Japanese firms turn up heat on APP

Japanese firms turn up heat on APP

Dow Jones, Jakarta

Asia Pulp & Paper Co. (APP), embroiled in talks with creditors
over restructuring US$13.9 billion in debt, appears to have
another problem on its hands: The company's important Japanese
customers are threatening to stop buying paper from APP unless it
cleans up its environmental record.

Japanese companies led by Ricoh Co., the country's top
manufacturer of copy machines, have demanded APP take steps to
protect the forest near its pulp-and-paper mill on Indonesia's
Sumatra island. Environmentalists estimate that at current rates
of deforestation, Sumatra's lowland forest, home to tigers and
elephants, would disappear within five years.

Stung into action, APP signed an agreement with the World Wide
Fund for Nature (WWF) this week. Indonesia's Sinar Mas Group,
which owns APP and a number of forestry companies, has agreed to
set aside 58,500 hectares of its concessions in Sumatra's Riau
province as a conservation area. The company also pledged to
tighten up procedures to stop illegally logged wood ending up in
its mills, and to publish by January a plan to make its forestry
operations self-sustaining over the next few years.

This kind of action is unprecedented for APP, which built its
paper empire in the 1990s on vast forestry concessions from
former President Suharto's government, and by selling bonds to
foreign investors to fund the expansion of its mill.

After becoming one of Asia's largest paper manufacturers, APP
stopped repaying its borrowings in March 2001 amid slumping
global paper prices, and is still trying to clear up the mess.

During the boom years, APP made little effort to replant the
forest it cut down, forcing it to rely increasingly in recent
years on wood from third parties to feed its mills. APP admits
some of this wood is cut down illegally by local villagers from
protected areas, but has previously claimed it could do little to
verify the origin of every log entering its plant.

APP's attitude appeared to change after the Japanese customers
paid a visit to the mill in early July. The Japanese, which are
APP's largest foreign customers, threatened to pull their
business if the company didn't clean up its act. APP says it
sells around 20,000 tons of photocopy paper per month to Japan,
or about a quarter of its total sales.

"Without the Japanese companies, this agreement wouldn't have
happened. There's been an escalation of corporate involvement,"
said Michael Stuwe, a WWF consultant that has worked extensively
in Sumatra.

The agreement shows how companies in Japan, which depend
heavily on foreign countries for their natural resources, are
becoming more sensitive to environmental issues due to pressure
from non-governmental organizations. It also highlights how the
WWF is aiming to change the way APP operates, through working
with the company rather than calling for a boycott of its
products.

The WWF is hoping the risk of losing its Japanese customers
will push APP to seriously implement the agreement. APP
acknowledges corporate pressure had a role in pushing it toward
an agreement with the WWF, but says it's also committed to saving
the forest. "We are trying as much as we could not to receive
illegal logs," says Joice Budisusanto, a spokeswoman for AAP.

Still, the WWF admits it's running a risk by engaging APP,
which is owned by Indonesia's Widjaja family, rather than
organizing boycotts of its products as other NGOs have done.
Despite warnings that Sumatra's forest could be soon wiped out,
the company has continued to gobble up trees: 60 million of them
last year alone, environmentalists say.

The first major test of whether APP is serious about the
agreement with the WWF will come in November, when it must
publish the results of an independent survey on its wood supply.
The survey will identify where the company's wood is coming from,
and propose measures to stop accepting illegal wood. Much of that
wood comes from villagers that are infringing on Tesso Nilo, NGOs
say.

APP must then produce a plan by January, which will set a
detailed timeframe to make its wood supply sustainable. The
company has begun working to establish self-sustaining
plantations on deforested land, but they won't be ready until
2007 at the earliest.