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Chapter 6
CURRENT AND FUTURE BUSINESS AND MARKET ENVIRONMENT IN EUROPE FOR TROPICAL TIMBERS

6.1 Introduction

Chapter 5 examined those aspects of the marketing of tropical timber products which generally lie within the control of the tropical timber industry, from exporter through to end user. This chapter reviews features of the wider business and market environment which influence sales of tropical timber products but which lie outside the immediate control of industry participants. The following features are examined:

Business environment

Market environment

Economic activity

Exchange rates

Competitiveness of European woodworking industries

Business consolidation and trends in purchasing

European Union monetary union

European Union enlargement

Harmonization of construction codes and product standardization

Tariffs

CITES (Convention on International Trade in Endangered Species of Wild Fauna and Flora) and trade restrictions

Certification

Environmental and lifestyle concerns

There is clearly interaction between these factors but they are considered separately in the following sections.

6.2 Business environment

6.2.1 Economic activity

The general level of economic activity in European countries has a major influence on the state of the tropical timber market. This linkage can be seen in very general terms by reference to the movements of tropical imports by European countries in the 1990s and trends in GDP. From early 1995 to mid-1997 the major economies of Western Europe experienced a substantial fall in economic growth rates and over this period imports of tropical timber products fell below levels of the early 1990s (see Table 2.1 and Figure 2.1). By 1998 most countries had begun to recover from the recession and economic growth in the European Union has ranged between 2.3 percent and 3.1 percent since 1997 compared with a rate of only 1.6 percent in 1996. The substantial and more acute slow down in the Japanese economy from 1997 led to a larger fall in tropical timber imports by Japan compared with Europe and had a major impact on tropical timber exporters in Southeast Asia. The long standing growth of the United States economy and strength of the US dollar has been a contributing factor to the expansion of United States imports of secondary processed tropical wood products.

Recent studies have analysed the relationships between output levels in the main end-user industries (e.g. construction, manufacturing, furniture) and the consumption and imports of wood products. Table 6.1 shows short-run end-use elasticities for imports of sawnwood and plywood for major European importing countries. The figures indicate the sensitivity of imports to changes in the outputs of the main end-user industries. By way of clarification an elasticity value of two indicates that for every 1 percent change in output in the end-user industries the volume of imports will increase by 2 percent. The higher the elasticity value the greater the sensitivity of imports to changes in outputs.

Table 6.1: End use elasticities for imported sawnwood and plywood in the main European importing countries

 

Sawn hardwood (1)

Sawn softwood

Plywood

France

3.09

0.64

2.35

Germany

2.87

0.70

2.41

Italy

2.07

0.57

3.29

Spain

1.83

0.36

0.88

United Kingdom (tropical)

1.18

0.49

N/A

(1) Temperate and tropical hardwood

(Source: UN-ECE/FAO, ETTS V Working Paper, 1995)

Points to note are that:

end use elasticities are relatively high for sawn hardwoods and plywood indicating that import fluctuations are greater than fluctuations in levels of end user activity;

elasticities for imported sawn hardwoods and plywood are substantially larger than for sawn softwood where valves are less than one;

import elasticities are higher than elasticities for domestically produced hardwoods (not shown in table), i.e. imports are more sensitive than domestic production to activity levels in the end use industries.

These general findings from statistical studies were corroborated by contacts with industry who were asked what they considered to be the main drivers of demand for tropical timber products. Virtually all respondents confirmed that the main determinants of demand were activity levels in the construction, joinery and furniture industries. Several respondents also highlighted house sales and consumer spending as important macro-economic drivers of demand for joinery and building products and furniture production, respectively. GDP was also cited as a general, but less accurate, indicator of consumption levels.

In assessing future trends in demand for tropical timber products in Europe, it is clearly important for exporters to monitor current and predicted growth trends in the main end-use sectors in their main export markets.

6.2.2 Exchange rates

These are of major significance to the competitiveness and profitability of tropical exporting countries. Over the period 1997-2000 the most notable features of global exchange rates impacting tropical timber exporters have been the strength of the US dollar, the weakening of the Euro since its launch in January 1999, the relatively strong performance of the pound sterling, the weakness of the yen and the collapse of Southeast Asian currencies in 1997 and 1998 and their subsequent recovery. Figure 6.1 illustrates the relative movements of the US dollar, Euro, yen and pound sterling from 1995 to 2000.

