5. ALTERNATIVE SCENARIOS TO 2010

5.1 Summary scenario results
5.2 Base Case Scenario
5.3 Scarcity Scenario
5.4 Stronger Demand with Scarcity Scenario

5.1 Summary scenario results

This section examines some alternative scenarios for development for the Asia-Pacific region using the ITTO Trade Model. Three scenarios are considered:

· Base Case scenario
· Scarcity scenario
· Strong Demand with Scarcity scenario

The Base Case scenario models the status quo - how the forest sector of the Asia-Pacific region might develop if current, commonly held assumptions about its determinants continue to hold over the planning horizon and the region avoids unforeseen scarcity, changes in trade policy, or consumer acceptance of substitute products.

The Scarcity scenario addresses two issues described earlier in the paper: the possibility that the harvesting limits from current sources assumed for 2010 are unsustainable, and the likelihood that log exports from Malaysia and Papua New Guinea will be reduced by the end of the study period.

The Strong Demand with Scarcity scenario examines the eventuality that demand in the region for sawnwood and panel products will develop at a rate exceeding the base trend incorporated into the model and described earlier in this report, and that the scarcity conditions assumed in the Scarcity scenario also develop.

Table 8 - Summary of scenario results: price and quantity in 2010

Scenarios:		Base Case	Scarcity	Demand & Scarcity	Scarcity (% of Base Case)	Demand & Scarcity (% of Base Case)	Demand & Scarcity (% of Scarcity)
Consumption
Qd Ply		11,732	10,858	14,419	93	123	133
Qd Saw		29,523	27,730	28,313	94	96	102
Pd Ply		0.84	0.98	1.26	116	149	129
Pd Saw		0.82	0.95	1.30	116	159	137
Supply
Qs C		54,252	46,110	50,040	85	92	109
Qs IU		11,155	10,237	11,187	92	100	109
Qs LI		8,662	9,113	9,786	105	113	107
Qs Con		7,537	9,871	11,548	131	153	117
Ps C		0.83	0.97	1.41	117	169	145
Ps IU		0.84	0.98	1.42	116	169	145
Ps LI		0.95	1.01	1.47	105	154	146
Ps Con		0.67	0.96	1.44	144	216	149
Manufacturing
Consumers
	Qm Ply	5,694	5,399	7,592	95	133	141
	Qm S Ply	-	2,107	4,184
	Qm Saw	5,837	3,903	2,866	67	49	73
	Qm S Saw	3,708	3,377	2,350	91	63	70
Producers
	Qm Ply	5,809	5,176	6,246	89	108	121
	Qm S Ply	-	-	-
	Qm Saw	24,047	24,255	26,107	101	109	108
	Qm S Saw	397	1	1	0	0	100
Total
	Qm Ply	11,503	10,575	13,838	92	120	131
	Qm S Ply	-	2,107	4,184
	Qm Saw	29,884	28,158	28,973	94	97	103
	Qm S Saw	4,105	3,378	2,351	82	57	70
Trade
Qe Logs		13,030	7,377	7,377	57	57	100
Qi Logs		15,572	8,249	8,249	53	53	100
Qe Ply		3,831	3,390	3,644	88	95	107
Qi Ply		3,563	3,153	3,389	88	95	107
Qe Saw		3,336	5,128	6,583	154	197	128
Qi Saw		3,508	5,379	6,875	153	196	128
Qe S Logs		7,536	9,870	11,548	131	153	117
Qi S Logs		7,536	9,870	11,548	131	153	117

Notes:
Q	quantity	C	current sources	volumes are '000 m3
P	price index	IU	improved utilization	price index 1995=100
s	supply	LI	low-impact harvesting
d	demand	Con	conifer logs
m	manufacture	Logs	logs
e	export	Ply	plywood and veneer
i	import	Saw	sawnwood
		S	softwood only

The Base Case results are described in detail, while the reporting of the other two scenarios is limited to identifying results that differ from the Base Case and discussing their significance. Table 8 summarizes the results for each of the three scenarios.

5.2 Base Case Scenario

Key assumptions

The Base Case scenario incorporates assumptions about log supply, consumer demand for tropical timber forest products and their willingness to accept substitutes, and log export policies.

