Pulp industry faces low prices and oversupply

Pulp industry faces low prices and oversupply

By Prapti Widinugraheni

JAKARTA (JP): Indonesia's burgeoning pulp and paper industry,
which some analysts predict will become giant, is being hampered
by price declines and oversupply issues.

Indonesian pulpmakers and government officials are both
confident that adding new pulp and paper mills while expanding
operating mills will not significantly lower current prices.

Analysts predicted earlier this year that Indonesian pulp and
paper companies would suffer declines in profit due to dropping
world prices and an oversupply of up to three million tons of
paper.

International pulp prices declined last month to US$500 per
ton for Northern Bleached Softwood Kraft, the benchmark for pulp
pricing, after peaking at $1,000 last October.

A slight price rise is expected later this year, based on
reports that major producers in Scandinavia are planning to raise
the price of their premium pulp grade this month.

Timber tycoon Mohamad (Bob) Hasan, who owns extensive forest
concessions and plywood mills -- and last week gained a US$410
million syndicated loan to construct a giant pulp mill, PT Kiani
Kertas -- dismissed the pessimistic predictions.

"Some 20 to 30 pulp mills in North America will be closing
down this year, so we can hope to see prices go up," said Bob,
who was criticized last year by members of the Association of
Indonesian Wood Panel Producers for holding a monopoly on plywood
exports. He heads the association.

Bob, who also chairs a number of other forest-related
organizations -- the Indonesian Forest Society and the
Association of Indonesian Forest Concessionaires (APHI) --
claimed that campaigns against tropical timber products,
including paper, were conducted by the West because it was
"jealous of Indonesia's resources" and "afraid of Indonesia's
high competitiveness".

Deputy Executive Chairman of APHI, Hendro Prastowo, recently
told The Jakarta Post that Indonesia was very competitive because
of its cheap labor and the nature of its natural resources.

"Being a tropical country, trees can grow the whole year
round. Pulpwood species can be harvested after seven or eight
years," he said. "In subtropical regions and Scandinavian
forests, harvesting takes up to 40 or 50 years."

According to APHI data, Finland can only yield eight cubic
meters per hectare each year of the hardwood required for its
pulp mills. Portugal can yield 11 cubic meters. The United
States, South Africa and central Brazil have respective average
yields of 15, 18 and 28 cubic meters.

In Aracruz, a tropical region in eastern Brazil where
extensive research on timber species has been done, yields can
reach up to 58 cubic meters per hectare each year, the study
found.

"Indonesia's yield is about 35 to 40 cubic meters, but there
is plenty of room to increase because research to design high-
quality, high-yielding species, is scarce here," Hendro said.

Another reason to be optimistic, Hendro said, was that pulp
and paper utilization was currently low in developing countries.

Indonesians each use about 10 kg of paper a year, far below
the United States (more than 200 kg a year), Europe and Japan
(250 kg a year).

Bob said that manufacturing costs in Indonesia, which reached
US$250 a ton, were also far below the $550 to $600 per ton
required in most developed pulp-manufacturing countries.

Concerns

Despite the industry's seemingly bright future, some concerns
loom.

Scientists have warned that Indonesia may soon suffer a
shortage of pulpwood.

Pulpwood currently comes from natural forests because
plantations -- which are expected to become the main source of
pulpwood -- are not yet mature enough to harvest.

The natural forests will soon be exhausted, forcing pulp mills
to use timber from pulpwood estates.

The earliest harvest of plantation wood, based on the eight-
year rotation period for fast-growing species like acacia and
eucalyptus, will be in 1997.

A joint study by the Ministry of Forestry and the United
Nations Food and Agriculture Organization estimates that the
supply of logs from natural forests will decrease from about 30
million cubic meters in 1995 to 21 million cubic meters in 2030,
assuming that deforestation continues at a rate of 0.7 percent
per annum, and that natural forests are properly managed.

The study targets an annual supply of plantation-grown logs
for wood-based industries, including pulp, of 9.7 million cubic
meters in 2000, 20.1 million cubic meters in 2010, and 54.5
million cubic meters in 2030.

If the pulp production capacity in 1995 is estimated at 2.02
million tons, then at least 8.09 million cubic meters of wood
will be required from 40,450 hectares of plantations.

These figures are based on the assumption that one ton of pulp
can be produced from four cubic meters of wood, and that 200
cubic meters of wood can be derived from one hectare of
plantation.

Natural forests are so far sufficient to supply domestic pulp
mills. But will plantations be ready to do their share when the
time comes?

Hendro dismissed the fear of a raw material shortage,
insisting there was no need to worry because pulpmakers were
committed to developing pulpwood estates.

"Investors have put billions of dollars into pulp mills, so it
will be unlikely for them to take such a big risk of neglecting
the raw material needed for the mills," Hendro told the Post.

APHI and government figures, however, show that less than 20
percent of the 4.05 million hectare area targeted for plantations
has been planted.

Furthermore, Enso Forest Development Ltd. of Finland stated in
its report, The development of small-log harvesting for the
Indonesian pulp and paper industries, that the concept of
industrial timber plantations was presently "understood
differently in different statistics".

The statistics of timber estates in Indonesia, Enso noted,
failed to specifically regard whether or not the trees had grown.

"The statistics seem to refer to the area planted rather than
the area effectively established. For example, the reported
plantation areas in Java were 1.4 million hectares in 1988, but a
recent inventory found only 0.85 million hectares or 59 percent
of the reported areas fit for keeping under the planned regime,"
the Enso report disclosed.

The Indonesian Pulp and Paper Association (APKI) said in its
1995 directory that 16 new pulpmakers, with a total capacity of
5.45 million tons, will start operations between 1997 and 2003,
or after their pulpwood estates are ready to harvest.

These include PT International Timber Corporation, PT Nityasa
Prima and PT Sumatera Sinar Plywood Industry, which have a
capacity of 500,000 tons each, and PT Kiani Kertas and PT Tanjung
Enim Lestari Pulp and Paper with a capacity of 450,000 tons each.

They will add to the 65 integrated and non-integrated mills
already operating in Indonesia. All the operating mills cut trees
from natural forests.

New mills will continue to be built while the sufficiency of
the supply of wood is debated.