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Indonesian Forestry Industry Saturated?

April 19, 2007

Forestry industry in Indonesia seems to enter the saturation era. The availability of woods supply becomes the main issue for national forestry industry. As the environment condition has been very critical, the government tightened natural forest concession and conduct a war against illegal logging. Furthermore, the government only provides the quota for annual allowable cut which is only 5.7 million CUM, far below the usual annual raw material demand of 40 million CUM.

Hence, the volume of forestry and woodcraft tends to decrease. In 1999, the production volume was 20.62 million CUM, however, by the year of 2004, the production volume dropped by 130% to 9 million CUM only.

The shortage continued and had made many companies had to close-down their operations and even many more are coming. The giant players such as Barito and Djajanti, which known as “The Kings of Forest” are also facing the problem and had to close some of their subsidiary companies for efficiency and lack of profit.

The impact of the policies is the drop of wood production and export value. Data from the Forestry Ministry, national plywood production dropped every year. The 2003 production was 6.11 million CUM and it predicted dropped to 2.5 million CUM in 2006. The export value dropped with an approximate average of USD 100 million annual decreasing; it decreased to USD 1.55 Billion in 2005 compared to USD 2.26 Billion in 1999.

The other forest-related industries facing the same situations are sawn timber, chips, and house furniture. In 2000, the sawn timber production was 2.79 million CUM; but, the production of 2004 was only 0.43 million CUM or falling down by 549%.

The woodcrafts became the main export commodities ever since the government banned log wood export in 1980ies as forest concession holder must invest up to the end product, including plywood. However the illegal logging caused the supply problem for the industry. In 1999 the export value of Indonesian woods and woodcrafts products amounted to USD 3.65 Billion; it kept dropping down almost every year and only amounted to USD 3.33 Billion in 2006.

Supply shortage is not the only issue for wood industry; there are other issues such as plant overcapacity, financial problems, and inefficient machineries.

The only forest-related industry which is relatively not impacted by the regulations is the pulp industry. By 2006, Indonesia produced 6.4 million tons production per annum; it increased 17% from the 2005 production of 5.47 million tons..

Industrial Timber Plantation Forest (Hutan Tanaman Industri; HTI) is one of the resources that still being developed. The Forestry Ministry targets land extension to be up to 5 million hectares by 2009. However, it already reached 4.07 million hectares in 2005 which is expected to be able to provide 20-22 million CUM per annum.

The HTI scheme seems to be the best solution to fulfill the market demand, as pulp industry would avoid the supply shortage using the scheme; it might be followed by other industries.

According to the Ministry of Forestry, industrial demand of 62.9 million CUM in 2006 was not met; only 48.2 million CUM was provided to the industry. Industrial Timber Plantations (HTI) contributes 41% or 19.7 million CUM, conversion forests (or often called crop estate land clearing) 28.42% or 13.7 million CUM, natural forests occupies 13.69% or 6.6 million CUM and 8.51% or 4.1 million CUM from the stocks of industries in 2005.

Market Prospect
Basically, the forestry and woodcraft product still have prospective market. The market demands for both local and export are still widely open. There are increasing market demands for these products from both domestic and international markets; but, Indonesian producers are unable to meet the demand due to the current situation.

The shortage caused by the war against illegal logging should not make the industry to die off. Industrial Timber Plantation Forest (HTI) in Indonesia has a comparative advantage compared to the Europe or other region. The Indonesian HTI is available for harvest after 7 years compared to 13-14 years in Europe, and the momentum of illegal logging war should be considered as the new era for cleaner and environment-friendly business for forestry industries. Rejuvenation of machineries and improving efficiency are also compulsory to save the industry.

The current market prospect for the wood and forestry companies should be a great opportunity, especially for the parties having clean and proper business. Given illegal logging is relatively slowing down; the legal business should be able to grab the market niches left by the illegal business.

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