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4. INDUSTRY STRUCTURE AND TRADE


4.1 Current Industry Structure
4.2 Current Trade Flows
4.3 Factors Influencing the Pattern of Industrial Development and Trade


4.1 Current Industry Structure


4.1.1 Overview
4.1.2 Logging Sector
4.1.3 Sawmilling Sector
4.1.4 Veneer Sector
4.1.5 Plywood Sector


4.1.1 Overview

Over the past decade, the manufacture of tropical timber products has shifted from the consumer countries (especially the Republic of Korea and Japan) to the major producers (Malaysia and Indonesia), due to increasing production costs in the consumer countries, improved manufacturing efficiency and product quality in the producer countries, and restrictions on the trade of tropical logs.

Table 6 describes the structure of the forest industry for the major producer countries in 1995. Malaysia and Indonesia have the largest forest sectors by far; together, these two countries account for 94% of the installed capacity of sawmills and 98% of the installed capacity for plywood production.

Table 6 - Forest industry structure in ITTO producer countries in 1995

a Enterprise and installed capacity figures for Indonesia are 1994 figures.

b Number of enterprises, installed capacity, and employees of veneer mills include those of plywood mills.

c Installed capacities of sawmills and plywood mills have been adjusted from ITTO figures.

d Number of employees of logging include those of sawmills.

Source: ITTO 1996b

4.1.2 Logging Sector

The major tropical log producers of the study region are Malaysia, Indonesia, and Papua New Guinea, contributing 92% of the log supply of the region. The remaining tropical log production is from Myanmar, Vietnam, the Philippines, Cambodia, Laos, and the Solomon Islands.

Indonesia

The logging sector of Indonesia features a mixture of government and private ownership and management. The Ministry of Forests administers all forest land, owns several mills and approximately 1 million ha of plantations (mainly teak), and operates logging concessions. These concessions are licences granted to organizations specifying a geographic area on which harvesting will occur, the rate of harvesting, and other management obligations. In 1979, 579 concessions in Indonesia covered 60.4 million ha, with roughly two-thirds of their AAC controlled by 10 private Indonesian organizations (ITTO 1993).

Contractors most often execute Indonesian concession logging. Separate contractors are often used for logging and log transport, and are paid on a unit-volume basis.

Malaysia

As in Indonesia, forest harvesting in Malaysia is controlled by awarding concessions.

In Peninsular Malaysia, a few large-area, long-term agreements have been issued to partially or wholly state-owned integrated operations; more recent licences are small and short term.

Approximately 3 million ha of the total land base of Sabah (7.3 million ha) is controlled and supervised by the Sabah Forestry Department. Most of these lands are allocated to concessions with a variety of durations and ownerships. The remainder is managed on long-term agreements with several state agencies and two corporations which are partially or wholly state-owned.

Sarawak has roughly 8.8 million ha in forest licences, with about two-thirds of the area managed under long-term (5-25 year) agreements. At present, approximately 12 operators hold concessions.

Papua New Guinea

The forest land base of Papua New Guinea is almost entirely (98%) owned under customary law by local clans. Subject to the agreement of the clan, the state establishes forest management agreements with logging enterprises. These agreements specify conditions of access, harvesting, and management, as well as monetary benefits to the owners. The objective of the forest management agreements is to bring large contiguous forest areas under long-term management. The logging sector is comprised of 40 foreign-owned companies.

Minor producers

The logging and management of Myanmar's forests are the responsibility of a single state enterprise. In the early 1990s, logging concessions in the Philippines were reduced substantially by cancelling licences, due to overcutting; by late 1992, only 42 concessions operated in the country. Cambodia has reported that an Indonesian group has been awarded a 50-year concession covering 1.43 million ha. Otherwise, the institutional arrangements of the logging sectors of the remaining minor producers of the region (Vietnam, Cambodia, Laos, and the Solomon Islands) are unknown to this study.

Producing consumers

Two ITTO consuming countries, Australia and China, produce significant volumes of tropical logs (700,000 m3 in 1995); this supply is consumed almost entirely domestically.

4.1.3 Sawmilling Sector

Total tropical sawnwood production for the study area has trended down since 1992, reflecting the move to further processing in producer countries and log shortages in consumer countries. Figure 1 shows the production of tropical sawnwood in 1993-95 for the ITTO member countries of the region. The major producers (Malaysia, Indonesia, and Japan) account for 88% of the region's tropical sawnwood.

