Distr. GENERAL

PPR 65/01(M)

ITTO Original: ENGLISH

INTERNATIONALTROPICALTIMBER ORGANIZATION

PRE-PROJECT REPORT

A STUDYON THE MEDIUMAND LONG-TERM OUTLOOK FORTHE TROPICAL TIMBER MARKET

[PPD 27/99 (M)]

PREPARED FOR ITTO

BY

LTS INTERNATIONAL LTD.

OCTOBER 2001

The Medium and Long-term Outlook forthe Tropical Timber Market

I . EXECUTI VE SUMMARY ...... I I . I MODELLING...... I. .. 1.2 DATA SOURCESAND VERIFICAnON ...... 2. I . 3 RESULTS ...... ,...... 2 .. 1.4 MAJOR FACTORS IN THE GLOBAL SUPPLY OF TROPICAL TIMBER PRODUCTS...... 3 I . 5 TRENDS...... 6 .. 1.6 SUMMARYFOR PRODUCER COUNTRIES...... ,...... 7. 1.7 SUMMARYFOR CONSUMER COUNTRIES...... 7. 1.8 GLOBAL DEMAND FOR TROPICAL TIMBER PRODUCTS...... ,...... Z 1.9 MAIN SCENARIOS FOR SUPPLYAND DEMAND TRENDS...... 7 2. BACKGROUND...... I O

3. METHODOLOGY ...... _..... I I 3 . I SERA nFiCA nON...... ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, I', 3 . 2 COUNTR Y SUR VEYS ...... I 2 3 . 3 MODELLING CONCEPT...... ,...... I 3 3 . 4 DESCRIPTION OF MODELS...... ,...... ,...... ,...... 14 3.5 DATA SOURCESAND VERIFICATION, ...... 1.6 4 . RESUL TS ...... I 8 4. I OVER VIEW ...... ,...... 1.8 4 . 2 COUNTR Y REPORTS...... ,...... I. 9 4 . 2. I BOLIVIA ...... 2 I. 4 . 2. 2 BRAZIL ...... 23 4 . 2. 3 CAMER 00N ...... 25 4. 2. 4 CONGO REPUBLIC. ....,...... 26 4 . 2. 5 ECUA DOR ...... 28 4 . 2. 6 GABON ...... 30 4 . 2. 7 GHANA ...... ,...... 3 I. 4 . 2. 8 MALA YSIA ...... 32 4 . 2. 9 THAILAND ...... ,.... 35 4 . 2. I 0 CHINA ...... 3 7 4 . 2. I I INDIA ..,...... ,...... ,...... 4 O 4 . 2. I 2 GERMANY...... 43 4 . 2. I 3 ITA L Y ...... 4 5 4 . 2, I 4 JAPAN ...... ,....,...... 4 7 4 . 2. I 5 NETHERLANDS...... 50 4 . 2. I 6 SPAIN ...... 51. 4 . 2. I 7 USA ...... 54 4.3 GLOBAL SUPPLYSITUAnON FOR TROPICAL TIMBER PRODUCTS...... 56 4.3. I MCIjor supply factors identified. .,...... 57 4. 3.2 Export trends for the inojor tropical forest products ...... 68 S@w" timber ...... 68 Plywood and panel products...... 68 4.4 GLOBAL DEMAND FOR TROPICAL TIMBER PRODUCTS...... 69 4. 4. I Import trends for the major tropical forest products...... 69 5. DISCUSSIONOFSTUDYFINDINGSANDSCENARIOSFORSUPPLYANDDEMAND TRENDS To 20 I 0 ...... 7 I

5. I . I Bw sin ess OS u s " o1 ...... 72 5. I . 2 S" stomable supply...... 73 5. 1.3 Individu@/ country scen@nos...... ,.,..... Z4 APPENDICES A1. List of key source contacts A2. Data collection sheet A3. General structure of the model A4. Stratification by 12 country groups A5. Stratification by tropical and non-tropical country groups A6. Stratification by region A7. Distribution of tropical timber imports and exports between country groups A8. Trade statistics for major producer and consumer countries List of Abbreviations

AAC Annual allowable cut AIMEX Associacao Brasiliero do Industria de Madera Processado- Mecanicamente A1TBT Association Technique Internationale de Bois Tropicaux ASEAN Association of SE. Asian Nations AsL Small, individual operators (Bolivia) C + I Criteria and Indicators CERFOR Forest certification scheme - Brazil ENGO Environmental Non-Governmental Organisation EU European Union FAO Food and Agricultural Organisation FAS Free along side FDl Foreign Direct Investment FOB Free on board FSC Forest Stewardship Council FSFM Forest Sector Framework Model FSVAM Forest SectorValue Added Model GDP Gross Domestic Product GFPM Global Forest Products Model ha hectares HDF High Density Fibreboard IBAMA Institute for Natural Resources and the Environment (Brazil) IMF International Monetary Fund ITFMP Indonesia Tropical Forest Management Project ITFO International Tropical Timber Organisation LKS Lesser Known Species in cubic metres in 31a Cubic metres per annum MAI Mean Annual Increment MBl Market Based Instruments MDF Medium Density Fibreboard min millimetre n/a not available NFAP National Forest Action Plan NTCC National Timber Certification Council(Malaysia) OSB Oriented Strand Board PEFC Pan-European Forest Certification PNG Papua New Guinea rule Roundwood equivalent SFl Sustainable Forest Initiative SFM Sustainable Forest Management spp Species STCP STCP Project Engineering Ltd TCO Indigenous groups UFA Unite Forestere d'Amenagement(long term concessions - Cameroon) usD United States Dollars UsDA United States Department of Agriculture

The Medium and Long-term Outlook forthe Tropical Timber Market

I. EXECUTIVESUMMARY

The study is primarily concerned with tropical timber used for sawn timber and wood- based panel production. The marketforthese products is more or less worldwide, and tropical timber products are in competition with other types of timber, especially temperate hardwoods, in many consumer countries. It is therefore not possible to make a realistic estimate of the likely future demand fortropicaltimber products without considering the global market, and the potential supply of competing products. In order to assess the factors that are affecting global supply and demand fortropical timber products, it was felt important to visit as many countries as possible in the time allowed forthe study. This meantthatthe time spent in each country was limited and consequently it has only been possible to develop brief overviews for each country. In total, 17 countries were visited, of which eight were producers and nine were consumers of tropical timber. The objective of these country visits was to collect data to facilitate the modelling of the forest and forest industry sectorfor individual countries, to determine the actual balance of supply and demand, and to determine regional and global balances by aggregating the country results.

1.1 Modelling

Since data on the forestry sectoris generally incomplete and open to doubtfor many tropical developing countries, forecasts of the medium term supply are often unreliable. The modelling approach provides a means to verify the consistency of data and to estimate how supply and demand may change in the future according to a range of assumptions. These assumptions can be applied to both demand and supply to determine possible impacts of changes in such variables as: . productprices . operating costs . substitution with other wood species or different materials . improved conversionefficiency . growth in consumption in producer and consumer countries . changes in forest management regimes A model, the Forest SectorValue Added Model(FSVAM) has been developed on Excel spreadsheets. The modelis designed so that many of the variables that may need to be changed forthe purpose of examining scenarios can be readily altered, and this enables a range of values to be easily applied. An additional advantage of this approach is that the model can be used for different countries, where such variables as wage rates, interest rates and labour productivity may differ considerably. The values appropriate to the country in question can therefore be used without having to change the basic construction of the model. The FSVAM has three identical worksheets that are initiated from the data entry sheet, but two of them have the option to substitute different values for examining scenarios. One of the scenario models is supply driven and the other is demand driven allowing possible changes in factors influencing either supply or demand to be examined. The model applies to the forestry sector of a country, and although it cannot produce a precise estimate of the performance of an individual company, it can produce an aggregate assessment of all companies manufacturing one of six major classes of product. This approach provides a means to check that allthe elements that make up the wood processing industry are internally consistent.

LTS International Ltd The Med^^in and Long-term Outlookforthe Tropical Timber Market 1.2 Dotcisowrcescindverij7cc, tion

The major source of much of the data required to determine the wood supply and demand balance for individual countries is published FAO statistics. Despite the best efforts of FAO, there are many inaccuracies and shortcomings in the data for many countries. These errors are often riotimmediately obvious, because no attemptis made to assemble an overall material balance between the apparent production and consumption. In many tropical developing countries, reports indicate that illegal and unrecorded log production represents a significant volume, and that an informal processing sector exists. Few countries collect and record data on actual domestic consumption of wood products, so that the scale of such operations is almostimpossible to estimate. However, in many countries it represents a substantial drain on the forest resources, and has an impact on the medium and long-term log supply potential. Forthis study, countries were placed into one of twelve groups according to whether they were tropical or non-tropical, consumer or producer and resource rich, resource transition or resource poor. The summaries of this stratification provided averages for each class for many of the importantindicators, such as apparent per capita consumption and log production per unit area offorest, and these averages provided a yardstick for comparisons between countries. This enabled countries that were very differentfrom average to be identified and the reasons forthis to be considered. The country visits combined with a wide variety of country reports were used to cross check the published data forthe limited number of countries involved, but at the global levelthe overall precision of the data is still very questionable.

1.3 Results

Although the study is concerned only with the supply and demand fortropicaltimbers, the prospects fortropicaltimbers cannot be separated from the overall global timber market, because of the influence of trade and potential substitution with other timber species and other materials. The current volume of tropical timber exported as logs, sawnwood, plywood and veneers represents about 20% of the total log production in tropical countries. Thus the vast majority of tropical timber is consumed within tropical countries. A combination of population increase and economic growth is likely to increase the demand fortimber products in tropical countries in the future, though current consumption is certainly considerably higher than the reported data would suggest because of widespread illegal logging and under-reporting. The future trend in supply-demand balance fortropicaltimber is therefore likely to be determined more by developments in tropical countries than in the traditional consuming countries. The future trend will be influenced by a combination of increasing domestic demand and changes in the supply. Some producing countries will see a decline in supply due to resource depletion, while a combination of political stability and investment in infrastructure will create the potential to increase supply in others' It therefore seems likely that the nextten years will see some structural changes in trade flows in tropical timber products. The approach taken by this study has been, to examine: . the current and potential future supply situation in those countries that are currently the main exporters of tropical timber products . the potential, among resource rich tropical consuming countries, to expand their production in order to have a surplus for export . the current and potential future consumption in those countries that are currently the main importers of tropical timber products, in order to assess likely trends in total consumption of timber products.

2 LTS International Ltd The Medium andLong-term Outlook forthe Tropical Timber Market Analysis of currenttrade flows shows very clearly that practically alltropicaltimber products traded internationally at the presenttime originate from only 16 countries and are imported by only 19 consumer countries. Malaysia and Indonesia accountfor 75% of the exports and PR China and Japan accountfor about 65% of the imports. Therefore, in the short-term, changes that may affectthe balance between supply and demand will be most influenced by developments in these countries.

1.4 MCIjorjtzctors in the 910bc, ISM!?/?Iyoftro/?ICOltimber products

Row material supply Deforestation in the tropics has been a major cause of concern for some time, and there are no signs that the rate at which forest is being lost is slowing down. Published data on roundwood production gives no indication as to the proportion of the current supply that comes from salvage felling in forest that is being cleared and how much comes from harvesting of old growth forest that is likely to remain as permanent productive forest. Illegal logging was reported in almost allthe producer countries visited, and appears to represent a substantial proportion of total actual production. This is having a significant impact on the potential forthe sustainable management of the resource, through depletion of the growing stock. Illegal logging conceals a substantial domestic consumption of wood products, since the logs harvested illegalIy generally finish up supplying products forthe local market. Published data on production does not distinguish between logs from old growth forest and from other sources such as secondary forest and plantations. However, as the area of industrial plantations in the majortropical producer countries is relatively modest, it can be safely assumed that most of the recorded log production is from natural forests. The general pattern of exploitation of tropical forests is to harvest the most accessible forest and advance through the forest leaving aside patches of poor growth and difficultterrain In those tropical countries that have been harvesting logs for some time, the remaining old- growth forest will tend to be the least accessible and the least productive. The conclusion that must be drawn is that the days of harvesting large sized logs from old growth forest are numbered, and that sustained production will depend on harvesting smaller sized logs and less popular species. Plantations Plantation grown wood from the tropics has no particular advantage over plantation grown wood from temperate regions, other than slightly higher growth rates. Much of the plantation production that will become available in the short to medium term will riot readily replace the logs from old-growth forest and much of it is intended forthe pulp industry. Processing of plantation grown wood into sawnwood or plywood, will require processing capacity to be re-equipped to handle the different specifications, and the product will be in direct competition with utility wood from a wide range of alternative sources. Government!?oncies Most governments now have policies for sustainable forest management, but so farfew have put in place the necessary measures to implement the policies. Long-term stability of the permanentforestis key to this and while a few countries have established permanent forest reserves, many of these are under threatfrom clearance, encroachment and disturbance.

LTS International Ltd 3 The Medium andLong-term Outlookforthe Tropical Timber Market Resource pricing Most governments in tropical producing countries only capture a very small proportion of the economic rent from the harvesting of their natural forest resources. A substantial proportion is, however, captured by the logging companies in the form of excess profits. These profits are not re-invested in forest management, and so the cost of protecting and managing the forest falls to governments, but because of the low stumpage charges most governments do not have the revenue to carry outthis function effective Iy. Illegal loggers do not pay any fees or stumpage to governments and thus deprive the government of potential revenue. Wood based industry Lack of reliable data makes it difficult to assess trends in the performance of the tropical wood based industry. Annually published production data is based on government returns, and these generally underrecord the actual situation. Important factors in assessing the performance and prospects of the industry are the size, age and quality of the installed capacity. Without inspecting a substantial sample of plants, it is impossible to assess the latter two factors. However, in most of the producer countries visited the reported recovery levels (volume product as % of volume of logs) was generally low compared with the consumer countries. Residues were rarely utilised to produce composite panels, for example. In the country studies attempts were made to assess the capacity utilisation as an indicator of the current state of the industry and its potential for increasing output and the results suggest that sawmilling capacity in particular in South America and Asia is heavily underutilised. Capacity The limited information gleaned during the country studies suggests considerable under utilisation of both sawmilling and plywood capacity in the tropical producing countries. Sawmilling Plywood Capacity Region Production Capacity Production Utilisation Exports Exports Utilisation Exports Exports % % 9'0 (inji. in3, ,in, , ina, 9'0 (injj. in3, (inil. in')

South 31 29 3.3 11 65 6 I .6 28 America Africa 57 8 1.5 19 58 2 0.5 25 Asia 29 58 5.2 10 50 31 5.4 17

End-"se applications The principal issue of concern in forecasting the future demand fortropicaltimber products is the end-use forthe product, and the degree to which tropical timber has special characteristics that suit it uniquely to that use. For uses where a tropical timber product is just a utility commodity, there is a strong likelihood that substitution will take place according to relative prices. There are already signs that plywood made from temperate hardwoods and coniferous species, especially from Russia, is making in roads into the marketfor commodity plywood formerly dominated by utility grade plywood from South East Asia. Where tropical timbers have special advantages, such as durability, appearance or working qualities, their use is likely to be much less price sensitive. However, the demand for products for which these advantages are important is likely to be relatively modest.

4 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market Competition grid substitution Competition in the market fortropicaltimber products in the international market is intensifying. Producers of tropical timber products in different countries and regions are having to compete, both between themselves, and with suppliers of alternative types of timber products that can be substituted fortropicaltimber. The market is highly price sensitive, and is strongly influenced by eXchange rates. The future success of tropical timbers will increasingly depend on improving the efficiency of processing, the quality of the products, and adoption of new processing techniques that reduce costs. Trons!?ort costs In view of the likelihood that tropical timber products will have to become more price competitive to maintain market share, it will be important to minimise costs at all points along the production chain. Processing in country should, in principle, be more efficient than exporting primary products, as the higher value of the product means that the transport costs are a lower proportion of the total value, and will not include the cost of transporting process waste. Competitive processing in producer countries will however, be criticalIy dependent on the achievement of similar levels of efficiency in the use of raw material to those that are the norm in consumer countries. profit"nit, Ifthe tropical timber industry is to survive and remain competitive, investment is needed in a wide range of improvements, and this will require companies that not only have the resources, but are also prepared to make a long-term commitment to the industry. Forest industry companies in developed countries have been merging and re-organising in order to attract capital, and they must compete with more modern high-tech companies forthe available capital. Most tropical producing countries do not have large amounts of capital, so that raising funds locally for investment is very difficult. In order to improve the performance of the sector generally, governments must consider whether it is appropriate to try to attract foreign investment, and to create an economic environment to facilitate this.

Economic issues The average contribution offorestry to GDP, forthe resource rich non-tropical producing countries is over 10% and forthe resource rich tropical producing countries it is about 6.7%. The GDP contribution from the forestry sector has been calculated .as the final value of the total production and therefore includes the wood processing sub-sector as well as the forest resource (see table I in section 3.1). Forestry contributes to national economies in other ways, butthese are generally more difficult to evaluate, because the values put on soil and water conservation, biodiversity and the environment are very subjective. However, with new thinking on such matters as market based instruments (MBl) for valuing such services as water conservation through charges to the consumer, and carbon sequestration, these other contributions will gradually become more apparent. Morketgrowth The marketfortropicaltimber products is comprised of two very different components, the domestic market in tropical countries, and the international market. Both of these components have particular characteristics and are impacted upon by differentfactors. It is considered that the market prospects fortropicaltimber products are likely to be more dependent on the ability of producer countries to sustain or increase production and remain competitive, than on lack of demand. Apparent domestic consumption, estimated from recorded production and trade, is substantially lower than actual consumption. Since illegal logs are generally sold at lower prices than the officially sanctioned harvest, this distorts the prices of wood products on the local market, and among other things, tends to encourage wasteful use.

LTS International Ltd 5 The Medium andLong-term Outlookforthe Tropical Timber Market The domestic demand fortimber products in tropical countries is likely to continue to increase due to population and economic growth, and governments will have to consider policy options for reducing illegal logging. The recent meeting of Ministers from East Asian countries in Bali(September 11-13'' 2001) on forest law enforcement took a strong line with regard to the need to eradicate illegal logging. Environmentgliss"es Public concern about environmental issues is rising in many producer countries and may result in increased pressure to adopt some of the measures necessary to reduce destruction and degradation of forest. In some countries this may lead to a curtailment of log production. There is also international concern about environmental and habitat degradation in tropical forests, and this has an impact on the way in which buyers perceive tropical timber products. Certification In several of the consumer countries visited, the need for certification of tropical timber products was raised as being a majorfactor in determining future market prospects. Although the current imports of tropical timber products by countries where certification is a major issue only represents about a third of total imports, these countries are the ones where there are the best prospects for expanding exports of value added products. For producer countries facing limitations on log supplies, the best way to maintain foreign eXchange revenue will be to use theirresources more efficiently and to move into higher value added products. There is therefore a choice for some countries between continuing to export relatively low value products to countries that are less demanding and seeking to maintain or build market share in the more demanding countries, with higher value added products.

1.5 Trends

Logs Only five countries currently export significant quantities of logs and this trade is concentrated within the Asian region, which accounts for about 75% of the total. The trade in logs has shown a steady downward trend, and this is likely to continue. The main reason that log exporting is still attractive for producer countries is the low level of efficiency in processing into primary or secondary products, which reduces the competitive advantage that should exist for value added products. Although log exporting may be the more economicalIy attractive option in the short term, it is depriving the countries concerned of potential revenue and economic development. It is therefore in the best interest of those countries that currently export logs, to seek investment in their domestic processing capacity and move up the value added chain. A ban on exporting logs will be counterproductive, since it depresses the value of logs and-leads to increased waste rather than to investment and expansion. S@writimber The overalltrend fortrade in tropical sawnwood overthe past 5 years has been downwards, and appears to pre-date the Asian economic crisis. The latest available figures do not show any indication that the overall downward trend has been reversed, but they do suggest some re-distribution of trade. The downward trend of imports by some ITTO consumer member countries has been offset by an increase in others, in particular China and to a lesser extentthe USA. The country visits suggest that this development is likely to continue. The gradual downward trend of imports into Europe is very much influenced by consumer concerns that the tropical forest is not managed sustainably. This trend is likely to continue until producer countries can demonstrate that there are effective measures in place to deal with the problems of resource depletion.

6 LTS International Ltd The Medium andLong-term Outlook forthe Tropical Timber Market Plywood ond ponel!?rod"cts As with sawnwood, the overalltrend fortrade in tropical plywood and veneer overthe past 5 years has been downwards, and appears to pre-date the Asian economic crisis. The pattern of redistribution of trade in these products and the factors influencing trade volumes are similar to those for sawntimber.

1.6 Summc, Iy/OrProd, ,corcot, ntries

The key issue for producer countries is resource sustainability. Tropical timber products have been losing market share while overall demand fortimber products has generally been increasing. This is largely due to concerns in the traditional consuming countries overthe environmental consequences of tropical forest degradation. The loss of market share would have been more pronounced had it not been forthe growth of the demand from China, in particular, where a combination of economic growth and national environmental concerns have led to a reduction in domestic production and to an increase in imports. Many of the producer countries are facing serious problems of resource depletion because of the impact of illegal logging. The data collected from some of the countries visited indicates that the annual volume harvested by illegal loggers is equal to or greater than recorded production. Underestimates of production and domestic consumption act to distort the true supply and demand picture.

1.7 Summc, Iy/by Consumer countries

The overall demand fortimber-based products is expected to grow slowly but steadily over the next 10 years, very much driven by economic and population growth. The share of this increased demand that is captured by tropical wood products is dependent on the response of the tropical producing country governments and theirindustries. The two key issues that need to be addressed are resource sustainability, especially in the context of illegal logging, and efficiency in terms of the value added per cubic metre of log, by reducing waste and other losses.

1.8 Globcr/demc, ridjbrtro!?ICOltimber/?rod, ,cts

Since tropical timber products only represent a small proportion of the global demand for forest products it is very difficult to make meaningful forecasts of demand forthem. Since most of the uses to which tropical timbers are put can be met with other types of timber, the market share captured by tropical timbers depends mainly on the ability of producers to offer the kind of products that are needed at a competitive price. This study is not a market study, and therefore it is not possible to give specific pointers regarding markets for particular products. However the future prospects fortropicaltimbers seem to be mainly dependent on the ability of producer countries to resolve problems over resource sustainability and to improve the efficiency of processing of timber products to remain competitive.

1.9 Mom scenc, nosjbrsti!?plycinddemc, ridtrends

The main finding from the study is that the future market fortropicaltimber products will be determined by the policies of, and decisions taken, in the producing countries. Global demand fortimber products, generally, is forecast to increase by aboutthe same as total current production of tropical timber every 21. ^ years, so that the market share of tropical timber must continue to decline.

LTS International Ltd 7 The Medium andLong-term Outlookforthe Tropical Timber Market The study has revealed that the growth of domestic demand fortimber products in the tropical producing countries is likely to absorb much of the production that is currently exported from the major producer countries. Under these circumstances the development of general scenarios becomes a rather meaningless exercise, because individual countries must make the important decisions related to the management of theirforest resource management and trade policy that will determine the future pattern of trade. With good data, the impact of possible choices facing individual countries could be modelled as scenarios. However, at the regional or global levelthere is a likelihood that changes made by different countries could complement or cancel out changes made by other countries. This means that there is an almost infinite number of possible combinations that cannot be investigated in a limited period of time. Since the sort of information required to formulate realistic scenarios was not readily available in any of the producer countries visited, it is impossible to produce a detailed forecast offuture production at sustainable levels. Scenorio I- Business OS usual Under this scenario aggregate log production is likely to continue at about present volumes forthe next decade, regardless of the possibility that this means depleting the growing stock in several countries. Domestic consumption in the tropical producer countries will increase gradually due to population growth and rising incomes. Exports of tropical timber products will gradually decline as domestic markets in the producer countries absorb more of the output. There are a number of responses that producer countries could adopt, and the overall impact on global supply and demand will depend on which countries respond, when they respond and in what way they adapt. The possible responses are: . Improve the efficiency of processing and reduce processing and harvesting waste in order to increase the output offinal products from the same volume of logs. . Adopt a more selective strategy for processing in terms of the end-use according to timber species, quality and log size class, with the aim of maximising value-added, so that export value does not decline in line with decline in volume. . Evaluate more accurately their domestic demand and develop a strategy for eliminating illegal logging over a reasonably short time period. Scen@Ii0 2 - S"sininoble supply The producer country surveys and analysis of the individual country supply demand balances, combined with data from other published sources, indicate that the annual volume harvested is considerably more than that reported. There appears to be considerable under-reporting of log harvests, partly because of inefficiencies in the monitoring systems and partly because of illegal logging. The aggregate difference between the apparent consumption from currentreported production data and a calculation of per capita consumption using published country data forthe 27 ITTO member countries is around 31.2 million in' out of a total production of around 118 million in'. This estimate of the possible scale of illegal logging is quite consistent with the few individual country estimates that have been published. The implication of this situation is that for many tropical producing countries the resource is not being managed sustainably, but is being gradually depleted. The sustainable level of production is less than current production, and although currentlevels of production could be maintained for about 10 or possibly 20 years, it will be at the expense of production thereafter. One strategy in response to this would be to reduce production overthe nextfew years to a levelthat could be sustained in the longer term which probably means by an amount roughly equivalent to the estimated volume logged illegalIy quoted above.

8 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market It is difficult to illustrate this scenario in detail, partly because good data is not available on the genuine level of sustainable production for most of the producer countries, and partly because in practice different countries would make different degrees of adjustments over differenttime periods, and the aggregate effect on global supplies of tropical timber products could vary within a very wide range. The main outcome of this scenario would be a reduction in supply of logs forthe production of timber products for export, as more of the outputis diverted to domestic markets in order to reduce the incentives for illegal logging. The decline could be ameliorated by simultaneously taking steps to reduce waste and utilise a wider range of species, and focussing on producing higher quality and value products.

LTS International Ltd 9 The Medium and Long-term Outlook forthe Tropical Timber Market

2. BACKGROUND

In 1995, ITFO commissioned a study PD 28/93 entitled "Analysis of Macro-economic Trends in the Supply and Demand of Sustainably Produced Tropical Timber from the Asia Pacific region Phase 11". This study was a follow-up to an earlier study with the same title. The 1995 study offered alternative global demand forecasts fortropicaltimbers under various economic and supply scenarios. These projections, together with global projections for all classes of wood products made in similar studies by the World Bank and the UN/FAO have been affected by the 1997 Asian currency crisis and subsequentturmoil in the world commodity trade. At the 27'' Session of ITFO in November 1999 it was noted that there had been a marked improvement in the international timber trade, because economic conditions and currencies had stabilised, exports were growing and confidence had started to return. It was therefore considered timely to provide a reassessment of the outlook forthe tropical timber marketforthe medium term covering the nextten years. Where appropriate, this reassessment has been carried out in close association with on-going outlook studies being undertaken by other organisations such as FAO and the UN/ECE. At the 28'' Session of ITFO in May 2000 it was decided to authorise the Executive Director to engage consultants to carry out a study on the Medium and Long-term Outlook forthe Tropical Timber Market, with the following terms of reference: I. To redefine and reassess the factors affecting global supply and demand fortropical timber and wood products, namely logs, sawnwood and panel products. 2. To prepare forecasts of supply and demand forthe above products under various assumptions, providing full details of the basis forthe assumptions used in preparing the forecasts. 3. To prepare and deliver to ITFO a single seamless report including a forecasting model in hardcopy and in digital form. 4. To presentthe report in such a way as to facilitate the ready updating offorecasts that can be periodically modified and updated by the ITFO Secretariat to generate forecasts reflecting changes in the sector. 5. To prepare and present forthe consideration of the Inc, the preliminary report at its Twenty-ninth Session and the completed report including the forecasting model at its Thinieth Session and the 2001 ITTO Annual Market Discussion. 6. To submitthe final report of the Study including the forecasting model to the ITTO Secretariat not later than 31 August 2001. LTS International was appointed as the consultant to undertake the study in late September 2000, and the Team Leader attended the 29'' Session in Yokohama and presented an overview of the intended methodology, and the planned schedule of country visits. Visits to 17 countries were made between November 2000 and March 2001. The Team Leader presented the draft report at the 2001 Inc Annual marketing Discussion held at Yaounde in Cameroon.

to LTS International Ltd The Medium andLong-term Outlook forthe Tropical Timber Market

3. METHODOLOGY

3.1 Strcitij7ccition

The study is primarily concerned with tropical timber used for sawn timber and wood- based panel production, butthe marketforthese products is more or less worldwide, and tropical timber products are in competition with other types of timber, especially temperate hardwoods, in many consumer countries. It is therefore not possible to make a realistic estimate of the likely future demand fortropicaltimber products without considering the global market, and the potential supply of competing products. The first stage of the study was therefore to construct a database of the global supply and demand situation for alltimber products. This was done by creating a spreadsheet with data for 182 countries, using the FAO Yearbook of Forest Products Statistics as a starting point. The Yearbook for 2000 with data up to 1999 was used and reported production, imports, exports and apparent consumption of industrial round-wood, sawn timber, wood- based panels, pulp, paper and paper board products was entered. The data fortropical timber products published by ITFO forthe same year was also added for comparative purposes. Data on population, GDP, and forest resources from World Bank and other FAO sources was then added, together with a variety of other data such as fuel-wood production and consumption, and average product prices, where available. The spreadsheet was then set up to perform a number of calculations on the data, partly to provide a check on consistency, and partly to determine values for a number of indicators and multipliers for use with the models. These included such factors as per capita consumption of product classes, and the apparent average volume recovery of product from round wood. These calculations indicated a considerable number of discrepancies and inconsistencies in the data, and efforts were made to resolve these, especially forthe countries visited. Countries were categorised againstthree criteria. First, the average latitude of the centre of gravity of the land mass was estimated, and tropical countries were taken as allthose having an average latitude of less than 23'. Second, producer and consumer countries were determined according to whether the country is a net exporter orimporter respectively of timber and timber products. Third, countries were classed according to their area of productive forest per capita as follows. Classification Area of roductiveforest erca ita Ha) Resource rich >0.5

Resource transition 0.5 - 0.1 Resource poor <0.1 Using these three criteria, the countries were stratified into 12 Groups. A summary was then prepared of total production, imports, exports and consumption offorest products for each group. Tropical countries that are not members of ITTO were assumed to be producing tropical timber, and any exports from these countries were also assumed to be tropical timber, but imports cannot be differentiated. See Table I.

