Indonesia's plywood exports face challenges

By Sylvia Gratia M. Nirang

JAKARTA (JP): The lingering Asian economic crisis continues to haunt Indonesia's plywood industry, with exports to the region remaining low despite signs of a turnaround in several countries.

According to data from the Association of Indonesian Wood Panel Producers (Apkindo), plywood exports in the first semester of 1999 totaled around 3.5 million cubic meters worth US$1.15 billion. This represented less than half of the eight million cubic meters exported in all of 1998.

"Overseas demand for Indonesian plywood has continued to decline since July. It is likely that demand will continue to be sluggish and prices will continue to be depressed at least until the end of this year," association director Kristiyono Fajari said.

The $1.15 billion in plywood exported during the first semester of this year was a 10 percent increase than the $1.04 billion recorded in the first half of 1998, but Kristiyono said this increase did not reflect "real demand".

"Many Japanese importers placed more orders in the first semester because they feared that unrest ahead of and after the June election would disrupt supply. So it is likely that demand from Japan in the second half of this year will decrease," he said.

The continuing fall in overseas demand for Indonesian plywood is the result of declining demand from our main purchasers, including Japan and South Korea, Kristiyono said.

"The monetary crisis has hit the property sector and because most wood products, especially plywood, are used in the property sector, the demand for plywood has also been hit," he said.

Japan is the biggest importer of Indonesian plywood and South Korea is the third largest.

The Japan Lumber Importer's Association (JLIA) acknowledged there was an oversupply of plywood in the Japanese market.

According to JLIA reports, the supply of plywood in the Japanese market between January and June of 1999 totaled 4.2 million cubic meters, a 13.9 percent increase over the same period in 1998.

Some 2.6 million cubic meters of this supply were imported, while the remaining 1.6 million cubic meters were produced domestically.

The Japanese property sector, which produced 587,853 housing units during the January to June period of 1999, a 1.8 percent decline from the same period the previous year, could not absorb the entire plywood supply, according to the report.

The report also said the supply of imported plywood between January and June of this year increased rapidly while domestic demand declined. It added that domestic plywood producers were continuing to reduce their production.

"This will likely prompt plywood importers to cut their imports in the second half of 1999 in order to stabilize the domestic market," JLIA said in its report.

U.S. and Europe

Kristiyono said it was unlikely the market outside of Asia would be able to offset the fall in orders from Japan, because demand from major buyers in European countries and the United States traditionally dropped during the summer.

Indonesia's plywood export volume has decreased since the beginning of the monetary crisis in early July 1997.

Export volume dropped to 8.04 million cubic meters in 1998 from 8.35 million cubic meters in 1997 and 8.57 million cubic meters in 1996. About 3.1 million cubic meters were exported to Japan last year.

Export value plunged to $2.2 billion last year from $3.88 billion in 1997 and $4.03 billion in 1996.

Plywood exports peaked in 1993, when export volume reached 9.71 million cubic meters with a total value of $4.57 billion.

Plywood, a wood panel product, is Indonesia's second largest non-oil and gas foreign currency earner after textiles and textile products.

Over the past five years, plywood exports have contributed an average of over 10 percent of the country's earnings from non-oil and gas exports.

Apkindo chairman Abbas Adhar said depressed demand last year forced at least 30 plywood producers to close, or almost a third of the country's 112 plywood producers.

The rupiah's sharp depreciation against the U.S. dollar should have made Indonesian wood products more competitive in overseas markets.

However, the currencies of Indonesia's main plywood importers, Japan, South Korea and Taiwan, also weakened, hitting the three countries' property sectors and cutting importers' ability to purchase Indonesian products.

Besides suffering from the monetary crisis, Indonesian plywood faces increased competition from other countries.

The export volume of Indonesian plywood to Hong Kong is seen as dropping by around 30 percent this year due to cheaper Chinese plywood.

"The price of Chinese plywood is between 15 percent and 20 percent lower than our plywood. Their shipping costs are also lower because the distances are relatively closer," he said.

Demand for Indonesian plywood in Taiwan is also expected to drop by at least 35 percent this year, as Taiwanese buyers turn to plywood from China and veneer from Malaysia, Kristiyono said.

"Many Taiwanese construction companies are out of businesses, while the rest are on the verge of bankruptcy. They prefer to buy cheaper products from China, despite the fact that the quality of our plywood is much better," he said.

In Europe and the United States, Indonesian plywood faces competition from Brazilian plywood, and Chinese plywood has also entered the U.S. market, he said.

Kristiyono said Apkindo set an export target of 8 million cubic meters this year despite sluggish demand.

He said if Indonesia reduced its plywood exports, countries such as Malaysia and China would fill the void.

"We have to keep exporting our plywood to prevent other countries from eroding our market share," he said.

Malaysia, with an annual plywood production of between 4.2 million and 4.5 million cubic meters is the second largest supplier of plywood in the world after Indonesia. For the most part, both countries compete in the same overseas markets.

Indonesia is the world largest plywood producer with annual production of around 10 million cubic meters.

Kristiyono said local companies should be more innovative in their efforts to overcome the crisis, including looking to expand their exports to countries other than Japan and Korea.

"It's risky if the businesspeople rely on just one or two countries for their exports. We should not depend on our traditional plywood markets Japan and Korea, especially while the two countries are suffering from currency turmoil," he said.

He said countries in the Middle East were a new market with bright prospects for Indonesian plywood, but more promotion was needed to boost Indonesian exports to the region.

Kristiyono said that besides sluggish overseas demand, Indonesian plywood producers also faced higher production costs.

The rupiah's fall against the greenback caused a sharp increase in shipping costs and in the price of production materials, including glue.

"Production costs have increased sharply since the crisis started, mainly due to the skyrocketing price of raw materials and increasing labor costs," he said.

The government's decision to reduce the export tax on logs to a maximum of 10 percent is also expected to deal another blow to Indonesia's plywood industry due to a depleted domestic supply of logs.

Many analysts said the decision would encourage timber companies to export logs rather than supply the local wood processing industry.

The government's recent move to revoke several timber companies' concessions which allegedly were obtained through corruption, collusion and nepotism will also hurt the country's plywood industry, Kristiyono said.

He said the number of plywood producers facing closure due to a scarcity of logs would increase within the next few months.