Log supply

The availability of logs from current sources is assumed to increase slightly from 69 million m³ in 1995 to 71 million m³ in 2010. The Base Case scenario also includes potential incremental supply that could total 44 million m³ by 2010: 18 million m³ from improved utilization, 10 million m³ from the adoption of low-impact harvesting technology, 12 million m³ from conifer logs imported into the region, and 4 million m³ from the improved recovery of logs from estate crops, principally rubber (Figure 6). This incremental supply is described as "potential" in that product prices must be sufficiently high to cover the higher cost of harvesting or processing the incremental supply.

Figure 6 - Potential supply levels to 2010 under the Base Case scenario

Substitution

The Base Case assumes that product substitution will reduce the demand for traditional products, replacing the consumption of 30.5 RWE million m³ of plywood and 11.7 RWE million m³ of sawnwood.

Log export policy

Log export policy will remain as currently expressed: log exports will continue from Sarawak at a maximum level of 62% of the annual harvest until 2000, and then will continue indefinitely at a rate 50% of the annual harvest; Sabah will allow the export of plantation-grown wood up to a maximum of 33 % of annual harvest; and Papau New Guinea will continue to export up to 90% of its harvest as logs.

Analysis of the Base Case scenario with the ITTO Trade Model yields the following forecast.

Plywood consumption falls

Consumption of panel products is forecast to rise from 18.5 million m³ in 1995 to 28 million m³ in 2010; however, the consumption of the plywood component of the market for panel products will decrease from 16 million m³ to 11.8 million m³ over the same period (Figure 7). Substituted panel products account for the difference. The suppression of demand for plywood results in a real price decrease of 15% over the study period. ⁴

⁴ This result may be due to the lack of product detail in the Trade Model (i.e., only one grade of plywood is included).

Figure 7 - Forecast plywood and veneer consumption and price index to 2010 under the Base Case scenario

Plywood consumption declines overall but the producer countries increase their share of consumption of the plywood produced in the region from 15% in 1995 to 26% by 2010.

Sawnwood consumption rises

Sawnwood consumption shows a different pattern, increasing by almost 50%, from 20.7 million m³ to 36 million m³ from 1995 to 2010, of which 6.5 million m³ is substituted product (Figure 8).

The proportion of the sawnwood production consumed by the producer countries changes little over the study period (from 28% to 25%), but by 2010 much of the sawnwood consumption by the consumer countries is from conifer logs (63%).

The real price for sawnwood drops 18% over the study period, due to the acceptance of the substitute product and the importing of relatively inexpensive conifer sawlogs.

Figure 8 - Forecast sawnwood consumption and price index to 2010 under the Base Case scenario

Total log production rises

Although the volume of logs from the conventional supply decreases by 22% (from 67 million m³ to 52 million m³) over the study period, 29 million m³ of incremental supply is being utilized by 2010 (Figure 9). The more expensive portion of the conventional supply has been replaced by the lower-cost portion of the incremental wood. Consequently, real log prices decline by 16% over the study period.

Figure 9 - Forecast harvest levels and log price index to 2010 under the Base Case scenario

Figure 10 - Forecast levels of plywood and veneer manufacturing to 2010 under the Base Case scenario

Plywood production falls

Plywood production declines by 45% across the region, with most of this reduction occurring in the producer countries (Figure 10). The main consumer countries are favoured by their higher mill recoveries, the continuation of log exports in the region, and the availability of conifer substitutes.

Sawnwood production rises

Sawnwood production increases across the region, with consumer countries achieving a 150% increase in volume (Figure 11). As noted, much of this gain is realized by sawing imported conifer logs. Producer countries increase sawnwood production by 33%.

Figure 11 - Forecast levels of sawnwood manufacturing to 2010 under the Base Case scenario

Log exports rise

Although Malaysian log exports are forecast to decline by 15% by 2010, a 150% increase in exports from Papua New Guinea causes the volume of exported logs (from current sources) in the region to rise by 36% (Figure 12). Including the exported conifer logs in the total results in an increase of 115% during the study period. (Note that the large increase in exported logs from Papua New Guinea is drawn mostly from the supply increment due to low-impact harvesting.)

The traditional major importers of logs (Japan, the Republic of Korea, and Taiwan Province of China) retain their share, claiming 87% of the exported hardwood logs (Figure 13).

Figure 12 - Forecast of log exports to 2010 under the Base Case scenario

Figure 13 - Forecast of log imports to 2010 under the Base Case scenario

Plywood exports and imports fall

Plywood and veneer exports and imports decrease over the study period reflecting the reduction in manufacturing previously noted, the adoption of substitute panels in consuming countries, and the redirection of the product to the domestic market (Figures 14 and 15). Plywood exports from Indonesia are forecast to drop by 60% while imports to the main consumer countries will decline by 80% by 2010.

