Emerging Markets Program Assessment: The Egyptian Market ...€¦ · INTRODUCTION 3 MARKET ASSESSMENT CHECKLIST 4 EXECUTIVE ... and strong demand in the country’s furniture manufacturing

Egypt Market Assessment and Development Program for U.S. Softwoods Page 1

Emerging Markets Program Assessment: The Egyptian Market for U.S. Softwoods

Market Assessment

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TABLE OF CONTENTS

INTRODUCTION 3 MARKET ASSESSMENT CHECKLIST 4 EXECUTIVE SUMMARY 5 DIFFICULTIES ENCOUNTERED 5 MARKET ASSESSMENT 5

1. Supply and demand indicators – is there a need for wood imports? 7 2. Characteristics of the country’s lumber market 9 3. Can the U.S. compete in this market? 9 4. What needs to be considered when selling to this market? 10 5. Who are important allies and partner organizations? 11 6. Should the U.S. undertake a long-term development strategy? 11 7. What would help importers and allies/partners begin importing 11 U.S. wood products?

COOPERATION AND ACKNOWLEDGEMENTS 12 FOLLOW-UP: PHASE 2 12 PRINCIPALS 14


Emerging Markets Program Assessment: The Egyptian Market for U.S. Softwoods

Date: November 30, 2017 Title: Egypt Market Assessment and Development Program for

U.S. Softwoods Target market: Egypt Target commodity: Softwood lumber, treated lumber Lead authors: Bryan Smalley Charles Trevor Jerry Hingle Emerging market agreement: #2016-22 Central Funds

Activity E16MX-SW2EG INTRODUCTION This is one of several Emerging Market Program (EMP) projects that the U.S. forest products industry is undertaking to reach potentially new emerging markets. Each project is led by a team of highly experienced researchers backed by the organizational and administrative support of forest products cooperators with decades of experience administering FAS-funded market development programs. Without EMP program support, the U.S. forest products industry would not be able to carry out these projects. Each project is divided into two phases: Phase 1 is an assessment the market and what technical or promotional assistance is needed to grow the market. Phase 2 involves carrying out the technical assistance recommended in the market assessment after obtaining FAS’s approval to do so. Note: This agreement includes funds to conduct technical assistance projected under Phase 2 of this project. SFPA/SLMA requests FAS’s approval of this market assessment so that industry can commence Phase 2 activities. No additional funding is requested to conduct Phase 2.


Egypt Numerous indicators show strong potential for growth in U.S. wood product exports to Egypt, including overall economic growth, and strong demand in the country’s furniture manufacturing industry. U.S. softwood lumber exports to Egypt nearly doubled to $8.3 million, yet the United States holds a very small share of this market, estimated at less than 1%. The increase in U.S. exports is impressive given the country’s political and economic instability to which Egypt has been prone over the past couple of years. One of the sectors which shows potential for U.S. exports is the furniture industry centered around the triangle of Damietta, Alexandria, and Cairo. The industry consumes huge volumes of solid wood, importing substantial volumes of beech and Spruce-Pine-Fir from Romania as well as oak from the Balkans. The U.S. industry is convinced that American softwoods could rapidly gain share of Egypt’s furniture production industry, as well as in the construction sector given massive construction projects in the works over the coming years. However, at this stage little is known about what technical and/or promotional support is needed to expand consumption of U.S. lumber. This Market Assessment and Development Program addresses these issues and offers solutions to increase exports of value-added U.S. softwoods to Egypt. MARKET ASSESSMENT CHECKLIST

Who conducted the assessment and what makes them an expert? FAS/Cairo conducted an assessment of the Egyptian market for wood products in 2015 (see GAIN report attached). The assessment below was updated and supplemented in 2017 by individuals with decades of experience in the U.S. forest products industry and extensive backgrounds in developing new emerging markets for American softwood lumber. Project principals are listed below.

How did you conduct the assessment? Thorough desk research on Egypt’s timber industry was conducted followed by in-country interviews of the country’s major timber importers and specifiers. Meetings were also held with FAS/Cairo for a regulatory overview of the market.