LTS InternatibnalLtd 11 The Medium and Long-term Outlook forthe Tropical Timber Market

Tobie I Coinporison of the output from the forest ond forest industry sector between groups of tropical and non-tropical consumer ondproducer countries str@tified occording to the richness of their forest resources.

Stratification Group Proportion of Log Forest Sawnwood Plywood Sawnwood GDP (%) Production Area('000 Production Production plusPlywood 1998 ha. ) 1998 1998 production as a % of log production

Resource Poor Tropical Consumers 2.68 28,365 67,240 27,304 1,196 100 Resource Poor Non-Tropical Consumers 1.57 28,868 42,188 12,248 15,153 95 Resource Poor Tropical Producers 6.24 987 6,793 203 138 34 Resource Poor Non-Tropical Producers 4.59 17,057 20,500 4,472 1,179 33 Resource Rich Tropical Consumers 2.95 19,987 390,529 7,342 1,680 45 Resource Rich Non-Tropical Consumers 1.57 465,383 347,736 191,300 67,244 56 Resource Rich Tropical Producers 6.72 174,674 1,134,458 53,279 36,233 51 Resource Rich Non-Tropical Producers 10.49 419,817 834,609 179,095 31,558 50 Resource Transition Tropical Consumers 5.18 26,457 87,989 10,093 1,954 46 Resource Transition Non-Tropical 1.97 217,860 215,059 102,022 57,479 73 Consumers Resource Transition Tropical Producers 476 393 2,128 64 o 16 Resource Transition Non-Tropical Producers 4.34 113,335 62,629 48,430 18,989 59 World Total 2.56 1,512,958 3,401,696 415,511 150,458 37

Source: FAO Yearbook of Forest Products Stat^^tibs 2000 Table I illustrates one of the common data anomalies, with the recorded production of sawnwood and plywood forthe resource poor consumer countries (tropical and non- tropical) being the same as the volume of logs. This is clearly not possible because of conversion losses, and suggests a significant unrecorded log harvest. The approach was first to examine the current and potential future supply situation in those countries that are currently the main exporters of tropical timber products, in order to assess possible changes in domestic demand and the likely trends in production of logs overthe nextten years, The second step was to examine the potential, among resource rich tropical consuming countries, to expand their production in order to have a surplus for export. The third step was to examine the current and potential future consumption in those countries that are currently the main importers of tropical timber products, in order to assess likely trends in total consumption of timber products.

3.2 Countrysurveys

In order to assess the factors that are affecting global supply and demand fortropical timber products, it was felt important to visit as many countries as possible in the time allowed forthe study. This meantthatthe time spentin each country was limited and consequently it was not possible to explore the market situation in any one country to any great depth and the information described in the various country "reports" should be viewed as an overview based on a limited exposure to the particular market. The consultants and ITFO agreed on a selection of producer and consumer"target" countries (see table 2), all of which are current members of the International Tropical Timber Organisation.

12 LTS International Ltd The Medium andLong-term Outlook forthe Tropical Timber Market

Tobie 2 Country Selection for study Region Producers Consumers Number America Bolivia, Brazil, Ecuador USA 4 Africa Gabon, Cameroon, Congo, 4 Ghana Europe Germany, Italy, Holland, Spain 4 Asia Malaysia China, India, Japan, Thailand 5 TOTAL 8 9 17

Prior to commencing the field work every effort was made to prearrange meetings with relevant government and industry contacts who could provide an informed description of the tropical timber supply and/or demand situation in their own country. The ITTO helped to arrange a number of these appointments through the ITFO delegates from each country. Other meetings were arranged by the consultants, through their own networks and drawing on their previous experience in the international tropical timber trade Eventually more than 160 meetings were concluded during the field research in the seventeen designated countries. Details of the organisations and individuals consulted in each of the countries in which fieldwork was conducted are noted in Appendix I. Field visits were structured to achieve two objectives: I. to collect data and data sources for use with the model, using a specially designed data collection format (Appendix 2). 2. to interview representatives from government, industry and ENGOs to seek opinions on the major issues and challenges facing the tropical timber trade that could impact on the future supply and demand outlook.

3.3 Modelling concept

The concept adopted is to modelthe forest and forest industry sectorforindividual countries, to determine the actual balance of supply and demand, and then to determine regional and global balances by aggregating the country results. The global data from FAO used forthe stratification on production, trade and apparent consumption offorest products, and from ITFO for member tropical producing countries, is used forthe countries not visited. When this data is analysed in more detail many anomalies become apparent, manifested in many ways. Frequently the production of products is not consistent with recorded log production so that there appears to be insufficient raw material forthe reported production. This raises questions overthe accuracy and completeness of the data. In addition the data on production may imply per capita consumption of products that are not consistent with the level of economic development compared with other countries having similar economic conditions. Further, more detailed analyses of supply and demand that take account of processing capacity also suggest anomalies, which either imply that capacity utilisation is very low, or that actual production is higher than the recorded figures. In order to shed light on the processing capacity, to check whether the recorded production is consistent with the state of the industry, a component of the model simulates the financial performance of segments of the industry for each of the major product classes. Data on the amount of capital and labour employed in the industry, together with actual or representative productivity factors and sample data on energy consumption, other material costs and other operating costs, such as overheads, enable the apparent profitability of each industry component to be checked from the reported prices for products.

LTS International Ltd 13 The Medium andLong-term Outlookforthe Tropical Timber Market While the model cannot produce a precise estimate of the performance of individual companies, it does produce an aggregate assessment of all companies manufacturing one of the six major product classes recognised by the model. This approach provides two advantages. First it provides a means of checking whether allthe elements that make up the wood processing industry are internally consistent. Second it allows many of the variables that determine productivity and profitability to be adjusted in line with observations or with assumptions to determine whether an internally consistent state can be achieved in which allthe variables lie within a realistic range. An example of how this works in practice is provided by results from use of the modelin Indonesia. In 1998, the model was run forthe forest and wood processing sector, and two majorfindings emerged. First, the only way in which consistency could be achieved forthe wood flow in the system was by assuming that the apparent shortfall between the reported production and the consumption of raw material by the industry was coining from illegal logging. Subsequent studies of illegal and unrecorded log production indicated that the model estimate was of the right order of magnitude. The second finding was that the only way in which a financial balance forthe pulp industry could be achieved with the product prices prevailing at the time, was by assuming that the pulp industry was not servicing its capital costs. Shortly after this conclusion was reached, two of the major pulp companies defaulted on debt repayments. Since data on the forestry sectoris generally incomplete and open to doubtfor many tropical developing countries, forecasts of the medium term supply are open to considerable unreliability. Many of these countries are suffering from illegal logging, because demand fortimber products exceeds the officially authorised production. This has serious implications forthe sustainability of supply in the medium term, either because resource depletion may occur more rapidly than is expected, or because governments may introduce measures to tackle the problem, by adjusting domestic processing capacity, or by imposing restrictions on trade. The modelling approach provides a means to verify the consistency of the data and for estimating how supply and demand may change in the future according to a range of assumptions. These assumptions can be applied to both the demand and the supply side to determine possible impacts of changes in such variables as product prices and operating costs, substitution with other wood species or different materials, improved conversion efficiency, growth in domestic consumption in producer and consumer countries and changes in forest management regimes.

3.4 Description of models

Two models have been developed for previous work related to the forest and forest industry sector in Indonesia, and for a study on financial incentives for promoting sustainable forest management. The firstis referred to as the Forest Sector Framework Model(FSFM) and the second as the Forest SectorValue Added Model(FSVAM). Both have been developed on Excel Spreadsheets. Forthis study, the models have been combined, so that both use the same data, and the outputs of one model are used in the other. The model has been designed so that many of the factors that may vary between countries, or may change overtime, such as the wage rate, interest rate, labour productivity etc. , can be entered separately in part of the data entry sheet. This enables new values to be easily applied for different countries, so that the values appropriate to the country in question can be used without having to change the basic construction of the model. An additional advantage of this approach is that the variables can also be changed to create scenarios for individual countries that allow the potential impact of the changes to be assessed.

14 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market The FSFM part of the model seeks to determine a balance between the supply of wood raw material and the demand. The reported data on log production, imports and exports, industry processing capacity and domestic demand are entered into the model. Internally the model separates log production and smallroundwood production which includes plantation grown wood, and processing and demand are divided into primary products; sawnwood, plywood and pulp; and secondary products; manufactured wood products, composite panels and paper products. The model converts alltimber volumes to roundwood equivalent, as appropriate, in order to be able to compare volumes of different products. An overall balance is determined between the aggregate consumption of wood by each of the process components and the total supply, taking account of the imports, exports and domestic consumption of each product component and the processing capacity and internal transfers between components. This applies particularly to the transfer of primary products such as sawnwood to manufacturing, and of residues from primary processing to composite panels, such as particle board and MDF. When data is complete and accurate the model would normally indicate that there is a balance between the total roundwood volume on the supply side (production + imports) and the demand side (consumption + exports). When some illegal or unrecorded log production is occurring the model will show a deficit, and ifthere is unrecorded processing capacity, such as small sawmills, the model may indicate a surplus. Should the modelindicate a deficitthere are a number of possible causes apart from illegal logging that need to be considered. Domestic consumption may be overestimated orthe processing capacity utilisation may be less than reported. In order to check whether these are possibilities, the model can be re-run with different values for some of the variables (for example a higher or lower recovery factor) to see whether a balance could be achieved, while still maintaining plausible values forthe variable. For example, it is possible to see whether a reduction in domestic consumption sufficient to achieve a balance is still appropriate forthe country concerned in relation to the general level of economic activity and in comparison with other similar countries. Similarly, ifthe reduction in processing capacity utilisation required to achieve a balance were very large, and clearly unrealistic in relation to observations, then it would indicate unrecorded production as being the more likely cause of the imbalance. The model allows for differentforest management regimes to be assessed by defining the productivity, for both natural forest and plantations, and it also allows for additional production from estate crops such as rubber and from home gardens. It also calculates the amount of residues available from processing according to the recovery factor. These residues can be allocated either to production of composite panels or to fuelwood, according to the situation in the country concerned. The general structure of the modelis illustrated in Appendix 3. The data entry sheet has a fixed window that shows the balance as the data is entered, which allows for rapid testing of a range of alternative values where data is not available or is suspect. The FSVAM has two parts. The first part calculates the unit costs for each of the major components of the sector;log harvesting, small roundwood harvesting, sawmilling, plywood manufacture, pulp, manufactured wood products, composite panels and paper manufacturing. These are calculated according to a number of variables from the data entry sheet. The unit cost is broken down into elements for materials, capital, labour, fuel and energy, operating and maintenance, and fees and levies, the taxes payable and the profit. The sum of the unit costs divided by the volume of product gives an estimate of the unit sales price. This estimated price is then compared with the reported product price. If there is good agreement, it indicates that the modelis reasonably representative of the actual situation. The modelinitially calculates the profit based on a given profit margin, entered in the data entry sheet. Normally one would start with a profit margin in the range of 10-20% , as this is a reasonable level of profitthat would be commercially viable. If there is a significant difference between the model estimate of the product price, and the actual price, the level of profitability can be altered up or down in the data entry sheet until a good match is achieved. In the use of the modelforthe Indonesian forestry sector, the profitability of the logging and plywood component appeared to be higher than this LTS International Ltd 15 The Medium and Long-term Outlook forthe Tropical Timber Market assumed value, while that of the pulp component appeared to be negative. Both these findings were consistent with the actual situation. The second part of the model applies the calculated unit costs to the volume of wood going through each of the components as defined by the data on production entered, to determine the total cost. It then calculates from the aggregate costs the apparenttotal number of persons employed, and the total capital employed. These can also be compared with actual data if available as a further means of checking the consistency of the model. Additional calculations by the model are the total value of exports and imports and the total value of the sector production as well as the apparent per capita consumption of each of the product classes. These results provide an additional means for checking the consistency of the model calculations, if any of the data is available from national statistics or other sources. The models have been fully tested forthe Indonesian forest and forest products sector, and generally gave good agreement, but also indicated some shortcomings in the published data that could be checked. In Indonesia, as in most countries, there is no single agency that collects comprehensive data forthe forestry sector, and generally there are differences between the published figures from different sources. For example, both the Forestry Department and the Labour Department publish data on employment in the sector, butthe former appears more accurate forthe forestry sub-sector, and the latter forthe processing sub-sector. Where published statistics are the result of surveys, they are considered to be more accurate than estimates obtained by other methods. The calculations are done on three separate worksheets that are initiated from the data entry sheet, buttwo of them have the option to substitute different values for examining scenarios. One of the scenario models is supply driven, in that it allows possible changes in the supply situation to be examined. This could be a change in the log production, or a change in the processing capacity, either of which would affectthe supply of products. The other scenario modelis demand driven, in that it allows possible changes in demand to be examined. This could be a change in demand due to population and income growth or to change in product prices. The demand driven scenario sheet differs from the others in that the model calculates the domestic consumption from population and per capita GDP, using equations similarto those used in the FAO production forecasts, rather than using the domestic consumption figures given in the data entry sheet. It then calculates imports and exports as residuals rather than as givens, after balancing the production and domestic consumption. Ifthere is a surplus of production over consumption it is shown as exports, and if there is a deficit it is made up with imports. The key results from the initial"base case" and the two scenarios are compared on a separate worksheet where it is possible to adjust some of the major variables and immediately see the effect. The differences between the scenario results such as changes to imports or exports, changes in employment and government revenue and changes in industrial capacity utilisation are highlighted. Full details of the model and its use are presented in a 'User Manual' which has been prepared as a separate document, butts an integral part of this report.

3.5 Dotciso, !Icescrndverijiccition

The major source of much of the data required to determine the wood supply and demand balance for individual countries is the published FAO statistics. However, these are based mainly on government returns, which may not be complete, accurate or up-to-date. FAO attempts to estimate data, where it is not available, and may also adjust some returns, where it has data considered to be more accurate, from other sources, such as its own surveys or country studies. Despite these efforts, there are clearly many inaccuracies and shortcomings in the data for many countries. In many cases, these errors are not immediately obvious because no attemptis made to assemble an overall material balance between the apparent production and consumption.

16 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market In many tropical developing countries, reports indicate that illegal and unrecorded log production represents a significant volume, and similarly that an informal processing sector exists, mainly comprised of small, unregistered and sometimes mobile sawmills and pit- sawyers, which supply the domestic market. Very few countries collect and record data on actual domestic consumption of wood products, so that the scale of such operations is almost impossible to estimate. However, in many countries it represents a substantial drain on the forest resources, and has an impact on the medium and long-term log supply potential. The only way to obtain an indication of whether or notthis situation applies in a particular country is by assessing the apparent domestic per capita consumption of wood products. Such estimates can be validated by comparing the recorded data with data for similar countries where more detailed studies have been carried out and consumption has either been measured by surveys or from more comprehensive studies of the supply and demand balance. Forthis study, the global database used forthe stratification gives an indication of those countries where apparent domestic consumption is unusually low in relation to such indicators as per capita GDP. The stratification placed countries into one of twelve groups according to whether they were tropical or non-tropical, consumer or producer and resource rich, resource transition or resource poor(Appendix 4). These results were also summarised for alltropical and non-tropical countries separately, and within these two major groups for all consumers, all producers, and for all countries in each of the three resource classes (Appendix 5). The results were also stratified by geographic region (Appendix 6) These summaries provided averages for each class for many of the important indicators, such as apparent per capita consumption and log production per unit area offorestthat provided a yardstick for comparisons between countries. Overallthe class averages appeared rational in comparison with one another, as is discussed in the next section, but within the classes it enabled countries that were very different from the class average to be identified. The country visits combined with a wide variety of country reports were used to cross check the published data forthe limited number of countries involved, but clearly at the global levelthe overall precision of the data is still very questionable. However, the modelling approach does allow a scenario to be examined, where the question could be asked "whatif, those countries which have an unusually low per capita consumption were actually consuming wood products more consistent with their average income, and the class in which they fall?"

LTS International Ltd 17 The Medium andLong-term Outlookforthe Tropical Timber Market

4. RESULTS

4.1 Overview

The assembly of the global database used forthe stratification (see section 3.1) provided an initial overview of the current supply-demand balance for primary wood products, including tropical timbers. This overview provided the basis for verifying the quality of the data, and gave a general picture of the current situation with regard to the resource, production, trade and consumption. The global data is sorted and summarised according to a number of classifications and is presented in the tables below. Although the study is concerned only with the supply and demand fortropicaltimbers, the prospects fortropicaltimbers cannot be separated from the overall global timber market, because of the influence of trade and potential substitution with other timber species and other materials. The current volume of tropical timber exported as logs, sawnwood, plywood and veneers represents about 20% of the total log production in tropical countries. Thus the vast majority of tropical timber is consumed within tropical countries. A combination of population increase and economic growth is likely to increase the demand fortimber products in tropical countries in the future, though current consumption is certainly considerably higher than the reported data would suggest because of widespread illegal logging and under-reporting. The stratification found 35 tropical countries that metthe criterion for producer country of which 30 were classed as resource-rich, and 56 tropical consuming countries, of which 17 are classified as resource-rich. These resource-rich consuming countries have the potential to become producers iftheir resources are more fully utilised. In some of these countries political instability is a major factor in the under utilisation of their forest resources, while in others it is more related to accessibility. The future trend of the supply-demand balance fortropicaltimber is therefore likely to be determined more by developments in tropical countries than in the traditional consuming countries, by a combination of increasing domestic demand and the possibility of changes in the supply. The latter can change in either direction, with resource depletion in some producing countries leading to a decline in supply, and a combination of political stability and investment in infrastructure creating the potential to increase supply in others,

Toble 3 Distribution of InO member countries in the CIOsses derived by styotij7c@tio" Resource Resource Resource Total rich transition poor Tropical Producer ITTO 17 19 Stratification 30 2 3 35 Consumer ITTO (6) (3) (I ) 10 Stratification 17 19 20 56 Non- Producer InO 4 4 tropical Stratification 12 18 3 33 Consumer ITFO 3 (7) 6 16 Stratification 7 13 31 51 Total ITFO 30 11 8 49 Stratification 66 52 57 175 cogures in brackets indicate that ITFO classification differs from the stratification and the country has been counted according to the stratification class)

18 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market Table 3 above shows a comparison between the classification of all countries and ITFO member countries, according to the criteria used in the stratification. The most important point to note is that only 19 of the ITTO member countries meetthe criterion for being producers, although there are 35 countries worldwide that do so, and a significant proportion (30%) of the producer member countries are currently consumers, However, there are 13 resource rich tropical producers that are currently not members of ITFO, and there are additional resource rich tropical countries that are currently net importers (consumers), that have the potential to become producers. The ten ITFO tropical producer member countries classed as consumers, have been producers in the past, but a combination of growth in domestic demand and resource depletion has resulted in them becoming net importers. This trend is likely to continue with other countries currently classed as producers, gradually becoming consumers, butthere is a possibility that some of the tropical resource rich countries that are currently net importers, will increase their production of forest products and begin to have surplus for export. It therefore seems that the nextten years will see some structural changes in trade flows in tropical timber products. Certain tropical timber species have more or less unique properties of durability, colour or figure, such as teak, rainin, rosewood and greenheart, and consumption is relatively inelastic with price, butthese species represent a very small proportion of the total volumes traded internationally. Many other tropical species do not have such unique properties and their use is determined more by price or availability. The products made from these species can be made from other non-tropical species, and price is likely to be a crucial factorin determining how much of future growth in demand fortimber products will be met by utility grade tropical timbers. Appendix 7 shows how exports and imports of tropical timber products are distributed between the twelve groups of countries defined by the stratification process. It shows very clearly that practically alitropicaltimber products trade internationally at the present time originate from only 16 countries and that it is imported by only 19 consumer countries. Malaysia and Indonesia accountfor 75% of the exports and PR China and Japan account for about 65% of the imports. Therefore in the short-term, changes that may affectthe balance between supply and demand will be most influenced by developments in these countries. Forthe medium term situation, the possibility of additional tropical countries becoming significant exporters needs to be examined, together with consumption trends in the existing consumer countries, including possible substitution, and the possibility of additional countries becoming significant consumers.

4.2 CountryReports

During the fieldwork, in addition to obtaining anecdotal information from individual discussions, every effort was made to obtain reliable and accurate published or collated statistical information that could help to describe production and consumption trends in the various countries. The availability of reliable statistical data varies from country to country. While a great deal of useful statistical material was obtained, there remain a few gaps in one or two cases. In these instances, a greater emphasis must be placed on anecdotal information. In one or two countries it was suggested that the ITTO could provide help in compiling statistical information as the countries themselves did not have the necessary infrastructure and/or manpower to undertake the work. (ITFO is currently undertaking such a project in Bolivia. ) Additional information has been obtained from reviewing previous reports on this subject, some of which have been produced by the ITTO.

LTS International Ltd 19 The Medium and Long-term Outlook forthe Tropical Timber Market The following country reports, therefore, reflectthe opinions of a number of individuals and organisations in each of these countries as to the future outlook forthe tropical timber trade. They take into account a great many factors, all of which have a bearing on future supply and demand. The international trade in tropical timber products will continue to ebb and flow. Meanwhile however, the information contained in this section should provide the basis upon which future trade can be forecast. Issues to Consider In order to predictthe future demand/supply fortropicaltimber products, it is necessary to consider a number of relevantfactors, all of which have some bearing on the medium and long term outlook. It is these factors that formed the basis for discussions with government and industry representatives and with industry associations in each country. Many of these factors are also reflected in the statistical material obtained. Some of them are of more significance to producer countries while others have more bearing in consumer markets. Many of the factors are common to all sectors of the tropical timber industry. Consideration has been given to all of them in preparing the country reports. . Roundwood Supply - A fundamental question. What will be the future availability of tropical roundwood overthe next 10 - 20 years? . Government Policies - Where governments hold jurisdiction overthe forest resources, how will their policies impact on harvesting levels in the tropical forests? What will be the impact of stumpage costs and royalties and ever changing environmental regulations on growing costs? . Plantations - To what extent, and with which species, will future roundwood requirements be supplied from industrial plantations? What advantages/disadvantages will face tropical, as opposed to temperate plantations? . Consumer Demand -Another fundamental question. Will consumers continue to demand wood products and will their preferences be fortropical or temperate species; for hardwoods or softwoods? How will growing populations and increasing purchasing power impact on demand in tropical producing and consuming countries? . Economic Issues - Whatis the overall economic outlook, both short and long term, in the consuming countries? Consumer demand/purchasing power must be a reflection of the degree of prevailing economic prosperity. . End Use Applications - Tropical forest products are currently in demand for a wide variety of applications. Will they gain or lose market share overthe next decade? What are the particular advantages provided by tropical timber Of any) in terms of decorative, durability and structural characteristics? . Competition - Tropical forest products face increasing competition from a variety of wood (and non-wood) alternatives. How will the tropical timber trade react/respond to this challenge. To what extent does the pulp and paper industry compete fortropical fibre with the solid wood sector?

. Capacity - What is the capacity of the tropical timber industry to convert logs to products? Is there enough capacity to meet demand or is there already an excess? What changes are in store forthe production sectors? How can product output be increased with less raw material inputthrough improved production recovery and efficiencies and the possible use of waste and residual material? . Transportation - Given the global timber marketplace that now exists, wood and wood products are moving freely around the world. Transport economies of scale are becoming ever more important in terms of the international timber trade. . Profitability - Again, a fundamental issue. Can tropical timber products continue to compete for market-share against an increasing range of alternatives? Will product price levels allow suppliers to operate with a reasonable expectation of profit margin? Will raw material costs rise significantly due to changing government policies?

20 LTS International Ltd The Medium and Long-term Outlook forthe Tropical Timber Market . Environmental Issues - To what extent will the question of"saving the rainforest" impact on the future of tropical forest logging and, by extension, the supply and demand fortropicaltimber products? . Certification - A new, but increasingly demanding issue for producers of tropical forest products. The requirement from a number of important customers, in several countries, that suppliers provide some form of assurance that their products originate from a sustainably managed forest resource - be it tropical ortemperate. All of these importantissues were considered during the course of the meetings in each country. They provide the foundation upon which the medium and long term outlook for the tropical timber trade is projected.

PRODUCERCOUNTRIES

4.2. I BOLIVIA

National economy Bolivia is landlocked, with a land area covering 1.1 million square kilometres and a population of 75 million. The forest industry employs 200,000 indirectly, equivalent to more than 7% of the workforce. Although forest product exports have been declining steadily overthe pastfour years they accountfor nearly to% of total Bolivian export earnings. Wood product exports in 2000 were only 36% of the export total achieved in 1997. Forest resources Bolivia has a total forest concession area of 5.5 million hectares. Bolivian tropical forests may contain up to 400 species per hectare, yettwenty species make up 80% of the total volume harvested. ECotypes include moist, tropical lowlands and high, and plateau. By year end 2000, Bolivia had registered some 803,377 hectares of FSC certified forest and a further 830,000 hectares are currently undergoing pre-certification assessment. In addition to established industry concessionaires social groups and small, individual operators (AsLs) and indigenous groups (TCOs) control 6 million ha. Importantly the AsLs and TCOs do not have to register any forest management plans and are Charged a lower royalty. Harvesting and log production Annual allowable cut is 1.6 million in' but actual harvest during 1999 was only 502,000 in' and harvest for 2000 is expected to have been lower with many concessionaires returning some of theirlicensed operating areas to the government. In July 1996 the Government passed a new forestry law emphasising the need fortimber companies to submit management plans prior to harvesting. At the same time companies are encouraged to undergo a voluntary certification process on the assumption that the establishment of a certification system will help to increase export market share in Europe and North America. The Government has provided little incentive to the industry and its potential to benefitthe country's economy does not seem to be fully recognised. Banks seem to view the sector with suspicion, and there is considerable difficulty in financing long term capital projects. Sawmilling No longer can producers rely on exports of rough sawn mahogany lumber to support them. Mahogany was once the mainstay of the Bolivian industry but in 1999 it accounted for only 3.9% of the total harvest.

LTS InternatibnalLtd 21 The Medium andLong-term Outlook forthe Tropical Timber Market Transportation is a major challenge forthe Bolivian forest industry both in getting the logs to the sawmill and timber to the port. The total cost of transporting a container of wood products to Arica (in Chile) for shipment to an export market, can cost up to 40% of the FAS vessel price. Perhaps, more than anything else, the high cost of getting products to market explains the'evolution in the range of forest products that has taken place in Bolivia overthe past decade. Many Bolivian sawmills went out of business overthe loss of the Argentine market following the 1998 economic crisis and Argentina joining Mercosur. Those producers who have survived have been forced to add more value to their products and to search for new export markets in the USA and Europe.

. . Table 4 Chongi"g Trends in Bolivian Forest Products Exports 1990 - 1999 ('000, UsD) ,990 1995 1999

Exports of rough sawn timber 36,425 63,188 22,223 (% of total forest product exports) 74 80 30 Exports of processed woodproducts including furniture 2,185 10,837 39,134 (% of total forest product exports) 4 14 54 Source: Supenhtendencia Forestsl Manufactured wood products and wood based panels Exports of processed wood products have increased eighteen fold overthe ten year period and are now nearly double the value of rough sawn lumber exports. The development of the value added wood products sector offers one positive prospectfor the industry. The ability to offer "certified" forest products also adds to the potential forthis sector to generate better financial returns than from the domestic marketforrough sawn timber and plywood products. In addition, many of the possible value-added products can be produced from lesser known species that may not be available in large volumes (per hectare) butthat have the necessary characteristics to meet some customer and marketrequirements. Such diversification will require additional investment. Given the high cost of borrowed capital and the uncertainty over forest resource tenure it remains a real gamble for any company considering such expansion. However, ifthe industry is to survive, it must improve both production and recoveries and it must develop new, niche markets outside of Bolivia. Domestic consumption and trade With the exception of value-added and (possibly) certified forest products, almost all of Bolivia's production of wood products is absorbed in the local market. There are no building codes or standards for construction and many non-wood building products are now competing for market share with timber(eg aluminium frames). Table 5 below illustrates the extent to which the Bolivian timber industry relies on the domestic market.

