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Authors: Shelley Gardner and Ivan Eastin
The goal of this paper is to provide objective and reliable information about Chile’s forestry sector and its current and future role in the international forest products industry. The contents should provide a well-rounded view of forestry and associated issues in Chile and would be well suited to someone looking to gain insight on this topic, update their knowledge of the subject, compare Chile to other countries of interest, or begin to understand investment opportunities in Chile. While the document does provide investment information, someone seriously considering investing in Chile would most likely want to undertake a more thorough investigation of issues specifically related to their strategic plan and some appropriate resources for this have been cited.
Chile’s favorable soil and climatic conditions allow for a rapid growth rate and production of marketable wood. They have an increasing plantation resource base (mostly radiata pine (Pinus radiata) and Eucalyptus species) and potential to expand their forestland further. Decree Law 701, now refocused from plantations and large landowner support to subsidizing planting and trimming costs for small landowners, has been the major and often criticized piece of forest management legislation since its induction in 1974. Not yet enacted, the “Recovery of the Native Forests and Their Promotion in Forestry” seeks to subsidize native forest management as well. Property rights are more respected for plantations, there is virtually no land tenure for native forest and what ownership does exist is hard to track.
Chile’s forest industry has contributed about 3% of the total GDP over the last 15 years and made up 10% of all exports in Chile and 2% of the world trade in forest products. Their primary products consist mainly of roundwood, lumber, fiberboard, particleboard, wood chips, pulp, and newsprint. As the trend moves more toward secondary products such as sawnwood, molding and millwork, and furniture, they strive to strike a balance between the two. Non-timber forest products, such as sweetbriar rose (Rosa eglanteria), soapbark tree (Quillaja saponaria), and boldo (Peumus boldo), while hard to estimate due to the fragmented market, also significantly contribute to exports and may offer alternatives for more sustainable management. Wood pulp producers have made major investments in modern, low-pollution industrial plants and processing technologies to meet European market demand. Chile’s exports focus makes them a reliable trading partner. Chile’s ability to standardize and harmonize with market demand, share market information, adapt to the Argentinean crisis, and obtain more forest products marketing training; Chile’s geographical location in relation to export markets, wood quality, use of natural resource-based exports as major momentum for economic growth, and technology restrictions; and forest-certification coupled with NGO pressure or boycotts are all potential challenges to the industry and important considerations for investors.
The major competitive threats regarding Chile are its likelihood of becoming more competitive in international markets as exports increase, increasing production and exports, and low production costs and labor costs relative to competing nations. Opportunities for countries interested in working with Chile include its positioning to resume higher growth, market-oriented economy, well-diversified international trade, well established State institutions, democratic government, and relatively qualified and ethical labor force.
The Chilean government provides active encouragement to private sector forest activity and is seeking to promote foreign direct investment (FDI) to capitalize on developing value-added products. The greatest opportunities include investment in sawmills, pulp plants, wood composite panels, and wood preservation. However, there are potential challenges or serious considerations for prospective investors. There is extreme consolidation of the industry. Empresas Compañía Manufacturera de Papeles y Cartones S.A. (CMPC) of Matte Holding and Angelini forestry own 80% of productive forestland and wield serious political power. There is a relatively small presence of foreign capital compared to the 1980’s. Chile’s production base structuring allowed for better positioning of local groups, so foreign investors associated with local groups, but withdrew when profits decreased. Environmental pressures/restrictions and plantation criticism make it increasingly attractive to divert investments to neighboring countries with fewer restrictions.
Chile has gained preferred market access to certain countries by participating in free trade agreements with Canada, Mexico, and tentatively with the European Union (EU). It has bilateral trade agreements with the Andean Pact countries, the Southern Cone Common Market (MERCOSUR) countries, and Central America. It has also received invitations to Asia-Pacific Economic Cooperation (APEC), Latin American Integration Association (LAIA), and North American Free Trade Agreement (NAFTA). Chile actively participates in negotiation of the Free Trade Area of the Americas (FTAA), but negotiations between Chile and the United States have been held up mainly due to the U.S.’s hesitation to address sensitive agricultural issues.
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Authors: Ivan Eastin, Paul Boardman and John Perez-Garcia
Background to the Study
The lack of competitiveness of Japan’s wood producers, continued growth in imported lumber and wood products, and a growing unmanaged timber stock on Japanese national and private forests spurred the Japanese government to review lumber imports and its relation to its depressed wood products market. Although the initial Ministry of Agriculture, Forestry and Fisheries inquiry into how exports of wood products from the US and other regions of the world have proven injurious to the domestic industry never reached a pan-ministry consensus, at the time of this writing some lumber products are still on the MAFF’s list of products for potential WTO safeguard protection. A Safeguard Action under WTO guidelines requires that the Japanese government: (i) identify the affected industry, be it the forestry sector or the wood-processing sector; (ii) identify the affected product and its relation to substitute import products; (iii) determine how the sharp increase in imports resulted in injury to the affected industry; and (iv) determine how Safeguard measures would improve the competitiveness of the affected industry over the 4 to 8 year period it is in effect.