What are the opportunities in the market? Wood demand in Egypt is set to increase dramatically while the country relies entirely on imported material. Meanwhile, wood traders and specifiers are seeking alternative wood species/sources that are priced more competitively than hardwoods yet share some of the same characteristics such as density, hardness, and with few knots. U.S. softwoods species are the ideal alternative and interest in U.S. material is rising. Buyers interviewed welcome partnering with the U.S. on procuring and specifying U.S. softwoods.


What is the assessment of the food and rural business system needs of the emerging

market? A thorough description of the market’s characteristics, trade flows, regulatory issues, and considerations needed when selling to the market is addressed in this report.

What are the recommendations or measures necessary to enhance the food and rural business system needs and develop the market for U.S. agricultural products? Export growth can only be obtained by providing technical assistance – by way of seminars and one-on-one training – on U.S. species, grades, and sizes. Doing so would enhance the competitiveness of Egypt’s joinery and furniture manufacturers squeezed by the escalated cost of traditional imports due to unfavorable exchange rates. Detailed follow-up work is outlined in the assessment (see follow-up: Phase 2).

EXECUTIVE SUMMARY Egypt is the largest market for softwood lumber in the Middle East and North Africa. Lumber demand is set to rise sharply over the coming years as its economy improves and several large-scale developments are in works. The country relies entirely on imported softwoods and buyers are seeking alternative sources due to the rising cost of imported hardwoods. U.S. softwoods are the ideal alternative and interest among buyers is rising. However, the timber trade and furniture and joinery manufacturers are accustomed with European and Russian material and unfamiliar with U.S. lumber species, grades, and sizes. The assessment recommends that the U.S. provide technical assistance and training to enable Egyptian buyers to specify and source U.S. softwoods. Doing so would enhance the competitiveness of Egyptian manufacturers who are squeezed by rising prices of imported hardwoods. FAS/Cairo encourages the U.S. industry’s efforts to develop the market. DIFFICULTIES ENCOUNTERED No difficulties have been encountered in this project. MARKET ASSESSMENT Note: This assessment seeks to update and supplement an assessment of Egypt’s wood market conducted by FAS/Cairo in 2015 (see GAIN report in separate attachment). It seeks to address in greater detail the market for softwood lumber, determine what technical assistance is needed to grow the market, and ally organizations to partner with to do so.


While economic problems remain, the long-term outlook for Egypt – and demand for imported softwood lumber – is bullish. Egypt’s growing and young population will bolster economic growth over the coming years, the construction market is about to recover from the shock of the floatation of the Egyptian Pound, tourism is slowly rebounding, and the Egyptian government is investing heavily in infrastructure. A government initiative to build one million housing units as well as a multi-billion dollar initiative for a new administrative capital to seat the national government is expected to drive growing demand for softwood lumber. With no domestic lumber resources, the country must rely entirely on imports to fulfil burgeoning demand. Egypt is the largest market for softwoods in the North Africa and Middle East (MENA) region. The market imported 4.4 million cubic meters of softwood lumber in 2016, but imports are expected to fall to 3.5 million cubic meters by the end of 2017 due to sharp devaluation of the Egyptian Pound, which plummeted nearly 50% since 2011. Imports bottomed-out in 2017 but are recovering: Imports are expected to climb to four million cubic meters in 20181. U.S. softwood lumber exports to Egypt grew steadily over the past five years – rising from $4.3 million in 2012 to $8.3 million in 2016, but declined sharply 2017 in line with the country’s overall imports. Already being a very price-conscience market, the weaker Egyptian Pound has exacerbated sales.