Malaysia

Malaysia is the largest producer of sawnwood in the Asia-Pacific region and the world, but its production is falling due to the diversion of scarce logs to veneer and plywood mills. Peninsular Malaysia's decision to phase out sawnwood exports (in favour of more manufacturing) by 2000 will result in further decreases in production. Peninsular Malaysia has an extensive kiln drying and secondary processing industry which manufactures mouldings and furniture parts.

Indonesia

Indonesia ranks second in the region in the production of tropical sawnwood and is reducing production for reasons similar to those of Malaysia - scarce sawlogs are being diverted to plywood mills. Few sawmills have processing equipment suitable for small-diameter trees, but increasing scarcity of larger timber has heightened interest in the processing of small wood.

Japan

Tropical hardwoods are a minor proportion of Japan's sawnwood industry, and have declined steadily for two decades due mainly to the substitution of softwood lumber (largely from North America). Restrictions on the export of tropical logs has accelerated this trend.

Other minor producers

The Republic of Korea, China, Taiwan Province of China, Thailand, and the Philippines produce the remaining 12% of the region's sawnwood for domestic consumption.

Figure 1 - Production of sawnwood, 1993-95

4.1.4 Veneer Sector

Veneer is used for manufacturing plywood and laminated veneer lumber. Most manufacturers use the veneer on site to make plywood; the volumes traded or used for laminated veneer lumber are small relative to the volume of traded plywood. However, plywood producers may purchase veneer to obtain small runs of species that would be uneconomic to peel in their facilities or to obtain a higher quality veneer for appearance surfaces.

Malaysia

Malaysia manufactures significant volumes of veneer for export or secondary manufacturing; it is the dominant producer of veneer in the study region with 78% of the total production in 1995.

Japan

Japan's share of production was 7% in 1995, with production dropping steadily over the decade, due to declining log availability.

Taiwan Province of China, Thailand, and the Philippines are also significant producers of veneer, although production in Thailand and the Philippines is only 20% and 24%, respectively, of their 1992 levels, again due to declining log availability.

4.1.5 Plywood Sector

The production of tropical plywood has remained relatively constant since 1992, with reductions in Japan (4% of regional production) and Indonesia (5% of regional production) being offset by increases in Malaysia (11% of regional production).

Indonesia

Indonesia is the lead producer of plywood in the region but has reduced production since 1993 due to scarcity of logs.

Malaysia

Malaysia has increased plywood production throughout the decade and exceeded Japan's production for the first time in 1995. Logs previously exported as sawnwood and veneer from Sabah and Sarawak have been diverted to plywood mills.

Japan

Japan's tropical plywood production has nearly halved since 1991, reflecting the declining availability of tropical veneer logs. Japanese plywood manufacturers are steadily increasing the proportion of softwoods used in plywood production, and implementing technological innovations to re-use concrete form ply (the largest use of tropical hardwood plywood in Japan). These substitutions in Japan and other consuming countries will ensure the continued decline in plywood manufacture.

Korea

The Republic of Korea produced about 4% of the total tropical plywood of the region in 1995. Production levels have dropped by 29% since 1991 (the year of highest production) due to restrictions on tropical log exports from Malaysia.

Figure 2 - Production of plywood, 1993-95

4.2 Current Trade Flows


4.2.1 Logs
4.2.2 Sawnwood
4.2.3 Veneer
4.2.4 Plywood


The dominant historical trade pattern of the region was the flow of hardwood logs from the southern producing countries to the northern consuming countries, primarily Japan, Taiwan Province of China, and the Republic of Korea. The current pattern of log trade has been shaped by restrictions on log flows from producer countries to consumer countries, where manufacturing has until recently been concentrated. The study region is rapidly replacing log exports with the export of processed products.

Figures 3,4, and 5 show the relative volumes of imports and exports of logs, sawnwood, and plywood, respectively, for each country in the Asia-Pacific region in 1995. Impediments to trade in the region are listed in Table 7. 2

2 Tariffs and trade barriers as reported via the ITTO (1996b) questionnaire Forecasting and Statistical Enquiry Table 7 may be incomplete due to non-reporting.