Figure 6.1: Real effective exchange rates, January 1995 - January 2000

(Indices, 1995 = 100)

(Source: IMF)

The expectation at the end of 2000 was that the two-year decline in the Euro/US dollar exchange rate would have stopped and that a strengthening of the rate would occur during 2001.

Exchange rate instability affects tropical timber exporters in different ways. First, it affects the competitiveness of manufacturer customers in importing countries. Manufacturers in a country experiencing rising or high currency rates face intense competition from cheaper imports of manufactured products. This may well cause a contraction of the manufacturing industry and loss of markets for primary products to the tropical exporter. This has been a significant feature of the United Kingdom economy from 1996 to 2000. Second, currency movements influence the pricing of the product by the exporter and the currency of the contract. Third, erratic exchange rate movements adversely affect price stability, which as was mentioned in Section 5.5 was noted to be an important weakness of tropical timber products by European customers.

6.2.3 Competitiveness of European woodworking industries

The competitiveness of European industries is important for exporters of sawnwood, plywood and veneer on two levels. The first is the competitiveness of European production of these products and the second is the competitiveness of the secondary wood processing industries which buy primary tropical timber products.

At the first level, tropical timber exporters are competing directly with European producers. As far as manufacturing costs are concerned, European producers have considerably higher costs than the main tropical exporters. A recent assessment comparing hardwood sawmilling in France with Brazil and Indonesia put costs per cubic metre of output about 25 percent lower in Brazil and 50 percent lower in Indonesia compared with France. The main differences were the lower log costs in Brazil and Indonesia plus much lower labour costs in Indonesia. Similar situations face the European plywood industry. The results of a SWOT analysis (strengths, weaknesses, opportunities and threats concept) of the European Union hardwood sawmilling industry (unpublished European Union report) is presented in Figure 6.2.

Figure 6.2: SWOT analysis of the European Union hardwood sawnwood industry

Strengths

Market proximity

Fashion favours lighter coloured European wood (wood culture - lifestyle products)

Environmentally more friendly relative to tropical woods

Brand awareness. Oaks

Traditional use

Weaknesses

Resource has not been developed. Focus has been on softwoods. Time lag for resource development

Fragmented resource and industry

Wood and labour cost

Narrow range of species suited to demanding end users. At best the resource is second best compared to competing sources. Growing conditions limited (climate and forest structure)

Lack of critical mass

Resource quality (size and mill presentation)

Opportunities

Develop resource (plantations) and industrial base. Resource quality and forest practices

Supply chain from Eastern Europe/Russia. Add value

Develop grading uniformity

Apply technology to overcome materials deficiencies

Stimulate co-ordinated marketing (clustering, North America)

Create virtual consolidation

Focus on niche and image

Re-align market perception of material quality

Certification

Threats

Value adding at log source. Supply chains not managed by the European Union

Plantation species more appropriate to tropical conditions

Fashions change

Hardwood forest sensitivity in the European Union

Substitution (e.g. overlaid wood-based panels)

Competition from Eastern European countries

(Source: unpublished European Union report)

The analysis focuses mainly on the production of temperate hardwoods, rather than tropical hardwoods from imported logs. Three features of the analysis are worth highlighting (shown in bold); the poorer environmental image of tropical hardwoods (seen as a strength for the European industry), threats posed to the industry by value adding at source (including the tropics) and the competitiveness of hardwood plantation timbers from the tropics.

Figure 6.3 shows the SWOT analysis (unpublished European Union report) for hardwood plywood producers in Europe. Here, the weaknesses lie primarily with the raw material resource (limited availability of high quality veneer logs from Europe and dependence on log imports from the tropics) and the cost competitiveness and improving quality of tropical plywoods.

Figure 6.3: SWOT analysis of the European Union hardwood plywood industry

Strengths

Product quality

Very competent manufacturing

Know-how and skill base

Market access and connection

Niche markets. Positioning within niches

Further processing. Overlaying

Weaknesses

Limited growth potential due to resource limitations

Reliance on raw material imports

Opportunities

Move into components manufacture

Harmonize linkages to Russian resource

Threats

Competing nations improve product quality and maintain cost competitiveness

(Source: unpublished European Union report)

At the second level, the competitiveness of the European end user industries (e.g. joinery, furniture) is also relevant to exporters. Figure 6.4 presents a SWOT analysis (unpublished European Union report) of these secondary wood processing industries. In some of these industries, there is a clear trend towards production cost advantages lying outside the European Union, such as in Southeast Asia, Brazil and Eastern European countries (Poland, Baltic States, Czech Republic). This is certainly one of the reasons for the investment by some European wood industries in secondary wood processing in tropical countries (e.g. garden furniture manufacture in Indonesia) and in Eastern Europe. However, the more specialist, higher value joinery and furniture manufacturers remain profitable within the European Union and will provide potential markets for exporters of tropical sawnwood, plywood and veneer. The high European wood and labour costs are seen as weaknesses of these industries and Southeast Asia and South America are seen as threats. The rapid growth in imports of secondary processed wood products, as shown in Section 3.4, support this conclusion.

