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