T^ble 5 Bolivian copodty, !?rod"ction grid consumption Product Installed Actual Domestic Capacity Production Consumption Sawn Timber 1,500,000 500,000 450,000 plywood 41,000 22,000 21,500 Source: STOP Given the local market emphasis on low prices and with little real concern over quality, there is strong incentive to retain only the minimal level of production technology. The returns generated from this trade could not support any significant capital expenditure on new equipment orfund any research on possible uses for some of the lesser known species available from the forest resource. 22 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market

4.2.2 BRAZIL

National economy Since the devaluation of the REAL in 1999, Brazil's economy has grown at an annual rate of about 4%. GDP in 2000 was estimated at 651 billion UsD and annual inflation remains fairly steady at 7%. Despite the current economic slowdown in the USA, the Brazilian economy should continue to grow. The government has continued to follow IMF guidelines and its fiscal performance has improved. The current rates for capital investment financing are in the range of 15% per annum. Forest resources The natural forests of the Amazon region include an area of nearly 400 million hectares of potentially productive forest. In addition, some 50 - 60 million hectares of forest have been set aside in parklands and a further 120 million hectares have been designated as Indian lands and given over to indigenous peoples, Although more than 3000 timber species have been identified in the Amazon, only 100 of these are commercially utilised. The 15 most important commercial species accountfor 95% of the industrial production of sawn timber and veneer. Given that there have been frequent changes to natural resource legislation, and that there is no concession system, timber processors are reluctant to commit to making significant capital investments in harvesting and processing. The question oftenure security is a very important issue when looking to future tropical timber production from Brazil. Harvesting and log production It is estimated that annual harvesting from Brazil's tropical forests totals 28 million in'. Most of this production is converted to sawn timber, veneer and plywood and between 85 - 90% of the volume is consumed in the domestic market. The total value of tropical timber products produced in the Amazon region (350 million UsD) accounts for only 10% of total national revenue from the forest industry. The vast majority of forest industry revenue is generated by the plantation based industries in Southern Brazil. Brazil does riot allow exports of logs from any native forests. Rough sawn timber exports are permitted but fortwo species (mahogany and virola)there are export quota limitations. Sawmilling It has been estimated that there are some 9,600 sawmills in Brazil, over 99% of which ore small!?rod"refs with production of less thon 30,000 in'!?er onnum.

T@ble 6 Instolled capacity of sawmills in Brazil Size Capacity range Number of facilities % 'in'1yr' < 10,000 7,180 74.6 Small 10,000 - 30,000 2,383 247 30,000 - 50,000 50 Medium 50,000 - 100,000 15 0.7 100,000 - 150,000 2 Large > 150,000 TOTAL 9,630

Source: STOP data bank Approximately 60% of mills are producing from tropical hardwood logs and the remaining 40% are based in Southern Brazil, processing pine and some eucalyptus from industrial plantations. Total capacity forthe tropical sawmills is estimated at between 50 million to 60 million cubic metres annually.

LTS InternatibnalLtd 23 The Medium and Long-term Outlook forthe Tropical Timber Market Capacity utilisation is estimated at between 25% to 30% for most mills, with the larger mills attaining rates of around 40%. Manufactured wood products his expected that the secondary processing of solid wood products such as mouldings, edge glued panels and furniture blanks will continue to be in demand and will see some growth in the nextfew years in a number of export markets. Exports of blanks and edge-glued panels have remained fairly static overthe last 5 years, while mouldings have shown a steady export growth. Following the Asian "economic crisis" of 1997 - 1998 many companies were reluctant to invest in new equipment. However, since the devaluation of the Realm 1999 and the recent decline in bank lending rates, there is now a better climate for investment in new capital equipment and exports of these other value-added products should grow. In respect to all value added exports, there is an increasing demand for some form of "certification". While not all customers will view an "eco-label" as an essential requirement, many of the high profile, big volume buyers will. Wood based panels Brazil has been a major plywood producer since 1985. In 1993 a combination of strong overseas market demand plus a shortage of supply from producers in SE. Asia brought about a plywood "boom" forthe Brazilian industry. With capital investment in technology and larger mills, production peaked at nearly 2 million in' in 1994. Since 1994 however, the industry has declined significantly. Many mills have closed and those that have survived are operating well below capacity. Exports to Europe and the Far East have all but dried up and today the USA (80%) and the Caribbean countries (20%) account for virtually all of Brazil's plywood exports. Brazilian plywood producers will have to search out special end use applications fortheir production ifthey intend to compete in the export marketplace. Producers will also have to be assured of theirfibre supply on a long term basis, ifthey are to justify any capital investment that may be required in order to supply these new niche markets. Market development will have to be undertaken with increasing utilisation of softwood and plantation species. Domestic consumption and trade The majority of tropical timber produced'in Brazilis consumed in the local market. Only a small volume of tropical timber is consumed within the Amazon region, while more than three-quarters of the tropical sawn wood produced in the Amazon is transported to southern and south-eastern Brazilfor conversion into a wide range of products. The State of Sao Paulo alone consumes 20% of the tropical sawn timber produced in the Amazon region. Exports of sawn timber and wood products represents only 10 - 15% of the total market consumption. Domestic consumption is expected to grow as the more stable economy and a revalued Real have created a better climate for construction. Consumers will increasingly demand a better quality of finished product and this may put some pressure on the small saw mill operators who will not be able to compete outside their local market. Environmental issues Forthe past decade Brazil has been one of the prime targets for international environmental groups who have severely criticised her overthe alleged mismanagement of the tropical forests of the Amazon. Conversion of natural forests to grazing land for cattle and slash and bum, shifting cultivation have contributed on a far greater scale to tropical deforestation than the timber industry.

24 LTS International Ltd The Medium and Long-term Outlook forthe Tropical Timber Market In 1999 a new Federal law was passed covering "environmental crimes". This new law provides severe penalties for harvesting, transporting or processing any timber or timber products withoutthe accompanying approvals authorised by IBAMA. The Brazilian government views SFM certification as a positive initiative but only on the basis that all credible certification schemes should be available and the market can selectthe one(s) that best meets its demands.

4.2.3 CAMEROON

National economy The Cameroon economy experienced strong economic growth throughoutthe latter part of the 1990's, butthe underlying structural problems and the failure of the government to carry through the required programme of reforms are thought to have hampered development. GDP growth is currently estimated to be 5.2% (1999) compared with 3.3% in the early 1990's. The continued privatisation of major industries it is felt will enable the economy to maintain this rate of growth in GDP. Unemployment is high, currently running in excess of 30%. However, inflation is relatively low with the latest rise in consumer prices being estimated at 2.1%. Forest resources

The forest area of Cameroon is about 22.5 million hectares of which, 17.5 million are said to be exploitable. The potential volume of exploitable standing timber is estimated to be I. 6 billion in3. Harvesting and log production From the latest statistics available, it appears that production of logs from the forest have declined during the lasttwo years, In 1997/1998, log production reached almost 3.4 million in' but according to published data production in 1999/2000 had declined to an estimated 2.5 million in3.

Table 7 Production of Roundwood 1997-2000 ('000 in3) Year Volume % Change

1997-1998 3358 1998-1999 3000 (11) 1999-2000 2500 (17)

There are some doubts by industry commentators as to the accuracy of the latest figures given that considerable illegal logging activities are alleged to be occurring. Nevertheless there is a strong indication that there has been a noticeable decline in harvesting levels. The actual production levelis still higher than the target set by Government and this, along with the possible adoption of increased rotation lengths pointtowards further reductions in log production. Sawmilling The Cameroon government is following a policy of increasing the volume of timber processed domestically. The number of operations processing timber within Cameroon has increased from 38 in 1994 to almost 100 now. The total production capacity of these mills is thought to be in excess of 3 million in' annually. The trend for growth in processing capability is moving in the opposite direction to that of log production. Production of sawn timber for export has increased dramatically overthe lastthree years. In 1997/98 output was reported as being 391,000 in'. By 1998/99, output had grown by around 18%, and in 1999/2000 by a huge 74% to 801,000 in'.

LTS InternatibnalLtd 25 The Medium and Long-term Outlook forthe Tropical Timber Market Manufactured wood products and wood based panels The trend towards increased levels of production of veneer and plywood is less pronounced compared to the sawmilling sector. This sector suffered more severely during the Asian crisis and production fell by 18% during 1998/99 from the level of the previous year. However, output recovered and reached a reported 110,600 in' in the year 1999/2000 compared to 96,300 in' in 1997/98. Domestic consumption and trade With little current hard data available, domestic consumption levels have been estimated. Using the above roundwood production figures and conversion factors for sawn timber, plywood and veneer used by A1TBT in calculating round wood equivalent volumes, there would appearto be a domestic consumption of logs of around 750,000m'. This volume is less than halfthat of 1998 published by bodies such as ITFO and FAO. These figures show respectively that domestic consumption of logs in 1998 was 1.6 million in' (ITFO) or 2.0 million in' (FAO). Even allowing for possible differences in collection methodology, periods, sources and conversion factors, the situation is very anomalous and would tend to support the existence of a high degree of informal exploitation. The implementation of a ban on the exportation of sipo, sapele and iroko amongst a range of other species has considerably impacted upon the level of log exports. Log exports in the year 1999/2000 have fallen to 711,000 from the 1,275 million in' recorded forthe previous year, a fall of around 44% and export levels are now less than halfthat of 1997/1998.

Environmental issues The situation regarding "Unite Forestiere d' Amenagement" (UFA's) is causing some concern within the timber industry. These long term concessions are less available than they were and many operators are applying and receiving "ventes de coupe". Because of the proliferation of these small concessions, many of the larger operators feelthat because of the sheer logistics involved, little can be done to ensure that the concessions are being managed according to the regulations laid down by the authorities.

4.2.4 CONGO REPUBLIC

National economy The economy of the Republic of the Congo has as its mainstay, oil production. Prior to the beginning of the armed conflicts the rapidly rising oil revenues facilitated the financing of large scale developments enabling GDP growth to average 5% per annum. The impact of the 1997 civil war and now the latest conflict combined with falling oil revenues has resulted in negative growth. However with the latest conflict over, there are hopes that the economy will once again experience strong growth but although the government has forecast economic growth of 6.5% for 2000, it is felt by other economic observers that, at best, growth will be in the region of 5% for 2000/2001. Forest resources The Republic of the Congo has 22.06 million hectares of forest cover. This represents 64.6% of the total land area. Around 5% of the Congo's forests are inside protected areas. Concessions awarded to industry total 9 million hectares There exists a further 83,000 hectares of plantations, predominantly eucalyptus. Harvesting and log production Because of the warit was not possible to get complete statistics from organisations in Congo relating to recent production. Log production virtually ceased in the south of the country between late 1999 and late 2000. However, activities in the North of the country were not affected to the same extent. 26 LTS International Ltd The Medium andLong-term Outlook forthe Tropical Timber Market Table 8 Production of roundwood 1998 &1999 ('000 I^) Year Volume

1998 1056 1999 1191

Even with the conflict, production of logs increased by 12.8% although more than 90% of the production volume emanated from the north of the country. Sawmilling, manufactured wood products, wood based panels and domestic consumption and trade As shown in table 8, production of logs grew between 1998 and 1999. At the same time exports of logs apparently grew by 21.4%.

Table 9 Production of Timber Products in 1998 & 1999 ('000 in3) Product 1998 1999

Logs 1056 1191 Sawn Timber 78 120 Veneer 55 60 Plywood 2

Sawn timber production grew by almost 54% during the period 1998-, 999 again reflecting the increase in output occurring in the north of the country. Veneer production also experienced an increase of 9%. Whereas production of plywood ceased. More recently, several new projects to expand production capacity have been announced in both the north and south of the country, and these developments will increase the capacity of both the sawmilling and veneer industries. These developments reflectthe stated aim of the Government to process domestically 60% of alllog production from the Congolese forests. Export volumes have also increased, exports of logs grew by 21.4%; sawn timber exports almost doubled, whilst exports of veneer increased by 3.8%. As would be expected, given the conflict, domestic consumption declined during this period and indications are that the decline worsened during 2000. Consumption of sawn timber reported Iy declined by 2% and veneer by 11% in the period 1998/1999. The overall outlook, despite the uncertain security situation, is relatively positive, the industry is growing in confidence and recentinvestments by large forest industry companies are felt to augur wellforthe immediate future. Environmental issues The majorrecentlegislation is the new law requiring all companies operating in the Congo to have the necessary facilities to process the logs within the country. The aim is that eventually only 15% of log production will be available for export in an unprocessed form. Note Due to the current security situation the programme of visits and availability of key contacts was constrained by the political dialogue taking place within the country. However, more detailed data has been promised when available and will be included in the final report. Several meetings were held with various departments of the Ministry of Forests.

LTS International Ltd 27 The Medium andLong-term Outlook forthe Tropical Timber Market

4.2.5 ECUADOR

National economy By the end of 1999, Ecuador's economy was weak. The currency (Sucre) had collapsed and the economy shrank by more than seven per cent. In 2000 the government decided to convert to a dollar based economy and by September of last yearthe Sucre had been phased out of circulation. Since then Ecuador has been struggling to regain some economic stability and there has been some positive progress. Inflation in 2000 remained very high at over ninety percent per annum butthe forecastfor the current yearis that the rate will slow to 25% and may even reach single digits by next year. GDP for 2001 is forecast to reach 17.3 billion UsD and the economy should expand by two percent. Strong oil prices combined with financial support from the IMF have enabled Ecuador to come to some agreements with its various creditors. Investor confidence has begun to increase and is evidenced by renewed foreign investment which will be a necessity for any long term growth. Forest resources Ecuador has some 12.5 million hectares of natural forest lands, of which 4.5 million ha. are under protection. The remaining 8.0 million ha. are deemed "productive" but it is generally accepted that less than 1.0 million are of commercial significance. There are probably between 70 - 80 recognised species in Ecuador's forests but only 15 - 20 are considered to be of commercial value. The country also has some 160,000 ha of plantation forests in eucalyptus and pine species. Over sixty percent of the natural forest is located in the Province of Esmereldas in the North-west of the country. The remainder is located in the East and South-East butthere has not been much large scale activity in these 2 regions as they are inhabited mostly by settlers (Colonios) and indigenous groups. Ecuador's forests are disappearing at a faster rate than they are being re-planted. Trees felled to make way for subsistence crops are sold to traders for very low prices. Only about 35,000 ha of tropical forest are in the hands offorestindustry companies. Many of these producers buy a large proportion of theirroundwood from log traders based in Esmereldas. There is no concession system in Ecuador. There is a new forest law, currently in draft form, that is being reviewed by the Government, that is intended to bring more control to the management of Ecuador's natural forest resource. It is hoped that this draft legislation will be passed into law before the end of 2001. Harvesting and log production Reliable forest industry statistics are very hard to come by in Ecuador. Many of the operators, whether in log or lumber production, are very small producers who do not record their production. It is estimated that annual log production is about 8.0 million in' but only some 2.5 - 3.0 million in' is officially recorded as consumed by the forest industry. The balance simply disappears. Probably some of these logs are traded across the border into Colombia while considerable volumes will be processed by chain saw-millers for sale into their local markets. Others will simply be left on the forest floor or burned to clear land forthe subsistence farmers and I or the Colonios who will settle the land as a means to eventually obtain ownership. The forest industry records log consumption forthe registered sawmillers as being between 2.3 and 2.5 Million in' annually with another 250-300,000 in' being utilised by the plywood industry.

28 LTS International Ltd The Medium and Long-term Outlook forthe Tropical Timber Market Sawmilling ms very difficult to come up with an accurate figure for annual production of sawn timber in Ecuador. The proliferation of chainsaw saw-millers makes any such figure an estimate at best. Based on discussions in Ecuadorthe best guess is that production is about 1.5 million in' most of which is forthe domestic market. The log supply from the Esmereldas region is not particularly good for lumber production and recovery is low, probably not more than 35%. The quality of the finished productis low and would not meet export market standards. Manufactured wood products and wood based panels Ecuador has seven plywood mills producing some 188,000 in' offin ished plywood per year. Nearly sixty percent of the production is of the species sande (Brosimum utile) with the remainder in a range of lesser known tropical species which are used for core-stock. Ecuador also has 2 particleboard mills and I MDF operation all of which are based on plantation pine fibre. Production from the particleboard mills is 36,000 in' per year and from the MDF operation a further 50,000 in'. Nearly allthe production of these panels is exported. Domestic consumption and trade There are virtually no exports of tropical sawn timber from Ecuador, as timber quality is generally not good enough for export market requirements almost all sawn production is consumed in the domestic market. There are no standards fortimber utilisation in Ecuador and much of the lumber is used for packaging and crating forthe banana trade. Tropical sawn timber is also used in local construction. There is an export trade in tropical plywood with some 125,000 in' or 66% being exported last year. The remainder is consumed in the local market. The plywood industry is, to some degree, driven by the export market as there is currently too much production forthe local market to consume. Over 90% of the particleboard and MDF produced in Ecuadoris exported. Ecuador also exports some plantation grown teak logs to India and there is a growing trade in the export of eucalyptus chips to Japan. The export of chips was valued at 25 million UsD in 2000. Forthe tropical plywood trade the principal export destinations are USA (40%), Mexico (30%), the Andean Region (25%) and the balance to Europe (Spain & France). Environmental issues It has been estimated that each family of subsistence farming settlers "advances" at a rate of 2.7 ha per year and, despite the ability of Ecuador's soil to regenerate quickly, there has been no real effort at reforestation. his hoped that the new forestry law will be approved later this year and this will bring about dramatic improvement in overallforest management. Currently there are some studies underway that are looking at the issue of Sustainable Forest Management. At the same time it is recognised that this idea will be contentious in the Eastern Provinces. There are working groups looking at the possibility of FSC certification. An important yet unknown factoris the extent to which buyers in the USA and Europe, who are currently purchasing sande plywood, will put pressure on their Ecuadorian suppliers to provide "certified" plywood.

LTS International Ltd 29 The Med^^in and Long-term Outlook forthe Tropical Timber Market

4.2.6 GABON

National economy Gabon enjoys a per capita income fourtimes that of most nations of sub-Saharan Africa. The oil sector accounts for 50% of GDP. In the period 1987-97, GDP growth averaged 4.1%, World Bank forecasts up to 2002 indicate that GDP will grow at the lower rate of 3.0%. However, actual growth in GDP in 1999 was estimated to be 1.7%. Unemployment is currently running at 21% with 30% of the active urban population, under the age of 26, unemployed. Unemployment pressure is intensifying as new job creation is not occurring fast enough to compensate forthe contraction of public and parastataljobs which has arisen through IMF led reforms of the macroeconomic framework. Forest resources Gabon has a forest area of 22 million hectares representing 85% of its surface area. Plantations amount to 30,000 hectares. Productivity of the forest is stated to be 0.62 in' per hectare per annum. Of the total forest area, 6.3 million hectares are attributed to wood production and at present around 20% of this is being exploited. Harvesting and log production In 2000, total log production was 2.9 million in' an increase of 16% on the previous year. Production of okoume accounted for 67% of the total output of the forest. Production of other species has been steadily increasing and in 2000 it is reported that the volumes harvested of other species was 0.96 million in' an increase of almost 28% on the volume harvested in 1999.

Toble 10 Production of Roundwood in 1999 & 2000 ('000 ,, I) Species Volume 1999 Volume 2000

Okoume 1750 1943 Other Species 750 957 Total 2500 2900

Sawmilling There are currently 34 plants processing timber within Gabon. Twenty-eight of these are sawmills (one millis currently inactive) and six plywood/veneer mills. There are 12 well- advanced projects forthe production of sawn timber and veneer/plywood. No details of the potential capacity of these projects were identified. Sawmilling capacity is around 180,000 in' annually and outputin 1999 was 100,000 in' annually. Production in 2000 was estimated to be approaching 140,000 in'. Output of sawn timber has grown steadily in recent years as companies have been beginning to see some success in developing markets for sawn okoume. Manufactured wood products and wood based panels The capacity of the veneer industry in Gabon was estimated as being around 200,000 in'/a but utilisation has been relatively low as in 1999 output was 100,000 in'. However discussions during the field visit gave indications that output would be in the region of 140,000 in' in 2000. Exports of logs, lumber, veneer and plywood have grown in the period 1998 - 2000. In 2000, exports of logs reached 2.7 million in'. Sawn timber exports are estimated to be 90,000 in' and veneer/plywood at a similar level as that of sawn timber. The major overseas markets for Gabonese logs are nowthe Far East markets whereas sawn timber, veneer and plywood are exported to Europe and South Africa.

30 LTS International Ltd The Medium and Long-term Outlook forthe Tropical Timber Market Attitudes to export market development were mixed with the Far East markets and China in particular being seen as providing strong growth prospects forthe future. However, the expansion in capacity was seen as evidence that the future prospects for not only log exports, but also sawn and peeled products were positive. Domestic consumption and trade Statistics on domestic consumption are non-existent; as a result consumption levels have to be inferred from the hard data that is available. The indicative figures for 2000 show that log consumption by domestic producers was in the region of 160,000 in' and the processing of which produced circa 50,000 in' of sawn timber and 50,000 in' of veneer/plywood. Anecdotal evidence suggests that illegal logging and sawmilling with chainsaws is rife and that most of the outputfrom these unregulated operations would be consumed domestically. Given that the economy improves in line with forecasts and that oil prices provide additional income it was generally feltthat a smallincrease in domestic consumption could be expected. Environmental issues The 1998 Forest Law still has not been adopted. This law is designed to link sustainable forest management with utilisation. Proposals have been made to place 30% of the forest area under protected status. Individual companies have developed their own forest management plans which they state are in line with SFM practice.

4.2. 7 GHANA

National economy The timber industry, together with gold and cocoa, is one of the main export earning industries in Ghana, with agriculture as a whole accounting for 40% of GDP. Annual population growth rate is around 1.9% with per caput GDP at 1,900 UsD per annum. The economy continues to be affected by inflation, devaluation of the national currency (cedi) and recently by sharp price rises in fuel and electricity. Population growth rate is 1.9% and with 31% of the population living below the poverty line pressure on forest resources for land clearance is intense.

Forest resources

Ghana's total land area is estimated at 23.85 million ha. of which 7 million ha. is forested. 70% of this area is savannah woodland. Of the high forest estate, 1.6 million ha is reserved as permanent high-forest estate which is scheduled as follows.

T@ble 11 Scheduling of!?elmonent high-forest estote Forest class Area (ha) Production 762,400 Convalescence 122,000 Conversion 397,200 Protection 352,500 Total 1,634,100

Harvesting and log production Timber is harvested from both reserved and unreserved forests. The current Annual Allowable Cut (AAC) of timber is 1.0 million in', comprising approximately 500,000 in' from reserved and 500,000 in' from off-reserve areas. The validity of 1.0 million in' as the AAC has been widely questioned, and actual harvesting is estimated at 3-4 times the AAC.

LTS International Ltd 31 The Medium and Long-term Outlook forthe Tropical Timber Market A complicated land ownership and system of access rights has affected rational resource utilisation. Illegal harvesting of logs forthe export market and for domestic chainsaw conversion is wide spread and the government agencies are insufficiently resourced to regulate this activity. The currentlog export ban has caused significant distortions on the domestic log price and is under review. Sawmilling There is an excessive over capacity of timber processing (with 50% capacity utilisation likely sector wide) and inefficient conversation is endemic (30% recovery on export quality lumber). The dwindling resource base and opaque process of allocation of land for harvesting, is putting pressure on access to resource for industry. The poor management and internal accounting practices in sawmilling companies (which can be sustained when high value timbers are readily available) are no longer viable. Increasing costs of production (300% increase in electricity prices) add additional pressure, although the continued devaluation of the Cedi has been an important cost saving for exporters. The situation is particularly acute for companies without access to capital which have not been able to add value with downstream processing and access export markets. Manufactured wood products and wood based panel products Extensive data on exports has been collected for several years by Government authorities and numerous studies on the timber industry have been undertaken over recent years, The log export ban has stimulated domestic conversion of logs and taxes on exports of air dried lumber have stimulated investment in domestic value adding. Domestic consumption and trade Access to traditional high value timber species is increasingly acute. There is likely to be an increase in downstream value added processing and the use of a wider range of secondary species in composite, or non-species specified, products forthose companies that continue trading. Overall exports will decline sharply. Production in the formal sector will decline, butthe outlook for illegal harvesting is unclear. Production will be export orientated, with markets being sought in Asia and possibly West Africa. Much of the sawn timber available on the domestic market is provided by illegal chainsaw operations. A declining resource base and falling profits will force many of the timber processing companies out of business in the short term. Current reviews of legislation may have a significant impact on the industry, especially those relating to royalties, log exports, and the allocation of concessions. Environmental issues The major impacts of deforestation are related to habitat destruction and loss of bio- diversity. Social impacts may be acute with increasing pressure on NTFP's, notably bush meat, which is a key income source for rural communities.

4.2.8 MALAYSIA

National economy By 1999 Malaysia had pretty wellrecovered from the "Asian Flu"that had devastated most of the ASEAN economies during 1997-98. In June of 1999 the ringgit was pegged at 3.8 to I UsD and the economy surged forward, helped in large part by a growing high tech industry. Gross export receipts for 1999 reached 84.5 billion UsD and the forest industry contributed some 4.5 billion UsD or 5.3% of the total. In 2000 the economy grew by over 8% but by year end the effects of stuttering economies in the USA and Japan were beginning to have an impact on Malaysia. The forecast growth forthe current year has been scaled downwards to 6%.

32 LTS International Ltd The Medium andLong-term Outlook forthe Tropical Timber Market While other currencies have weakened and I or been revalued againstthe strong U. S. dollar, the ringgit has remained alits' fixed rate which has had an impact on trade. The decline in the global high tech industry has also been felt in Malaysia and exports of these products are down from last year. Consumer confidence has alleast been stirred (if not shaken) and some financial managers are suggesting that the ringgit should be devalued or unpegged againstthe dollar. The overall outlook for Malaysia however, remains positive and economic stability seems assured.

Forest resources Malaysia has a total area offorest cover of some 203 million hectares including Sabah, Sarawak and Peninsular Malaysia. The three regions combined have a total area of production forest of some 10.4 million ha. Within the Permanent Forest Reserve there are also 3.49 million ha under protection and an additional 2.1 million ha in parks and sanctuaries. Malaysia has established 226,000 ha of Industrial plantations in a variety of species other than rubberwood. In Peninsular Malaysia there are already 1.2 million ha of rubberwood estates although this volume has declined overthe past decade from a high of 1.8 million. The future growth in plantations will be in Sarawak. Harvesting and log production

Tob/e 12 Year ending 2000 109 production for Momysio by region Region Volume % Peninsular 5,843,000 in 25 Sarawak 14,272,000 in 61 Sabah 3,384,000 in 14 Total volume 23,491,000 in 100

In addition another 677,000 in'were imported to Sabah (from Kalimantan) and to Peninsular Malaysia (from Sumatra). There were no recorded imports of logs to Sarawak. It is interesting to note that Malaysian log production justten years ago (1990) totaled more than 40 Million in3. There was also an estimated production of rubberwood logs of between 1.2 and 1.5 million in' in 2000. Sawmilling Total Malaysian production of sawn timber during 2000 was 5.2 million in'with the bulk of this volume (3.3 million in') coining from Peninsular Malaysia. This represents only about 20% utilisation of capacity and reflects the factthat there is far more capacity, particularly in Peninsular Malaysia, than necessary. Many of the existing small mills will have to close as there is not sufficient roundwood to sustain them. Log imports and the increased use of plantation species are attempts to keep some of the sawmills operating butthese volumes are insufficient to prevent closures. Concessionaires in Sarawak who are integrated from forest through processing are able to operate at utilisation levels of better than 60%. By law these companies are obliged to limittheir log exports to a maximum of 40% of theirtotal production. Forthese integrated companies there will be no shortage of roundwood in the foreseeable future. In Peninsular Malaysia producers have been forced to add value In order to survive and this is reflected in the growth of production in mouldings and other value added products. Production of such products in 1999 was estimated at 316,000 in', (up from 177,000 in'in I990).