1 Source: Elshal Timber

Egyptian pound plummets nearly 50%, sharply increasing cost of imported material


While wood is rarely used structurally in Egypt, wood demand is expected to rise sharply for interior joinery (floors, moulding, millwork) as well as for door and window production. Demand in the furniture production sector is also expected to rise over the coming years as the country seeks to become more competitive in that sector. Low-priced European redwood is used for construction – primarily concrete forming – while U.S. Southern Pine is used for interior joinery, paneling, doors, windows, and flooring. Interviews with a major importer holds that Southern Pine from the United States is viewed as a “hardwood” due to its density, and increasingly a less expensive substitute for Oak. Southern Pine is priced in the “sweet spot” between hardwoods (oak) and European and Russian pines. Southern Pine is also preferred for its grain pattern and is typically lightly stained to expose the grain. Importers hold that the market is ripe for development and technical assistance is needed immediately as buyers turn to alternative material imported from Europe. U.S. softwoods are priced right – and that “the opportunity is now” to grow imports by providing the technical assistance and training that enables them to properly specify U.S. material. Devaluation of the Egyptian Pound puts U.S. material in the “sweet spot” as buyers eagerly source alternative supply. 1. Supply and demand indicators – is there a need for wood imports? Domestic supply With practically no domestic production of softwood lumber, the country relies entirely on imports to meet demand. Demand - Construction While wood-frame construction is rare in Egypt, some 70% of softwood lumber is consumed in the construction sector for concrete forming. The sector is supplied almost entirely by inexpensive, low-grade Scandinavian and Russian softwoods. The timber importer Elshal Timber estimates the sector consisting of 75% redwood and 25% whitewood. Given the higher price of

Softwoods used for concrete forming


material imported from the U.S., the concrete forming sector is deemed not worthy of pursuing by the U.S. industry. However, significant volumes are consumed in interior joinery and window and door production. This sector, which favors higher grades, is where most U.S. softwoods are consumed and represents the ideal market channel for export growth. Demand -- Furniture An estimated 15% of the country’s softwood consumption is used in furniture production. According to the Egyptian Furniture Export Association, the country exports some $360 million in furniture, primarily to the Gulf States and Europe. Most production is centered in Damietta. A new “Damietta Furniture City” clustering furniture manufacturers in that region aims to bolster the competitiveness of Egypt’s furniture exporters. Demand – Decking/preservatively treated wood

Although data is hard to collect, wood decking is uncommon in Egypt. Importers interviewed report that demand for preservatively-treated wood is limited due to no presence of termites in the market and Egypt’s dry climate. Third -country imports/competition The U.S. holds a tiny 1% share of the market. Leading suppliers are Finland (35% market share), Sweden (34% market share), and Russia (24% market share). As such, Egyptian buyers are more familiar with European and Russian species due to a long-standing trading relationship with those suppliers. However, importers interviewed report that European material often must be kiln or air dried again upon entry in order to meet the lower moisture content demanded in the market. They hold that U.S. softwoods – which is imported at a maximum moister content of 19% (and often lower) does not need to be further dried upon import, thereby giving U.S. material a bit of a cost advantage. Potential growth of U.S. softwood lumber exports The research team predicts exports quadrupling to 100,000 cubic meters (valued at $32 million) should the U.S. industry begin to introduce its softwood species to the market. At this stage, U.S. softwoods are known by a handful of the country’s wood traders and specifiers. Efforts to

Niche opportunity high grade U.S. Southern Pine used structurally


introduce U.S. products to a broader spectrum of buyers is expected to lead to a substantial increase in sales.

2. Characteristics of the country’s lumber market

Demand for environmental certification Importers and manufacturers report little demand for environmental certification. Most wood is consumed domestically while furniture exports are primarily destined for the Middle East, which rarely requires environmental certification, with the possible exception of the United Arab Emirates. Sizes Buyers readily take standard U.S. lumber sizes, nearly all

rough stock, and long lengths preferred.

Grades Clear material – with very few knots – is preferred in the market for joinery, windows, and doors. Hence, clear Southern Pine is often preferred over European softwoods that often have a higher presence of knots. Importers report most demand centering on high grade Prime and Merchantable stock, and limited demand for lower grades such as No. 2. Importers interviewed appeared to have a working knowledge of U.S. grades, but some confusion exists over “prime” vs “merchantable” grades and, like many markets, there is confusion over nominal vs actual sizes – particularly among those accustomed to carrying hardwoods which are sized actual – plus confusion over thicknesses. Moisture content Imports are typically KD-19 and, while lower moisture contents may be preferable, buyers prefer not to bear the higher cost of further dried material. 3. Can the U.S. compete in this market? U.S. softwoods – Southern Pine in particular – are becoming increasingly competitive in the market. Material is priced in the “sweet spot” for joinery and furniture production: They’ve become less expensive than oak (and an increasing substitute for that species). U.S. species are not competitive in the concrete forming sector which is dominated by inexpensive Scandinavian and Russian species.