Figure 6.4: Summary SWOT analysis of the European Union woodworking industries

Strengths

Sustainable and expanding raw material base

Strong technology, know-how and skill base

Proximity and access to one of the world's largest and sophisticated markets

Industry clustering and development of home-base advantages

Weaknesses

Relative lack of wood culture, stifling opportunities to rejuvenate markets

High raw material costs (especially wood)

High labour costs

Low profitability, reducing opportunities to re-invest, support R&D and create critical mass to consolidate and rationalize

Opportunities

Expanding the use of wood:

    - promote wood as a lifestyle product

    - broaden product propositions, create solution packages for end users

Further development of home-base advantages around clustering, synergies between subsectors (e.g. geographical, know-how, technological, supplier, infrastructural)

Capitalizing on the expanding European Union forest resources

Participate in the supply chains from cost competitive regions

Threats

Competition from Eastern Europe, Russia, Southeast Asia and Latin America established and low cost resources

Failure to develop products and solutions, leading to increasing substitution by other materials

Failure to capitalize on environmental initiatives

(Source: unpublished European Union report)

6.2.4 Business consolidation and trends in purchasing

During the 1990s there has been a relentless squeeze on the profitability of European timber importing companies and the major industries buying tropical hardwoods. This has been caused by the recession of the mid-1990s, the downturn in the construction market, growing competition from non-wood materials (e.g. PVC), finished products imported from Southeast Asia and Eastern Europe and falling commodity prices.

One result of these pressures has been business consolidation which has taken several forms including:

It is likely that these trends will continue in the future.

Another response to these pressures has been that companies have sought to reduce their costs of stockholding and work in progress. Just-in-time purchasing by manufacturers has become increasingly common and tropical timber importers/merchants/wholesalers are adjusting their services to meet these requirements. This in turn means that increasing importance is placed by traders on regular and reliable deliveries, consistent product quality and price stability. As these factors become increasingly significant in the purchasing decision, customers are looking for a package of benefits including price and service which enables them to minimize their production costs.

The late 1990s saw rapid growth in the use of the World Wide Web for commercial purposes. A number of Scandinavian and North American producers now offer their products over the Web and contracts can be closed using standard contract forms. European traders are developing similar services offering their end user customers the possibility of buying over the Internet. It seems very likely that this form of trading will increase. Once a system is set up it offers a very flexible and cost-effective way of trading for both sellers and buyers. This will have the effect of reducing transaction costs to both sellers and buyers.

However, successful marketing of tropical timber using the Internet will rely heavily on suppliers being able to meet their commitments in terms of delivery times, product quality and price. It is essential that tropical timber exporters have fully developed supply logistics in place before they plan to sell direct to end users using the Web. End users contemplating direct purchasing will want firm assurance about security of supplies and will not be likely to engage in e-commerce without these guarantees.

6.2.5 European Union monetary union

During the interview programme, hardwood traders and users were asked to assess the impact of monetary union on current and future trade in tropical timber products. Most responded that the effect so far had been minimal but that it had simplified trading between companies within the Euro zone. It appears that at the moment few exporters of tropical timber are pricing their products in Euros and the currencies most commonly being used are the deutsche mark, French franc (from Francophone countries), US dollar and pound sterling.

In the future the Euro could well become the major trading currency within Europe especially if its world value appreciates and when the European Union enlargement occurs. Exporters should plan to be able to quote and offer contracts in Euros.

6.2.6 European Union enlargement

Enlargement of the European Union to include Poland, the Czech Republic, Slovenia and Hungary seems likely to strengthen competition for tropical timbers. These countries, plus longer-term members, Slovakia, former Yugoslavia and Romania, have large forest resources with substantial proportions of these resources being prime hardwoods such as oak, beech and birch. The current harvest in these countries is well within the allowable annual cut and there is potential for substantial increases in production. Low labour and wood costs, increasing Western European investment in these countries and their possible incorporation into the European Union and Euro zone make it likely that these countries will become even greater competitors with tropical timber exporters than they are now. In general, standards of forest management are high and there should be no major difficulties in these forests becoming certified. Indeed Poland already has 2.7 million hectares of FSC-certified forest.