LTS International Ltd 33 The Medium and Long-term Outlookforthe Tropical Timber Market Manufactured wood products and wood based panels Malaysia produced 4.1 million in'of plywood during 2000. This represents a 40% capacity utilisation and reflects the decline in plywood production as a result of the stiff competition for export markets from low priced Indonesian manufacturers. Sarawak, which has the largest rated capacity of 2.6 million in' must rely on exports as its small population cannot absorb allthe output. Malaysia also produced 1.0 million in' of tropical hardwood veneer in 2000, almost all of which was exported. Peninsular Malaysia has developed a significant MDF industry based on rubberwood fibre. Total capacity is 1.2 million in' and over 90% is exported. Sarawak also produces MDF using mixed tropical hardwoods. Production in 1999 was 206,000 in'. MDF and particleboard are also being used in the manufacture of furniture, an industry which has grown significantly in the past few years, In 1999 the total value of Malaysian furniture exports was equal to the value of plywood exports. In 2000 furniture production is expected to become the leading money earner forthe Malaysian forest products industry. Domestic consumption and trade The Malaysian forest products industry has an export focus. Malaysia, along with Brazil and Indonesia, is one of the world's leading producers offorest products and it exports a range of products to many of the major consuming regions of the world. The total value of forest product exports in 2000 will be 4.7 billion UsD. Log exports in 1999 were 6.0 million in' and the following countries were the main destinations. Japan (35%), China (21.5%), Taiwan and India (each 14.5%), Hong Kong (7%) and South Korea (5%). The balance (2.5%) was spread among several destinations. In 2000 Malaysia expects to export 3.0 million in' of sawn timber with the principal destinations being Europe (20%) and Japan (10%)taking most of the higher quality production, mainly from Peninsular mills. ASEAN countries (40%) and China I Hong Kong (10%) were customers forthe lower grade, merchantable lumber for general construction purposes. Plywood exports in 2000 are forecast to reach 3.8 million in' and halfthat volume (50%) will be sent to Japan which is, by far, the most important customer for Malaysian plywood producers. Other significant markets include the USA (, 2%), China I Hong Kong (11%) and ASEAN (10%). Other export forest products and their main destination countries include: Veneer- China (50%), Philippines (, 6%), Taiwan (, 4%), Japan (7%). Mouldings - Japan (24%), China I Hong Kong (16%), Taiwan and the USA (both 13%), Europe (14%) and Australia (11%). MDF - India and China I Hong Kong (both 25%), Taiwan (15%) and Japan (14%). Finally, mention must b. e made of the export trade in furniture, much of which is produced from tropical wood products. The main markets forthis 'hew" export productline are: USA (35%), Japan (15%), U. K. (10%), Australia and India (7% each) and Singapore (8%). These figures are for anticipated exports from 2000. Environmental issues There is a growing awareness in Malaysia about environmental issues, particularly among the urban population. International ENGOs are present and along with their Malaysian colleagues, are calling for sustainable forest management in all of Malaysia's forests. In 1999 the Malaysian National Timber Certification Council(NTCC) was formed with the objective of establishing criteria and indicators forthe Malaysian forest resource based on SFM principles. The target is to have a draft standard in place by year end 2001 that would include a chain of custody component based largely on the FSC model.

34 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market There are however some sectors within the Malaysian forest industry that view the FSC and its proponents with considerable suspicion. Thus one of the first objectives of the NTCC is to establish a truly national certification steering committee to hammer outthe details of a proposed national certification scheme. Malaysia feels that it has already got in place a high standard of forest management and that it simply needs to do a better job of getting its message across to the market place. To help in this respect Malaysia would like to see a framework of mutual recognition whereby different certification schemes, including the FSC, would all be recognised by consumers in Europe and North America. Malaysia is a supporter of the International Forest Industry Roundtable that is currently considering how to best establish such a framework. Meanwhile, for many Malaysian producers offorest products with exports to Europe and North America, there is a growing sense of urgency as more and more of their customers are demanding some form of SFM certification. Increasingly Malaysian mills are hearing threats from these buyers that they will go elsewhere if Malaysia cannot provide the environmental assurances they are seeking.

4.2.9 THAILAND

National economy Thailand's economy has bounced back quite wellfrom the "Asian Flu" of 1997 - 98. In 1998 the Thai economy shrank by 10% but since then GDP has increased steadily at a rate of about 4%. The forecast growth for 2001 and 2002 is forthis trend to continue. The new government has promised to improve the efficiency of the bureaucracy and to reduce corruption at alllevels of government. The new Prime Minister has a business background and has already shown signs on some success in both areas. Foreign investment is beginning to return to Thailand albeit slowly. The economy however, is export led so the current slowdown in the USA and the economic problems in Japan are having a negative effect on Thailand's trade. Thailand's biggest export markets are the USA, Japan, and Singapore. Thai consumers are starting to spend again although some economists fearthey are being overly exuberant and their expectations may be a bittoo high. The government debtis also increasing as their programmes are based on deficitfinancing. On balance however, the outlook is promising. Forest resources Thailand has a total land area of 513 million square kilometres and 25% of this area, or 130 million square kilometres is forested. The Government has a target to achieve 40% forest cover in order to meet basic environmental and biodiversity needs. However, given that 60% of Thailand's population are farmers, any reduction in available agricultural land in order to provide additional forest lands could have a significant socio-economic impact. The Government owns 99% of the Thai Forests, less than I% is privately owned. Forest administration is the responsibility of the Royal Forest Department. In 1989 the Government stopped allogging in the Natural Forests. In addition there are some 160,000 hectares of plantations, primarily in eucalyptus (90%) with the balance being a mixture of species including accacia, casuarina, and teak. Between 1993 - 98 some 368,000 ha. were planted with eucalyptus plantations but following the Asian economic crisis the Government has not had sufficientfunds to support the agro-farmers who were managing the plantations and the overall area has declined.

LTS International Ltd 35 The Med^^in and Long-term Outlook forthe Tropical Timber Market Harvesting and log production Thailand produces very little of its own roundwood requirement with total production in 1999 being only 50,200 in'. Much of this would have been in rubberwood. There is a certain competition for rubberwood fibre with the sawmillers anxious to obtain supplies as they can then export the sawn timber. Meanwhile the furniture industry needs the rubberwood forthe manufacture of furniture, a majorindustry in Thailand. Some rubberwood is also used for plywood corestock. Total log imports in 1999 were 468,642 in' with Malaysia being the biggest shipping 135,559 in' (29%). Most of these logs would have been converted to veneer for plywood faces and backs. Some of the heavier species would have been converted to sawn timber for construction purposes. Myanmar was also a major supplier shipping 123,705 in' of which some ninety percent was teak for conversion to furniture and for use as durable construction timber. New Zealand supplied 61,474 in' of Radiata Pine logs which represented nearly 13% of the total Imports. The increase overthe previous year was the result of very low prices and the need for increased supplies of corestock for plywood production. Sawmilling Total sawn timber imports during 1999 were 1,254,999 in'. There is a 2% import duty on rough lumber. Again Malaysia was the dominant supplier shipping severity percent of the total volume or 876,672 in'. Much of this volume would have been in merchantable grades for use as a general purpose construction timber. Laos also shipped a significant volume to Thailand providing 141,796 in' or eleven percent of total imports. Again, the bulk of this volume would have been used in a variety of construction applications. Manufactured wood products and wood based panels Since the Government stopped all harvesting in the National Forests in 1989, many plywood plants have been operating well below capacity. The industry now relies almost exclusively on imported fibre in the form of logs or veneer and occasionally as finished plywood. A small amount of domestic rubberwood is used for corestock. There are twenty plywood factories in Thailand. Plywood and veneer imports are dutiable at a rate of 20%.~Indonesia and'Malaysia are the main sources of both products with Indonesian supply being lower priced but Malaysian production being considered as a higher quality. During 1999 total plywood imports were just 2,962 in' with 57% coining from Indonesia and 20% from Malaysia. Imports of tropical veneer totaled 13,890 in' with Malaysia shipping 34% and Indonesia 18%. Other sources of veneer included Brazil, China, and Myanmar, each shipping aboutten percent of the total. Plywood is used for paneling, concrete formwork, and furniture. The higher grades of plywood with tropical"red" faces and backs are used in the furniture trade where red is the preferred colour. Domestic consumption and trade Total Thai consumption of logs and sawn timber in 1999 was estimated at 1.5 million in'. Obviously almost all of this volume is imported. Given Thailand's humid tropical climate there is little demand for softwood other than as a crating and packaging material. Only 4% of total log imports were softwood (Radiata Pine for corestock) and just 6% of all sawn timber imports were softwood (also Radiata Pine for packaging I pallets). These figures are for 1998. Softwood volumes in 1999 were slightly higher.

36 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market In 2000 the Thai Government agreed to an experimental provision for log exports of a 3 year period 2000-2002 inclusive. This would allow exports of rubberwood and plantation grown teak and eucalyptus. It could also allow for limited supplies of natural hardwoods to be exported provided official approval was given. Interesting Iy there were no exports during the first year of this window as allogs continue to be consumed by the domestic industries. Furniture is by farthe biggest wood export product with exports during 1999 totaling 325 million UsD. Japan and the USA were the biggest markets. Furniture accounted for 70% of the value of wood exports. There were also some exports of MDF and particleboard. It is difficult to accurately estimate the volumes as any statistics are reported in kilos. However, an estimate would be approximately 340 - 350,000 in' of each product. The MDF had a much higher value at 48 million UsD compared to particleboard which earned 35 million UsD. For both product lines the majority of exports were destined for Asian markets. Environmental issues Consumer awareness of environmental issues is increasing. There are now many more ENGOs in Thailand than previously and although the FSC is not presentthere are two teak plantations being reviewed by Smartin/o0d using FSC C&I. One area covers 17,300 ha while the other is smaller at 3,200 ha. The results will be made public soon and ifthe test meets expected levels it will then be possible to determine ifthe market will pay a premium price for the certified products. In this case it is believed that the customer is Ikea. The Royal Forestry Department provides an official certification for some species to verify that the timber originated from a well managed plantation. These certificates can be used to help sellthe productin some to the more demanding markets. Species covered by this certificate include rubberwood, eucalyptus, and accacia. There has been some demand from buyers in Europe and North America for SFM Certification. These requests are usually received by the agents and passed along to the producers. To respond to these demands some Thai producers have turned to the ISO 9000 and ISO 14000 Series. Some 20 mills can now offer one or other of these ISO Standards. It may costthe producer as much as 10,000 to 15,000 UsD to obtain ISO certification after which he will try to obtain a price premium forthe finished product. Reported Iy only new customers will pay the premium while old customers will still expectthe old price.

CONSUMERCOUNTRIES

4.2. 10 CHINA

National economy Between 1995 - 2000 China's GDP grew at an average rate of 8.6%. GDP in 2000 will exceed 1,000 billion UsD. Although the rate tailed off somewhatlast year, the forecast growth for 2001 remains strong at 7.8%. Average per capita GDP was 674 UsD in 2000 and is expected to double by 2010. However, there are great regional wealth disparities that must be taken into account. Guizhou, the poorest province, had a per capita GDP of only 280 UsD last year, while in Shanghaithe GDP was 3,400 UsD. At 23,000 UsD Hong Kong's per capita GDP was higher than that of the United Kingdom. Foreign directinvestmentin 1999 was pegged at 40 billion UsD, down slightly from 1997 and 1998 levels, but up by a factor of 8 since 1991. China's exports have grown by 15% per year overthe past decade. The biggest markets were Asia (excluding Japan), the USA, and Japan. In 1998 exports to these three regions were valued at over 130 billion usD. LTS International Ltd 37 The Medium and Long-term Outlook forthe Tropical Timber Market China's property marketis growing rapidly, responding to the pace of economic growth. Residential housing demand is strong, particularly in urban areas. In Shanghai it is estimated that forty percent of the population now own their own home. Home ownership has brought about an increase in consumer spending and the forest products industry is benefiting from the increased consumer confidence in the Chinese economy. Forest resources Ninety percent of China's forest resources have been privatised. China has a total forest area of 128.5 million hectares which represents 16.5% of the total land area of the country It has been estimated that some 27% of China's land area would be suitable for forests but the immediate targetforthe government is to reach 21.25% forest cover by 2010. Of the currentforest area natural forest cover accounts for 94.3 million ha or 73.5% , while plantations cover 34.3 million ha or 26.5%. Total growing stock from allforesttypes is estimated at 9.1 billion in ' and it is expected that this volume will increase to I 0.6 billion in' by 2010. However, the actual volume of near mature, mature, and over mature trees (i. e. suitable for industrial conversion) will decline from 1.35 billion in' in 2000 to 875 million in' by 2010, or only 15% of the growing stock. The National Forest Resource Protection scheme was broughtinto effectin 1998 and has drastically reduced harvesting levels in the natural forests. One of the objectives of this scheme is to reduce annual roundwood production by 6% per annum. Currently it is estimated that China is 55 - 60% self sufficient in wood production. Since 1998 an amount of 1.25 billion UsD has been set aside for forest protection, agricultural land conversion, and reforestation I afforestation. This represents a ten-fold increase from funding levels of 1.0 million UsD in 1997. Harvesting and log production Total industrial roundwood production in 1998 was 55.6 million in'. However, this volume fellfar short of meeting China's timber demand and an additional 4.8 million in' of industrial roundwood was imported. With the decline in industrial timber production since 1998 and the growing demand for a wide range of wood products, there has been a dramatic increase in the volume of log imports. In 2000 according to Chinese customs figures, some 13.6 million in' of logs were imported of which 7.2 million in' were from tropical sources. This represents a nearly three-fold increase in only a three year period. The government has stated that by 2010 there must be a balance between the value of imports and exports for all products. Thus the value of wood imports will have to be matched by the value of forest product exports. In order to meetthis objective China will have to significantly increase its'industrial roundwood self-sufficiency and the only way to achieve this will be through greater use of plantation fibre. By 2010 China expects to have some 48.7 million ha of plantation forests, much of them in fast growing species like poplar and Chinese fir. Most imported logs are used for plywood production with softwood species being used for corestock while hardwood logs are converted to face and back veneers. Some exotic hardwoods are sliced to produce high quality veneers for fancy plywood orfumiture. Russia was the biggest single source of logs for China in 2000, supplying 6.0 million in' or 44% of total log imports. Other significant suppliers included Malaysia (2.0 million in') and Gabon (1.14 million in'). Seventy percent of tropical log imports were supplied by justfive countries. (Malaysia, Gabon, PNG, Indonesia, and Myanmar) China will have to rely increasingly on softwood logs however, as future supplies of tropical roundwood decline overthe next decade.

38 LTS International Ltd The Med^^in and Long-term Outlook forthe Tropical Timber Market Sawmilling Timber imports originated from a wide range of countries and included tropical and temperate hardwoods as well as softwoods. Indonesia and Malaysia were the main sources of tropical timber supplying 1.4 million in' between them or 39% of total imports. For softwood lumber, Russia, Canada, and New Zealand supplied 0.5 million in' or 13.5% of total imports. Manufactured wood products and wood based panels Composite wood panels are produced from domestic smallwood sources and from industrial residues. Estimated particleboard capacity is 4.0 million in'/annum and for MDF it is approaching 6.0 million in'. There are very few imports of composites in panelform but a considerable quantity of MDF and HDF is imported in the form offin ished flooring (mostly European supply). Annual plywood production is estimated at to million in' with roughly 40% based on tropical roundwood supply. Almost all plywood is consumed in the domestic market. In 2000 there were imports of an additional 1.0 million in' mostly in thin panels. Increasingly China is producing plywood from plantation fibre including poplar, which can reach useable diameters within 8 - 10 years' Veneer imports reached 500,000 in'in 2000 and are expected to increase overthe decade at a rate exceeding 10% per annum. Production of all wood based panels will have to increase significantly overthe nextfew years of anticipated demand is to be met. Domestic consumption and trade Almost all sawntimber produced in China is consumed domestically. It is very hard to accurately determine total Chinese production of sawn timber due to the large number of very small sawmills who's volume outputis not recorded. For example in the recorded statistics of 1996 (FAO) and 1998 (Chinese National Statistics)there is a discrepancy of 9.5 million in'. This is illustrated in the table below.

Toble 13 API?@rent domestic consumption and trode Source Production Imports Exports Apparent consumption

FAO 1996 270 27 .8 28.9

China 1998 I7.9 I .7 .3 19.3

Customs figures for 2000 show that total imports were 3.6 million in' which suggest that actual production and consumption may be considerably higher that the National Statistics indicate. Although the available statistics may not be absolutely accurate, they do provide an excellent indication of the supply I demand situation. It is estimated that Chinese consumption of wood base panels in 2000 was between 21 - 23 million in'. This consumptiont' fis forecasttt t34 to increase '11' to 34 'b2010.million in by 2010. Environmental issues Environmental issues are of little concern to the Chinese consumer. While the government has initiated its programme to protectthe national forests, it really is only the professional community that has any awareness of sustainable forest management and tropical forest defoliation. However, the disastrous floods of 1998 on the Yellow and Yangtze Rivers have helped to open peoples' eyes to the need to conserve forests as a means of preventing erosion.

LTS International Ltd 39 The Medium and Long-term Outlookforthe Tropical Timber Market There are very few ENGOs in China working to raise awareness of the need for SFM. From time to time the FSC and Greenpeace have targeted inbound tropical log ships, However, local D. I. Y. stores (such as B&Q) present no evidence of having an environmental purchasing policy. Nor are there any examples of certified forest products on their shelves. Price and quality remain the key issues for shoppers. Some Chinese producers of plywood have received requests form buyers in Europe and North America for some proofthattheir products originate from a sustainably managed forest resource butthey have been unable to comply. Currently China has no national standards for SFM in its' own forests and it is pretty much impossible for a Chinese plywood manufacturer to obtain certified logs from sources in Asia and Africa. One possible way forward is to achieve an ISO 14001 accreditation and some producers are looking at this option.

4.2. 11 INDIA

National economy India has risen from being the world's 16'' largest economy in 1995 to 11'' place in 1999. GDP is based 25% on agriculture and 45% on services, notably software related, and grew at an annual rate of approximately 6% during the pasttwo years. Independent analysts forecastthat growth is likely to slow in the current year. India imports 70% of its petroleum requirements and rising global petroleum prices throughout 2000 have caused stress to the Indian economy. Annual inflation rate was 3.3% in 1999/00 but has more than doubled since then, largely due to higher fuel prices. Two-thirds of the population are engaged in agriculture and over one third of the population lives below the poverty line -the richest 10% of the population accountfor 25% of total household incomes. The population of over I billion is growing at around 1.6% per annum.

Forest resources India has 64 million hectares offorest cover representing 19.5% of total land area. In December 1996 the Supreme Court issued an edict prohibiting allogging in the natural forests. This was intended to put an end to illegal felling and preserve the remaining resource. The government has now set a new target to achieve 100 million hectares of forest cover by 2010 which would represent'30% of the total land area of the country. Reaching this target will require joint efforts with countless rural communities to establish and maintain small scale village forestry operations. Currently 95% of the forests in India are managed by the state. India has over 31 million hectares of plantation forests including eucalyptus, poplar, and acacia. However, only about halfthe timber produced from these plantations will be available for commercial use with the other half being used for fuelwood. The government hopes to establish a further 30 million hectares of plantations overthe next decade. The government must also address the issue of productivity if plantation fibre is to make up the existing short fallin wood fibre supply. The MAIforfast growing species in Indian plantations is only about 6 - 8 in'/ year which is not sufficient to meetthe wood demand of a population that is growing by nearly 2% per year. Harvesting and log production India does not produce a sufficient volume of roundwood to meetits current demand for fuelwood and industrial timber. The table below illustrates the extent of this shortfall.

40 LTS International Ltd The Medium andLong-term Outlook forthe Tropical Timber Market

Table 14 Shortfoll in dem@rid and supply 1996 1996 1996 2001 Demand Production Shortfall Demand forecast

Industrial 64 43 21 73 roundwood Fuelwood 201 I15 86 223 Source: Ministry of Environment and Forests NFAP report (million in') Assuming that there has been no significantincrease in overall wood production between 1996 and 2001, and taking into account India's population growth rate, the estimated shortfallforthe current year will have now reached a total of 272 million in'. This figure is probably a minimum volume. Any deficit in availability of industrial roundwood will have to be met by imports. Import duties have been reduced to only 5% for logs and flitches to help facilitate the import of raw material for subsequent conversion to sawn timber and plywood. There are no current statistics for imports of logs but ifthe foregoing figures are correct, it would appearthatimports of alleast 20 million in' are required to meet demand. Although this could be substituted by an equivalent amount in sawn timber, the current 30% duty rate implies that there will be a continued preference for logs and flitches if supplies are available. Sawmilling Most of the sawn timber consumed in India is firstimported in the form of logs orflitches and then sawn into lumber before it enters the distribution system. Only about 5% of India's sawn timber requirement is imported in the form of lumber because of the higher import taxes that this attracts. The small volume of sawn wood that is imported is comprised of higher value temperate hardwood species destined forthe Indian furniture trade. In 1994 the FAO estimated Indian sawmill capacity at 27 million in' and production at 17.5 million in' a utilisation factor of about 65%. At that time it was estimated that there were some 23,000 sawmills in operation including a large number of very small"sets"that produce only 4 - 5 in' per day. Probably 95% of India's saw mills would fallinto that category Using these figures it would require 20,000 mills, each producing 4.5 in' per day for an average of 300 days per year to produce the full capacity output of 27 million in . With the same number of mills an output of 5.5 in' per day would be required to produce FAO's forecasted demand for sawnwood requirements for 2010 of 33 million in'. India has a 'teakwood culture' and no other species realises the same level of market acceptance as teak, which is imported as logs and flitches from a wide range of countries. Most of this supply is plantation teak and originates from West Africa, South America, and Indonesia. Some flungle teak"is supplied from Myanmar. There is also a limited supply from Indian forests. These logs are converted to sawn timber for a variety of end uses from high quality furniture to structural applications. Other deciduous hardwood logs and flitches are imported from North America and Europe. These are usually intended for high grade furniture and for sliced veneers. India's softwood lumber requirements are almosttotally supplied by Radiata Pine from New Zealand. This species is processed into rough construction lumber intended for use as packaging and crating material and for lower quality frames and temporary construction applications.

LTS International Ltd 41 The Medium andLong-term Outlookforthe Tropical Timber Market Manufactured wood products and wood based panels In 1999 India had a total of 62 plywood mills with a total rated capacity of 496,000 in' (4mm basis). Actual production however, was only 55,000 in' (an 11% utilisation rate). This compares to production in 1996 of 277,000 in' (56% utilisation rate), and reflects the decline in production, due to diminished log supplies, since the Government stopped all logging in the natural forests at the end of 1996. Total production figures however do notinclude volumes from the estimated one thousand small scale industry (SSl) plywood mills scattered throughoutthe country. These "back yard" operations produce a very low grade product on a very occasional basis butthey do supply some immediate, local market demand. It is estimated that these SSl's produce an additional I. 2 million in' annually. India can continue to meet its plywood demand provided a sufficientlog supply is available. Forthe most part Radiata pine and plantation poplar and eucalyptus can provide suitable material for core-stock. The face and back veneers are usually made from tropical hardwoods imported from Malaysia and PNG. In 1999 Sarawak shipped nearly 900,000 in' of logs to India. Despite the 35% duty there were also some deliveries of Indonesian plywood. India has 2 MDF factories producing some 24,000 in' annually. There are 4 particleboard mills with a total annual production of 40,000 in'. Most of this production is consumed by the furniture industry. Particleboard production has actually increased significantly since 1996 probably reflecting an increase in substitution of composite panels for solid wood and/ or plywood. Domestic consumption and trade Forthe most part Indian consumers do not have a lot of confidence in either MDF or particleboard. Both products are compared unfavourably to teak and deemed to be less durable and far less reliable, and, as a result, their use is generally confined to the lower end of the market. There is little market awareness or concern about sustainable forest management. The attitude of most consumers is that ifthe wood product is available in the stores there cannot be a problem. Indian importers do not ask their suppliers in Asia, Africa, or South America whether or nottheir products originated from a well managed forest resource. It has been suggested that they prefer notto. know. For most Indians economic concerns override any environmental issue and there is little prospect for any change to this attitude in the near future.

Environmental issues There is a hunger for land in India. The country has 2% of the global forest resource but 16% of the human population and 18% of the animal population. Rural communities need land for livestock grazing and for subsistence farming. Much of the land currently under such pressure is designated to be used for future forest plantations as part of the Government's drive to increase the percentage of land under forest cover to 30%. ENGOs and the forest industry are lobbying government on the land use options forthe remaining forest areas. The Environmentalists want further controls and limitations on the use of the forest resource while industry looks for support in terms of tenure security that would enable them to invest in technology to increase efficiencies in order to meetthe demand for wood products. The Government's view is reflected in the provision of the necessary policy framework to facilitate: the protection of the existing resource;increased forest productivity; reduction in the demand fortimber and timber products; and an expansion in the area of productive forest.

42 LTS InternatibnalLtd The Medium andLong-term Outlookforthe Tropical Timber Market

4.2. 12 GERMANY

National economy German GDP grew moderately in the late 1990's. In 2000 growth is expected to be 3.1% but will decline to 2.1% during 2001. Although the rate of inflation is low (0.6% in 1999) it is expected to rise to 1.9% in 2000 before falling to an average of 1.6% forthe period 2001 - 2005. Unemployment levels have consistently fallen in recent years and are expected to continue to fallfrom the current level of 8.1% to 5.1% by 2005. The level of construction activity fell considerably during 2000 with applications for building permits for dwelling units decreasing sharply. Allied to a decrease in renovation work, this situation is starting to make itselffelt on the timber trade in Germany. The relative eXchange rate position of the Euro has also had a contributory effect in the slowing down of economic activity. Forest resources The forest area of Germany amounts to 10.74 million hectares and corresponds to 31% of the total land area. Of this, 56% is coniferous forest, 25% broadleaved and the remainder is mixed species forest. Public ownership accounts for 54% of the forest estate. The net annual increment is 92.46 million in' overbark and annual removals averaged 38.9 million in' overbark per annum during the 1990's. Harvesting and log production Log production in Germany has increased steadily in recent years and in 1999 total roundwood production reached 40.7 million in'.

Toble 15 Production of Roundwood 1999 & 2000 ('000 in') Industrial Wood Volume 1999 Volume 2000

Sawlogs 26,900 n/a Pulpwood 10,710 n/a Poles n/a n/a Other industrial wood 1,925 n/a Fuelwood 1,155 n/a Total 40,690 nla

The production of roundwood in Germany comprised 66% sawlogs, 26% pulpwood and the balance other industrial roundwood and fuelwood. Sawmilling The sawmilling sectoris a major consumer of roundwood in Germany. Sawmilling capacity is reported to be in the region of 17-, 8 million in'. In 1999 total production of sawn timber totalled some 15 million in'. Softwood sawmilling predominates and accounts for 93% of the total sawn output although outputfrom the hardwood sector has been increasing in the latter part of the 1990's. Output of tropical hardwood sawn timber from imported logs has declined and is around 65,000 in3. Manufactured wood products and wood based panels Germany is Europe's largest producer of panel products. In 1999 total output of alltypes of wood based panels was almost 12.7 million in'. Production of plywood amounted to 370,000 in" particleboard production was just over 10 million in' and fibreboard output was 2.3 million in'. Domestic production of particleboard and fibreboard has been increasing continually throughoutthe 1990's and with several capacity expansions underway or planned will likely continue to do so.

LTS International Ltd 43 The Medium andLong-term Outlook forthe Tropical Timber Market Domestic consumption and trade

T@ble 16 Consumption of Timber Products in 1998 &1999 ('000 in')

Product 1998 1999 % Change Category Roundwood 34,400 34,950 I .5 Sawn Timber 18,960 19,040 <1 Plywood 1,320 1,370 <1 Other Wood 6. I Based Panels 11,010 11,680

Within the major broad based categories of timber products growth in consumption has been low or virtually static albeit at very high levels. The exception to this is with other wood based panels where, in line with most other European countries, demand has increased strongly. The impetus forthis rate of growth has come from increased demand for MDF and OSB in particular, since during this period consumption of particleboard in Germany actually fell. Consumption levels for sawn timber and plywood show little or no increase and the situation in 2000 was said to be similar to that of the previous years, With regard to the markets fortropicaltimber products, the situation has been one of decline for logs and tropical sawn timber consumption, with plywood experiencing a relatively strong rate of growth in recent years.

T@ble 17 TropicolTimber Consumption 1998 - 2000 Product 1998 1999 2000 Logs 165 145 130 Sawn Timber 167 154 140 Plywood 286 389 N/a

Consumption of tropical hardwood logs has declined by just over 21% in the pastthree years. The decline in consumption of tropical hardwood sawn timber has. been of a similar magnitude. In contrastthe latest figures available show that plywood demand has increased by 36%. African countries are the main sources of supply of tropical hardwood logs and accountfor 95% of the logs consumed in Germany. Cameroon has been the main source of supply but with the current supply constraints interest has moved to the Congo and Gabon. In the sawn timber market African hardwoods were losing market share to Asian hardwoods butthe effect of the Euro/Dollar eXchange rates in recenttimes this trend has been halted. Ghana and Malaysia are the two principal supplier countries which between them supplied around 88% of alltropical sawn timber consumed. Indonesia and Brazil dominate the plywood market and in the case of the latter, supply from this source accounted for virtually 50% of the total market. Tropical timber consumption has suffered from substitution by alternative materials and also from the environmental campaign againsttropicaltimber usage. German companies and organisations tend to have a pessimistic outlook regarding future growth forthe primary products but feelthat any future growth will come from further manufactured products and components. It is expected that forthe nexttwo years alleast, consumption of tropical hardwood logs and sawn timber will continue to decline.

44 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market Environmental issues There is a high degree of awareness regarding the environmental issues surrounding tropical timber and it is a widely held view that although the Federal Government has not instigated any restriction on usage of tropical wood, the stated preference that timber should come from sustainably managed resources allied to the autonomy of individual states in deciding policy, has had a marked influence on consumption. There is an ongoing debate regarding the benefits of certification and the favoured approach is for a system based upon German criteria and indicators rather than those of say, FSC.