High grade Southern Pine, preferred in long lengths


Taxes and import duties Lumber imported from all sources are subject to a 14% VAT and tariffs ranging from 0% to 5%. Softwood lumber (HS 4407.10) is imported duty free from all countries of origin. Availability of U.S. government-supported trade financing

Egypt is approved for the financing incentives offered by EXIM bank and USDA’s GSM-102 program.

Current and pending Free Trade Agreements with the U.S. and competing suppliers A free trade agreement between Egypt and the European Union gives European suppliers an advantage in the market. 4. What needs to be considered when selling to this market? Importing logistics Buyers typically quote orders CIF delivered Alexandria or Damietta. Transit time from the U.S. gulf coast 42 to 65 days and from Savannah 25 to 30 days. Regulatory and import requirements (e.g., phytosanitary requirements)

Following are import requirements for softwood lumber applied to product imported from all origins.2 Exporters are cautioned to check with their freight forwarder to verify prior to shipment. 1. Original invoice (must be stamped from the chamber of commerce) and include the trade

Terms + 1 copy. 2. Original Packing List + 1 copy with log n°, length, diameter, volume and net weight. 3. 1 Original + 1 copy of Certificate of Origin issued by authorized authorities. 4. Full set shipped on board Bill of Lading. 5. 1 Original + 1 copy of Phytosanitary Certificate issued by authorized authorities. 6. 1 Original + 1 copy of Insurance Certificate.

2 FAS/Cairo


Note important requirement: All of the above documents must be mailed from the exporter’s bank to the importer’s bank and NOT by the exporter to the importer’s. Importing/customs clearance requirements

Importers report few regulatory issues when importing U.S. softwoods. Graft or prejudicial import requirements do not appear to be an issue.

Typical payment terms Importers interviewed report little use of letters of credit due to the higher cost. Most payment terms are open account. 5. Who are important allies and partner organizations? The Egyptian Furniture Export Association represents the country’s numerous furniture producers and expressed interest in partnering with the U.S. in providing training to its members on specifying U.S. softwoods. 6. Should the U.S. undertake a long-term development strategy? Potential partners hold that “the time is ripe” to grow the market given the need to find alternative wood sources while its economy continues to mend, massive development projects are in the works, and its furniture industry consolidates its efforts to bolster its competiveness. Interest in U.S. softwoods is on the rise, but much work is needed to train buyers on U.S. grades, sizes, and characteristics in a market accustomed to European and Russian material. FAS/Cairo encourages the U.S. industry to develop the market, pointing out opportunities in its GAIN report authored in 2015. FAS Post recommends follow-up technical seminars in Cairo, where most procurement decisions are made. While most material is imported in Alexandria, the ATO holds that decisions are made in Cairo. Thus a “pull” approach targeting interior designers/architects and furniture manufacturers is best suited. 7. What would help importers and allies/partners begin importing U.S. wood products? Technical seminars – With Egyptian buyers accustomed to hardwood and European softwood sizes and grades, much work is needed to train lumber importers and specifiers on U.S. softwood species, grades, and sizes. The furniture manufacturing industry and lumber trade offered to partner with the U.S. industry and training would enhance the competitiveness of the Egyptian industry which, squeezed by the high price of imported material, is eager for alternative material. Trade servicing/training – On-site training should be provided to the country’s top traders and specifiers – including joinery producers and furniture, window, and door manufacturers – to