4.2.1 Logs

Indonesia

Indonesia replaced log export bans with levies in 1993, but their magnitude (from $500/m3 to $4500/m3) continues to ensure that few logs are legally exported. Nonetheless, some countries reported substantial imports of Indonesian logs in 1994 and 1995 (ITTO 1996b).

As of 1996, Indonesia is allowing the log imports as a short-term means of coping with a shortage of raw materials for the wood-based industries. To prevent illegal trading, imported logs must not come from neighbouring countries such as Papua New Guinea or Malaysia.

Malaysia

Log exports are banned from Peninsular Malaysia. In 1995, Sarawak restricted log exports to 60% of its harvest; this is scheduled to drop to 50% by 2000. Sabah plans to allow up to 2 million m3 (one-third of its harvest) for export after a temporary three-year ban designed to ensure sufficient raw material for local industries.

Peninsular Malaysia imported logs from Indonesia and Papua New Guinea in 1995.

Papua New Guinea

Papua New Guinea is the second largest exporter of logs to the region, after Malaysia, and obtains significant revenue from an average 13% FOB price export tax. Current government policy is to reduce log exports by 10% per year from 1995 to 2000, after which a ban will be imposed. However, a recent consultant's report (PNG Forest Authority 1996) casts doubt on the feasibility of this policy, as the domestic manufacturing industry is considered too inefficient to compete in the region's export markets.

For 1995, Papua New Guinea reports a 30% import tariff on logs.

Japan

Japan imports the largest volume of logs in the Asia-Pacific region, but this volume decreased by 13% in 1995 and will decrease substantially over the next few years as exportable logs become scarce. In response to this scarcity in the study region, imports from Africa increased until 1994, but are now dropping as African countries have tightened their export controls.

China and Taiwan Province of China

China and Taiwan Province of China are the second largest importers of tropical logs in the study region. China reports a 3% import tax and 17% value-added tax (VAT) on logs.

Other major importers

The Republic of Korea is also a major consumer of logs, followed in order of volume by Thailand and the Philippines. Korea imposes a 2% import tariff.

Rest of the world

Imports into the region from the rest of the world (principally Africa) are substantial, while most logs exported from the region are destined for India.

Figure 3 - Tropical log trade, 1995

Table 7 - Tropical timber trade barriers of ITTO countries of the study region, 1995

Countries

Logs

Sawnwood

Veneer

Plywood

Exports

Indonesia

$500-4500/m3

$250-2400/m3



Malaysia





Pen. Malaysia

ban

ban by 2000



Sabah

max. 2 million m3




Sarawak

max. 60% to 1999




Philippines





Papua New Guinea

13% (ban in 2000)




Imports

Indonesia

partial ban




Malaysia



25% (face ven. free)

45%

Papua New Guinea

30%

30%

175%

175%

China

3% (17% VAT)

6% (17% VAT)

20% (17% VAT)

20% (17% VAT)

Japan



15% (5% in 1999)

17-20% (8.5-10% in 1999)

Republic of Korea

2%

5%

5%

8%

VAT value-added tax;
Source: ITTO 1996b

4.2.2 Sawnwood

Malaysia

Although Malaysia currently dominates the trade in tropical sawnwood, exports fell in 1995 and 1996 due to diversion of log supply to plywood production and other secondary processing. 3 Sawnwood export is approximately evenly distributed between Peninsular Malaysia, Sabah, and Sarawak. Malaysia's major sawnwood customers in 1994-95 were all in Asia (Thailand, Japan, Taiwan Province of China, and the Republic of Korea).

3 Revenue from manufacturing mouldings is approximately double (per m3) the revenue derived from lumber (Western Canadian Wood Machinery and Services Export Association 1996).

In 1995, Malaysia also reported importing 0.4 million m3 of sawnwood, primarily from Indonesia and the Philippines.

Peninsular Malaysia intends to ban sawnwood exports by 2000, in response to anticipated reductions in timber supplies due to stricter management standards, and to facilitate further value-added processing within the country.

Indonesia

Indonesia is currently the second largest exporter of sawnwood in the study region and levies substantial export charges, ranging from $250/m3 to $2400/m3.

