Ailing timber industry pays high cost of revival

Ailing timber industry pays high cost of revival

Rendi A. Witular
The Jakarta Post
Jakarta

The country's timber industry had been in the doldrums since
the beginning of 2003, when the government launched efforts to
restructure the industry to save the little that remain of
country's natural forests and prevent them from being further
overexploited.

Twelve months on and the industry remains in bad shape
economically as dozens of large companies have decided to shut
down or downsize their operations, while those that remain in
business are anticipating another gloomy year.

The government has been aggressively trying to restructure the
country's forestry-based sector, which had, for many years,
enjoyed the privileges bestowed on them by the New Order regime
in exploiting the natural forest, in order to gain as much as
possible foreign-exchange earnings via exports.

"This is the time for the industry to undergo a restructuring
in order to achieve sustainable development for the future. I
expect the industry can bear this hardship," said Minister of
Forestry Mohamad Prakosa earlier this year.

As part of the restructuring policy, the government decided to
gradually lower the country's logging quota of natural forests
for the industry to 6.89 million cubic meters this year and 5.7
million cubic meters next year.

The government also urged those in the industry to lower their
collective, installed capacity to 20 million cubic meters per
year from the existing 30 million cubic meters to cope with the
declining supply of local raw materials. The balance is made up
by imported logs.

To plug the raw material shortage, the government urged the
industry to import logs or procure them from industrial
replantation areas.

Forestry-related companies are major export earners for the
country. Last year, they contributed a total of US$6.5 billion in
the country's foreign exchange revenue, or 11.5 percent of the
total. But this year, revenue from the industry is projected to
decline to possibly as low as $4 billion.

Of course, the restructuring is neither easy, nor cheap. Among
other things, the process will likely result in unemployment for
tens of thousands of people currently working in the sector
because companies are lowering their output capacity to cope with
the policies.

However, the government, along with environmentalists,
consider the long-term cost to be negligible compared to the
irreplaceable value of the tropical forests that the nation still
has and to the losses that the country already has had to bear as
a result of massive deforestation.

According to the Directorate General of Industrial Relations
at the Ministry of Manpower and Transmigration forestry-based
businesses have informed the ministry of their intention to lay
off at least 50,000 workers in Riau and Kalimantan due to the
downturn in business this year and next year.

The directorate said that some of the companies had already
suspended their workers earlier this year.

Another impact is that the Indonesian Wood Panel Association
(Apkindo) reported that exports of plywood from Indonesia plunged
by 15 percent in the first semester of this year. As for the full
year, the association expects exports to drop to 5.5 million
cubic meters from 6.5 million last year, with export value
predicted to also slide to $1.7 billion from about $2 billion.

As a result, most plywood companies listed on the Jakarta
Stock Exchange also performed poorly. Most of the companies, such
as Surya Dumai, PT Sumalindo Lestari and PT Daya Sakti Unggul,
booked declines in first-half sales.

The plywood industry accounts for around 60 percent of the
country's total exports of forestry products with the rest coming
from the pulp and paper industry and wood-working products.

Apkindo said that the drop in official plywood export numbers
was also caused by the government's inability to curb rampant
illegal loggers, who often export on the black market and neither
pay tax or are included in the official data.

The association has several times complained to the government
about the smuggling of the country's illegally cut logs to
Malaysia and China.

"Malaysia and China are flooding the local market with cheaper
plywood made from logs illegally taken from our own forests. We
cannot compete with them," said Apkindo chairman Martias.

Plywood made from illegally felled trees is less expensive
because it is not subject to taxes and other fees imposed by the
governments in question.

Local firm's share of the domestic plywood market has also
declined from about 85 percent in 1995 to just 55 percent
estimated for this year.

Angered by reports that Singapore, Malaysia and China have
been buying illegally felled logs from unauthorized Indonesians
companies or individuals, Minister of Forestry M. Prakosa asked
the European Union (EU) and Japan to stop importing wood products
primarily from Malaysia and Singapore.

Following Prakosa's remarks, Malaysia's Primary Industries
Minister Lim Keng Yaik retorted that his government would file a
diplomatic protest with Jakarta. However, no news has been heard
on the follow-up on the threat, which was made several months
ago.

This year, Indonesia signed agreements with the EU, Japan and
China under which they agreed to reject all goods made from
illegal timber or that which originated from dubious sources.

The Ministry of Forestry said Kalimantan lost at least 1,000
truck loads -- or about 10,000 cubic meters -- of illegal logs
every week, in the May-June period alone. The trucks carry the
their prohibited cargo clandestinely from Kalimantan to
neighboring Malaysia and on to Singapore, or put them directly on
boats to China, while local officials and security people turn a
blind eye, presumably for certain incentives.

Illegal loggers process around 51 million cubic meters of
timber annually, resulting in financial losses to the state of at
least Rp 30.42 trillion ($3.37 billion) in unearned taxes and
future revenues.

In order to prevent local companies from dealing with the
illegal logs and to help solve the industry problem, the Ministry
of Forestry and the Ministry of Trade and Industry have tasked
the Forestry Industry Revitalization Agency (BRIK) to conduct a
joint audit of all domestic firms to ascertain the precise amount
of logs used by each of them.

BRIK has required all forestry-related products to first
undergo "administrative inspection" before being exported.

This means companies are not allowed to export their products
unless they receive a license from the agency.

BRIK chairman Soewarni said that from March until early
December, the agency had issued export licenses to 3,900
companies with a total export value reaching 4.7 million cubic
meters, valued at around $1.85 billion.

Eyebox

Plywood export in FOB value (in thousand U.S. dollar)

Country 1998 1999 2000 2001 2002

Japan 538,094 889,791 845,796 753,009 743,750
Hongkong 132,701 81,526 49,074 35,998 26,066
South Korea 65,426 117,519 102,416 114,999 124,275
China 136,065 105,543 100,060 71,700 70,338
Singapore 44,494 41,593 28,499 27,343 27,824
Malaysia 6,992 5,583 4,843 5,820 2,409
Saudi Arabia 88,238 76,580 69,689 65,016 63,031
United States 270,770 304,026 209,324 191,980 194,004
United Kingdom 68,457 67,933 61,393 83,949 70,339
Netherlands 30,462 28,442 25,016 28,063 22,577
Germany 34,891 46,369 37,534 32,764 27,757
Belgium and 102,838 93,555 71,803 73,773 46,079
Luxembourg
Italy 17,368 10,262 4,585 7,010 6,757
Others 541,136 387,557 378,889 346,484 323,097

Totals 2,077,938 2,256,286 1,988,927 1,837,914 1,748,309

Source: BPS