditions such as typhoon prone area.

In Canada, “one-sided” assemblies that are fire-rated only on the interior face of the wall are permitted and in these assemblies, wood structural panel wall sheathing is installed over studs on the exterior face and various exterior finishes can be installed on the sheathing. However, in Korea, this type of one-sided fire-rated construction is not permitted, and all fire-rated walls must be tested on both sides and satisfy the same fire resistance rating, regardless of its applications as interior or exterior walls.

Thus a pilot test of load-bearing wood frame wall assembly sheathed with 11 mm thick OSB structural panels between 2X4 studs spaced at 610mm on centre and 1 ply of 15mm exterior grade gypsum boards (exterior face of the exterior wall) on fire side and 2 plies of 12.5 mm thick fire rated gypsum boards on the other side (interior face of the wall) was conducted in August 2008 at the Fire Insures Laboratories Korea, and official result issued in September rated the assembly’s fire resistance at 66 minutes.

Canada Wood Group would like to acknowledge the contribution of FP Innovations’ fire experts, who have given invaluable advice on choosing the assembly and every detail of the assembly, and Korea Wood Construction Association and its member companies as well as Lafarge Plasterboard Korea for their support of materials and labor for the success of the pilot test.

CW Korea in collaboration with CW China have successfully implemented a Quality Assurance (QA) Program to two of the biggest construction companies in Korea: SK E&C and Donwha SFC.

The necessity of a Quality Assurance (QA) program to improve the construction quality of wood frame buildings in Korea has been discussed since last year after extensive site visits have revealed that while framing work is generally excellent, there are still certain areas that need more attention to detail and training. In particular, the control of moisture in the building envelop and waterproofing which can affect the durability of wood frame buildings.

When Canada Wood contacted SK late last year to discuss the technical cooperation through QA program, they were more than glad to accept our offer. SK well understands that construction quality is a critical issue for every builder. For SK, one of the top 10 construction companies in Korea building several thousand residential units a year and spending millions of dollars in branding their products, quality is an imperative. The provision of Quality Assurance service for SK’s Dongbeak ApelBaum project was agreed upon and Canada Wood has begun its first monthly visit in April 2008. This service was extended to Dongwha SFC, a joint venture between Donwha Holdings and Sumitomo Forestry Co., Ltd., who owns one of the largest wood frame construction companies in Japan. Now, CW staff from China and Korea visit the sites once a month together and produce site reports for SK and Dongwha SFC.

Quality Assurance services for SK’s Dongbeak ApelBaum project were provided by CW Korea staff.

CW’s efforts to improve construction quality have been rewarded with the improvements to construction details that we have found in our subsequent visits. The majority of recommendations that we made during the site visits and in reports have been heeded and implemented. However, it must be noted, that there was some initial uneasiness on the part of subcontractors over construction delays and cost increases due to QA activities by an outsider, but those apprehensions soon proved to be unfounded and our QA visits are appreciated by them, as well.

Also Canada Wood is pleased to announce that SK’s Dongbeak ApelBaum project, the largest gated community development in Korea, has won the most prestigious architectural award in Korea, the Presidential Award for residential construction - a first ever for a wood frame single detached housing development! Following that, an agreement was signed to establish wood frame construction technical cooperation and training between Canada Wood and SK E&C and Donwha SFC.