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.