4.2. 13 ITALY

National economy The Italian economy has been relatively strong in recent years with the main indicators showing positive movements. Real GDP growth increased by 2.5% in 2000 compared to 1.4% in 1999 and is expected to grow by only a marginalIy lower rate (2.4%) during this year. Unemployment levels have been declining and are expected to continue to do so, as has inflation which is currently running according to government figures at 2.5% p. a. and forecast to fall to 2.4% this year and 2.2% in 2002. Overallthe Italian economy has performed reasonably well albeit in the construction and some other sectors, this growth has been recovery rather than real growth. The problems with euro eXchange rates particularly with the dollar has had a significant effect on the economy and in particularthe forest based industries' trading position. Forest resources

Toble 18 Forest area of jinly by category Category Area (in thousand ha) Ordinary forest surface 6,147 -of which high forest 2.1 79 -of which coppice forest 3,674 Specialised. forest (poplar, sweet chestnut, cork oak) 289 Particularforest area (shrubland etc) 2,239 National forest area 8,675

Forest policy is a regional responsibility undertaken by 15 regions and varies accordingly by the needs of each region. Harvesting and log production Total roundwood production has averaged around 4.8 million in' annually in recent years and of this total production, output of saw and peeler logs from Italian forests has accounted for around 50% and the balance pulpwood (940,000 in') and other forms of industrial roundwood. In 1999 output was almost 4.3 million in' but preliminary figures for 2000 indicate that output will be around 4.8 million in'. There is also an estimated production of 5.3 million in' offuel wood and other roundwood. Production of temperate hardwood logs accounted for 68% of total sawlog production

LTS International Ltd 45 The Medium andLong-term Outlookforthe Tropical Timber Market

T@ble 19 Production offowndwood 1999 & 2000 ('000 in') Industrial Wood Volume 1999 Volume 2000

Pulpwood 940 n/a Logs 2,350 n/a - Other 950 n/a

Total 4,240 4,800

Domestic supply has been irregular and according to the Forest Service, has displayed a declining trend in recent years and with the best quality material coining from the mountainous northern part of the country, domestic wood is viewed as comparatively expensive by industry compared to imported logs, especially imports from Austria. With only a small pulp capacity, the output of pulpwood is largely utilised by the wood based panelindustry. Sawmilling The sawmilling industry produces annually around 1.5 million in' of sawn timber from an estimated capacity of 2.1 million in'. Production of coniferous sawn timber accounts for around 31% of output, a significant proportion of the nori - coniferous output is poplar, a species that is also widely utilised in veneer and plywood manufacture. Manufactured wood products and wood based panels Current production of veneer and plywood in Italy amounts to 430,000 in' and is estimated to equate to a capacity utilisation level of just over 60%. Production of other wood based panels (particleboard and fibreboard) has been increasing and in 2000 production is estimated to be in the region of 3.4 million in' an increase over 1999 of 11.5%. Production of particleboard accounted for nearly 90% of this total. Domestic consumption and trade Total consumption for allthe major products in 2000 has increased overthe levels of 1999. The exception to this general situation being that consumption of sawn timber has remained virtually static.

Table 20 Consumption of timber products in 1999 & 2000 ('000 in')

Product Category 1999 2000 % Change

Roundwood 9.16 9.6 4.8 Sawn Timber 7.8 7.73 (09) Plywood 0.6 0.85 41.6 Other Panel 3.2 3.4 6.3 Products

The changes in consumption levels are highlighted in the above table, however, it is felt at this preliminary stage that the position regarding plywood consumption may be a statistical error arising from the different sources of statistics analysed. It is possible that the scale of the increase in consumption has arisen from the low base in 1999, rather than any real substantial growth in demand.

46 LTS International Ltd The Medium andLong-term Outlook forthe Tropical Timber Market The tropical timber market has been in gradual decline in recent years, this has been partly due to economic factors and partly to substitution by alternative products. Nevertheless in 2000, the trend fortropicaltimber products has been positive with the latest statistical figures showing that log imports were up by 13%, and sawn timber imports up by almost 12% in the first half of the year. At the same time imports of temperate hardwood logs and sawn timber have declined by I and 8% respectively. A significant factor in this state of affairs has been the strength of the Us dollar which has made not only African hardwoods more competitive than Asian but also in comparison to North American hardwoods which in recent years have been taking market share from tropical hardwoods.

Table 21 Tropical timber consumption, 1998 - 2000 ('000 in') Product ,998 1999 2000

Logs 391 338 235 Sawn Timber 442 405 243 Plywood 204 190 120

(7) Jan-Jun 2000 The main tropical region supplying logs and lumber is Africa while plywood imports were dominated by Asian supplier countries. Latin American countries are not significant players in the Italian market. Companies and organisations consulted feltthatthe outlook forthe short and medium term would see the decline in consumption of tropical timber being arrested and that the market would sustain a smallrate of growth forthe nextfew years, Log imports would decline in favour of sawn timber imports butthe situation regarding plywood and veneer was problematic because of pressure from alternative materials such as MDF. Environmental issues In terms of the marketplace, Italian consumers are not particularly influenced by the environmental issues in making their purchasing decisions and awareness of the debates on sustainable forestry tends not to be high.

4.2.14 JAPAN

National economy Japan's economy peaked in inid-year 2000 and has been in decline since. The downward economic trend is expected to continue through the first half of the current year. GDP for 2000 was only 1.2% which was much lower than the forecasted rate at inid year of 1.9%. The forecastfor GDP growth in 2001 is 1.7%. Japanese debt, as a percentage of GDP, has reached 130%. Most economists believe that this can be handled withouttoo much difficulty but ifthe percentage approaches the 150% mark it could generate significant problems forthe country. There is (currently) a credit crunch as banks try to repairthe damage they have incurred as a result of an excessive level of bad debts and inappropriate lending policies. Consumer spending is sluggish at about 60% of GDP. Consumers are concerned about the economic outlook and aboutthe high rate of unemployment which, at 5%, is the highest ever post-warlevel. The Nikkeilndex is around the 13,000 Yen mark and economists are concerned that further declines towards a level under 12,000 could precipitate a major financial crisis. The downturn in the USA economy has not had as much effect on the Japanese economy as in some other countries but it has been felt, particularly in the decline of high tech exports to the USA and to the ASEAN countries.

LTS International Ltd 47 The Medium and Long-term Outlook forthe Tropical Timber Market It is hoped that the recent change in leadership of the ruling LDP party will improve over all confidence in the economy, particularly ifthe new Prime Minister continues to push for economic reforms as promised. Forest resources Forests covertwo-thirds of Japan's total land area. Total forest coverts 25.15 million hectares of which 53% is in Natural forests and 41% is in planted forests. The balance is logged overlands, bamboo and scrub. Total area of natural forests is 13.83 million ha and the estimated yield from these forests is 1,591 million in'. The principal species in the planted forests are tsugi(50%), hinoki (20%) and spruce (10%). The majority of Japan's forests (69%) are under small scale, private ownership. The remainder (31%) are national forests which include those owned by cities and I or prefectures. Harvesting and log production Japan produced 19,316 million in' of mostly softwood logs in 1999. Of this volume roughly 40% was converted to sawn timber; another 40% to wood chips for pulp; and 15% to veneer for plywood. Japan also imported an additional 16,551 million in' in 1999, of which 22.5% or 3,709 million in' were from tropical sources. Almost alltropicallog imports were converted to plywood. Imports of tropical logs have been declining overthe pastfew years (since 1997) and the forecast volume of arrivals for 2000 is expected to reach only 3.3 million in'. This downward trend in tropical log imports will continue as coniferous roundwood continues to gain market share. Sawmilling In 1999 Japan produced 18.127 million in' of softwood lumber. Most of this volume was produced in small, local sawmills that represent over 70% of the total Japanese sawmilling industry. Sawn timber comprises the largest segment(40%) of wood product demand in Japan, and 80% of this volume is used in house construction. Japan is expected to build 1.2 million homes during 2001 of which probably 45% will be of traditional wood construction. It is estimated that each wood home will consume 25 in' of timber which means that 13.5 million in' of wood will be required during the current year for house construction alone. This illustrates the importance of this sector of the economy to the timber industry both in Japan and in those supplying countries who compete for a share in this market. In addition to its domestic lumber production, Japan also imported nearly ten million in' of sawn timber in 1999 (9.74 million in'). However, just overten percent of the import total was in tropical timber (,. 02 million in'). Imports of sawn timber are expected to grow but the percentage of tropical timber imports will not likely expand beyond the ten percent level. Forecast arrivals for 2000 are I 0,269 million in' (total) and 1,059 million in' (tropical). Increasingly Japanese sawmillers are importing tropical flitches instead of logs despite the factthatflitches may cost as much as three times the FOB price of logs. Recovery from flitches can be as much as 60% while recovery from sawlogs may not exceed 4045%. In addition there is a high incidence, as much as 30%, of pinworm in tropical log supplies and this will have a significant negative impact on the eventual selling price of the sawn timber that is produced. By purchasing flitches the sawmiller can largely avoid the pinworm problem.

48 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market Manufactured wood products and wood based panels Domestic plywood production in 2000 was 3.2 million in' of which 45% (1,454 million in') was produced from softwood logs, while 55% (1,746 million in') was made from tropical logs. Russia has become the biggest shipper of softwood logs to Japan and it is estimated that Russian Larch now comprises 30% of total Japanese plywood production. An additional 5% is produced from Japanese domestic Larch. In addition, Japan imported 4,855 million in' of plywood of which the great majority was from tropical sources (4,550 million in'). Indonesia and Malaysia supplied 95% of all tropical plywood with Indonesia shipping 2,765 million in' (58%) and Malaysia supplying I. 783 million in' (37%). The number of plywood mills in Japan has been declining steadily year on year. In 1991 there were 517 factories but by 1997 there were only 420. Over roughly the same period plywood imports have increased by 22% from 3,987 million in' in 1993 to 4,855 million in' last year. The manufacture of thin panels has become increasingly uneconomic for Japanese plywood mills who cannot compete on a delivered price basis again the Indonesians and Malaysians. There has been however, in the production of thicker panels (12 mm up) by Japanese factories, particularly in compound panels which utilise a softwood core overlaid with tropical face and back veneers. This trend will continue as the decreasing availability and higher prices fortropicallogs makes their use as corestock material increasingly less economic. Domestic consumption and trade Japan is the largest consumer of wood products in the world. Total consumption, from all sources, is estimated at 100 million in' annually. Japan is currently abouttwenty percent self-sufficient in forest product production and hopes to reach a level of 40% by 2010. Environmental issues Although there has been some increase in awareness of sustainable forest management issues in Japan, most consumers continue to focus on price and quality when selecting a forest product. The Government however, does remember wellthe criticism levied by ENGOs some ten years ago against Japanese. Trading Houses who were accused of contributing to the destruction of the tropical rain forests. The Government does not want a repeat of that bad press and has tried hard to encourage environmental responsibility at alllevels. Some local authorities and prefectures have since adopted Green purchasing policies in an effort to demonstrate their support. In addition, a few of the larger home builders have stopped using tropical timber in new house construction and have switched to softwood products. In part, this has helped to increase the demand for Larch plywood but now some ENGO's are asking ifthese panels are produced from a sustainably managed forest resource. While some companies have expressed interest in ECo-Labels, and would welcome an ISO 14001 certification, there is very little demand for an SFM Certification such as the FSC or other similar schemes. It may be that this demand will increase in Japan as a follow-on the developments in Europe and the USA. Forthe moment however, the Japanese consumer has little awareness of sustainable forest management and remains focussed on the considerable economic problems that currently dominate the country.

LTS International Ltd 49 The Medium andLong-term Outlookforthe Tropical Timber Market

4.2. 15 NETHERLANDS

National economy In recent years the Dutch economy has performed well and has experienced high economic growth and increased employment. Throughoutthe 1990's growth has averaged 3.2% per year and GDP reached 3.9% in 1999 and 4.5% in 2000. Forecasts for 2001 indicate that growth of GDP will be around 4% Forest resources The Netherlands has a forest area of some 339,000 ha equating to around 8% of the total land area. Of this 279,000 hectares are exploitable forests. Throughoutthe 1990's the forest estate has been increasing. The net annual increment of the Netherlands forests is said to be 2.24 million in3. Coniferous forests accountfor 63% of the total forest area with SCOts pine being the major species. In broadleaved woodlands oak is the predominant species. Harvesting and log production Throughoutthe 1990's the timber harvest has generally increased in line with the expansion of the forest estate. In 1999, log production in the Netherlands was 1.07 million in'of which around 54% was sawlogs, 20% pulpwood and the balance other industrial roundwood.

Table 22 Production of Roundwood 1999 & 2000 (000 in') Industrial Wood Volume 1999 Volume 2000

Sawlogs 575 594 Pulpwood 215 220 Poles 29 35 Other 254 251 Total 1,073 1,100

(1) Estimates based upon fieldwork Although 1999 log production was slightly down on the previous year it is believed that in 2000 log production will show a slight increase overthat achieved in 1999. Sawmilling The sawmilling industry is relatively small and utilises both domestic and imported hardwood and softwood logs. Total sawmilling capacity is stated to be 675,000 in' per year on a single shift basis and production currently around 400,000 in' per year. The currentlevel of outputfrom the domestic industry has increased by just over 11% compared to the 1999 production statistics. Softwood sawn timber production accounts for around 56% of output and production of tropical hardwood sawn timber from imported logs accounts for around 12% of total sawn timber production. Manufactured wood products and wood based panels As with other mechanical wood products, the Netherlands is not a major producer of wood based panels. Production of plywood and veneer was only 22,000 in' and based mainly on imported logs. Production offibreboard totalled 150,000 in' and is largely based on wood residues.

50 LTS InternatibnalLtd The Medium andLong-term Outlook forthe Tropical Timber Market Domestic consumption and trade

Table 23 Consumption of Timber Products in 1999 & 2000 ('000 in')

Product Category 1999 2000 % Change

Roundwood (1) 1,030 1,100 6.8 Sawn Timber 3,440 3,500 I .7 Plywood 495 450 I .O Other Wood Based Panels 1,640 1,700 3.7

(1) Includes pubwood Consumption of all broad categories of timber and timber products in the Netherlands has been increasing, however, within each category there are product sectors which have been in decline. One such marketis that fortropicaltimber. Consumption of tropical timber has been under pressure arising from environmental and fashion factors. In the case of the former, -Dutch consumers are very aware of the issues surrounding sustainability and purchasing decisions are being negatively affected by these issues. Additionally, in the furniture and joinery markets there has been a change in consumer preference towards light coloured woods and this has led to a growing consumption of temperate hardwoods and wood based panels particularly MDF. The following table shows the declining trend fortropical timber products.

T@ble 24 Tropical Timber Consumption 1998 - 2000 ('000 in') Product 1998 1999 2000

Logs 155 150 120 Sawn Timber 380 365 330 Plywood 192 220 220 (7) Estimates based on fieldwork The main supplying region for logs is Africa and in particular Gabon. Malaysia is the main supplier of sawn timber and Indonesia provides almost 95% of alltropical plywood consumption. Companies and trade organisations contacted during the course of the study were optimistic that the corner had been turned, the decline in overall demand was over and that consumption would remain around the levels achieved in 1999 or at a slightly higher level. However the trend was towards the import of more sawn and plywood products as supply problems were reducing the demand for logs. Environmental issues Demand for certified timber has not matched earlier projections as end users and consumers have been unwilling to pay the reported price premiums (25-30%). The proposal for alltimber products to be labelled red or green has stalled due to doubts as to the legality of the legislation under European Law.

4.2.16 SPAIN

National economy The Spanish economy has experienced very high growth overthe lastfour years with GDP growing by 4% each year. However, prospects forthis current year are for growth to fall to 3.2%. Unemployment levels are still high, currently around 13.6% and inflationary pressures are evidentin the economy. The high level of activity in the construction sector and also the furniture sector overthe last few years has contributed to a strong timber products market . LTS Internatibna/ Ltd 51 The Medium andLong-term Outlook forthe Tropical Timber Market Forest resources Forest and other wooded land cover 52% of the Spanish land area and total some 8.4 million hectares. Of this 43% is predominantly conifer, 38% broadleaved and the balance mixed woodland. There is no one single body responsible for forestry in Spain. Seventy eight percent of the forest area is s privately owned and the forests in public ownership are administered at regional level. The standing volume totals 606 million in' overbark and the net annual increment 30.1 million in overbark. Harvesting and log production The annual volume of log production has been steadily increasing. In 2000 the total production volume of logs and pulpwood reached 11.9 million in'. Production of sawlogs accounted for 48% of the outputfrom the forest and of this, coniferous sawlog production accounted for 71%.

Toble 25 Production of Roundwood 1999 & 2000 ('000 in') Industrial Wood Volume 1999 Volume 2000

Sawlogs 5,340 5,700 - coniferous 3,800 4,040 - non coniferous 1,540 1,660 Pulpwood 5,600 6,200 Total 10,940 ,,, 900

Total log production in 2000 is expected to be almost 9% higher than in 1999. In addition to the above there is around 1.9 million in' of fuel wood produced. Sawmilling The sawmilling industry currently has a capacity of around 4.0 million in' and utilises both softwood and hardwood raw material. In 2000 outputis expected to reach almost 3.2 million in . Production of sawn timber is mainly coniferous although output of hardwood sawn timber has been increasing in recent years' In 2000 production of coniferous sawn timber is expected to accountfor some 71% of the total compared to 77% in 1996. In volume terms the output of hardwood sawn timber has increased from around 700,000 in'in 1996 to close to I million in' in 2000. Manufactured wood products and wood based panels Spain is a significant producer of wood based panels. Output covers almost allthe various types of panel products. Production of plywood and veneer is expected to reach 240,000 in' in 2000, a slightincrease on the previous year. Plywood and veneer production is largely based upon tropical wood and much of the outputis centred in the Valencia region. Production of particleboard is expected to be in the region of 1.9 million in' an increase of almost 6% on the previous year. A similar situation exists for producers of fibreboard where production is expected to reach 800,000 in' in 2000, some 14% higher than the previous year.

52 LTS InternatibnalLtd The Medium andLong-term Outlook forthe Tropical Timber Market Domestic consumption and trade

Tobie 26 Consumption of Timber Products in 1999 & 2000 ('000 nf) Product 1999 2000 % Change Category Roundwood 12,900 13,900 7.8 Sawn Timber 5,100 5,200 0.02 Plywood 228 242 6. I Other Wood 4.3 Based Panels 2,300 2,400

Consumption of most categories of timber products has been increasing, the exception to this has been the softwood sawn timber market where demand has remained static reflecting the maturity of this market. Within this product sector however, consumption of non-coniferous sawn timber has been increasing. Within this product category, consumption of tropical timber products in Spain has been declining.

T@ble 27 TropicolTimber Consumption 1998 - 2000 ('000 in') Product 1998 ,999 2000

Logs 314 233 n/a Sawn Timber 482 461 n/a Plywood 67 70 n/a

Consumption of tropical hardwood logs has seen the greatest decline, falling by almost 26%. The results of the field interviews gives rise to the beliefthatthe decline continued during 2000 albeit at a slower rate. Sawn timber consumption has also declined although by a much smaller proportion Oust over 4%). Of interest is the growth in consumption of plywood and veneer in recent years, which according to companies and organisations contacted during the course of the study has continued during 2000. African countries are the main suppliers to the Spanish market. In 1999 the share of the tropical timber market held by African species was: Logs almost, 00% Sawn Timber 76% Plywood & Veneer 13.8% Tropical timber product consumption levels are under threatfrom both temperate hardwoods and from substitute materials as well as problems posed by supply constraints. The general outlook was that overall demand fortropicaltimber products would likely continue to decline in the short term but would eventually stabilise as market development activities being undertaken took effect. Environmental issues Awareness by consumers of the issues surrounding tropical timber is not high although organisations such as Greenpeace are becoming more active in Spain than has been the case in the past. There has been an increase in interest by public authorities in the question of certification and in terms of the domestic forest, owners are tending to favour the PEFC.

LTS International Ltd 53 The Medium and Long-term Outlook forthe Tropical Timber Market

4.2.17 USA

National economy The USA has the largest world economy and a per capita GDP of 33,900 UsD. Long-term problems include inadequate investment in economic infrastructure, rapidly rising medical costs of an ageing population, sizeable trade deficits, and stagnation offamily income in the lower economic groups. There is a marked social inequality with almost 13% of the population living below the poverty line and the bottom 10% of the population accounting for only 1.5% of total household incomes. Forest resources

The total land area of the USA is 931 million ha of which 32.5% or 302 million ha is forested. In 1997 there were 204 million ha of productive timberlands and 21 million ha in parks and set asides. Of the productive forest lands, 57.5% were privately owned. It is estimated that the USA timberlands contain nearly 26 billion cubic metres of timber of which over ninety percent would be suitable for industrial roundwood production. Of the total forest growing stock 58% is softwood and 42% hardwood species. In 1996 net annual timber growth was estimated at 700 million cubic metres. Harvesting and log production The United States is the world's biggest forest products producer. In 1996 total roundwood production was 391.2 million in' of which just over half were converted to sawn timber or panel products. Pulp and paper production consumed one third of the harvest and the balance was either exported in log form or consumed as fuelwood. In 1999 exports of hardwood logs from the USA totalled 1.7 million in' of which 73% or 1.2 million in' were shipped to Canada. Japan, Italy and Germany were other markets of note. These logs would have been converted to sawn timber or sliced veneer for high quality furniture orjoinery applications. Softwood log exports in 1999 totalled 7.6 million in' of which Japan (59%) Canada (31%) and Korea (7%) were the principal buyers. Imports of round logs totalled 1.34 million in'. Softwood logs accounted for 86.5% of the total. Of the small volume of hardwood logs imported, it is estimated that only 45,000 in' were from tropical sources. Sawmilling According to FAO (1996) the USA produced 110 million in' of sawn timber and 39 million in'of wood based panels.

Tobie 28 Breakdown ofp@helprodwction byproduct Product Production volume million in Plywood 17.0 Particleboard 15.6 MDF 2. I Other/fibreboard 4.3

N. B: OSB is assumed to be included in the fibreboard volume Total imports of softwood lumber to the USA in 1999 were 44,683 million in'. Canada was by farthe biggest supplier at 42,530 million in' or 95% of total imports. By comparison hardwood lumber imports totalled only 1,496 million in' of which it is estimated that 0,335 million in' or 22% of hardwood imports were from tropical sources. Interesting Iy tropical hardwood lumber represents less than I% of total Us lumber imports.

54 LTS International Ltd The Medium and Long-term Outlook forthe Tropical Timber Market Exports of softwood lumber(2,980 million in') and hardwood lumber (2.790 million in') were almost equal in volume. Canada, Japan and Mexico were the principal markets in both cases. However, the value of the hardwood exports at 1,355 billion UsD was almost twice the value generated from softwood lumber exports (737 million UsD). Exports of hardwood lumber and flitches will continue to grow Manufactured wood products and wood based panels Total exports of plywood in 1999 were only 706,000 in' as the USA consumes nearly all the plywood it produces. Canada and Mexico, trade partners under the NAFTA were the main destinations. By contrast however, the USA imported 2.645 million in' of plywood in 1999 of which tropical species made up 60% of the total or 1,595 million in'. Indonesia was the leading supplier shipping 799,000 in' or 50% of the total tropical supply. Malaysia supplied 419,000 in' or 26% of the total.

Toble 29 Trode in composite wood panels Imports Exports Particleboard 1,220 .140 MDF 1,094 .990 Hardboards .526 .270 OSB 6,513 .159

^gures 7999 (mill^^n ina) Overall, in terms of tropical timber products plywood will continue to play an important role in the USA market. Indonesia and Malaysia will remain as the principal sources, particularly for thin panels. The trade in tropical hardwood mouldings and value-added products has also grown steadily. In 1996 this trade was valued at 65 million UsD but by 1999 it had doubled in value to 131 million UsD. This trade will continue to expand subject to the evolution of the demand for'bertified" forest products. One other imported hardwood productthat should be mentioned is the trade in flooring. The volume of hardwood flooring imports totalled 7.5 million in' in 1999 which far exceeded the import volumes of rough sawn timber. However, a considerable share of this volume will be in deciduous species imported from Canada and the EU. Domestic consumption and trade The United States is the World's largest consumer offorest products. The table below shows estimated consumption in 1996 based on FAO data, Us DA Forest Service statistics, and Us DA trade statistics forthe same year.

Toble 30 Consumption ond tr@de Product Production Imports Exports Consumption Logs 199.5 05 11.8 188.2 Sawn Timber 110.0 43.8 7. I 146.3 Wood Based Panels 390 8.0 3.0 44.0

^gures in 1996 million in3 * Note: softwood and hardwood logs suitable for conversion to sawn timber and I or veneer. None of the above production or export volumes were tropical timber species.

LTS InternatibnalLtd 55 The Medium andLong-term Outlookforthe Tropical Timber Market Environmental issues Overthe past 6-7 years the United States has seen a dramatic increase in overall concern about sustainable forest management. During the Clinton administration significant areas of U. S. forest lands were set aside for conservation and forestry and wildlife regulations were tightened. Endangered species legislation and concerns over bio-diversity and forest eco-systems have been brought to the forefront of public opinion by a wide range of environmental groups. While the new Bush administration may not have quite the same level of commitment to environmental issues the overall standards have been significantly increased. During this same period the demand for some form of SFM certification and forest product eco-labelling has increased dramatically. Following the lead of their European counterparts, large retail chains such as Home Depot, Lowe's, WalMart and others have put considerable pressure on their suppliers to provide them with certified forest products. In some cases these large retailers have publicly stated their intention to have only certified products by a certain date (2002 is a popular choice) or their suppliers will risk losing business. At the same time, none of these stores has indicated any willingness to pay a premium for a certified forest product. Alithey are offering to the producing companies who can offer certified products is a "preferred supplier" status. Forthe most part retailers have insisted on having an FSC Certification persuaded by the ENGOs that this is the only really credible option. However, the stores are increasingly looking for equivalents given the evident inability of producers to supply anywhere near the certified demand. Ironically this push for certification is not coining from either the consuming public or from the importing trade. As is the case in Europe, the USA demand is coining from the retailers only urged on by assorted environmental groups who have pressurised these companies. Given that any exclusive arrangement is out of the question, many importing and exporting countries have established their own SFM Standard and producers in the USA (and Canada) can now offer the Sustainable Forest Initiative (SFl) standard as an alternative to the FSC. This is a voluntary standard but for members of the American Forest & Paper Association, the Nation's largest forest industry organisation, adherence to the SFl standard is obligatory. While the SFl may well serve the domestic producers and enable them to continue to supply the majorretailers, it remains to be seen how offshore producers, particularly in tropical countries, will meetthis certification challenge. The retailers have taken a position which may not be attainable by theirtropical suppliers, at least not within the time frame provided. At this stage the outcome is still very much up in the air although logic would suggest that some form of compromise solution will be reached. So far however, the ENGOs do not seem to favour any compromise and are continuing to press the retailers to stand firm in their demands. The next 12 - 18 months will be an interesting time for alithose participants in the USA forest products trade.

4.3 Globc71sti/?/?Iysit"61tion fortro/?ICOltimber/?rod, ,cts

Tropical timber products have been losing ground while overall demand fortimber products has generally been increasing, and is expected to continue to do so. One reason forthe loss of market share is the concerns in the traditional consuming countries overthe environmental consequences of tropical forests destruction and degradation. The key issue for producer countries is resource sustainability. Many of the producer countries are facing serious problems of resource depletion because of the impact of illegal logging. Many governments are aware of its existence, but do not realise the scale of the problem, because of lack of information about domestic consumption. The analysis for some of the countries visited, suggests that illegal logging may be as much or more than the official production. This has two important implications.

56 LTS International Ltd The Medium and Long-term Outlook forthe Tropical Timber Market First, the resource is being depleted at a faster rate than is realised, and second, domestic consumption is much higher than is realised, and with economic and population growth will increase the pressure on the resource to a far greater extentthan expected.