This study, through in-country interviews, literature review, and data analysis, sought to analyze the state of the competitiveness of the Japanese forestry and wood products industries, and, using the CINTRAFOR Global Trade Model, to determine the impact of a protectionist trade policy on the domestic industry’s competitive strength and upon Japanese home-buying consumers.
Summary of Findings
During the period of the writing of this report it appeared that the threat of a WTO Safeguard Action subsided. However, as of July 2001 lumber products are still officially listed by MAFF for a potential safeguard action. Though this is not a study regarding the impact of protectionism on US or foreign exports to Japan the consequence of such a protectionist action on US and foreign wood exports to Japan is large. As the study findings suggest the benefit of trade restrictions to the domestic industry is mixed with the main burden of such an action being shouldered by the Japanese consumer. Many of the reasons for the lack of Japanese forestry and wood product sector competitiveness have more to do with internal systemic issues than with external issues traceable to exports.
Potential Impact of a Safeguard Action
Although the intended objectives of the Government of Japan forestry and forest products policies and subsidies is to realize “an era of domestic timber, a Safeguard Action may have the opposite effect by increasing log imports 44%.
Since 1955, Japan has seen its self-sufficiency in wood products decline from approximately 95% to below 20% by 2000. While there are a variety of factors that have contributed to this decline, the net effect has been that domestic forest products manufacturers have lost tremendous market share to imported wood products. Similarly, the competitiveness of the forestry sector has declined significantly relative to imported softwood logs. The dominance of the timber market by imported timber has contributed to a fundamental structural change within the forestry and forest products sector. Analysts and politicians have charged that these structural changes in the forestry and forest products sector have not only adversely affected the competitiveness of the domestic forest products sector but that they have severely restricted the ability of forest owners to actively manage forests in Japan, both private and public. In an attempt to rectify this inability to manage its forests and to bolster the competitiveness of its forestry and wood-products industries the Government of Japan has considered a Safeguard. However, the conclusion of this study is that given the burden that this trade restriction will likely cause to the Japanese consumer coupled with the probability of a significant increase in log imports, protection is not the road to profitable and well-managed forests and wood products industry. Perhaps more importantly, given the internal systemic issues described earlier, there appears to be little likelihood that a Safeguard would result in the increased competitiveness of the sawmill industry.
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Authors: Bruce Lippke, Rose Braden, Scott Marshall
The Pacific Northwest (PNW) forest sector is strategically linked to Pacific Rim markets, as it has been at a competitive disadvantage with the US South and interior Canada in delivering wood products to the population dense eastern and southern US markets. Deep-water port access to Asia however, has provided the PNW with a comparative advantage in serving what was until recently, the region with the world's highest sustained growth. The Asian financial crisis, which began in 1997, substantially reduced US exports to Asia, and has compounded the negative impacts of the harvest restrictions intended to protect the habitat of endangered species, which began in 1990. Both the Asian financial crisis and the harvest constraints are forcing long-term structural changes. Understanding these changes is important to maintaining the economic and biological health of the forest sector.
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Authors: Samuel J. Fleishman and Ivan L. Eastin.
Argentina’s geography, demographic profile, and level of infrastructural development are very favorable in comparison to other possible sources of plantation timber. It has a highly-educated population of over 35 million people who are generally more sophisticated and accustomed to a higher standard of living than those in other Latin American countries. Its industry and infrastructure, although somewhat inefficient and in need of upgrades in many respects, is also vastly superior to almost every other country in the region.
The stability of the government, the financial system, and the overall business climate have traditionally been suspect, but have improved dramatically over the last decade. As part of a dramatic reform plan begun in 1989, Argentina’s government has improved the efficiency of its own operations, deregulated and privatized the banking system, and pegged the currency to the US dollar in order to defeat hyperinflation. The general business climate continues to improve as well, as a new, more efficient way of conducting business takes hold. As a result, Argentina has recently become more attractive to foreign investors.