Thailand

Thailand imports the largest volume of sawnwood in the study region, driven by the country's rapidly expanding economy and large furniture and secondary processing industries. Thailand's sawnwood imports are primarily from Malaysia.

Other major importers

Japan, China, Taiwan Province of China, and the Republic of Korea are the other major importers of softwood in the study region. China collects a 6% import tariff and a 17% VAT on imported sawnwood, and Korea imposes a 5% import tariff.

Rest of the world

Imports of sawnwood to the region (primarily to Japan and the Philippines) totalled 1.1 million m3 in 1995, and exports from the region were 1.6 million m3, primarily to countries of the European Union.

Figure 4 - Tropical sawnwood trade, 1995

4.2.3 Veneer

The volume of veneer trade is quite small compared to plywood.

Malaysia

Malaysia is the dominant exporter of veneer, shipping 91% of the volume of the study region. Malaysian veneer exports are primarily directed to China, Taiwan Province of China, and Japan.

Other exporters

The Philippines, Indonesia, and Taiwan Province of China contribute the remaining export volume.

China

China is the largest importer of veneer, primarily to sustain its own plywood industry. Veneer imports face a 20% import tax and a 17% VAT.

Other importers

Taiwan Province of China and the Republic of Korea are also significant importers of veneer. Japan charges a 5% tariff on veneer imports.

4.2.4 Plywood

Indonesia

Indonesia is the major exporter of plywood in the region, accounting for 70% of the region's exports in 1995. Indonesia exports plywood primarily to Japan, China, and the Republic of Korea, although the proportion of its exports shipped to these countries has dropped since 1992, due to increased exports to the United States and the European Union.

Malaysia

Malaysia is Indonesia's major competitor in the tropical plywood trade, and accounted for 29% of the plywood exports of the study region in 1995. Sabah and Sarawak exported 42% and 46%, respectively, of Malaysia's total plywood exports. Malaysia exports plywood chiefly to Japan, China, Taiwan Province of China, Singapore, and Hong Kong.

Malaysia discourages the import of plywood with a 45 % import tariff. Veneer also faces a 25 % tariff, although face veneers are imported free of tariff.

Figure 5 - Tropical plywood trade, 1995

Japan

Japan is the largest importer of tropical plywood in the study region and is replacing domestic plywood production with imported plywood (tropical and non-tropical) and substitutes such as OSB and MDF. In 1995, plywood faced an import tariff of 17-20%.

Other importers

China, Taiwan Province of China, and the Republic of Korea are all substantial importers of tropical plywood. China imposes a 20% import tariff and a 17% VAT, while the Republic of Korea levies an 8% import tax.

4.3 Factors Influencing the Pattern of Industrial Development and Trade


4.3.1 Natural Forest Supply Restrictions
4.3.2 Barriers and Incentives
4.3.3 Demand Growth


The industry structure and trade from 1995 to 2010 will be shaped largely by restrictions in producer countries on the supply and export of logs from the natural forests, growth in domestic demand for forest products, and the expansion of wood processing and secondary manufacturing. Consuming countries will face a scarcity of logs for processing and the increasing availability and acceptance of substitute products.

4.3.1 Natural Forest Supply Restrictions

Indonesia and Malaysia

Indonesia and Malaysia, the dominant producers of tropical hardwood logs from the natural forests of the region, are currently harvesting at, or above, their sustained yield limit. Timber supply from the clearing of the conversion forests of Indonesia and Sarawak is scheduled to decline to about one-third of its current level by 2010. Additional timber will only be harvested at steeply higher cost from areas currently deemed inaccessible for economic or environmental reasons or by recovering and utilizing less desirable fibre.

Papua New Guinea

Papua New Guinea alone has substantial potential for expanding its harvest. However, the traditional clan-based ownership of the forest land base, which contributes to uncertainty about access to timber, will slow resource development. High labour and other operating costs, plus an inefficient processing industry, also discourage log production.

Myanmar and Indochina

While Myanmar, Cambodia, Laos, and Vietnam have considerable potential for increasing log supply from their natural forests, all suffer from a lack of infrastructure, a lack of institutional capacity to develop this infrastructure, and political and economic environments that discourage investment.

4.3.2 Barriers and Incentives

Although normal market forces are inducing the relocation of processing capacity from consumer countries to producer countries, this shift has been modified by trade barriers and investment incentives.