4.3. I Mojor supply fc, ctors identified

The following factors are not presented in any order of precedence. The importance of these factors and their impact on the supply of tropical timber varies from country to country and region to region. Raw materialsupply Deforestation in the tropics has been a major cause of concern for many people for some time, and there are no signs that the rate at which forest is being lost, is slowing down. The available published data on roundwood production gives no indication as to the proportion of the current supply that comes from salvage felling in forest that is being cleared and how much comes from harvesting of old growth forest that is likely to remain as permanent productive forest. The former, being a "one-off' product will not be sustainable or repeatable, and so must eventually decrease as the area offorest suitable for conversion declines. If governments decide that forest clearance should be reduced or halted, and introduce the necessary measures to make this happen, then that proportion of total supply that is coining from resource liquidation will decline. A second majorissue affecting the raw material supply is the widespread prevalence of illegal logging. It has been reported in almost allthe producer countries visited, and appears to represent a substantial proportion of the total actual production. This has two important implications forthe future. The first is the impact that it is having on the resource, through depletion of the growing stock. This will not have an immediate impact, but as the reserves of old growth forest decrease and more harvesting is represented by second cut in previously logged forest, the productivity of the forest is likely to be greatly reduced. In some forest areas where the volumes per hectare that are harvested are already low, a second harvest may be uneconomic within the projected harvesting cycle. The second impact of illegal logging, is that it conceals a substantial domestic consumption of wood products, since generally the logs harvested illegalIy finish up supplying products forthe local market. This means that the apparent domestic consumption estimated from recorded production and trade is substantially underestimating the actual consumption. Since illegal logs are generally sold at lower prices than the officially sanctioned harvest, it distorts the prices of wood products on the local market, and this among other things, tends to encourage wasteful use. The domestic demand fortimber products in tropical countries is likely to continue to increase due to population and economic growth, and governments will have to consider policy options for dealing with this. Old growth forest The published data on roundwood production does not distinguish between logs from old growth forest and from other sources such as secondary forest and plantations. The recorded production of industrial roundwood in alltropical countries for 1998 was 254 million in' to which must be added an unknown volume logged illegalIy. In some countries it is known that production from illegal logging is more than the recorded production, and so throughoutthe tropics it is reasonable to assume that illegal logging might represent an additional 30%. However, most reports of illegal logging suggest that it is carried out in forest already logged, rather than in virgin forest. In tropical countries, the production of pulp from small roundwood and the area of industrial plantations is relatively modest, and it can therefore be safely assumed that most of the recorded log production in the tropics is from natural forests, and that it will be composed of relatively large logs. The total area of natural forest in the tropics, according to FAO figures is about 1.7 billion ha, but no data is available as to how much of this is productive forest, has been logged and how much is still old growth forest. The general

LTS International Ltd 57 The Medium and Long-term Outlook forthe Tropical Timber Market pattern of exploitation of tropical forests is to begin with the most accessible forest and advance through the forest leaving aside patches of poor growth and difficultterrain. This means that in those tropical countries that have been harvesting logs for some time, the remaining old-growth forest will tend to be the least accessible and the least productive. Once old-growth forest has been logged, it becomes more accessible to encroachment, and also more susceptible to fire, which can spread rapidly through disturbed forest. Over the past 35 years, the production of tropical logs has increased from about 135 million in' in 1963 to a peak in 1988 of around 260 million in' since when it has declined slightly.

Table 31 Comparison between estim@red total removals during the period 1962-2001, grid oreo of'hot"rollbrest"by region Region Total production (inil. in ) Forest area (inil. ha. ) Africa 1,462 5027 Asia-Pacific 3,402 297.5 South & C. America 3,006 901.3 Total 7,870 I, 601.5

Table 31 shows the estimated total removals of tropical logs for each of the three main regions, in comparison with the area of natural tropical forest in the region, according to FAO data. This suggests that there is very little "old growth" forest remaining in the Asia- Pacific region, because the total production represents over 10 in' per ha. even after allowing for unproductive forest, though it does nottake account of forest area lostthrough deforestation. Log production in the Asia-Pacific region peaked around 1988-90, and has since declined sharply, but some of this drop in production has been made up by increased outputfrom Africa. Estimates by ITFMP in Indonesia suggest that illegal logging removed an additional 500 million in' overthe same period, and a study in the Philippines suggest a similar high level of unrecorded removals. Thus the remaining area of unexploited old growth forest in the region is very limited and is confined to less productive forest areas such as those found on the island of New Guinea, and parts of Indo-China. Although the apparentintensity of harvesting in Africa and South America is much lower, the forests in these regions are generally much less productive. The conclusion that must be drawn is that the days of harvesting large sized logs from old growth forest are numbered, and that sustaining production will depend much more on harvesting smaller sized logs and less popular species. Growing awareness of the importance of forests in the tropics for environmental purposes, especially amongstthe wealthier middle classes is raising the pressure on governments to conserve more of the dwindling old growth forest to protect watersheds and sustain habitats for wildlife. Increasing attempts are being made to set aside forests for conservation, and the emergence of concerns about global warming and the potential for carbon trading are beginning to provide the means and the justification for using greater areas of forest forthese purposes, rather than for production. The tropical timber industry will need to face up to these challenges and adapt its operations to survive. Plantations Areas of industrial plantations in the majortropical producer countries are still very limited and are principalIy aimed at providing raw material forthe pulp industry. Plantation grown wood from the tropics has no particular advantage over plantation grown wood from temperate regions, other than slightly higher growth rates. Much of the plantation production that will become available in the short to medium term will not readily replace the logs from old-growth forest. Processing of plantation grown wood into sawnwood or plywood, will require processing capacity to be re-equipped to handle the different specifications, and the product will be in direct competition with utility wood from a wide range of alternative sources. 58 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market The total area of industrial plantations in the tropical producing countries at the present time is 5.38 million ha. and current annual production is about 13.76 million in'. The same countries currently produce about 8.76 million tonnes of pulp, which requires about 35 million in' of roundwood, so that it would appearthat more than 60% of the raw material for pulp production is coining from natural forest. Although there are forecasts that plantations will meetthe major proportion of wood raw material requirements in the future, it will clearly be some time before plantations have any impact on the supply of raw material forthe traditional products of sawnwood and plywood, currently manufactured from tropical logs from natural forests. Government policies Most governments now have policies for sustainable management of theirforest resources, but so farfew have putin place the necessary measures to implement these policies. One of the most important pre-requisites for sustainable management of natural forest is long-term stability of the area under management. A few countries have established permanentforestreserves, but even some of these are under threatfrom clearance, encroachment and disturbance. Although the productivity of many natural forests can probably be increased in the longer term by improved silviculture, in the short- term the sustainable production from many forests is less than that obtained from logging of primary forest. When the impact of illegal logging is taken into account, the sustainable production from the current natural tropical forests used fortimber production will be substantially less than current levels of production. Resource management A major problem facing most tropical producing countries, in achieving sustainable production is the lack of areas offorestlogged 20 to 30 years ago, which, in the normal progress offorest management would be nearly ready for a second harvest during the coining decade, as the old growth forest is finally harvested. Much of the forest logged in the early years of large-scale commercial logging during the 1960s and 1970s has subsequently been cleared, and this is likely to result in a severe decline in log production in the near future. This problem applies particularly in the major producing regions in South East Asia. Resource pricing Much has been written in recent years aboutthe issue of resource pricing. There are many ways in which the general underpricing of tropical timber resources impact on the resource, on the industry and on trade based upon the resource. Generally old growth tropical forests have been treated as a "free good" and governments have levied very low stumpage values in the form of royalties or other fees for logging. Many studies have indicated that most governments in tropical producing countries are only capturing a very small proportion of the economic rent, and that most of it is captured by the logging companies in the form of excess profits. These profits are not re-invested in forest management, and so the cost of protecting and managing the forest falls to governments, but because of the low stumpage charges most governments do not have the revenue to carry outthis function effective Iy. The low stumpage does not reflectthe real cost of managing the resource sustainably, treats logging as a mining operation, and encourages very wasteful use. This results in very large volumes of waste both in the forest and in the processing industry. In Indonesia, it has been estimated by ITFMP from comparisons of the standing volume before and after logging, that the volume harvested from old-growth forest is only about 50% of the volume that is lostin the process. Although much of the volume that is lostis made up of smaller trees and poorer quality large trees, much of it could and would be used ifthe joggers were obliged to pay for it regardless of whatthey did with it.

LTS Internatibna/ Ltd 59 The Medium and Long-term Outlook forthe Tropical Timber Market In the processing industry, the country studies and many other sources of information indicate that the recovery in the processing industry is typically 50% or less. Thus taking account of waste in the forest and the industry, four or five cubic metre of logs are lostfrom the forest for every cubic metre of primary product produced. In those countries where wood raw material prices are higher, either because it must be imported, or because of resource depletion, the level of waste is much lower because a high proportion of the material that is residue from the primary process is used forthe manufacture of other products. These can range from pulp manufacture, composite panels and wood products such as glue-lain and small utility items and handicrafts. Illegal logging raises a more difficult issue related to resource pricing. This is affected by the price of timber products in the domestic market in the producer countries. Manufacturing for export requires substantial investment in processing plant and marketing, in order to meetthe standards of the international market. This results in higher costs of production than would normally be required to meetthe standards of much of the domestic market in most developing countries. Because exporting generates foreign eXchange, higher revenues and may appear to create more employment than less sophisticated processing for domestic consumption, governments tend to give priority of access to forest resources to export oriented industries. If small enterprises that aim to meet domestic demand fortimber products are denied access to resources, this will inevitably lead to illegal logging, and conflicts overthe access to resources. Illegal loggers do not pay any fees or stumpage to governments, though there are usually "rent seekers"involved in the system, and thus deprive the government of some additional revenue. Experience in most countries where illegal logging is rife suggests that illegal joggers are almost as selective of log quality and species as the export industry. They generally do not utilise waste and reject material, but often remove additional good quality timber in the form of smaller trees that may be just below official felling diameter limits. They tend to be as destructive as the regulated commercial loggers in their operations, and to work in recently logged forest, where they have good access and no need for investment in infrastructure. In the process of re-logging the forest, they damage small trees, saplings and seedlings and so deplete the resource that should be available for future harvests. Table 32 below is based on a study in Indonesia, and is merely indicative (because log prices and costs vary appreciably from time to time and place to place), but shows that the income derived by the illegal loggers is very much lower than that forthe labourers employed in legal operations. This is partly due to the more labourintensive methods used which mean that productivity is very low, but partly due to exploitation by the rent seekers who can always find someone else willing to work for wages well below the legal minimum wage. The lower capital costforthe illegal loggers is partly due to the use of much less and much smaller equipment, which is normally hired, but it does not reflectthe full cost of the capital employed, because it takes no account of the depreciation. Thus the owners of the equipment do not accumulate the financial resources to replace the equipment and its productivity is therefore also low.

Table 32 Comparison of the breakdown of harvesting @rid extraction corts for commercial@rid illegal operations, bosed on data from Indonesi0 1998 Item Legal operations Illegal operations Market price of log (UsD/in ) 90 40 Costs Extraction 47 20 Labour 4 1.6 ind 3.5 6 ind Capital 17 9.5 Fuel 7 7.0 Roads Mgmt 18 Profit after tax or captured rent 23 20 Government revenue incl. corp. tax 20

60 LTS International Ltd The Medium and Long-term Outlook forthe Tropical Timber Market The above table shows how the price of illegal logs is well below the full commercial price based on exporting products, and this makes it impossible for export oriented operations to compete on the domestic market. The main solution to the illegal logging problem, is therefore to give the illegal loggers access to resources and to recognise the existence of the domestic market. If domestic quality standards are lower than the export market, then steps need to be taken to encourage greater use of residues and lower quality material from export oriented commercial operations. Wood based industry Lack of reliable data makes it difficult to assess trends in the performance of the tropical wood base industry. Production data is published annually by FAO and ITFO, butthese are based on government returns, and generally underrecord the actual situation. Reference has already been made to the large number of anomalies found in the published data sets. Important factors in assessing the performance of the industry and its future prospects are the size, age and quality of the installed capacity. Without inspecting a substantial sample of the plants, it is impossible to assess the latter two factors. In the country studies attempts were made to assess the capacity utilisation as an indicator of the current state of the industry and its potential for increasing output, should the resources be available. Capacity The limited information gleaned during the country studies suggests considerable under utilisation of sawmilling capacity, especially in South America and Asia, where the figures obtained suggest that it is around 30% or less. In Africa, it seems to be over 50%, butthe total capacity installed is much lower in Africa than in the other two regions, but a much higher proportion of the outputis exported. This would suggest that both Asia and South America have been more seriously affected by downturns in theirlocal and regional economies, than Africa, where exports in particular, and the domestic market have been more stable. For plywood, processing capacity utilisation is currently much higher at around 60%, with Asia appearing to be rather lower than the other regions, again suggesting an impact of the regional financial and economic downturn. The factthat exports represent a higher proportion of the production than for sawmilling may explain why capacity utilisation is generally higher. Table 33 below compares the current situation in the three regions, based on the sample data obtained, which though limited, refers to the major producers in allregions.

Tobie 33 Averoge current!?loressing capocity utilisotion (%) for sowmilling grid plywood manufacture by region with currento"tp"t and exports Sawmilling Plywood

Region Capacty Production Capacity Production Utilisation Exports Exports Utilisation Exports Exports % % % (inil. in') (inil. in') % (inj'. in3, (in", in3,

South 31 29 3.3 11 65 6 I .6 28 America Africa 57 8 I .5 19 58 2 0.5 25 Asia 29 58 5.2 10 50 31 5.4 17

LTS International Ltd 61 The Medium andLong-term Outlook forthe Tropical Timber Market End-use applications The principal issue of concern in forecasting the future demand fortropicaltimber products is the end-use forthe product, and the degree to which tropical timber has special characteristics that suit it uniquely to that use. For uses where tropical timber products are just a utility commodity there is a strong likelihood that substitution will take place according to relative prices. Where tropical timbers have special advantages, such as in durability, appearance or working qualities, their use is likely to be much less price sensitive, though the volumes are likely to be much smaller. There are already signs that plywood made from temperate hardwoods and coniferous species, especially from Russia, is making in roads into the marketfor commodity plywood formerly dominated by utility grade plywood from South East Asia. Competition and substitution Competition in the market fortropicaltimber products in the international market is intensifying. Producers of tropical timber products in different countries and regions are having to compete, both between themselves, and with suppliers of alternative types of timber products that can be substituted fortropicaltimber. This is highly price sensitive, and is strongly influenced by eXchange rates. The future success of tropical timbers will increasingly depend on improving the efficiency of processing, the quality of the products, and adoption of new processing techniques that reduce costs. The earlier discussion on waste and resource pricing, and on the declining availability of low cost logs from "old growth" forest, has highlighted some of the areas where tropical timber producers need to pay particular attention. In the longer term, population and economic growth will undoubtedly increase the overall global demand for forest products butthe declining resource base and increasing costs in tropical countries could make it more difficult fortropicaltimberfrom natural forests to compete with other timbers from plantations and well managed forests. Transport costs Transport costs have an impact on the market price at several points along the value added chain. Transporting logs in the forest represents about 2% of the cost of delivering logs to processing facilities. This cost is partly affected by fuel costs, but is most affected by distance and the method used. Transport by water is the least cost overlong distances, and road transport costs rise sharply with increase in distance. The need to harvest more remote forest resources, as the accessible forests are depleted will tend to push transport costs up. The cost of transport from processing facility to a shipping port, and the shipping costs from there to overseas markets is very dependent on the type of product and the volume of the product, as well as on the condition of the transport infrastructure. Thus exporting logs is relatively expensive, and may represent up to 30% of the landed price at the final destination. This is one reason why recovery from imported logs tends to be much higher than it is from logs processed in producer countries. For several producing countries in Africa and the Asia-Pacific region, the low recovery from log processing in the country still makes it more attractive for foreign buyers to seek logs rather than finished or semi-finished products. This deprives the producing country of potential revenue as well as employment and investment, that all contribute to economic growth. In view of the likelihood that tropical timber products will have to become more price competitive to maintain market share, it will be important to minimise costs at all points along the production chain. Processing in country, in principle should be more efficientthe exporting primary products, as the higher value of the product means that the transport costs are a lower proportion of the total value, and it eliminates the transport of that part of the material that will be wasted in further processing. Processing in producer countries will however, be criticalIy dependent on them being able to achieve similar levels of efficiency in the use of raw material to those that are the norm in consumer countries.

62 LTS International Ltd The Med^^in and Long-term Outlook forthe Tropical Timber Market Profitability Because of the shortcomings in resource pricing discussed above, the tropical logging and processing industry generally has enjoyed high levels of profitability in the past. Where the logging and processing is carried out by the same company, it has frequently been the practice forthe logs to be transferred to the processing facility at cost, so that the logging operations do not appear to be profitable and the profit is transferred to the processing facility. In many tropical producing countries, tax liabilities are reduced by transfer pricing along the chain, which makes it very difficult for governments to assess the true level of profitability. A commercial operation is entitled to make a "fair profit" which should represent a competitive return on the investment when allowance is made forthe risks involved, and the alternative investment opportunities. Ifthe profit levelis higher than this it creates a number of distortions that have an adverse impact on the industry. The first, which is the encouragement of wasteful practices, has already been mentioned, and it also encourages a speculative approach and a short-term perspective to make as much profit as possible while the going is good. Later, as the profitability inevitably declines it discourages investment to improve efficiency and improve the quality of products. When companies enjoy high profit levels there is a tendency to transfer these out of the sector and to invest in other speculative ventures and repeatthe process. This has been one of the underlying causes of the economic crisis in parts of Asia in 1997. Ifthe tropical timber industry is to survive and remain competitive, investment is needed in a wide range of improvements, and this will require companies that have the resources, and the commitment to the industry forthe long-term. Forest industry companies in developed countries have been merging and re-organising in order to attract capital, and they must compete with more modern high-tech companies forthe available capital. Most tropical producing countries do not have large amounts of capital, so that raising funds locally for investment is very difficult. In order to improve the performance of the sector generally, governments must consider whether it is appropriate to try to attractforeign investment. Where this is considered appropriate, then it will be necessary to create an economic environment that is conducive. However, it is notjust investment in the industry that will be required, it will also need investment in infrastructure fortransport, communications and human resources, if it is to become modern and competitive. Economic issues An analysis of the apparent contribution offorestry and timber processing to GDP forthe 170 countries for which the basic data is available from FAO and World Bank sources is given in Appendix 5. This shows that for alltropical countries the contribution is over 4% and is almost 5% fortropical producing countries. Appendix 6 shows that it is highest in Africa at over 5% and lowest in the Asia-Pacific region. However the average forthe latter region is reduced because the region includes a large number of countries with very little forest resources. For some individual countries contribution to GDP appears to be as high as 11%. Data available in the countries visited showed the contribution of forestry to be lower than these estimates, butthis is generally because these estimates do nottake account of the processing industry and the value of exports of products. There is a tendency in most countries forthe contribution from the timber processing industry to be incorporated into the figures for industry rather than being separated out and added to the primary forestry sector data. Thus many governments underestimate the importance of theirforestry sectors, and do little to promote its development. The average contribution of forestry to GDP forthe resource rich non-tropical producing countries is over 10% and forthe resource rich tropical producing countries it is about 6.7%. The GDP contribution from the forestry sector has been calculated as the final value of the total production and therefore includes the wood processing sub-sector as well as the forest resource. Forestry contributes to national economies in other ways, but these are generally more difficult to evaluate, because the values put on soil and water

LTS International Ltd 63 The Medium andLong-term Outlookforthe Tropical Timber Market conservation, biodiversity and the environment are very subjective. However, with new thinking on such matters as market based instruments (MBl) for valuing such services as water conservation through charges to the consumer, and carbon sequestration, these other contributions will gradually become more apparent. There is concern in many quarters, especially among environmental and conservation NGOs that timber production is incompatible with these other important services provided by forests. Industrial scale harvesting also impacts upon the local economies of forest dependent communities which may rely on income from non-timber forest products, and on timber harvested legally or illegalIy. While these concerns seem valid under present practices, there is no particularreason why they cannot be overcome. Sound forest management can reconcile the competing and conflicting demands on the forest. This will increase the costs of logs harvested, but improvements in efficiency and cooperation with local communities that gives them a legitimate source of income can reduce costs. Such changes are urgently needed in the way in which the tropical timber industry is run, and it will very much depend on the will of governments to use theirforest resources wisely for economic development, ifthey are realised. Market growth The term markettends to be used to refer both to the overall consumption of a product and to the specific markets for a specific product at a particular price. In considering the marketfortropicaltimber products the term is used to refer to the general consumption of broad product classes. The marketfortropicaltimber products is comprised of two very different components. There is the domestic market in tropical countries, and there is the international market. Earlier discussion of illegal logging has shown that in many countries a substantial proportion of the outputis exported at the expense of the domestic market, and so the domestic demand is metfrom illegalIy harvested logs. Ifthe problem of illegal logging is to be tackled, then tropical producing countries must take steps to incorporate their domestic demand into theirforestresource management policies, and decide how best to achieve a new equilibrium. The most recent comprehensive forecast of the likely future trend in consumption offorest products is the Global Forest Products Outlook Study being prepared by FAO. This study is not yet complete, but various preliminary findings are available. The main source of information is the projections offorest products consumption, production and trade to the year 2010 based on the outputs from a global forest products model(GFPM). These projections are used as the framework for considering the possible development of the market fortropicaltimber products. The GFPM is a complex linear programming modelthat seeks to achieve an equilibrium between supply and demand. It calculates demand at the global levelfor 14 product categories based on GDP as a measure of economic activity and the real average prices forthe product categories. The supply forthe main raw material categories offuelwood and industrial wood are based on the assumption that the supply in each country will be determined by the demand. Fortropicaltimberthis presents a serious problem for many countries, because some countries have already reached or exceeded their sustainable level of production and may introduce policies to limit further increases in production in order to conserve their resources. There is also the problem referred to earlier, that current production is frequently substantially more than recorded production, because of illegal logging, and it takes no account of the problems of accessibility of additional resources, which may limit scope for expanding supply in the short to medium term. Forthis study the national, regional and global forecasts of consumption (demand)that the GFPM has produced are used as the basis for determining the potential demand for tropical timber products, and attempts are made to assess the potential within tropical producing countries to meettheir own estimated domestic demand and the impactthatthis might have on their ability to continue exporting.

64 LTS International Ltd The Med^^in and Long-term Outlookforthe Tropical Timber Market There are 27 tropical countries currently exporting timber products and 29 countries that currently import from them and tables 34 and 35 below compare the consumption forecasts forthe year 2010 for each of these producer and consumer countries respectively with the current log production for producer countries and imports of tropical timber products for consumer countries. Table 34 shows that only 6 of the 10 African countries; 3 of the 6 Asian countries; and 3 of the 11 American countries are currently producing more than their estimated domestic consumption in 2010. Between them these 12 countries will have a surplus of about 11 million in' in 2010 if they sustain current levels of production. However, as previously noted, for several of the countries visited forthis study, the current level of production is substantially higher than the recorded production, because of illegal logging. This results in underestimates of current domestic consumption, so that the base line data used in the model, applying the officially recorded figures, will almost certainly underestimate the consumption in 2010. In the countries concerned, the forecast consumption for 2010 is well below actual current consumption.

Toble 34 Estimates of tomldomestic consumption of timber in 2010 and currentlog production for tropical producer countries ('000 ,?f rwe) Country Estimated consumption Currentlog production Cote d'Ivoire 2,929 3,146 Cameroon 1,806 2,980 Gabon 398 2,775 Ghana 1,375 1,227 Congo DR 4,580 3,624 Congo Rep. 1,376 1,789 C. African Republic 529 839 Liberia 393 321 Togo 330 287 Gambia 13 113 TOTALAFRICA 13,729 17,318 Indonesia 56,960 36,195 Malaysia 24,883 21,735 Papua New Guinea 591 3,239 Myanmar 3,748 1,766 Cambodia 87 1,040 Fiji 196 557 TOTALASIA 86,465 64,432 Bolivia 992 475 Brazil 88,114 24,500 Colombia 4,194 1,299 Ecuador 1,519 3,500 Guyana 39 431 Honduras 663 25 Panama 199 97 Peru 2,357 1,500 Suriname 89 182 Tnnidad & Tobago 96 50 Venezuela 1,692 868 TOTALAMERICA 99,954 32,527 TOTAL 200,148 114,277

LTS InternatibnalLtd 65 The Medium and Long-term Outlook forthe Tropical Timber Market

Toble 35 Estimates of total domestic consumption of timber in 2010 and current imports of tropical timber products for consumer countries ('000 fir Iwe) Country Estimated consumption Currentimports of TTP Egypt 467 432 TOTALAFRICA 467 432 India 49,995 1,532 China 154,770 20,884 Japan 90,631 17,130 Korea Rep. 14,331 3,432 Philippines 6,072 1,666 Thailand 9,747 1,775 Australia 20,045 677 New Zealand 17,999 46 Nepal 1,266 19 TOTALASIA-PACIFIC 364,856 47,161 Austria 19,425 39 Ben-Lux 13,773 1,563 Denmark 5,255 431 Finland 55,504 48 France 40,036 2,096 Germany 51,714 858 Greece 1,748 142 Ireland 1,564 297 Italy 11,867 2,114 Netherlands 5,348 1,300 Norway 12,031 93 Portugal 11,445 622 Spain 20,621 1,652 Sweden 58,385 51 Switzerland 7,194 36 UK 15,663 1,538 TOTALEUROPE 331,573 12,880 Canada 200,058 324 USA 431,351 6,513 TOTALAMERICA 683,960 6,837 TOTAL 1,380,856 68,310

The above tables also show that the currentimports of tropical timber products by consumer countries at the equivalent of 68.3 million in' (mye) is about 60% of the 114.3 million in' of log production in the producer countries. It also shows that the present imports of tropical timber products by consuming countries are only about 5% of their anticipated consumption of alltimber products in 10 years time. The market prospects for tropical timber products are therefore likely to be more dependent on the ability of producer countries to sustain or increase production and remain competitive, than on lack of demand

66 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market Consumer demand Consumer demand differs from consumption, in that it incorporates the requirements of the consumers in terms of the suitability and acceptability of the productforthe end-use in question. The vast majority of the tropical timber products that are exported at the present time are primary products such as sawn timber and plywood, which are used for further processing in the consuming countries. In recent years there has been a trend towards manufacturing some final products in producer countries, such a joinery components and furniture but it still represents a very small proportion of the total. The advantage of exporting final products is that it adds value in the producer country, which brings the benefit of employment and greater foreign eXchange earnings for a given volume of logs. The disadvantage is that the volume of products that can be marketed depends very much on the design and quality of the products. Designs are changing allthe time and are to some extent dependent on fashion, so that the producer must maintain very close contact with the marketin order to maintain market share. Manufacturing of such products also requires investment in machinery and in training of the labourforce in order to achieve the quality standards and levels of efficiency that are necessary to compete in the market. A further factor related to exporting final products is the increasing demand for "certification" in some consumer countries where the buyers are under pressure to show that their products have been made with wood from sustainably managed forest resources. This applies to alitropicaltimber products and is discussed further below. Environmental issues Environmental considerations affectthe tropical timber trade in several ways. One is the potential adverse impact on the environment in producer countries where poor logging practice can cause increase of siltflow in rivers and the risk of flash flooding. Creating access to the forest for logging also encourages encroachment and clearance of the forest and increases the risk of fires spreading. Logging and the degradation of the forest that often follows can also have an adverse impact on the forest habitat and so indirectly contribute to the threats on many species of plants and animals. Public concern about these issues is rising in many producer countries and may resultin increased pressure to adopt some of the measures necessary to reduce destruction and degradation offorest and in some countries this may lead to a curtailment of log production. In both Indonesia and Thailand there have been strong calls to ban logging, and China has introduced a logging ban in response to widespread flooding. There is also international concern about environmental and habitat degradation in tropical forests, and this has an impact on the way in which buyers perceive the products. In those consumer countries where environmental and conservation NGOs have been particularly active, there is pressure for a system of"certification" as a means of reassuring buyers that they are not contributing to the destruction of tropical forests. Certification In several of the consumer countries visited, the need for certification of tropical timber products was raised as being a majorfactor in determining future market prospects. Although the currentimports of tropical timber products by countries where certification is a major issue only represents about a third of total imports, these countries are the ones where there are the best prospects for expanding exports of value added products. For producer countries facing limitations on log supplies, the best way to maintain foreign eXchange revenue will be to use their resources more efficiently and to move into higher value added products. There is therefore a choice for some countries between continuing to export relatively low value products to countries that are relatively undemanding and seeking to maintain markets in the more demanding country markets, with higher value added products.

LTS International Ltd 67 The Medium andLong-term Outlookforthe Tropical Timber Market 4.3.2 Export trends for the incljor tro!?icc, I forest!?rod"cts

Logs Only five countries currently export significant quantities of logs (Appendix 8). The major trade is within the Asian region which accounts for about 75% of the total, with most of the remainder being between Africa and Europe. The trade in logs has shown a steady downward trend, and this is likely to continue. The main reason that log exporting is still attractive for producer countries is the low level of efficiency in processing into primary or secondary products, which reduces ability to find markets for more value added products. Although log exporting may be the more economicalIy attractive option in the short term, it is depriving the countries concerned of potential revenue and economic development. It is therefore in the best interest of those countries that currently export logs, to seek investment in their domestic processing capacity and move up the value added chain. A ban on exporting logs will be counterproductive, since it will depress the value of logs and lead to increased waste rather than to investment and expansion.

Sowntimber

Exports of sawn timber by tropical producer countries amount to about 8 million in' annually, which is about 17% of total production (Appendix 8). Twenty four producer countries currently export sawn timber, but 6 countries accountfor about 80% of the total and the remaining countries export relatively small amounts. Twenty five consumer countries import tropical sawn timber and in addition 10 tropical producer countries import modest quantities. Only two consumer countries import more than I million in' and 10 of the others import between 250,000 and 500,000 in' and these 12 countries together accountfor more than 85% of total imports. Exports are divided between Asia, Africa and South America roughly in the ratio 50:35:15 and imports are divided between Asia, Europe and North America in the ration 50:40:10. Overallthe Asian region is a net importer of tropical sawnwood, where inter-regional trade is important. European imports are predominantly from Africa, but in some countries imports from Asia have been replacing those from Africa. South America is a modest supplier to Europe. The overalltrend fortrade in tropical sawnwood overthe past 5 years has been downwards, and this trend appears to pre-date the Asian economic crisis. The latest available figures do not show any indication that the overall downward trend has been reversed, but it does suggest some re-distribution of trade. The downward trend of imports by some ITTO consumer member countries has been offset by increase in others, in particular China, and to a lesser extentthe USA. , and the country visits suggests that this development is likely to continue. The gradual downward trend of imports into Europe is very much influenced by environmental concerns overthe resource sustainability, and is likely to continue until producer countries can demonstrate that there are effective measures in place to deal with the problems of resource depletion.

