China to launch raw timber futures trading

China is expanding its financial toolbox to support the domestic forestry sector.

On Friday, the Dalian Commodities Exchange (DCE) called for comments on a plan to launch futures trading of raw timber (logs).

The details:

• Trading will be based on 90 cubic meter lots of coniferous (softwood) logs.
• The contract is physical, meaning participants must deliver or purchase the timber – limiting speculation and increasing transparency.

ICYDK: China is the world’s largest importer of logs and lumber, driven by demand from the construction, home furnishing, and pulp and paper sectors (Futures Daily).

• The country used roughly 54.8 million cubic meters of coniferous logs in 2023, worth around RMB 46 billion dollars in value.
• More than half were imported.

Policymakers want forest rights holders to reap more of that value.

• Since last September, Beijing has been reforming the forest rights system to promote domestic logging.

That’s where futures markets come in.

• Better forward price prediction and risk hedging tools will limit domestic timber price volatility and increase offtake.
• Allowing insurers access to the futures market could also create better hedging options for those involved in the forestry sector.

Our take: Raw timber futures will likely be finalized and launched before year's end.

Get smart: The move will drive down imports by incentivizing domestic logging.

• Other factors, like the property slump and sluggish consumption, will further suppress imported timber demand.