6.2.7 Harmonization of the European Union construction codes and product standardization

The European Union has embarked on a complex and lengthy process of introducing European Union-wide standards for materials used in construction. At the moment most countries are in a period of transition from national to European codes and standards. Currently these developments are impacting primarily on softwood sawnwood and wood-based panels. However the new strength class system for use of structural timber specifically caters for the structural use of hardwoods and allocates six strength classes in the code specifically for hardwoods. Timber has to be graded by an approved system to be usable under this code. In the United Kingdom this is BS 5756 Specification for visual strength grading of hardwood and currently covers the following tropical species: balau, ekki, greenheart, iroko, kapur, kempas, keruing, merbau, opepe and teak. Tropical exporters of sawnwood and plywood targeting the structural timber component market will need to ensure that their species are included in relevant standards. This means that it will be necessary for scientific evaluations to have been carried out to establish the strength parameters under visual strength grading systems.

Compliance with other standards may also be necessary for secondary processed products to be acceptable to manufacturers and/or retailers.

6.2.8 Tariffs

The European Union levies no tariffs on tropical logs and rough sawn timber and for those secondary processed products subject to duty tariffs range from 3 percent to 10 percent depending on whether exporting countries can benefit from the Generalized System of Preferences (GSP) arrangements. Under the provision of the Uruguay Round of tariff reductions, existing tariffs will either disappear or be reduced over the transition period. An ITTO survey of exporters established that in trading with Europe, tariffs were not seen as a significant impediment.

6.3 Market environment

6.3.1 CITES and trade restrictions

Limited, legally-based restrictions on international trade in tropical timber products are imposed through CITES. Its effect on trading in Europe is minimal and the current CITES listing of timber species is generally accepted by European traders. However, proposals to expand the range and origin of species listed in Appendix II of the convention have drawn criticisms from European importers and CITES could become a more significant force in tropical timber trading in the future.

A more significant source of trade restriction has come from campaigns by NGOs against the use of tropical timbers. These started in the 1980s and gathered momentum in the early 1990s. The campaigns were based on the belief that using tropical timbers contributed in a significant way to tropical forest depletion. The campaigns were largely directed at wholesalers and retailers of timber products with the aim of persuading them to replace tropical timbers with alternative wood products. Campaigns were also directed at the public, largely to raise funds, and at specifiers of materials, e.g. architects and developers, to persuade them not to specify tropical timbers. As a result of these campaigns some local/regional government bodies prohibited the use of timber in public buildings in their area. The most widespread bans have been in Germany, the Netherlands, Austria and the United Kingdom. These moves certainly reduced the markets for tropical timber products but how much these campaigns contributed to the fall in consumption in the mid-1990s is uncertain. The realization by NGOs that these campaigns were only having limited success and that they were biased against developing countries stimulated the development of timber certification which was seen by NGOs as a less confrontational, fairer and a market driven means of achieving better forest management.

6.3.2 Certification

Certification is a market-based policy instrument to promote sustainable forest management. Certification firstly involves establishing criteria and indicators of sustainable forest management and then auditing of forests against these standards to determine whether management does comply with the criteria. If the management of a forest is judged to comply, it is awarded a forest management certificate. A second component involves auditing the `chain of custody' of timber or paper products to establish whether they can be traced back to their forests of origin. A product which can unequivocally be traced back to a certified forest is permitted to carry a label indicating it is a `certified' product. By these means certification enables buyers to purchase timber originating from sustainably managed forests. There are several sets of criteria and indicators of forestry standards which have been developed by various agencies. The most widely known, and until recently (December 2000), the largest in terms of certified forest area is the FSC. This scheme is strongly supported by NGOs, particularly the World Wide Fund for Nature (WWF) which took a leading role in promoting it in the early 1990s.

Being a market-based instrument, its success depends on creating a demand for certified timber. This has been done mainly by establishing `buyers groups' whose policy it is to move towards specifying or selling only certified products. These groups have also been promoted by NGOs, principally the WWF, and now exist in virtually all Western European countries but are strongest in the United Kingdom, Germany, the Netherlands, Belgium, Austria and Switzerland. They are weak or non-existent in Mediterranean countries and relatively weak in France. There are no definitive figures on the volumes of timber products actually being sold as certified products in Europe. Rametsteiner estimates the volume in mid-1999 to be as small as 600 000 m3. At the time of writing (December 2000) the volume is almost certainly larger than this but compared with Europe's wood production and consumption the share is still extremely small.