More than forty years of protectionism under the import substitution model left Argentina with hyperinflation, horrible credit, and an economy that was all but closed off to foreign trade. Thanks to the successful economic reforms that have taken place since 1989 under President Carlos Menem and Finance Ministers Domingo Cavallo and Roque Fernandez, Argentina is now on the road to recovery. Thus far, GDP growth has been very impressive, inflation has been defeated, foreign investment and foreign trade have increased dramatically, and the government has restructured its debt and reined in its fiscal policy. On the negative side, unemployment has been slow to recover from massive privatizations, while Argentina’s trade deficit and current account deficit remain larger than many economists would like. These economic reforms withstood a severe shock after the Mexican peso crisis in 1995. It remains to be seen whether or not a similar currency devaluation will occur in Brazil and, if so, how well Argentina’s hard-fought gains will survive another traumatic episode.
The total area of forest plantations in Argentina is now approaching 1 million hectares, the vast majority of which are southern pine, eucalyptus, willow and cottonwood. The government estimates that an additional 20 million hectares of land is suitable for forest plantations, in that they have favorable growing conditions and do not compete directly with agriculture or native timber stands. Plantations have been subsidized for decades, but most have not been managed properly until recently. Hence, the quality of the plantation timber available now is still quite low but is rapidly improving. The results of genetic improvement programs, already evident in the production of pine and eucalyptus in the subtropical northern regions of Argentina, are now being developed for Douglas-fir, ponderosa pine and lodgepole pine in southern regions that are similar in climate to the Pacific Northwest. While southern pine grown in the northern regions of Argentina will primarily be exported to North American and European markets, the native hardwoods and plantation softwoods in southern Argentina can also be conveniently shipped and effectively marketed into Asia.
Argentina’s government has deregulated the forestry sector and offered subsidies to reimburse plantation development. Due to the low quality of plantation timber and the underdeveloped nature of the industry, Argentina tends to export raw materials such as pulp logs and import higher-value wood products such as paper. Forest products exports, though low by global standards, are increasing at a rapid rate. Argentine
producers are now very active in trade within MERCOSUR and have recently penetrated the US structural timber market for the first time. The pulp and paper sector and the composite panel sector are more highly developed than the sawnwood, plywood, and veneer sectors. The former sectors utilize lower quality timber and enjoy higher domestic market demand. The latter two are currently developing, and should continue to do so as more well-managed plantation timber matures.
Argentina has made a remarkable transition over the past decade. It possesses the climate, infrastructure, low cost structure, educated labor force, and regulatory freedom required to support a globally competitive forest products industry. Given the rapidly developing nature of the Argentine forest resource and wood processing sectors, the high levels of investment by Chilean forest products companies, and the fact that a substantial volume of future production will be exported to the US, it is timely for US firms to begin looking for ways to understand and participate in Argentina’s forest products industry.
From the beginning, the Argentine government has promoted the forestry sector as an integral component of the economic reform plan. By emphasizing Argentina’s favorable climate and low land costs, the government hopes to attract foreign investment and develop new jobs in the forestry sector. The three major challenges confronting the forest products industry are high transportation costs, low domestic demand, and an underdeveloped forest products industry. High transportation costs are being addressed by new road construction and the dredging of the Parana River. Domestic demand for wood products should steadily increase as the government strives to address a serious shortage of low-income housing and Argentines begin to enjoy an increasing standard of living.
The underdeveloped forest products industry is improving rapidly due to foreign investment and the surprising success of MERCOSUR. MERCOSUR (the Southern Cone Common Market) has fully integrated the economies of the region (particularly Argentina, Brazil, and Chile) and provides the forest products industry with economies of scale that would not be possible within each country’s individual market alone. Perhaps the most notable impact of MERCOSUR has been the emerging regional dominance of Chilean forest products companies. With available investment capital, confidence in their ability to conduct business with their neighbors, and experience in the global forest products industry, Chilean investments represent over 60% of the foreign investment capital that has flowed into the Argentine forest products sector this decade. As a result, they have acquired large areas of plantation land and further developed every sector of the wood processing industry. They are also working to develop domestic, regional, and global markets and have taken advantage of some of Argentina’s best investment opportunities by moving quickly. While some US companies (e.g., Kimberly-Clark, Union Camp, and Trillium) have already established themselves in this emerging market, the vast majority are taking a more cautious attitude to investing in Argentina.
Argentina’s government has worked hard over the last decade to provide an attractive environment for foreign investment. With very few exceptions, foreign companies now enjoy the same rights and privileges as domestic firms. Thus far, Chileans companies have been active in developing new plantations as well as composite panel production facilities. Trillium and Fletcher Challenge New Zealand have each identified exceptional timber sources. Fletcher Challenge has already developed a modern mill complex among the northern forest plantations that produces lumber, plywood, veneer, and moulding and millwork. Trillium, which is now seeking government approval for its lenga project, hopes to do the same in the Patagonia region. Since its domestic market is the strongest, the pulp and paper sector is much more competitive.
