...Chinese state-owned companies started buying U.S. forest products companies, or US timber lands? It might not be too far-fetched.

China; that vast country of 1.2 billion people is short of fiber, high quality pulp, paper, packaging and tissue grades. Growing domestic production cannot satisfy consumption and massive imports of everything keep rising. So why not go out and buy the best around and send it back to the folks at home?

In August, the Chinese National Offshore Oil Corporation (CNOOC) failed in its $18.5 billion bid for California's Unocal. U.S. political pressure forced CNOOC to withdraw and Unocal accepted a lower bid from domestic rival Chevron.

There have been a string of bids by Chinese firms for U.S. companies. In July, Haier pulled out of a bid for Maytag after Whirlpool bid more. And China Minmetals failed in its $7 billion bid for Canada's Noranda.

China's determination to buy something in North America is obvious, and ultimately, unstoppable. Its main target is the oil and gas sector in order to achieve energy security. But is it too much to predict that parts of the U.S. paper industry and its forests may be destined for China's shopping basket?

Some U.S. paper companies desperately need funds to modernize. But very few people are interested in providing those funds. The big suppliers like Metso and Voith are looking elsewhere for their profits—to South America, Asia and Russia. So are paper companies like Stora Enso, M-real and UPM. U.S. companies may be cheap to buy, but the domestic investment required to modernize them isn't there.

Large chunks of the U.S. West Coast's export network of recycled paper are owned, essentially, by Chinese/American firms. So it's a logical next step to buy into a mature but cash-strapped U.S. papermaker of printing & writing papers, tissue or packaging, and export all the production across the Pacific to Chinese ports.

In similar fashion, China's need for fiber also makes U.S. forests attractive. Many U.S. paper companies have removed their forests from the bottom line and either sold or leased them to private owners. The latter care about money and might willingly sell to Chinese buyers.

The dilemma for a struggling U.S. papermaker is a dismal one. The options are usually to downsize, merge or close. The effects can be devastating for rural communities, extended families and infrastructure. But what if China-based manufacturers come shopping for U.S. mills, with promises of capital investment and the possibility of increased production in order to satisfy a growing Chinese market? Jobs become secure and employees remain in their communities, while the mill and its forests benefit from an infusion of foreign investment dollars.

It seems simple, but it won't be. First, the U.S. government would certainly object to such investment—there will be conflict between the anti-China groups in Washington and the pro-China business lobby. And, which way would the AF&PA lean? If it thinks Chinese investment could revive a struggling mill or forests in Alabama and be a good thing, would it say so to Washington? If the U.S. blocks Chinese investment would U.S. business interests be damaged in China and elsewhere? It's a nightmare for any executive or politician who relies on the good will of his supporters.

Industry analysts have told me it would be simpler and cheaper for China to continue to reform and modernize its own domestic production by installing more, big, new machines. But in my view, this will not be enough to satisfy a growing demand that will outrun any prediction I have read.

China's huge demand for fiber has already locked in every major fiber source in the region, such as Russia, Indonesia, South East Asia (Malaysia, Thailand, Vietnam, Cambodia, etc.), USA, Canada, and every Pacific island that has serious forests, such as Papua New Guinea or the Solomon islands.

By 2010 Chinese production is predicted to reach 62.4 million tons per year (tpy). However, demand will rise to 68.5 million tpy, according to Jaakko Poyry. So can the Pacific fiber suppliers feed China's insatiable appetite? It depends on how rapidly Chinese demand for virgin fiber will rise, and how efficiently China's suppliers can fill that need.

UK consultants Hawkins Wright estimate that through 2008 the world demand for market pulp will reach 51 million tpy, of which China will account for 50%. With these numbers I think that virgin fiber procurement will become a strategic necessity for China—it needs fiber security, similar to that of its oil and gas needs.

In a nutshell, this is my take on what will happen. Because the U.S. has abundant wastepaper, extensive privately-owned forests and many pulp and paper companies which are, right now, relatively cheap to buy, Chinese state trading companies will, discreetly and steadily, buy into these sectors.

At first this strategy will be hard to spot as the Chinese will try to minimize the political fallout. But by 2010, forest products could become a major trade row between the U.S. and China.

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