Figure 14 - Forecast of plywood/veneer exports to 2010 under the Base Case scenario

Figure 15 - Forecast of plywood/veneer imports to 2010 under the Base Case scenario

Sawnwood exports and imports fall

Sawnwood exports decrease by 50% over the study period, as exporters (mainly Malaysia) meet their domestic demand and importers adopt substitute products or manufacture conifer sawnwood (Figures 16 and 17).

Figure 16 - Forecast of sawnwood exports to 2010 under the Base Case scenario

Figure 17 - Forecast of sawnwood imports to 2010 under the Base Case scenario

Implications for industry structure

While the magnitude of some of the specific modelling results may seem unlikely, the general evolution of the Asia-Pacific forest sector described by the model, subject to the assumptions of the Base Case, is quite plausible. Log supply does not appear to constrain development of the sector under current policies and assumptions of harvesting and processing technology, and real price development seems unlikely.

The analysis indicates that the development of the sector under Base Case assumptions will be determined largely by issues of substitution: the rate that consumers accept substitute products and the supply of conifer logs into the region.

New manufacturing capacity will be developed in the region to utilize the changing log supply. Recovery of logs from increased utilization implies that smaller logs and logs with different technical characteristics will be processed, requiring appropriate milling capacity.

Smaller logs and lower grades will result in substantial wood fibre that is unsuitable for sawlogs or veneer logs, but will provide a fibre source for substitute products, such as reconstituted panels.

New or additional processing plants are most likely to be developed in the supplier countries, close to the resource, but subject to the incentives and barriers discussed earlier in this paper.

Implications for trade

While the modelling analysis indicates less trade of both sawnwood and plywood, the Base Case results imply that a compensating trade in substitute products must develop. For example, Indonesia's forecast reduction in plywood exports and Malaysia's reduction in sawnwood exports might be replaced with exports of reconstituted panel products and more highly manufactured products. This possibility is not represented in the model.

Also note that the forecast growth of sawnwood manufacturing based on conifer logs in the consumer countries is, at least partially, a modelling anomaly. The conifer logs are allocated by the model to the consumer countries based on the relative efficiency of current installed milling capacity; new capacity developed to process conifer logs would likely have the same efficiency in a producer country as in a consumer country.

5.3 Scarcity Scenario

Key assumptions

The Scarcity scenario incorporates the assumptions of the Base Case with the following changes:

· the harvest limit from the natural forest in 2010 will be 25% less than was assumed in the Base Case, and this reduction will occur gradually over the study period

· starting in 2000, Sabah's log export limits will decline from 33% of harvest to 10% in 2010, Sarawak's will decline from 62 to 10%, and Papua New Guinea from 90 to 50%

· log exports out of the region will be eliminated in 2001

Reduced log supply

Under the Scarcity scenario, the availability of logs from current sources is assumed to decrease from 70 million m³ in 1995 to 54 million m³ in 2010. The incremental supply is also reduced (39.5 million m³ in 2010) as it is partially a function of the supply from current sources. At 2010, 13.5 million m³ will be available from improved utilization, 10 million m³ from the adoption of low-impact harvesting technology, 12 million m³ from conifer log imports into the region, and 4 million m³ from estate crops (Figure 18).

Figure 18 - Potential harvest levels to 2010 under the Scarcity scenario

The product substitution rates assumed in the Base Case are unchanged. The Scarcity scenario was modelled and the results compared to the Base Case.

Plywood consumption is suppressed

Consumption of plywood in 2010 is reduced relative to the Base Case by about 7%, probably due to a 14% increase in price. The real price of plywood remains almost constant over the study period.

The producer countries' share of total consumption is unchanged.

Sawnwood consumption is suppressed

Sawnwood consumption is also suppressed (5% less than the Base Case) by a 13% increase in price in 2010 over the Base Case price. As with plywood, the real price of sawnwood is almost constant over the study period.

Total log production is suppressed

The total volume of logs harvested still increases over the study period, but is 5 % less than the Base Case harvest at 2010 (Figure 19). The volume taken from current sources is reduced by 12% relative to the Base Case, and the volume obtained from improved utilization is reduced by 8 %. The harvest from the low-impact supply and conifer imports increases to partially offset the reductions from the current sources and improved utilization.

The price of logs is unchanged over the study period, and exceeds the Base Case price by 14%.

