Monday, January 31, 2011

China's Demand for Timber Is Building

By Eric Jackson
RealMoney Contributor

1/28/2011 7:45 AM EST
Click here for more stories by Eric Jackson

I spoke earlier this week with TheStreet TV reporter Brittany Umar, for her "China Watch" segment. She asked about Chinese demand for lumber and the best way to play it.

It used to be that wood was not a popular choice for housing and construction in China. China used to be more fixated on getting structures up that were functional and cheap. Therefore, steel and concrete were the big commodities in demand for house construction over there. They're still going to be key inputs going forward, of course.

The steel and iron ore names with China exposure are pretty well known, of course. The two best pure-play cement companies, which both have exposure to China growth, are Lafarge (which trades on the pink sheets) andCemex (CX - commentary - Trade Now). Lafarge is the more stable of the two. Cemex has been trying to grow its way back to fiscal health, after taking on too much debt in the lead-up to the financial crisis.

I remember five years ago or so, a friend of mine got transferred to China to head up Lafarge's China operations in Beijing. His eyes were as wide as saucers for years. He couldn't believe the scale of growth going on there and the size of the opportunity. Compared with the company's North American business, it was an astounding difference.

So, what about lumber? As it turns out, after the U.S., China is now the second-largest consumer of lumber in the world. It is also the largest importer of lumber products. What gives?

There are a couple of factors at work here. First is the increased standard of living in China. The emergence of the middle class in China means that there has been an increase in demand in Western tastes. On a trip there recently, I toured some higher-end housing developments, which look like they were directly transplanted from Scottsdale, Ariz. As the property developers took us around, they proudly noted the hardwood floors -- very different from much "basic housing" that was built throughout much of China more than 10 years ago.


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