Processing industry development

In the same way that economic rent can be calculated by subtracting production costs from product price, a sawmill's ability to pay for delivered roundwood be calculated by subtracting its processing costs from the prices of the sawnwood it sells. A little information was collected about sawmill production costs and sawnwood prices in Suriname (Whiteman 1999b) and this has been used to calculate some rough estimates of ability to pay for delivered roundwood under a range of different circumstances (see Table 25).

The above table presents three different situations. The first is where a sawmill produces a high proportion of 1st grade sawnwood for the domestic market, but has relatively high production costs. The second is where a sawmill produces a high proportion of 1st grade sawnwood, but has lower production costs. The third is where a sawmill produces a generally lower value product mix and has relatively low production costs. The quality of the sawmill's output is also reflected in its product recovery rate, with mills producing higher value products generally achieving a lower product recovery rates than those producing lower quality sawnwood. The information shown in Table 25 came from discussions with sawmill owners (except the capital cost estimates which were derived from other sources) and these three situations are believed to be representative of most of the sawmilling industry in Suriname.

Working down the table, by subtracting the total production cost from the average selling price of sawnwood, it is possible to estimate each mill's ability to pay for wood inputs, per cubic metre of sawnwood produced. This then has to be divided by the product recovery rate to obtain each mill's ability to pay for wood inputs per cubic metre of roundwood. As the table shows, this varies from Sf 47,250/m³ or US$ 35/m³ in the case of high product value and production costs, to Sf 64,125/m³ or US$ 48/m³ in the case where the average product price is high but production costs are low. These figures are all relatively low compared with domestic log prices typically achieved in many other tropical countries. The results of this analysis have two interesting implications.

Rent capture in the sawmilling sector. All three of the cases examined above seem to indicate that sawmillers could, under existing circumstances, already pay more for their roundwood inputs than they currently have to pay. In other words, there is evidence that some more economic rent from roundwood production is currently being captured in the sawmilling sector in the form of excess profits there. For example, an average delivered roundwood price of Sf 45,000/m³ was used to calculate economic rent earlier. Based on the above figures, it would seem that the economic rent from roundwood production could be from Sf 2,250/m³ to Sf 19,125/m³ higher than the figures calculated previously. This situation is not uncommon in countries with high export tariffs on roundwood which, in effect, tend to depress local roundwood prices and encourage the development of a large processing sector that is heavily dependent on this supply of cheap (i.e. underpriced) roundwood.

Product recovery rate. The other implication of these results concerns the scope for improving sawmills' ability to pay for roundwood through increases in the product recovery rate. Product recovery rates of between 25% and 33% are believed to be typically achieved across much of the forest processing sector in Suriname. However, in comparison with other tropical countries, these product recovery rates would be considered very low. Recovery rates of around 40% and sometimes up to 50% and above are achieved in some tropical countries with significant wood processing industries.

The effect of improved product recovery rates on sawmillers’ ability to pay for roundwood inputs is shown in Figure 18. As the figure shows, a one percentage point increase in product recovery rate increases the average sawmillers ability to pay for roundwood inputs by Sf 2,000/m³ to Sf 2,500/m³, depending on the sawmillers production costs and product prices. Consequently, even a modest increase in product recovery rates of only 5% could increase ability to pay for roundwood and, thus, the economic rent from roundwood production by Sf 10,000/m³. It is also worth noting that, at recovery rates closer to what would be typically expected in other tropical countries (say 45% to 50%), the ability to pay for roundwood would also be closer to what sawmillers typically pay in these countries (US$ 70/m³ to US$ 90/m³). In other words, pushing-up forest charges may just simply result in higher delivered roundwood prices, which would have the beneficial effect of forcing sawmillers to improve recovery rates.

To summarise, the possibility for increasing economic rent by pushing-up delivered roundwood prices and stimulating better product recovery rates seems to be in the order of Sf 15,000/m³ to Sf 30,000/m³. It should be noted however, that the scope for pursuing such changes is somewhat limited by the current overcapacity in the sawmilling sector in Suriname. For example, part of the reason why product recovery rates are so low in Suriname might be simply that sawmillers do not have a market for the additional products that such improved recovery rates would result in. Therefore, such changes would either result in a downsizing of the existing forest processing industry or have to be accompanied by significantly improved market conditions. These issues will be considered further in the last section of this report.