Plywood grid panel!?roducts

Exports of plywood and veneers by tropical producer countries amounts to about 12.5 million in' annually, which is about 50% of total production (Appendix 8). Nineteen producer countries currently export plywood and veneer, but 2 countries accountfor about 85% of the total and the remaining countries export relatively small amounts. Twenty five consumer countries import tropical plywood and veneers and in addition 10 tropical producer countries import modest quantities. Only three consumer countries import more than I million in' and 8 of the others import between 200,000 and 500,000 in' and these 11 countries together accountfor more than 95% of total imports. Exports are divided between Asia, Africa and South America roughly in the ratio 90:5:5 and imports are divided between Asia, Europe and North America in the ration 60:20:20.

68 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market Overallthe Asian region is a net exporter of tropical plywood and veneer, although inter regional trade for about 70% of exports. European imports are relatively evenly divided between Asia and Africa, but in some countries imports from Asia and South America have been replacing those from Africa. South America is a modest supplier to Europe. As with sawnwood, the overalltrend fortede in tropical plywood and veneer overthe past 5 years has been downwards, and this trend appears to pre-date the Asian economic crisis. The latest available figures do not show any indication that the overall downward trend has been reversed, but it does suggest some re-distribution of trade. As with sawnwood, the downward trend of imports by some ITTO consumer member countries has been offset by increase in others, in particular China, and to a lesser extentthe USA. , and the country visits suggests that this development is likely to continue. The gradual downward trend of imports into Europe is very much influenced by environmental concerns overthe resource sustainability, and is likely to continue until producer countries can demonstrate that there are effective measures in place to deal with the problems of resource depletion.

4.4 Globc, Idemc, ridft?It10/9icci/timber/?rod, ,cts Since tropical timber products only represent a small proportion of the global demand for forest products it is very difficult to make meaningful forecasts of demand forthem. Since most of the uses to which tropical timbers are put can be met with other types of timber, the market share captured by tropical timbers depends mainly on the ability of producers to offer the kind of products that are needed at a competitive price. The future prospects for tropical timbers seem to be mainly dependent on the ability of producer countries to resolve problems over resource sustainability and to improve the efficiency of processing of timber products to remain competitive. The overall demand fortimber-based products is expected to grow slowly but steadily over the next 10 years, very much driven by economic and population growth. The share of this increased demand that is captured by tropical wood products is dependent on the response of the tropical producing country government and theirindustries. The two key issues that need to be addressed are resource sustainability, especially in the context of illegal logging, and efficiency in terms of the value added per cubic metre of log, by reducing waste and other losses.

4.4. I Import trends for the incljor tro!?ICOlforest!?roducts

Logs Tropical logs are mainly imported forthe manufacture of specific products, where it is more cost-efficient to do so in the consuming country than in the producing country. Some of the products made from imported tropical logs are then exported. It is in the producer country's long-term interests to do this manufacturing, but ifthe products are to be competitive Iy priced, it will need to be done as efficiently as it is currently done in the consumer countries. The long-term trend fortropicallog exports is therefore most likely to continue downwards, butthe rate at which it declines will depend on the response of producing countries to the underlying reasons forthat decline. Sowntimber The future fortropical sawnwood seems to be mainly a matter of market share. The medium-term forecasts of demand for sawn timber by the FAO GFPO is for it to grow at an average rate of over I% per annum. The same forecast sees Asia region having an increasing net deficit, balanced by an increasing net surplus in America, with Africa and Europe showing little general change in overalltrade. Thus the main growth in demand for tropical sawnwood is likely to be in Asia, especially China and India, but in the traditional markets in Europe and North America, tropical sawnwood will face increasing competition from domestic supplies of both hardwoods and softwoods.

LTS International Ltd 69 The Medium and Long-term Outlook forthe Tropical Timber Market Plywood and panel!?rod"cts The medium-term forecasts for plywood and veneer are for average growth of around 2% per annum. As with sawnwood, the Asian region is expected to have an increasing net deficit, while America will have an increasing surplus, and Europe will have a decreasing deficit, because of increased domestic production. As with sawnwood the main growth in demand is likely to be in Asia. The share of the market captured by tropical plywood will depend on a combination of price competitiveness and suitability of the product to the end- use.

70 LTS International Ltd The Medium and Long-term Outlook forthe Tropical Timber Market

5. Discussion of study findings ond scenorios for supply ond demond trends to 2010

The main finding from the study is that the future marketfortropicaltimber products will be determined by the policies of, and decisions taken in the producing countries. Global demand fortimber products, generally, is forecast to increase by aboutthe same as total current production of tropical timber every 21^^ years, so that the market share of tropical timber must continue to decline. In this contextthere are only two general scenarios that can usefulIy be discussed. The first of these, referred to as business as usual"is in some ways a worst case scenario, since it implies that producer countries will generally continue to harvest at current levels, and will continue to deplete their resources, through a combination of overcutting and conversion of forest to other land uses. The alternative to this is for consumer countries to undertake detailed assessments of current actual levels of harvesting, including illegal logging, and determine the truly sustainable level of production. This should be based on the area of their resource that will be retained as permanent forest, and the growth rates that will be achieved ifthey are managed properly, taking account of the productivity of areas of logged forest that will be due for further logging. The study has revealed that the growth of domestic demand fortimber products in the tropical producing countries is likely to absorb much of the production that is currently exported from the major producer countries. Under these circumstances the development of general scenarios becomes a rather meaningless exercise, because individual countries must make the important decisions related to the management of theirforest resource management and trade policy that will determine the future pattern of trade. Some countries may decide to take strict measures to regulate their production at sustainable levels, while others may continue to liquidate their resources. With good data, the impact of possible choices facing individual countries could be modelled as scenarios. However, at the regional or global levelthere is a likelihood that changes made by different countries could complement or cancel out changes made by other countries. This means that there is an almost infinite number of possible combinations that cannot be investigated in a limited period of time. Since the sort of information required to formulate realistic scenarios was not readily available in any of the producer countries visited, it is impossible to produce a detailed forecast offuture production at sustainable levels. In each of the producer countries visited, information was sought aboutthe average recovery achieved by the wood processing industry. That is the efficiency with which raw material is converted to product, measured as the volume of product(sawnwood, plywood etc) as a percent of the volume of logs utilised. Data was also sought on the installed processing capacity, which would indicate whether production could be expanded withoutfurther investment. The data provided was of dubious quality, and when used in the model was frequently found to be inconsistent with other data obtained. Based on the limited, reliable data available, and some model estimates of the actual current supply-demand balance in the major producing countries, the actual production, and therefore actual consumption, is estimated to be substantially higher than the published data would suggest, and exceeds the sustainable supply in many countries. Time did not permit a detailed investigation forthis study. However the factthatthe data is so unreliable, makes the presentation of detailed scenarios for all countries combined rather meaningless. Therefore a limited number of scenarios have been examined for individual countries that are likely to have a significant impact on the overall supply demand balance in the medium term.

LTS International Ltd 71 The Medium and Long-term Outlook forthe Tropical Timber Market

5. I. I Business OS usual

This scenario represents the forecast development of the supply and demand fortropical timber products if present policies on resource management, resource pricing, and trade remain more or less as they are at present, and neither governments northe commercial sector adapt to the major issues outlined in 4.2. The discussion of the forecasts of consumption prepared by FAO in section 43.1 above, under the sub-headings of"market growth" and "consumer demand"together with the data presented in Tables 34 and 35 illustrate a likely outcome of a business as usual scenario, since the forecasts are based mainly on changes in population and GDP that are almost certain to take place. The only uncertainty attached to the forecasts is the precise time period over which the forecast growth will actually take place. While population forecasts are reasonably precise, the rate of economic growth can fluctuate widely over short periods, so that the time required for a country to achieve the forecast average GDP per capita could be more or less than the forecasting period. Thus the consumption levels forecastforthe year 2010 could be achieved a few years before or after that date, but nevertheless are very likely to be reached by 2015. The forecast prepared by FAO does not assume any significant changes in policies that could affectthe supply side, nor any significant changes in the pattern of use of timber that would affectthe demand side. The aggregate domestic consumption of the 27 ITFO Member tropical producing countries in 2010 is estimated to be about 200 million in' mye, which compares with a currenttotal production of about 180 million in' mye. Many of the countries are likely become net importers by 2010, with an aggregate deficit possibly as much as 20 million in' annually. Only the African producers are likely to continue to have a small surplus for export after 2010. Under this scenario therefore aggregate log production is likely to continue at about present volumes forthe next decade, regardless of the possibility that this means depleting the growing stock in several countries. Domestic consumption in the tropical producer countries will increase gradually due to population growth and rising incomes. Exports of tropical timber products will gradually decline as domestic markets in the producer countries absorb more of the output. There are a number of responses that producer countries could adopt, and the overall impact on global supply and demand will depend on which countries respond, when they respond and in what way they adapt. The possible responses are: . Improving the efficiency of processing and reducing processing and harvesting waste in order to increase the output offinal products from the same volume of logs. . Adopt a more selective strategy for processing in terms of the end-use according to timber species, quality and log size class, with the aim of maximising value-added, so that export value does not decline in line with decline in volume. . Evaluate more accurately their domestic demand and develop a strategy for eliminating illegal logging over a reasonably short time period. In most of the tropical producing countries where illegal logging is taking place, it is symptomatic of an inadequate supply of products at reasonable prices from the authorised operators for the domestic market. This is often as a result of over concentration on exports. A strategy is needed to bring the total processing capacity into line with the sustainable supply from the forest and the promotion of investment in improving the efficiency of processing to maximise the output of products from the available supply.

72 LTS Internatibna/ Ltd The Medium and Long-term Outlook forthe Tropical Timber Market

5. 1.2 S"sininc, ble supply

The producer country surveys and analysis of the individual country supply demand balances, combined with data from other published sources, indicate that the annual volume harvested is considerably more than that reported. There appears to be considerable under-reporting of log harvests, partly because of inefficiencies in the monitoring systems and partly because of illegal logging. Interviews in the producer countries tended to confirm the widespread awareness that illegal logging is taking place, though little hard evidence is available. The data published by FAO on log production are often differentfrom those published by countries, because FAO makes some attempt to allow for under recording, where it has reason to believe that it is significant. The model used in this study enables an estimate to be made for individual countries, by comparing independent estimates of the supply and the demand for logs. The demand side is estimated according to the quantity of products and domestic consumption net of trade, and these are compared with the recorded log production. In addition to this, the data published by FAO for about 180 countries has been used to determine a general regression of total per capita consumption of wood products in roundwood equivalent against GDP per capita. Percapita consumption (in'mye/cap) = 0,0407 + 0,0000408* GDPpercaput(Us$) This regression was found to be statisticalIy significant with an R' value of 0,650. Using this regression, the per capita consumption was estimated forthe 27 ITFO Producer member countries. The results were compared with the apparent per capita consumption using the published country data, and for 21 of the 27 countries this estimate was found to be greater than the apparent consumption. Although the difference between these two figures does not give a precise estimate of the extent of illegal logging, it does provide an estimate of the order of magnitude, as it represents the amount by which recorded production falls below that which would be expected according to the general level of income in the country. The aggregate difference between the apparent consumption from current reported production data and this estimate forthe 27 ITFO member countries is around 31.2 million in' out of a total production of around 118 million in'. This estimate of the possible scale of illegal logging is quite consistent with the few individual country estimates that have been published. In the FAO forecastthat represents the 'business as usual' the base line used is the FAO estimate of current log production, which is higher than the recorded production in several countries, because some allowance has been made forthe underrecording. However, the FAO estimates are stilllowerthan some independent estimates that have been made by NGOs and other independent organisations. The implication of this situation is that for many tropical producing countries the resource is not being managed sustainably, butts being gradually depleted. The sustainable level of production is less than current production, and although current levels of production could be maintained for about 10 or possibly 20 years, it will be at the expense of production thereafter. Governments of countries where this is happening have a choice of strategies that they could adopt. As indicated under the "business as usual" scenario, a laissez-faire strategy would result in a gradual decline in output of logs, such as has happened in Thailand and the Philippines, untilthe country becomes a net importer of wood products. The alternative strategy would be to reduce production overthe nextfew years to a levelthat could be sustained in the longer term which probably means by an amountroughly equivalent to the estimated volume logged illegalIy quoted above. As the figures in Table 34 indicate, even a modest reduction in log production by the major tropical producer countries, which might be achieved by taking steps to prevent illegal logging, would leave little surplus for export. This will involve an adjustment for some producer countries to reduce the proportion of their outputfrom conversion of forest and over cutting through illegal logging, where these are resulting in resource depletion, to a situation where the supply is determined by the growth of a permanent production forest

LTS International Ltd 73 The Medium and Long-term Outlook forthe Tropical Timber Market estate. It is difficult to illustrate this scenario in detail, partly because good data is not available on the genuine level of sustainable production for most of the producer countries, and partly because in practice different countries would make different degrees of adjustments over differenttime periods, and the aggregate effect on global supplies of tropical timber products could vary within a very wide range. The main outcome of this scenario would be a reduction in supply of logs forthe production of timber products for export, as more of the outputis diverted to domestic markets in order to reduce the incentives for illegal logging. The decline could be ameliorated by simultaneously taking steps to reduce waste and utilise a wider range of species, and focussing on producing higher quality and value products.

5. 1.3 Inchvid"o1co"ntryscenorios

Chino China is the second largest importer of tropical timber products after Japan, and is likely to surpass Japan in the near future. The introduction of restrictions on logging within China has already had a large impact of the volume of imports into the country, and this is affecting the forests in many countries that have responded to this increased demand. Three scenarios have been examined for China, that representthe I) current situation, 2) a possible short-term response to potential supply shortages, and 3) an outlook for potential demand in the year 2010. Table 36 below give the comparison between the base case (current situation) and scenario A which looks at the effect of raising the average recovery in primary processing from the currentlevel around 33% to a level of 45% which is closer to the international norm. Several reports on the wood processing industry in China refer to the low efficiency and out dated ness of much of the wood processing industry in China. The model estimate is that achieving such an improvement in recovery would reduce the demand for logs by about 24 million in' annually. Table 37 below gives the comparison between the base case and scenario B which considers the potential demand in the year 2010 based on projections of population growth and growth in GDP per caput, and it assumes that the improved recovery examined in scenario A ,is achieved. The pattern of demand estimated by the modelis somewhat differentfrom the FAO forecasts, with substantially higher estimates for sawnwood and wood-based panel consumption and lower estimates for paper products. However, the FAO estimate suggests a substantial decline in consumption of wood-based panels from 19.5 million in' at present to only 16 million in' in 2010, and an increase in sawnwood consumption of only around 8 million in'from the present level of around 28 million in' These differences are due in part to differences in elasticity of demand between the two models, and partly due to the factthat no assumptions have been made on changes in prices in the model. Additional scenarios could be run with a range of different price assumptions, but with six major product categories and a wide range of possible price movements, there will be an almostinfinite number of possible outcomes. However, both the FAO and the modelforecasts imply average per capita consumption well within the realms of possibility, when compared with other countries that currently have GDP per capita similar to that which China can be expected to attain overthe next decade. Much will therefore depend on measures that China takes to improve the efficiency of its own timber growing and wood processing industry, and on movements in prices for forest products. If demand in China grows at the rates forecast by the model, it is likely to result in some increase in prices, and this in turn will have a dampening effect on overall demand.

74 LTS International Ltd The Med^^in and Long-term Outlook forthe Tropical Timber Market

Table 36 Scenario A results

Current situation Scenario results Parameter Quantity Quantity Change Log Supply (mill. in3) Volume Me Volume mye Total log production 55.58 55.58 000 Total smallroundwood production 44.78 4478 000 Apparent log deficit 14.66 0.93 -13.73 Apparent s. r'wood deficit 1050 000 -10.50 Total roundwood production 125.52 101.29 -24.23 Imports (mill. in3 product) Logs 4.69 4.69 0.00 000 4.69 Sawnwood 3.56 10.78 3.56 7.90 -2.87 Plywood 3.70 11.20 3.70 8.21 -2.99 Composite panels 4.17 6.95 3.65 5.21 -1.74 Pulp 4.01 16.04 4.01 16.04 000 Paper 11.24 53.50 11.24 53.50 000 Waste paper 377 13.21 3.77 13.21 000 Total imports 116.36 104.07 -, 2.29 Total roundwood consumption 24, .88 205.36 -36.52 Exports (mill. in3 product) Logs 0.41 0.41 0.93 0.93 0.53 Sawnwood 0.59 1.78 0.59 I. 31 -0.48 Plywood 1.12 3.38 0.85 1.89 -,. 49 Composite panels 0.52 087 0.52 075 -0.12 Pulp 003 0.10 003 0.10 000 Paper 3.24 15.43 3.24 15.43 000 Wood products 000 000 000 000 000 Waste paper o o 000 Total exports 2, .57 ,9.49 -2.09 Apparent domestic consumption 220.3, 185.87 -34.43 Percapita consumption 0261 0,241 -0020 Total employment('000 persons) 1,992 1,824.5 -, 68 6 Total Value added (Us$ million) 24,827 24,274 -552 Total government revenue (Us$ 2,065 1,974 .91 inii. ) Total value produced (Us$mill) Log harvesting 4,878 4,201 -678 Sawmilling 1,929 1,625 -304 Plymilling 1,533 1,270 -263 Pulpmills 919 919 o Composite panels 1,933 979 -954 Papermaking 13,634 15,280 4,646 Processing capacity utilisation V" Sawmilling 44 44 o Plywood 53 53 o Composite panels 86 86 o Pulp 87 87 o Paper 92 92 o Secondary products o o o

LTS International Ltd 75 The Medium and Long-term Outlook forthe Tropical Timber Market

Tobie 37 Scenario B results

Current situation Scenario results

Parameter Quantity Quantity Change Log Supply (mill. in3) Volume r. we Volume r. we. Total log production 55.58 55.58 000 Total smallroundwood production 44.78 4478 000 Apparent log deficit 14.66 -0.93 -, 5.59 Apparent s. r'wood deficit 10.50 39.67 29.16 Total roundwood production 125.52 139. ,O 13.57 Imports (mill. in3 product) Logs 4.69 4.69 000 000 4.69 Sawnwood 3.56 10.78 1,862 263.6, 252.83 Plywood 3.70 11.20 085 1.89 -9.30 Composite panels 4.17 6.95 39.75 5678 49.83 Pulp 4.01 16.04 4.01 16.04 000 Paper I1.24 5350 000 0.00 -5350 Waste paper 3.77 13.21 377 13.21 000 Total imports ,, 6.36 351.52 235.7 Total roundwood consumption 241.88 490.62 248.74 Exports (mill. in3 product) Logs 0.41 0.41 Sawnwood 0.59 I. 78 000 000 -1.78 Plywood 1.12 3.38 1.12 2.48 -0.90 Composite panels 0.52 087 000 000 -087 Pulp 003 0.10 000 000 -0.10 Paper 3.24 15.43 10.33 4920 33.76 Wood products 000 000 000 000 000 Total exports 21.57 51.68 30.0 Apparentdomestic consumption 220.3, 438.94 218.64 Percapita consumption 0,261 0294 0033 Total employment('000 persons) 1,992 1,632.4 -360 Total Value added (Us$ million) 24,827 25,482 655 Total government revenue (Us$ inil. ) 2,065 1,789.6 -276 Total value produced (Us$mill) Log harvesting 4,878 4,157 -722 Sawmilling 1,929 1,485 -444 Plymilling 1,533 1,239 294 Pulpmills 919 918 -2 Composite panel mill 1,933 1,113 -820 Papermaking 13,634 16,571 2,936 Processing capacity utilisation % Sawmilling 44 44 o plywood 53 53 o Pulp 87 87 o Paper 92 92 o Secondary products o o o

76 LTS International Ltd The Medium andLong-term Outlookforthe Tropical Timber Market Momysi@ Malaysia is the second largest exporter of tropical timber products, and the country with the most diversified export products. It is the largest exporter of logs, accounting for almost 50% of the world total, and the largest exporter of tropical sawn timber, accounting for about 40% of the world total. It is the second largest exporter of tropical plywood after Indonesia. The supply-demand balance for Malaysia calculated by the modelindicates a deficit of about 9 million in' annually. Some of this may be due to inconsistencies in the data due to different reporting periods. The domestic consumption estimates used by the model are based on the production, import and export data from FAO, as no information on domestic consumption was available locally. In addition the model estimated a shortfall of about 800,000 in' of raw material forthe paper industry, and it has been assumed that this is provided from recycled paper. However, the reported log production net of exports and imports is less than that required to meetthe reported production for each of the product categories with the reported recovery rates. There may therefore be some under recording of log production. Although the price obtained forthe exported logs is reasonably good, the model suggests that more value could be added by processing the volume of logs currently exported, into sawn timber and plywood, and exporting the products. One reason forthis is that the Malaysian primary processing industry is more efficientthan in many other tropical producing countries. The estimated increase in value added, ifthe logs currently exported were divided between sawmilling and plywood production in the same ratio as the current usage is around Us$ 600 million annually. It would generate an additional volume for export of about 2.8 million in' of sawnwood and about I million in' of plywood. The installed capacity for both sawnwood and plywood seems to be underutilised at present according to the information provided to the consultants, and so the additional production of these products would improve capacity utilisation. The main difficulty is likely to be that most of the logs exported are from Sabah, while most of the under-utilised is in Peninsular Malaysia and Sarawak. The prospects forthis scenario being realised are therefore somewhat doubtful, as the model may not capture some of the additional transport costs that would be involved. It would need a more detailed investigation than is possible in the time available forthis study. Ifthe estimated deficit in log supplies is of the correct order of magnitude, then the options are to reduce log exports to eliminate the deficit or to continue logging at current rates and export additional products as indicated above. This is clearly a subjectthat needs further more in-depth investigation in Malaysia. Indonesia Indonesia is the largest exporter of tropical timber products by volume, with plywood making up the largest proportion and accounting for about 60% of world exports of tropical plywood. The model was used previously for an analysis of the forestry sector in Indonesia, and the results suggested that there was a log deficit of around 30 million in' annually. This estimate has been discussed at some length in Indonesia, and while the exact magnitude of the deficit is unknown, it is generally agreed that it is very substantial. The main reason forthe large size of the apparent deficitis the enormous domestic demand. With most of the logging concessions tied to export oriented processing facilities, the domestic market is largely supplied from smalllocal sawmills, most of which are unlicensed or produce more than theirlicence permits. The government now appreciates the scale of the problem, and various investigations are under way to determine the most appropriate course of action, including closing down a considerable proportion of the capacity.

LTS International Ltd 77 The Medium andLong-term Outlookforthe Tropical Timber Market The dilemma facing the country is that much of the deficitis due to massive investment in expanding the pulp capacity during the 1990s, which was intended to operate mainly on plantation grown wood. This plantation supply has not yet materialised, and it may take some years yet before the raw material supply is adequate. Closing down some of the sawmilling and plywood industry might provide a temporary solution, butthe questions arise as to which part of the industry and how much capacity needs to be closed. Domestic consumption is mainly sawnwood, and so one option is to close most of the plywood industry and concentrate on meeting the domestic demand for sawn timber;this could be done by making the logs currently used by the plywood mills available to the small sawmills. The result would be a reduction in the incentive to log illegalIy at the expense of foreign eXchange earnings from plywood exports. Since this topic is currently the subject of a more detailed investigation in Indonesia, it is not appropriate to prefudge the outcome or the details of possible scenarios here. Suffice it to say, that the supply of tropical plywood from Indonesia is likely to be reduced sharply in the near future.

78 LTS International Ltd Appendix I List of key source contacts

PRODUCERCOUNTRIES

BOLIVIA Christopher Carden ( forest industry consultant) BOLFOR ( Us Aid funded SFM project) La Chonta Ltda. ( producer & exporter of timber doors ) Portal S. A. (timber producer & exporter) Superintendencia Forestal( Min. of Forests I Management) CADEFOR (tech. supportfor exporters ) Camera Forestal( Bolivian Forest Industry Assoc. ) Asserradero Sari Martin (timber & mouldings producer) CFV ( Voluntary Forest Certification Council) Sari Pedro S. R. L. ( door manufacturer & exporter) CIMAL ( plywood and furniture producer)

BRAZIL Canadian Consulate in Sao Paulo VVWF - Brazil Ministry of Foreign Affairs ( Agriculture Division ) IBAMA (Institute for Environment and Natural Resources) AIMEX ( Assoc. forthe Lumber & Plywood Exporters of Para ) Canadian Embassy in Brasilia Gulfstream Traders Ltd. (plywood exporter) Imazon (Amazonian ENGO ) Robinson Lumber Co. (timber exporter) Belem Robinson Lumber Co Cuntiba SCTP (forest industry consultants ) Triangulo Ltda. ( plywood and flooring infr. ) EMAPA (timber and moulding infr & exporter) Mr. 0. Gasparetto ( forest industry consultant)

CAMEROON Ministry of the Environment & Forests SFID GFBC Office national de development des Forets SEBC SEFAC AEFNA

CONGO Ministere des Eaux & Forets ATIBT - France Le Commerce du Bois - France

ECUADOR AIMA ( Forest Industries Assoc. ) Dep't of International Trade Ministry of the Environment CARE. Ecuador Industries Cotopaxi( plywood & timber producer) Fundacion Forestal( consultants in SFM development) GABON African Timber Organisation Ministere des Eaux & Forets, de Ia Peche at du Reboisement ENEF Rougier Gabon SNBG SEPBG SYNFOGA

GHANA Amex International British High Commission CARE International Coillte Delegation of the European Union in ACcra Environmental Protection Agency Forest products inspection division Forest Services Division Forestry Commission Forestry Research Institute of Ghana. Francis Koio Odoom Furniture and Wood ProductsAssoc. of Ghana Gene Binnkrong Ghana Primewood Products Ltd. Ghana Timber Association Ghana Timber Millers Organisation Habitat Timber(GH) Ltd. John Bitar & Co. Ltd Kumasi Logging and Lumber Co. Ltd. ManyellOwusu Timbers Ministry of Lands and Forestry NaJa David Veneer and Plywood Ltd. Natural Resources Management Project- Ministry of Lands and Forestry PAB consult. Resource Management Support Centre Samartex Timber and Plywood Co. Ltd. Small Scale Carpenters Association Swiss Lumber Co Ltd Timber Export Development Division University of Science & Technology, Institute of Renewable Resources Western Veneers and Lumber Co Wildlife Department World Bank MALAYSIA Malaysian Timber Council Malaysian Wood Moulding & Joinery Council Malaysian Timber Industries Board Ministry of Primary Industry ( Timber Div. ) National Timber Certification Council Forestry Department Peninsular Malaysia (plantations unit) Forestry Department Peninsular Malaysia (economics unit) E. P. W. Sdn Bhd. (sawmiller & exporter) Minho Kilning ( dry kiln operators ) Finewood (timber exporters ) Malaysian Furniture Industry Council SarawakTimberAssoc. Kiong Seng Timber( sawmiller) Forest Department( Sarawak ) Sarawak Timber Industries Development Corp. KTS Timber Industries (timber & plywood infr. ) Subur Tiasa Holdings ( plywood producer) KTS ( Sibu ) Sawmills VVFK Organization ( plywood & timber producer) Koh Ying Industries ( moulding manufacturers ) Rimbunan Hijau Sdn. Bhd. (integrated company )

THAILAND Royal Forestry Department Research Div. Royal Forestry Department Economic Research Div. Department of Export Promotion Bamboo Utilization Project Office Canadian Embassy Thai Plywood Co. ( plywood manufacturer) Thai Furniture Industries Assoc. Timber Importers & Exporters Assoc. Forest Industry Organization Royal Forest Department Forest Products Research Div. S. B. P. Marketing Co. (importer & agent)

CONSUMERCOUNTRIES

CHINA Chinese Academy of Forestry Chinese Society of Wood Industry China Timber Distribution Assoc. State Forestry Administration Planning & Designing Institute of State Forest Industry China Forest Products Industry Magazine Institute of Forestry Science & Technology Information (Research) United Network of National Wood Utilization Information Shanghai United Wood Industrial( MDF & Mouldingsproducer) Shanghai Wood Lumber Co. (forest products distributor) B & Q ( D. I. Y. ) Fortuna Timber Enterprises ( plywood producer & exporter) Xin Gao Chao Group ( Plywood producer) Shanghai Timber Wholesale Market(importer &distributor) Shanghai East China Timber Market( distributor) Malaysian Timber Council( Shanghai office)

INDIA United Timber Industries (timber importer) Regency Wood Products (importer) Canadian Consulate ( Mumbai) Sharda Timber Mart ( sawmiller) Alllndia Timber Importers Assoc. Jawahar Sawmills Shree Shankar Saw Mills Mr. Jagdish Toprani(forest industry consultant) B. F. Wadia & Sons (timber importers ) Canadian High Commission ( New Delhi) Ministry of Environment & Forests Forest Survey of India New Timber Market Dealers Assoc. Bawa Raghbir Singh & Sons (importers & sawmillers ) Federation of Indian Plywood & Panellndustries Vikram & Co. ( wholesale distributors )