Indonesia

Indonesia discourages the export of logs by imposing high tariffs, to ensure a raw material supply for its sawnwood and plywood industries. The export of sawnwood is also discouraged with substantial tariffs, to encourage further processing and to meet domestic demand for lumber.

The Indonesian plywood manufacturers are organized into the Indonesian Wood Panel Association (APKINDO), which monitors quality, influences pricing, and controls exports through quotas. While this organization has contributed greatly to the present dominance of Indonesia in tropical plywood markets, it has recently being cited as a significant source of marketing overhead in the highly competitive plywood market.

MDF and OSB are not restricted under quotas set out by APKINDO, and with the prospect of the future timber supply yielding smaller logs, the manufacture and export of these plywood substitutes appear attractive.

Indonesia no longer has specific tax incentives encouraging investment in the sawmilling or plywood industries, due to log supply limitations. However, ITTO (1996b) reports that Indonesia was considering the use of new fiscal, monetary, and administrative policies for selected labour-intensive industries, including furniture manufacturing.

Malaysia

Peninsular Malaysia bans the export of logs, while Sabah and Sarawak restrict exports and plan progressively tighter restrictions through 2010.

Sawnwood exports from Peninsular Malaysia are scheduled to be banned by 2000 in favour of further processing, primarily wood mouldings and furniture. While the import of veneer and plywood is discouraged by tariff, the import of face veneer has no trade barriers.

Malaysia presents an attractive investment environment and actively promotes foreign-domestic joint ventures. The level of foreign equity in a joint venture is tied to the proportion of the output that is exported. The domestic equity is subject to policies designed to include Bumiputeras (indigenous Malay peoples).

Papua New Guinea

Papua New Guinea is encouraging domestic processing by requiring that 20% of each licensee's harvest be directed to this processing and through an export tax on logs, but the country is hampered by an unattractive investment climate. The domestic processing requirement is perceived as expensive, ineffective, and inefficient. The distribution of returns from log exports is currently contentious and forest policy is considered unstable.

Myanmar and Indochina

The major barriers to expansion of the logging and processing sectors of Myanmar, Cambodia, Laos, and Vietnam are the lack of infrastructure, lack of institutional capacity to develop this infrastructure, and political and economic environments that discourage investment.

Japan

In 1996, Japan collected a 15% tariff against veneers, to be reduced to 5% by 1999. In the same year, a tariff rate of 17-20% was levied against plywood imports, (which is to be reduced to 8.5-10% by 2000).

Republic of Korea

Import tariffs are levied against logs (2%), sawnwood (5%), veneer (5%), and plywood (8%).

The Republic of Korea has an active program to support and encourage investment by its nationals in foreign markets. Southeast Asia has benefitted from these investments, although forestry and forest products manufacturing represent a relatively small share.

4.3.3 Demand Growth

Differential demand growth

In the less developed countries of the study region, the demand for timber products, driven by population and income growth, will increase at a faster rate than in the more developed consumer countries. Products currently exported will be increasingly diverted to domestic consumers.

However, demand for wood products in the consumer countries will continue to grow, and will be filled partly by substitutes.

Japan's economic recovery

Japan's deep recession of the early part of the 1990s dampened the economies of the region and suppressed demand. The recovery of the Japanese economy now seems well established, and the region should resume its normal pattern of growth in demand for wood products.

China

Although China is already importing significant quantities of logs, sawnwood and plywood, its huge potential demand for processed wood products is not likely to develop until well into the first decade of the next century. In the short term, concerns about inflation and a shortage of hard currency will prevent China from widely expanding its imports of wood products. In the longer term, ongoing scarcity of foreign exchange and the desire to maximize domestic processing will likely limit demand.

Substitution

Substitution as part of the demand process (described in an earlier section), can be expected to substantially dampen demand growth in the Asia-Pacific region. OSB is gaining acceptance as a substitute for some grades of plywood in the region, and MDF capacity in the region has expanded greatly since 1994. The low costs of producing MDF will suppress plywood prices, at least in the short term, and the growth in supply of OSB may erode these prices further.

Non-wood substitutes are also gaining ground in the region. In Thailand, flooring and other housing components are being constructed of concrete and steel as low-cost wood has become scarce.


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