Development of markets for roundwood and forest products

The final way in which economic rent could be increased (through higher delivered roundwood prices), would be to improve the marketing of roundwood and forest products. As noted above, there is considerable evidence that the small domestic market for forest products in Suriname is saturated, so the most scope for improving markets would be from the development of export markets. Some information about the current timber market in Suriname and the scope for market development is given below.

Current status of domestic and export markets. The current status of the major markets for forest products in Suriname is shown in Table 26. As the table shows, officially recorded roundwood production was about 140,000 m³ in 1998, a slight fall from the previous two years (180,000 m³ and 200,000 m³). About 15% of officially recorded roundwood production is exported and the majority of the remainder is processed into sawnwood. Based on the official roundwood production figures and commonly accepted conversion factors, sawnwood production might be around 35,560 m³, of which about 16% is currently exported. Also, based on these figures, current sawnwood consumption would seem to be at a similar level to other countries in the region (see Table 27).

However, there is anecdotal evidence to suggest that sawnwood production could be much higher than the figures presented above, due to unofficial roundwood production used in sawmills and chainsaw logging operations. A more realistic level of output of say, around 55,000 m³, would suggest that current domestic consumption is somewhat higher than in neighbouring countries. The main implication of this is that the domestic market is probably saturated, with little prospect of price improvements or potential for expansion in quantity terms.

The problem of domestic market saturation is exacerbated by the fact that Suriname has a wood processing industry capable of producing at least 70,000 m³ of sawnwood (with one-shift working and a 25% recovery rate) and potentially up to 225,000 m³ of sawnwood (with two-shift working and a 40% recovery rate). In other words, low domestic prices and the absence of almost any scope for increased domestic consumption are a result of too many producers chasing too small a market. Therefore, the only reasonable prospect for improving profitability, prices and, ultimately, economic rent, will come form the development of export markets.

Export market potential. Suriname appears to have two main export market potentials. Firstly, there is already some interest in Suriname as a source of industrial roundwood supplies for Asia. This market can be expected to grow as Asia recovers from current economic difficulties experienced in the region. Already, the prices paid for export quality roundwood are significantly higher than the prices paid by domestic producers even with the very unfavourable foreign exchange controls currently in place and the sizeable export levy. Roundwood exports are always a source of some controversy because of the strongly held belief that domestic wood processing is to be preferred because of its potential to create employment and income in the domestic economy. However, in terms of maximising value-added and foreign exchange earnings, a strategy to increase roundwood exports, reflecting Surinam's natural advantage in this area, may be an appropriate strategy to pursue.

The second potential area for expansion is the sawmilling industry. As noted above, Suriname already has a substantial sawmilling infrastructure. The industry is often criticised because much of its machinery and equipment is old. However, this should not necessarily be a major barrier to export expansion. There are many examples around the world of countries with old and outdated equipment that still manage to produce strong export performance. Indeed, Suriname was one once such a country. Rather, the main deficiency in the sawmilling sector in Suriname at the moment seems to be in technological, management and marketing skills.

In terms of potential markets, the Caribbean is obviously one region where Suriname could have an impact. The main importing countries and territories in the Caribbean are shown in Table 28. As the table shows, the region has the capacity to absorb over 900,000 m³ of sawnwood imports, of which Suriname currently has a share of about 2%. Prices are not significantly higher than domestic market prices in Suriname, but the potential for expansion of sales (and the consequent improvements in processing costs this might bring with better capital utilisation in sawmills) is something worth considering.

Perhaps the best way to demonstrate what could be done is to contrast the situation in Suriname with neighbouring Guyana. Guyana is a similar size to Suriname and has a similar forest resource and processing industry. However, in 1998, Guyana exported three times the volume of roundwood exported from Suriname (60,580 m³ as opposed to 20,747 m³) and nearly four times the volume of sawnwood (21,200 m³ as opposed to 5,560 m³). Since abandoning an export tariff calculated as a percentage of export prices (with posted minimum prices), export prices for Guyana have also increased. Roundwood export prices varied from US$ 66/m³ - US$ 124/m³ for Mora to US$ 65/m³ - US$ 184/m³ for Greenheart in 1998 and, for sawnwood, from US$ 318/m³ - US$ 369/m³ for Mora to US$ 332/m³ - US$ 438/m³ for Greenheart (Guyana Forestry Commission, 1999).

The prices quoted above were somewhat lower than prices obtained in Guyana in 1997. To a certain extent, the depressed market that Guyana experienced during 1998 mirrored that experienced in Suriname. However, in as much as Guyana appears to have developed more significant export markets than Suriname and earns more revenue from forest charges, it is an example worth following.