GERMANY Ministry of Economics & Technology Danzer Fumierwerke GinbH Menen Wood Products Johann D. Voss Statische Bundesant Gesamtverband Holzhandel BD Holz

ITALY Fedecomlegno assoLegno assArredo Edilegno & Specialegno FAO Instituto Nazionale of Statistica Morasso S. A. Gardino Consult JAPAN All Japan Federation of Lumber Associations Japan Plywood Manufacturers Assoc. Japanese Forestry Agency Canadian Embassy Japan Lumber Importers Assoc. Japan Wood Information Centre Department of Foreign Affairs ITTO Hishidai Lumber Company (tropical sawmiller)

NETHERLANDS Verenigiing van Nederlandse Houtondernemingen Stichting BOS en Hout Tropisch Hout Nederland Central Bureau voor de Statistiek Ministry of Economic Affairs

SPAIN AEIM Magimpex SA Mepal S. A. pHM Estrama SA Confamadera Instituto Nacional de Estadistica

UNITEDSTATES U. S. Department of State (forestry section ) U. S. Department of Commerce Us DA Foreign Agriculture Service Mr. A. Goetzel( consultant to the AF&PA ) Robinson Lumber Co. (importer/ exporter) Us DA Forest Service Global Forest Policy Project( ENGOs) IHPA ( Assoc. of forest productimporters ) Tropical Forest Foundation Plywood Tropics ( plywood & veneer importers ) ** Newman Lumber Company (timber & mouldings importer)** Can usa Forest Products ( wood products importer)

** interviewed by telephone Appendix 2 - Example of data collection sheet Model Data requirements Comments

Data item Definitions I Licence fee (Us$/in3) These should be the current 0020 On reserve 1200 c, off reserve 4000 c Iha 2 Smallrw. Royalty (Us$/in3) average amounts weighted 3 Royalty (Us$/in3) according to size or species mix, if 3 4 Other levies (Us$/in3) This should include any levy Air dried export 15%. Registration for export additional to items 1-3 payable on 15 UsD per year. Log measuring 2 UsD per logs harvested eg, grading fee, log. No levy on kiln dried. property tax etc. If payable on an area basis it should be converted to an e uivalent volume char e. 5 Rec. factor (Primary. processing) % Recovery factors should be 30% for export lumber. 70% for domestic, representative of national averages, 70% with downstream processing e. g. finger 30 but where possible some sample jointing. Rec. factor (pulping % values for individual mills should be no pulping in Ghana 70 Rec. factor(Secondary. processing) % obtained. Rec. factor(papermaking) % no paper making 6 Wage rate (Us$/ind) This should be a weighted average Supervisorlevel: around I UsD per day. of wages before income tax for all classes of employees, It should approximately equate with the total annual wages & salaries forthe sector divided by the total number of person days employed. Model Data requirements Comments 7 Labour intensity (log harvesting) ind/in3 3628 log produced Labour intensity (sin/ harvesting) ind/in3) Labour intensity is the total number Labour intensity (sawmilling) ind/in3 of employees times the average 25,764 log input Labourintensity (plywood) ind/in3 number of working days in a year 19 Labour intensity (pulp) ind/in3 divided by the volume of Labourintensity (papermaking) ind/in3 roundwood produced/utilized. Labour intensity (manufacturing) ind/in3 89 lumber input 8 Capital intensity (log harvesting) Us$/in3 15 per year Capital intensity (srw harvesting) Us$/in3 Capital intensity (sawmilling) Us$/in3 Capital intensity is the total value of 35 per year Capital intensity (plywood) Us$/in3 fixed capital divided by the volume 71 Capital intensity (pulp) Us$/in3 of roundwood produced/utilized. Capital intensity (papermaking) Us$/in3 Capital intensity (manufacturing) Us$/in3 178 per year lumber input 9 Primary processing operating margin % The operating margin is the sum of 3 Secondary processing operating margin % all costs other than labour, 3 Timber exportersoperating margin % capital, material andfuelcosts, that Plywood exportersoperating margin % is administration, sales and KLL - monthly turnover = 300.00 UsD on marketing, research as a percent of 1,000m3 - lumber. Pulp exporters operating margin % total costs, excluding profit. 10 Bank lending rate % The average commercial overdraft local currency 45%, UsD 8% rate 45 11 Income tax % The weighted average rate as % of Paid by workers - 15% total income 15 12 Corporation tax % The weighted average rate as % of 35% total pre-tex profit 35 13 Export duty on logs % Export duty on timber % The rate of tax for each product Export duty on products % class as a percent of the fob. price Model Data requirements Comments 14 Product prices Smallrw log price (Us$/in3) Log sale price (Us$/in3) See attached sheet. GTA indicated 15 UsD/ 20 in3. TEDD 20 usD/in3 Wastepaper price (Us$/tonne) Import price of pulp (Us$/tonne) Average prices for each product Fob. log price (Us$/in3) class, weighted according to the Timber sale price (Us$/in3) proportion of price categories within Mainly illegal chainsaw lumber on domestic F. 0. b. timber price (Us$/in3) the class, and representative of the 357 Plywood sale price (Us$/in3) current year. Export prices should 346 Just under export price. Fob. plywood price (Us$/in3) be obtained where possible from 433 Pulp sale price (Us$/in3) trade statistics. Fob. pulp price (Us$/tonne) Product price (Us$/in3) F. 0. b. product price (Us$/in3) 1,248 Available by productin TEDD report Paper price (Us$/tonne) Fob. paper price (Us$/tonne) 15 Profit margin logging % Profit margin is a residual value Operations unable to split harvesting from used to achieve a balance within processing Profit margin sriN logging % the model, but if actual values are Profit margin sawing % provided by respondents, it gives a Profit margin plywood % 25 means of verifying the validity of the Profit margin manufacturing % modelestimates. Profit margin is Profit margin pulp inarifr. % basically total revenue minus total Profit margin paper inarifr. % costs Profit margin exporting % 20 16 Population (million) CIA world fact book 19.5 M 19.5 CIA world fact book 19.5 M 17 Domestic consumption poles (mill. in3) Poles imported from SAF Log production (mill. in3) Official records I. 09 37 M in3 Small r'wood production (mill. in3) Model Data requirements Comments 18 Apparent Log Deficit (mill. in3) Calculated by the model, but should total harvest 3.72 M in3, legal 1,095, illegal cover any illegal or unrecorded log 2.63 0,925, chainsaw 1,696 Apparent small r'wood deficit (mill. in3) production if data exists I9 Sawmilling capacity (mill. in3 product) 1.32 annual log input - officially to mills Plywoodmill capacity (mill. in3 product) The installed capacity based on the 0.39 Pulpmill capacity (mill. tonnes) number of shifts that corresponds Papermill capacity (mill. tonnes) with the labour intensity data. M'fing processing capacity (mill. in3 produ 20 Sawnwood production (mill. in3 product) TOTAL 750-800 K in3. Officially 489,547 in3 0775 Plywood production (mill. in3 product) Total volume produced by product 0260 75,000 in3 Pulp production (mill. tonnes) class forthe current year. o Paper production (mill. tonnes) o Wood products production (mill. in3) 21 Total employment(persons) 105,000 105,000 in formal sector Logging These are estimated by the model, Pulpwood production but for verification purposes, any Sawmilling data published by government, Plywood mills trade associations etc should be Pulpmills recorded, and if it is aggregated Papermills data indicate which groups it refers Secondary processing to. 22 Capital employed (Us$ million) 210 These are estimated by the model, 2000 UsD per inari Logging but for verification purposes, any Pulpwood production data published by government, Sawmilling trade associations etc should be Plywoodmills recorded, and ifit is aggregated Pulpmills data indicate which groups it refers Papermills to. Secondary processing Model Data requirements Comments 23 Return on Investment % 15 These are estimated by the model, Logging combined but for verification purposes, any Pulpwood production data published by government, Sawmilling trade associations etc should be Plywoodmills recorded, and ifit is aggregated Pulpmills data indicate which groups it refers papermills to. Secondary processing 24 Trade Sawntimber exports (mill. in3) 0312 Plywood exports (mill. in3) 0158 Pulp exports (mill. tonnes) Paper exports (mill. tonnes) Total quantities for each product Secondary processing exports (mill. in3) class, imported or exported during 0030 Available from TEDD directory by product Log imports (mill. in3) the current year. Quantities should 0010 Imported transmission poles Sawnwood imports (mill. in3) be obtained where possible from Plywood imports (mill. in3) trade statistics. Pulp imports (mill. tonnes) Wastepaper consumption (mill. tonnes) Paper imports (mill. tonnes) Charcoal(mill. tonnes) 25 Capacity utilisation % 50% The average percentage utilisation sawmills 80 of the installed capacity as recorded Plymills in 19 above. It should equal Pulpmills production (20) as a percent of Papermills capacity (19) Secondary processing Model Data requirements Comments 26 Production exported % Officially 70% of total Logs The annual volume/tonnage O% Sawntimber exports (mill. in3) exported for each product class in 40 85% Plywood 61 35% (50%) Pulp the current year as a percent of the Paper total production of each product class during the same period Secondary products I% (mouldings, furniture parts, broomsticks) - 99 domestic consuption 27 Forest/Wood Producing Area Roundwood Production (Area, Average Productivity on reserve: loin3/ha, off reserve productivity, Sustainable supply) 5m3/ha) a) production area ;For each class Natural production forest offorestthe gross area that is 885 0.25 Industrial forest plantations recorded in official statistics as 76.46 15 Estate crops being used currently for production, Productive conversion forest 397 0.05 by Average productivity; for each Private/community forest(roundwood) Additional Wood Production (Area, Average class of forest, the total annual productivity, Sustainable supply) production divided by the gross Private/community forest(fuelwood) production ar Household gardens Ismallholder estates Other land 4,890 28 Other Forested Areas (Area, Average Available from sheet productivity, Sustianable supply) This is only needed ifthere is Area of conservation forest production from these forest classes, data as 27 above. Area of protection forest 752 29 Non-Timber Forest Products (Average This is only needed for valuation of Vol harvested bushmeat = UsD 350M, productivity, Sustianable supply) the whole forest sector 30 Allocation of smallholderwood product The percentage of production from Percentage to industry nori- forest sources sold/supplied to Model Data requirements Comments 31 Productlmport Prices (Us$/in3;tonne c Roundwood 80 Plywood Sawnwood As for 14 above for imports by prod Pulp (1) Paper (1) Waste paper Charcoal 32 Domestic demand (by unit, me, price) Roundwood & poles 0.01 Plywood TEDD estimate '96 - 52,000 in 31yr, inc. 5% 0052 per year Sawnwood 0889 TEDD estimate 96 - 380,000 in31yr, inc. 5% Paper (1) Fuelwood TEDD estimate '96 - 10-12M in 31yr- all bio 11 fuels. Charcoal Tourism (person days) Specifically to Kakum national park Number of domestic tourists 38384 (revenue total =24,526 GBP) Number of international tourists 19276 ToTAItourist numbers and spend available. Protective functions (UsD) These items only needed for Economic cost off100d damage complete valuation of the sector Economic cost of siltation Carbon absorption (tonnes per year) Net annual absorption of carbon Appendix 3. General structure of the Forest Sector Framework Model model.

SUPPLY DEMAND REPORTED IMPORTS PROCESSING CAPACITY

International price for Imports of plywood Plymill processing capacity plywood

International price for Imports of sawnwood Large sawmill processing sawnwood capacity

International price for Imports of pulp Total imports Gross estimated production Gross processing capacity Small sawmill processing plywood capacity

International price for pulp Imports of paper Pulpmill processing capacity

International price for paper Imports of waste paper Domestic waste paper Processing capacity. Papermill processing available for export capacity

INDUSTRIAL WOOD DOMESTIC DEMAND Forest Details Productivity Sustainable Supply NET WOOD BALANCE Area of natural production Average productivity of Average productivity of Domestic demand for Domestic price for r'wood & forest natural forest natural forest r'wood & poles poles

Area of industrial forest Av. productivity of ind. Av. productivity of ind. Net domestic industrial Domestic demand for Domestic price for plywood plantations plantations plantations Total annual production wood supply/demand Total domestic demand plywood balance

Area of estate crops Average productivity of Average productivity of Domestic demand for Domestic price for estate crops estate crops sawnwood sawnwood

Total exports (repeated) Area of productive Av productivity of prod. Av productivity of prod. Domestic demand for paper Domestic price for pulp conversion forest conversion forest conversion forest

OTHER PRODUCTS REPORTED EXPORTS Total ind. wood supply/demand balance Exports of roundwood International price for Area of private /community Average productivity of Sustainable supply from roundwood forest private/comm forests priv /com. forests

Exports of plywood International price for Area of household gardens Productivity of household Supply from g'dens,& plywood gardens cult.land Industry residues available for fuel Exports of sawnwood International price for Area of cultivated Productivity of cultivated sawnwood land,grass & fallow land Total exports

Net domestic wood energy Exports of pulp International price for pulp Domestic price of NTFPs Potential supply of NTFPs supply/demand balance

Exports of paper International price for paper OTHER SERVICES

Area of conservation forest Number of domestic tourists Exports of charcoal International price for charcoal

Number of international tourists FUELWOOD DEMAND Annual revenue from tourism Charcoal processing Area of Protection forest Economic cost of flood capacity damage

Aggregate domestic use of Domestic demand for Domestic price for firewood Economic cost of siltation wood for fuel fuelwood

Domestic demand for Domestic price for charcoal Total area of forest and Net annual absorption of charcoal gardens carbon

Net economic benefit Economic value of Total direct value of Total direct value of from biodiversity forest protection Conservation products INDIRECT VALUES Total indirect economic TOTAL DIRECT VALUE value TOTAL VALUE DIRECT VALUES

TOTAL VALUE OF Optimise areas of forest use FOREST classes

Appendix 4

Stratification by 12 country groups - Resource Data

Resource status Producer/ Tropical/Non- Number Population ('000) Forest area Forest area Industrial plantation GNP per Proportion of consumer tropical (000 ha) (000 ha) area (000 ha) capita GDP

Poor Consumer Non-tropical 32 739,791 18,405 18,405 3,227 5,639 1.8% Poor Consumer Tropical 19 1,042,059 67,082 67,082 4,214 585 3.2% Poor Producer Non-tropical 2 9,720 798 1.1% Poor Producer Tropical 4 10,596 6,891 6,891 270 9.6% Rich Consumer Non-tropical 7 436,258 347,736 347,736 20,462 21,805 1.8% Rich Consumer Tropical 16 214,374 348,393 348,393 814 1,406 2.9% Rich Producer Non-tropical 13 235,583 855,109 855,109 21,280 6,182 9.1% Rich Producer Tropical 31 640,764 1,176,594 1,176,594 5,379 1,608 4.9% Transition Consumer Non-tropical 15 1,748,269 219,871 219,871 34,749 5,807 1.7% Transition Consumer Tropical 19 498,619 87,989 87,989 1,681 746 4.4% Transition Producer Non-tropical 15 240,605 57,787 57,787 9,913 3,565 4.3% Transition Producer Tropical 3 12,200 2,158 2,158 308 5.1% World 176 5,828,838 3,188,015 3,188,015 101,721 4,886 2.4%

Appendix 4

Stratification by 12 country groups - Production

Resource status Producer/ Tropical/ Number Industrial Tropical log Sawnwood Tropical Wood based Tropical Sawnwood Wood pulp Paper and consumer Non- tropical roundwood production ('0003rwe) sawnwood Panels plywood & WBP ('000 paperboard ('000m3) 1998 Production production ('000 m3rwe) production Production tonnes) ('000 Production 1998 1998 Production 1998 1998 Production tonnes) 1998 1998 1998 Production 1998

Poor Consumer Non-tropical 32 28,868 12,290 299 15,153 193 27,441 1,746 18,219 Poor Consumer Tropical 19 28,252 18,575 27,262 10,550 1,196 475 28,458 1,624 3,557 Poor Producer Non-tropical 2 112 22 50 72 Poor Producer Tropical 4 1,087 434 206 12 138 343 Rich Consumer Non-tropical 7 465,383 48 191,300 20 67,244 10 258,544 63,594 85,555 Rich Consumer Tropical 16 20,054 8,304 6,867 4,950 1,705 851 8,569 476 1,562 Rich Producer Non-tropical 13 436,753 183,537 32,681 216,215 53,610 49,503 Rich Producer Tropical 31 174,607 105,477 51,658 40,620 33,844 26,738 85,501 8,761 12,982 Transition Consumer Non-tropical 15 221,915 440 103,863 2,426 58,364 8,222 162,224 19,820 103,228 Transition Consumer Tropical 19 29,269 588 10,094 582 1,954 802 12,047 753 3,444 Transition Producer Non-tropical 15 109,271 46,580 130 18,106 96 64,687 8,405 11,763 Transition Producer Tropical 3 402 287 73 40 73 World 176 1,515,973 134,153 633,752 59,629 230,435 37,387 864,174 158,789 289,813

Appendix 4

Stratification by 12 country groups - Consumption

Resource status Producer/consum Tropical/ Non- Number Sawnwood Per Plywood Per Pulp Per capita Paper (net ) Per Total Per capita Population ('000) er tropical capita capita Consumption capita Consumption Consumption Consumption (m3rwe /caput) Consumption (m3rwe /caput) (m3rwe /caput) (m3rwe /caput) (m3rwe /caput)

Poor Consumer Non-tropical 32 0.13 0.05 0.01 0.07 0.25 739791 Poor Consumer Tropical 19 0.04 0.00 0.00 0.01 0.06 1042059 Poor Producer Non-tropical 2 0.04 0.01 0.03 9720 Poor Producer Tropical 4 0.03 0.02 0.05 10596 Rich Consumer Non-tropical 7 0.93 0.29 0.15 0.36 1.58 436258 Rich Consumer Tropical 16 0.05 0.02 0.00 0.02 0.09 214374 Rich Producer Non-tropical 13 0.53 0.11 0.15 0.14 0.77 235583 Rich Producer Tropical 31 0.11 0.04 0.01 0.04 0.18 640764 Transition Consumer Non-tropical 15 0.11 0.06 0.02 0.12 0.29 1748269 Transition Consumer Tropical 19 0.05 0.01 0.00 0.01 0.07 498619 Transition Producer Non-tropical 15 0.24 0.12 0.03 0.07 0.43 240605 Transition Producer Tropical 3 0.01 0.01 12200 World 176 0.18 0.06 0.03 0.09 0.33 5828838

Appendix 5

Stratification by tropical and non-tropical country groups - Resource data

Country groups Population ('000) Forest area Industrial GNP per capita GNP Total net value Proportion of GDP (000 ha) plantation area (US$ million) ('000) (000 ha) 1999

World 5,828,838 3,188,015 101,721 4,886 28,477,711 682,575,380 2.4% Tropical 2,418,612 1,689,107 12,089 959 2,319,348 95,184,750 4.1% Non-Tropical 3,410,226 1,498,908 89,632 7,671 26,158,363 587,390,630 2.2% Tropical consumer 1,755,052 503,464 6,709 731 1,282,694 44,472,658 3.5% Non-Tropical consumer 2,924,318 586,012 58,439 8,151 23,836,320 417,464,599 1.8% Tropical producer 663,560 1,185,643 5,379 1,562 1,036,654 50,712,092 4.9% Non-Tropical producer 485,908 912,896 31,193 4,779 2,322,043 169,926,031 7.3% Tropical resource rich 855,138 1,524,987 6,194 1,557 1,331,481 59,067,137 4.4% Tropical resource trans. 510,819 90,147 1,681 736 375,877 16,565,452 4.4% Tropical resource poor 1,052,655 73,973 4,214 581 611,990 19,552,161 3.2% Non-Tropical resource rich 671,841 1,202,845 41,742 16,327 10,968,859 305,420,609 2.8% Non-Tropical resource trans. 1,988,874 277,658 44,662 5,536 11,010,423 207,621,742 1.9% Non-Tropical resource poor 749,511 18,405 3,227 5,576 4,179,081 74,348,279 1.8%

Appendix 5

Stratification by tropical and non-tropical country groups - Production data

Country groups Number Industrial Tropical log Sawnwood Tropical Wood Tropical Sawnwood Wood pulp Paper and roundwood production ('000 m3rwe) sawnwood based plywood & WBP ('000 paperboard ('000m3) 1998 Production production Panels production Production tonnes) ('000 Production 1998 1998 ('000 1998 1998 Production tonnes) 1998 m3rwe) 1998 Production Production 1998 1998

World 176 1,515,973 134,153 633,752 59,629 230,435 37,387 864,174 158,789 289,813 Tropical 92 253,671 133,665 96,160 56,754 38,837 28,866 134,991 11,614 21,545 Non-Tropical 84 1,262,302 488 537,592 2,875 191,598 8,521 729,183 147,175 268,268 Tropical consumer 54 77,575 27,467 44,223 16,082 4,855 2,128 49,074 2,853 8,563 Non-Tropical consumer 54 716,166 488 307,453 2,745 140,761 8,425 448,209 85,160 207,002 Tropical producer 38 176,096 106,198 51,937 40,672 33,982 26,738 85,917 8,761 12,982 Non-Tropical producer 30 546,136 0 230,139 130 50,837 96 280,974 62,015 61,266 Tropical resource rich 47 194,661 113,781 58,525 45,570 35,549 27,589 94,070 9,237 14,544 Tropical resource trans. 22 29,671 875 10,167 622 1,954 802 12,120 753 3,444 Tropical resource poor 23 29,339 19,009 27,468 10,562 1,334 475 28,801 1,624 3,557 Non-Tropical resource rich 20 902,136 48 374,837 20 99,925 10 474,759 117,204 135,058 Non-Tropical resource trans. 30 331,186 440 150,443 2,556 76,470 8,318 226,911 28,225 114,991 Non-Tropical resource poor 34 28,980 0 12,312 299 15,203 193 27,513 1,746 18,219

Appendix 5

Stratification by tropical and non-tropical country groups - Consumption data

Country groups Number Sawnwood Per Plywood Per capita Pulp Per capita Paper (net) Per Total Per capita Population capita Consumption Consumption Consumption capita Consumption Consumption ('000) (m3rwe /caput) (m3rwe /caput) (m3rwe /caput) (m3rwe /caput) (m3rwe /caput)

World 176 0.18 0.06 0.03 0.09 0.33 5,828,838 Tropical 92 0.06 0.01 0.00 0.02 0.10 2,418,612 Non-tropical 84 0.26 0.10 0.04 0.14 0.49 3,410,226 Tropical consumers 54 0.05 0.01 0.00 0.01 0.07 1,755,052 Non-tropical consumers 54 0.24 0.09 0.03 0.14 0.47 2,924,318 Tropical producers 38 0.10 0.04 0.01 0.04 0.18 663,560 Non-tropical producers 30 0.38 0.11 0.09 0.10 0.58 485,908 Tropical resource rich 47 0.09 0.03 0.01 0.03 0.16 855,138 Tropical resource transition 22 0.05 0.01 0.00 0.01 0.07 510,819 Tropical resource poor 23 0.04 0.00 0.00 0.01 0.06 1,052,655 Non-tropical resource rich 20 0.79 0.23 0.15 0.28 1.30 671,841 Non-tropical resource tansition 30 0.13 0.07 0.02 0.11 0.31 1,988,874 Non-tropical resource poor 34 0.13 0.05 0.01 0.07 0.25 749,511

Appendix 6

Stratification by region - Resource data

Region Number Population ('000) Forest area Forest area Industrial GNP (US$ million) Total net value GNP per Proportion of (000 ha) (000 ha) plantation area 1999 ('000) capita GDP (000 ha)

Africa 48 750,822 532,505 532,505 3,229 536,545 27,496,840 715 5.1% Asia-Pacific 51 3,542,825 561,825 561,825 44,126 7,746,899 153,849,739 2,187 2.0% Europe 38 735,560 669,834 669,834 30,201 9,425,188 257,589,195 12,814 2.7% N America / Caribbean 26 463,548 530,922 530,922 18,767 9,399,230 191,624,195 20,277 2.0% S America 13 336,083 892,929 892,929 5,396 1,369,849 52,015,411 4,076 3.8% World 176 5,828,838 3,188,015 3,188,015 101,721 28,477,711 682,575,380 4,886 2.4%

Appendix 6

Stratification by region - Production data

Region Number Industrial Tropical log Sawnwood Tropical Wood based Tropical Sawnwood Wood pulp Paper and roundwood production ('000 m3rwe) sawnwood Panels ('000 plywood & WBP ('000 tonnes) paperboard ('000m3) 1998 Production production m3rwe) production Production Production ('000 Production 1998 1998 Production 1998 1998 1998 tonnes) 1998 1998 Production 1998

Africa 48 70,368 17,318 16,816 5,090 4,681 1,921 21,496 2,853 2,933 Asia-Pacific 51 284,218 83,908 123,634 32,342 66,492 31,964 190,125 19,826 88,641 Europe 38 411,823 - 174,490 859 70,670 978 245,154 42,856 87,200 N America / Caribbean 26 618,988 172 268,172 80 78,855 2 347,025 83,193 101,109 S America 13 130,576 32,755 50,640 21,258 9,737 2,522 60,374 10,061 9,930 World 176 1,515,973 134,153 633,752 59,629 230,435 37,387 864,174 158,789 289,813

Appendix 6

Stratification by region - Consumption data

Region Number Sawnwood Per Plywood Per Pulp Per capita Paper (net ) Per Total Per capita Population capita capita Consumption capita Consumption ('000) Consumption Consumption (m3rwe /caput) Consumption (m3rwe /caput) (m3rwe /caput) (m3rwe /caput) (m3rwe /caput)

Africa 48 0.07 0.02 0.00 0.01 0.09 750,822 Asia-Pacific 51 0.07 0.03 0.01 0.05 0.15 3,542,825 Europe 38 0.34 0.14 0.06 0.19 0.66 735,560 N America/ Caribbean 26 0.90 0.27 0.16 0.36 1.53 463,548 S America 13 0.23 0.04 0.02 0.06 0.33 336,083 World 176 0.18 0.06 0.03 0.09 0.33 5,828,838

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Country Tropical Tropical Tropical Tropical Tropical Tropical Tropical Tropical Tropical log sawnwood plywood log sawnwood plywood log sawnwood plywood production production production Exports Exports Exports Imports Imports Imports 1998 1998 1998 1998 1998 1998 1998 1998 1998 Cote d'Ivoire 3,146 1,200 710 70 1,000 172 Cameroon 2,980 1,200 276 900 690 95 2 Gabon 2,775 200 200 1,800 120 50 Ghana 1,227 1,800 555 750 118 Congo DR 3,624 160 40 100 40 5 Congo Rep. 1,789 240 124 862 54 C. African Rep 831 238 4 135 216 Liberia 321 9 41 Togo 287 40 25 2 6 2 Egypt 12 10 8 203 Rwanda 225 Gambia 113 3 96 Africa Total 17,3.8 5,090 1,921 4,029 2,818 496 10 14 207 Indonesia 36,195 5,500 7,950 100 543 7,500 50 2 Malaysia 21,735 5,000 4,800 6,000 3,000 3,071 170 400 45 India 18,350 7,000 315 5 25 20 1,500 5 5 China 440 690 2,700 22 15 11 6,210 1,688 2,300 Japan 500 1,875 2 3,850 1,150 4,886 Papua New Guinea 3,239 135 45 2,000 39 Myanmar 1,766 372 13 4/5 33 2 Korea R. 150 426 4 1,050 250 785 Philippines 502 191 360 85 24 502 191 100 Cambodia 1,040 40 195 50 30 93 7 Thailand 36 80 41 95 211 391 Fiji 557 70 15 12 5 Australia 48 10 5 107 62 NewZealand 14 4 Nepal 2 3 3 2 Asia-Pacific Total 83,908 19,740 18,740 8,592 3,877 10,732 13,547 4,200 8,199 France 300 458 40 18 155 820 375 263 Italy 136 136 27 11 350 612 272 Spain 63 168 21 22 320 630 38 Bel-Lux 12 12 20 144 155 75 330 4/4 Netherlands 52 33 4 91 45 90 390 215 UK 9 2 6 7 12 250 513 Portugal 130 96 2 4 3 362 161 14 Germany 44 22 10 11 9 120 132 237 Denmark 90 28 7 91 60 110 Greece 18 53 4 10 80 26 5 Ireland 1/5 33 Norway 30 16 Sweden 5 7 18 Switzerland 5 8 14 Finland 13 11 Austria 2 6 13 Europe Total 858 977 79 359 432 2,332 3, ,51 2, , 71 USA 4 73 62 9 553 2,699 Canada 16 20 142 Tnnidad Tobago. 50 40 2 20 50 Panama 97 16 2 2 2 Honduras 25 24 2 N America I 172 80 2 6 75 78 29 626 2,842 Caribbean Total Brazil 24,500 15,806 1,843 4 628 406 7 87 3 Ecuador 3,500 2,624 203 136 23 36 Peru 1,500 1,200 140 130 23 Colombia 1,299 628 31 21 10 6 13 9 Venezuela 868 402 87 6 17 Bolivia 475 406 24 172 Guyana 431 110 180 71 40 80 Suriname 182 82 14 20 10 3 S America Total 32,755 21,257 2,522 252 1.0,3 555 9 ,05 29 Grand Total ,34,153 47,025 24,161 12,958 8,142 12,293 15,927 8,096 13,448