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Authors: Guy C. Robertson and Bruce R. Lippke
Harvest Declines and Revenue Growth
In spite of sharp declines in harvest volumes in the 1990s, Washington State’s forest products sector continues to generate substantial income for the state and its inhabitants. At approximately 4.1 billion board feet, Washington State’s 1994 timber harvest was 33% lower than the 1965-94 annual average of 6.1 billion board feet and was the lowest level reported during the 1965-94 time period. Total business revenue generated by the state’s wood products sector in 1994 was approximately $9.1 billion (revenues reported in real 1994 dollars). In contrast to the harvest volume, this revenue figure exceeded the 1960-94 annual average of $8.3 billion by 9%. The state’s forest products sector generated, on average, a total of $2,196 revenue per thousand board feet (Mbf) harvested in 1994--the highest figure ever recorded. While this record level is the partial result of sharp increases in real wood product prices due to recent supply constraints, trend analysis shows that growth in revenues per harvest volume prior to 1990 was also relatively robust. While yearly growth for the 1965-94 period was estimated to be 2%, that for the 1965-89 period was estimated at 1.7%. Washington State forest product firms have been successful at garnering increased revenues using fewer raw material inputs. This has been very important in mitigating at least some of the impact of recent harvest declines in the region.
Increases in the Real Price of Wood Products
The purpose of this report is to identify the primary sources of revenue growth for the Washington State wood products sector. While increases in the real price of wood products has certainly been important in the last few years, they should not be overemphasized in the explanation of long-term revenue growth. Indeed, the trendline for Washington wood products prices (weighted by 1965 product shares) is essentially flat, and, in spite of sharp price increases since 1991, current levels are well below peaks occurring in the late 1970s. Structural change, particularly a shift to greater secondary manufacturing, and increases in product recovery from log inputs are more important in explaining increases in revenue generated per unit volume of harvest.
Total revenue from secondary manufacturing was $2.6 billion in 1994, 142% higher than the 1965 level, with much of the increase occurring in the last ten years. Similarly, secondary manufacturing’s share of total wood product sector revenues increased from 17% to 29% over this same 29-year period. While many secondary manufactured products require clear wood or other high quality characteristics, raw material inputs comprise a relatively smaller proportion of total product value, and the industry is less dependent upon the gross volume of harvest than lumber, paper or log exports. As a result, the strong performance of secondary manufacturing in both domestic and export markets represents a particularly promising adaptation to decreased harvests.
Another source from which Washington State producers have been able to generate increasing returns from a declining raw material base is the increase of exports, thus taking advantage of the export premiums associated with the trade in logs, lumber and other wood products. Log exports have constituted a major business since the early 1970s, fluctuating between $1.0 and $2.5 billion since that time. 1994 log exports totaled $1.4 billion, a level slightly higher than the 1965-94 average but significantly less than the $2.5 billion record high in 1979 or the recent peak of $1.7 billion in 1988. Lumber exports were slower to develop and remain less significant than log exports. The record level of $494 million was reached in 1988. Since that time, the percentage decline in lumber exports has exceeded that in log exports, with 1994 lumber export revenues falling to $365 million. Japan remains the most important foreign consumer of Washington State wood products. The Japan wood trade began with a heavy emphasis on high-quality old-growth logs but, more recently, has shifted to mostly second-growth products. Given that recent harvest restrictions fall most heavily upon these higher log grades, it is not surprising that exports of both logs and lumber have been in decline since 1990 in spite of rising prices. In contrast to log and lumber exports, exports of secondary manufactured goods have more than doubled since 1989, and, at $232 million, 1994 revenues for this group of products are rapidly approaching those of lumber exports.
Efficiency Gains in Raw Material Conversion
Efficiency gains in the conversion of wood raw materials to final products has been another important contributor to Washington wood products manufacturers’ increasing revenues in spite of declining wood inputs. Lumber overrun (a measure of the amount of lumber produced from a given unit of log input) is estimated to have increased approximately 27% since 1960, and the increase in the amount of pulp produced from a unit of log input is estimated to have increased 35% since 1970. Likewise, efficiencies in plywood production (a significantly reduced part of Washington State’s wood product mix) are estimated at 40% since 1960. Taken together, this means that the wood products sector requires approximately one third fewer logs to produce the same volume of output relative to the 1960s.
