Financial meltdown and the future of the forest products industry
Some observations on the challenges and opportunities presented by the financial crisis – an industry viewpoint.
The perfect storm seems to be upon the world. The forest industries are not sheltered from it; they are only too aware of it. But the current recession creates opportunities as well as threats for the forest product industries.
In 2008, the World Bank forecasted that by 2030, global gross domestic product (GDP) could more than double to US$73 trillion, largely as a result of economic growth in developing nations. Such economic growth would have translated into extra demand for forest products. But given the current situation, that growth will most probably be delayed.
The effects are already evident. From October 2008 to March 2009, demand for wood and paper products declined profoundly. New housing starts and home repairs have dropped. Paper markets are suffering from a drop in advertising and the reduced production of many newspapers and magazines. With trade slowed, less packaging is needed.
Curtailment in the forest products sector is evident around the world, especially in rural areas, where the sector is often one of the only employers.
Cutbacks in manufacturing of all kinds of products across all sectors could mean the return of workers to rural areas. In some parts of the world the result could be increased attention to sustainable forest management, particularly by small forest owners. In other parts of the world, however, reverse migration could result in increased smallholder agriculture on forest land.
A time for change
Temporary unemployment is an occasion for governments to work with industry to invest in training and education to prepare the workforce for the future. The industry needs skilled people and knowledgeable employees.
One forecast that is not likely to prove wrong is the projected increase of the Earth’s population by 1 billion every 15 years. Population growth has typically been one of the primary drivers of demand for forest products. Although that link is likely to be less linear than it has been in the past, with economic recovery a rapid expansion of demand for forest products can be expected in the future, particularly for tissue, packaging and solid wood.
Challenge of competition for land
Competition between food demand and energy demand puts increasing pressure on land use. In many regions forest land is also suitable for agriculture or energy crops. In New Zealand, for example, expansion of agriculture has resulted in a net decrease in forest cover over the past three years, reversing the previously established trend of steady increase in forest land.
Competition for land may provide strong incentives to increase productivity on the existing land base. The comparative advantage in wood production is already shifting back to regions where land is abundant or relatively unattractive for other uses, such as large South American countries (e.g. Chile) and northern boreal forest regions.
Opportunities in bioenergy
This is a huge opportunity for the forest products sector, provided there is enough access to raw material for different uses – and provided the sector is able to drive the process and not leave it to the energy or chemical companies. The sector is in a good position to take the lead, having knowledge of the material, the infrastructure to move around large volumes of wood, a tradition of sourcing from a multitude of small suppliers and an existing use of biomass-based energy as some of the sector’s major assets.
Climate change concerns
It is imperative that the successor to the Kyoto Protocol be transparent and equitable at the global level to ensure that companies operating in each of the major trading areas are subject to the same rules.
There is a risk that the current economic situation could slow down the pace of efforts to regulate climate change. Public priority has shifted to the economy, and short-term risks to economic well-being and employment may not be tolerated. A global climate change agreement rests on financing, as does reversing deforestation and forest degradation. Under today’s conditions, the billions of dollars needed for these are competing with national recovery plans.
Growing public consciousness of climate change could have a positive impact on demand for forest products, as their low lifetime carbon footprint relative to alternative materials becomes more widely recognized. Public recognition is needed of the fact that harvesting trees does not add to CO2 emissions – that the carbon remains stored in harvested wood products. Increasingly, sustainable forest management certification is seen by buyers as a minimum requirement to ensure that products have been produced sustainably. Forest land may become more valued for its environmental services such as biodiversity and carbon storage, and as a source of renewable fuel.
New impetus for sustainability
Investments, environmental values, public behaviour, new business opportunities – all these will help society survive today’s perfect storm. The forest industries are in a better position than most. The sector already focuses on the sustainability dimension and on enabling climate change mitigation. The economics of sustainability as a key asset of the sector must be proved at a large scale as reliance on renewable energy increases and carbon neutrality becomes more imperative.
It is likely that the global recession will alter the structure of the global forest products industry and bring about different business models. Now is the time to prepare for these changes and to undertake the reforms that are needed, at both the business and policy levels.