Figure 19 - Forecast harvest levels and log price index to 2010 under the Scarcity scenario

Plywood production is stimulated

Plywood production declines substantially across the region, as in the Base Case. Hardwood plywood production is suppressed in 2010, relative to the Base Case, by 5% in the consumer countries and 12% in the producer countries. However, softwood plywood production is stimulated in the consumer countries; no softwood plywood was produced in the Base Case scenario. The aggregate production (softwood and hardwood) of the Scarcity scenario exceeds that of the Base Case in 2010 by 10%.

Sawnwood production is suppressed

Sawnwood production is suppressed (7%) across the region, with the largest reduction occurring in the consumer countries.

Reducing exports of tropical hardwood logs to the consumer countries stimulates the manufacture of conifer logs into plywood to meet domestic demand. The overall reduction in supply in the Scarcity scenario would cause the suppression of hardwood plywood and sawnwood across the region.

Log exports are suppressed

The major log exporters are constrained explicitly in the Scarcity scenario, and conifer logs flow into the region to meet the demand for logs. Under the Base Case, 7.5 million m³ of conifer logs was exported into the region and comprised 36% of the log market; under the Scarcity scenario, 9.9 million m³ of conifer logs comprise 62% of the market.

General comments

In summary, reducing the scheduled harvesting limits from current sources of supply by 25%, limiting log exports to roughly one-third of the level currently envisioned, and implementing these constraints progressively to 2010 have four general effects:

· the price for hardwood products increases by about 15% over the Base Case, but the real price does not increase over the period covered by the study

· manufacturing and consumption of hardwood log products decrease

· conifer logs imports to the region increase by one-third

· conifer logs are milled in consumer countries

The conditions imposed by the Scarcity scenario do not change the general findings of the Base Case analysis: log supply does not appear to constrain the development of the sector and various forms of substitution will be the dominant influence on the sector. Creating scarcity by removing 25% of the most valuable supply stimulates the importing and adoption of softwood substitutes, and the price effect serves only to maintain prices at 1995 levels.

5.4 Stronger Demand with Scarcity Scenario

To simulate the accelerated development of demand for sawnwood and panel products, demand was increased gradually above the base trend until it exceeded the base demand at 2010 by 20%. All other assumptions of the Scarcity scenario were incorporated without modification into the new scenario.

Plywood consumption increases

The 20% increase in demand scheduled for the region increases plywood consumption in 2010 by 23% of the Base Case amount and by 33% over consumption under the Scarcity scenario. Sawnwood consumption changes only slightly.

Plywood and sawnwood prices rise

The real prices of plywood and sawnwood rise substantially relative to both the Base Case scenario and the Scarcity scenario, and increase by about 30% over the study period.

Log prices strengthen

The price for logs harvested from current and incremental sources in 2010 increases by about 70% over the Base Case scenario price, 45% over the Scarcity scenario price, and about 40% over the study period.

Total log production rises only slightly

In spite of strong prices, log production in 2010 from sources in the region is up only slightly from the Scarcity scenario and is still less than the Base Case scenario. However, the importing of conifer logs rises substantially - by 53 % over the Base Case scenario and 17% over the Scarcity scenario.

Plywood manufacturing increases

In the consumer countries, plywood manufacture increases by 33% over the Base Case, by peeling imported conifer logs. The producers also increase plywood production (by 8% over the Base Case scenario and 21% over the Scarcity scenario) but process only hardwood logs.

Sawnwood manufacturing increases slightly

Sawnwood manufacturing increases slightly but the proportion of softwood processed drops from 14% (Base Case scenario) to 12% (Scarcity scenario) to 8% (Stronger Demand with Scarcity scenario).

Trade in hardwood logs suppressed

The volume of trade in hardwood logs remains unchanged from the Scarcity scenario, and suppressed relative to the Base Case, due to export restrictions.

Trade in conifer logs increases

However, the volume of trade in conifer logs increases by 53% relative to the Base Case scenario and 17% relative to the Scarcity scenario.

Trade in plywood and sawnwood increases

The volume of trade in plywood increases slightly with respect to the Scarcity scenario (7%) but remains less than the Base Case volume, while the volume of trade in sawnwood increases more substantially (53% relative to the Base Case and 17% relative to the Scarcity scenario).

General comment

In summary, the development of the sector indicated by the Base Case and Scarcity scenarios remains unchanged, except for strong real price development of products and logs. Note that this difference is likely due to the rate of product substitution being fixed in the current model. It is likely that price development would encourage further substitution, and reduce or eliminate the price trend.