Declining supply, increasing conversion efficiency, and greater export premiums could all be cited as reasons for rising timber prices (or “stumpage prices”). At $441/Mbf, 1994 stumpage prices were over four times the 1965 level and close to three times the 1986 level. The price that log buyers can pay for timber reflects the price they receive for products sold less processing costs--a residual price. Due to the nature of the stumpage price as a residual price and the volatility of wood products markets in general, the high variance in stumpage prices is not surprising. In particular, the sharp increases in stumpage prices since the late 1980s provide ample evidence of increasing supply constraints and conform with general observations about recent market developments. Prior to 1989, the positive trend in the price of timber was more directly related to other value increases in the use of wood.
Employment and Productivity
Direct employment in the wood products sector peaked at 72 thousand workers in 1978. Since that time employment has declined to 54 thousand workers, with most of this fall occurring during the severe recession in the wood products industries in the early to mid 1980s. Though falling employment is expected from declining harvests and from increased labor productivity, shrinkage in the labor force was significantly less than the fall in harvest. Contrary to expectations given productivity increases, the total number of employees per Mbf of timber harvested shows no discernible trend. The most important factor underlying this is the increase in secondary manufacturing and similar value-added activities which use more labor per unit volume of log input. Total 1994 Washington State employment (direct, indirect and induced) generated by the wood products sector is estimated at 194 thousand employees. Technology gains are usually associated with increased capital intensity (i.e., more machinery per employee) and thereby more purchases of outside goods and services. This will result in increased indirect employment partially offsetting losses in direct employment. Evidence suggests that the ratio of total employment to direct employment in the wood products sector has increased approximately 6% over the last decade.
Washington State wood products producers have made steady gains over the last three decades in the amount of revenue generated per unit of resource harvested. These gains have helped to mitigate the impacts of recent harvest declines and belie the image of the wood products sector as an overly mature or dying industry. While real price increases in wood products have been partially responsible for revenue increases, especially in the last few years, increases in secondary manufacturing and exports have been more important in the long run. Because secondary manufacturing is both more labor intensive and less reliant upon gross volumes of timber harvest, expansion in this product category represents a particularly promising development. The traditional export categories of logs and lumber have relied more heavily upon the availability of high quality stumpage, particularly old-growth. The maintenance and further expansion of revenues in these categories will depend upon the management of the state’s second-growth forests and marketing efforts to gain increased foreign acceptance of products produced from them.
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Authors: Laura E. Cottle, Gerard F. Schreuder and Antonio A.A. de Barros
Brazil has one of the larger natural forest areas of the world yet, historically, the level of development of the forest industry lass been relatively low. More recently, however, there has been significant growth in the pulp and paper sector. This has been largely as a result of the government's positive support and emphasis on the development of this industry. Fiscal incentives have encouraged the establishment of large areas of plantation strategically located near industrial centers. Such programs have enabled Brazil, formerly a large importer of pulp and paper, to become close to self-sufficient in these products and moreover a major world exporter of pulp. Brazil is certainly in an interesting and increasingly significant position vis-à-vis the global forest industry situation.
The objective of the present paper is to provide an in-depth review of the literature and data pertaining to the forest resource and forest industry of Brazil. The first chapter gives a general orientation to the country, then follows a detailed description of the forest resource and the three important sectors of the forest industry: the solid wood sector, the pulp and paper sector, and the energy wood sector.
The numerous sources of both literature and data examined included: international symposia, current periodicals, trade journals, newspapers featuring business and economics, Brazilian papers and government documents, and United Nations' publications. Wherever possible, Brazilian sources were used to report the various statistics for production and trade of forest products.
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Authors: Arnaldo Jelvez, Keith Blatner, Charles McKetta
Chile’s economy, which has been considered the most promising within Latin America, has had a free market orientation since 1973.
The Chilean forest industry has shown remarkable growth and development. A key question facing market analysts around the world is the role Chile will play in future international markets for forest products. Available forest resources are one key factor, as are available investment capital, the investment climate and many others to be considered in forecasting the country’s overall potential.
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Authors: Gerard F. Schreuder, Richard P. Vlosky and Yeo Chang Youn
Historically, South Korea has played a key role in global forest products trade. In the seventies for example, it was one of the world’s greatest producers of plywood. Presently however, recent events have compromised this position. One of these has been the ban of log exports by Indonesia, once South Korea’s primary source of supply for domestic plywood production.
Another factor concerns S. Korea’s existing forest inventory. Much, if not all, of the timber of merchantable diameter was cut during World War II and to a lesser extent during the Korean War. This event, coupled with a post war intensive reforestation effort, has produced a nearly even aged composition of standing inventory of no more than 12 inches in diameter.
Questions concerning the implications of the country’s forest products sector, domestic requirements and sources of supply have arisen. This paper will examine some of these issues and their effects on Korea and its position in global forest product trade flows.