assist in choosing the right species, size, and grade for the application. Several firms identified by the research team welcome the U.S. industry’s assistance in enabling them to apply U.S. material. COOPERATION AND ACKNOWLEDGEMENTS Support and assistance from the officers and staff at the Foreign Agricultural Service post in Cairo is critical to this project. SFPA/SLMA is relying on them for guidance and assistance as it plans technical seminars/training over the coming year. SFPA/SLMA is grateful for their support, particularly Messrs. Ali Abdi, Mariano Beillard, and Ibrahim Al-Habbal. FOLLOW-UP: PHASE 2 Funds are approved under this existing EMP project (agreement #2016-22) to conduct follow-up technical assistance (Phase 2 seminars and one-on-one training as outlined above). The U.S. industry seeks to do so upon FAS’s approval of this market assessment. The objectives of Phase 2 are to respond to the business and product needs of Egyptian lumber traders and joinery and furniture manufacturers and include:

a. Providing customized training and technical assistance to enable Egyptian wood traders and specifiers to choose the correct lumber grade, size, and species suitable for the application;

b. Providing Egyptian joinery and furniture manufacturers alternative sources of supply to better their competitiveness;

c. Increase awareness and demand for U.S. wood products Phase 2 -- Expected Outcomes and Performance Measures SFPA/SLMA seek to provide Egyptian wood traders and joinery and furniture manufacturers with the technical expertise needed to purchase and apply U.S. softwoods suitable for the application, thereby laying the foundation for increased exports. Note: These performance measures were developed by the softwood industry in consultation with its independent evaluator and FAS’s forest products team. SFPA/SLMA wishes to use the same metrics to measure gains resulting from its EMP projects. An independent evaluator will be used to ensure the accuracy and integrity of the data.


Description Baseline 2018 goal

% of respondents who cite “lack of knowledge about different species/products and their uses” an obstacle when using/specifying US softwood products

Benchmark to be established

-2%

% of respondents aware of US softwood grading rules and product standards


+2%

% of respondents aware of US softwood product characteristics


+2%

% of respondents who indicate that they’ve worked with a new US softwood variety after attending an AMSO event


+2%

% of respondents who indicate that their knowledge and understanding of US softwood products has increased after contact with AMSO


+2%

% of respondents who agree that US softwood products “are readily available”


+2%

% of respondents who agree that US softwood products “adds value to products/projects”


+2%

% of respondents who indicate their company works with US softwood products because they’re “better quality”


+2%

% of respondents who agree that US softwood products are “a good value for the money”


+2%

% of respondents who agree that US softwood products meet their codes and standards


+2%

% of respondents who use/specify US softwood products the most


+2%


PRINCIPALS Industry experts assigned to this project are: Bryan Smalley has fifteen years of experience in the U.S. lumber industry and is president of the non-profit lumber trade association Southeastern Lumber Manufacturers Association (SLMA). The association represents independently-owned sawmills, lumber treaters, and their suppliers in 17 states throughout the Southeast. SLMA’s small to medium enterprises (SMEs) are located throughout the rural South, employ over 12,000 people, and responsibly manage over a million acres of forestland. Mr. Smalley also has nine years of experience with Timber Products Inspection overseeing quality control and industry standards for wood packaging. Tami Kessler has as over thirty years’ experience in the U.S. lumber industry working for the non-profit lumber trade association Southern Forest Products Association (SFPA). Since 1980, SFPA has had an international market development program in place dedicated to increasing exports of value-added Southern Pine lumber products. Through these programs, the Southern Pine lumber industry has gained a dominant market position in many Caribbean countries, carved new market niches in Europe, and gained an important foothold in India, the Middle East region and China. Charles Trevor has over twenty years of experience promoting the usage of softwoods, including over eight years as managing director of the “Wood for Good” campaign and 14 years as UK Director of the Nordic Timber Council. He currently serves as American Softwoods’ representative for Europe and the Middle East. Jerry Hingle has over fifteen years of experience developing international markets for value-added U.S. wood products. For 10 years he directed the international marketing and trade policy program of the Southern Forest Products Association in more than 20 countries. Prior to that he oversaw the American Forest & Paper Association’s international marketing and research programs for wood products in Asia, Mexico, and the European Union.

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Emerging Markets Program Assessment: The Egyptian Market ...€¦ · INTRODUCTION 3 MARKET ASSESSMENT CHECKLIST 4 EXECUTIVE ... and strong demand in the country’s furniture manufacturing