The potential demand for certified products as measured by the timber (and paper) consumption of companies who are members of buyers' groups is very much larger. The United Kingdom 95+ buyers' group claims to hold a 20 percent share of the United Kingdom market for forest products but the percentage of products they actually sell or use is substantially below their full capacity which would amount to about 10 million m3 roundwood equivalent.

Up to mid-2000, the main sources of certified timber products were from FSC-certified forests. As at December 2000, 20.7 million hectares of forests had received FSC certification with 69 percent of these forests being in Europe. European countries with the largest areas of FSC-certified forests are Sweden (10 million hectares), Poland (2.7 million hectares) and the United Kingdom (958 000 hectares).

The area of FSC-certified forests in South America, Asia and Africa totalled 2.8 million hectares and most of this area is plantation forest, largely tropical and subtropical coniferous species.

The supply position in Europe has changed dramatically during 2000. In 1998 an alternative certification system, the Pan European Forest Certification (PEFC) system, was established mainly to serve the needs of small private forest owners in Nordic and Central Europe who were hostile to the FSC system. This system accredits individual member country certification systems, and forest management certification is then based on these country systems. During 2000 nearly all Finland's privately-owned forests, 21.9 million hectares, were certified under this system and together with 5.6 million hectares in Norway and 3 million hectares in Germany the total PEFC-certified area is 32.4 million hectares (December 2000). Large areas in Austria and Germany are likely to boost this figure in 2001. This dramatically increases the potential supply of certified timber in Europe, though overwhelmingly of softwoods. Supply potential probably now exceeds the demand potential of buyers' groups.

A crucial question is whether the buyers' group will accept the PEFC system and sell PEFC products alongside FSC-certified products. In other words, will there be mutual recognition of the two standards by the market? Given the similarity between the systems in terms of the core standards of good forest management, mutual recognition appears likely.

One further aspect of the market needs emphasis. The general public has a low level of awareness of timber certification in terms of its meaning and its purpose. Consumers are therefore very unlikely to create the demand for certified products. In practice, demand will only increase if industrial buyers believe they will gain market advantage by offering certified timber and if sales actually confirm this belief.

The impact of this potential increase in supply on the demand for certified tropical timber products in Europe is unclear. At one extreme mutual recognition of standards and increased supplies of certified timber could result in most European timber supplies being certified more or less automatically. This could induce timber specifiers to stipulate certified timber as one of their requirements (alongside for instance species, grade, strength, class, etc). This in turn could make it difficult for non-certified timber to compete in the market and uncertified tropical timber might then lose markets. However, if there was mutual recognition by buyers of tropical certification systems (e.g. Malaysian, Indonesian) then certified tropical timber products should compete on even terms in this respect with temperate timbers.

The other extreme is that companies in buyers groups fail to achieve any market advantage from certification and abandon specifying certified timber. If this happened, uncertified tropical timber might be at no disadvantage compared with temperate timber.

Three further aspects require mention. Firstly, surveys have shown there is a lower awareness of certification and of the link between certification and good forest management in France and the Mediterranean countries.

Secondly, surveys in the European forest/wood industry chain indicate that buyers do not expect to pay a price premium for certified timber. Furthermore, in the large market sectors there appears to be no firm evidence that certified timber is being sold at a price premium. Indeed if supplies increase rapidly as a result of the PEFC certification of Finnish and other countries' forests, it seems reasonable to assume that any price premiums which are currently paid will be eroded or disappear completely.

Thirdly, there is evidence that there are niche markets where certified timber is required and where price premiums may be paid. Craftsmen making furniture and joinery for specialist, high-value markets are an example and these may well be users of tropical timbers. Another example would be joinery manufacturers supplying windows for a local authority building for which certified timbers had been specified.

The main conclusions to be drawn from this review of certification for tropical timber exporters are that:

6.3.3 Environmental and lifestyle concerns

There is a growing trend among European consumers to favour `green' products. This is particularly strong in Germany, but is important in most other northern European countries. This trend reveals itself in different ways.

Tropical timber products will benefit from the generally favourable attitude towards wood but may offer some specific advantages over temperate wood viz.

Aesthetic properties of tropical timbers, e.g. wide range of colours and other decorative features.

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