For Staff Use Only Export Prospects for Forest Products in Indonesia, 1983-1990 Kenji Takeuchi Division Working Paper No. 1983-1 January 1983 Commodities and Export Projections Division Economic Analysis and Projections Department Economics and Research Staff The World Bank Division Working Papers report on work in progress and are circulated for Bank staff use to stimulate discussion and comment. EXPORT PROSPECTS FOR FOREST PRODUCTS IN INDONESIA, 1983-1990 January 1983 Prepared by: Kenji Takeuchi Assisted by: Sompheap Sem Commodities and Export Projections Division Economic Analysis- and Projections Department * Economics and Research Staff The World Bank - 11 - Acknowledgements This report was originally prepared as a background paper for the Country Economic Memorandum on Indonesia (Report No. 4279-IND, January 10, 1983), prepared by the East Asia and Pacific Regional Office of the World Bank. Special thanks are due to Mr. Karsudjono Sinduredjo, President, Indonesian Plywood Producers" Association (APKINDO), who provided data and information on Indonesia's plywood industry and pertinent comments on an earlier draft. - 111 - Table of Contents Page Acknowledgments... . a *.......ii List of Tables..... ......iv Summary and Conclusion. .oo......eooooooooooo.....t.*.o.ooeo.......v I. Trends in Indonesia's Forest Product Exports...............1 II. Recent Changes in Forestry Sector Policy..................1 III. Government Projections for Timber Production and Exports.. . . . . . . . . . . . . . .......... . .......4 IV. Alternative Projections for Timber Production, Consumption and Exports... ......9 A. Sawnwood............................................. 9 B. Veneers............................. .............12 C. Plywood ................................................ 12 V. Capital Requirements Implications......................... 15 VI. Policy Issues .............15 0 - iv - List of Tables Page 1. INDONESIA: LOG PRODUCTION AND EXPORTS OF LOGS, SAWNWOOD, VENEERS AND PLYWOOD, 1967-1981...................2 2. INDONESIA: GOI PROJECTIONS FOR SUPPLY OF LOGS, 1981-82 / 1988-89....... oooo............................5 3. INDONESIA: GOI PROJECTIONS FOR CAPACITY AND DEMAND (DOMESTIC AND EXPORT) FOR SAWNWOOD AND PLYWOOD SECTORS, 1981-82 / 1988-89......................6 4. INDONESIA: EXPORTS, CONSUMPTION AND PRODUCTION OF SAWNWOOD PLYWOOD (INCLUDING VENEERS) AND LOGS..........8 5. INDONESIA: PRODUCTION, EXPORTS AND CONSUMPTION OF SAWNWOOD, VENEERS, PLYWOOD AND LOGS IN ROUNDWOOD EQUIVALENT...............................................10 6. INDONESIA: THE STATUS OF SAWMILLING CAPACITY, 1981........11 7. INDONESIA: THE STATUS OF PLYWOOD CAPACITY DEVELOPMENT AS OF APRIL 1982......................13 8. INDONESIA: EXPORTS OF WOOD PRODUCTS, QUANTITY, VALUE AND UNIT VALUE, 1979-1981 (ACTUAL), 1982-1986 AND 1990 (PROJECTED)..........................14 9.(A) INDONESIA: EXPORTS OF PLYWOOD AND BLOCKBOARDS, 1977-1981..................... ... . sooooese......17 9.(B) INDONESIA: EXPORTS OF VENEER, 1977-1981...................17 -v - Summary & Conclusions 1. For some time, forest products have been the most important product group in Indonesia's exports except for petroleum. This report reviews the recent changes in Indonesia's timber policy and assesses the prospects for its forest product exports in 1983-1990. 2. Despite the long-standing principle of domestic processing, the government had not enforced it until 1978. Since 1978, however, the government has taken a series of steps to promote domestic processing of timber. Indonesia's log exports declined from 19.5 to (estimated) 4.0 million m in 1978-1982. The government plans to phase out log exports completely by 1985 (with the exception of Irian Jaya). At the same time, the government plans indicate increases of 25% and 80% in domestic consumption and exports of sawnwood, respectively, in the four years up to FY1985/86, and increases of 170% and 230% in consumption and exports of plywood, respectively, in the same period. These "projections", which were made two years ago, now appear to be too optimistic. 3. Taking into account the rather gloomy world economic outlook in the medium term and the time needed for the improvement of Indonesia's product quality, especially in plywood, our best estimates as of now indicate that sawnwood exports would rise by 57% in 1981-86 (and by a further 32% in 1986- 90), and that plywood exports (including veneers) would increase by 170% in 1981-86 (and by 56% in 1986-90). Log exports are expected to decline from (estimated) 4.0 to 1.0 milion m3 in 1982-86, but they are projected to increase to 1.5 million m by 1990, assuming that the liberal log export policy for Irian Jaya will be maintained. These projections imply that the export revenue from forest products in current dollars would remain at around 0.9 billion dollars in 1983-1985, but then increase to 1.13 and 2.03 billion dollars in 1986 and 1990, respectively. 4. In view of the difficult times ahead (stagnant fiscal revenues and export earnings from the oil/gas sector), it is recommended (a) that the government maintain the policy of allowing log exports from Irian Jaya and (b) that it may even consider delaying the target date of the complete phase-out of log exports (Irian Jaya excepted) from 1985 to 1987. EXPORT PROSPECTS FOR FOREST PRODUCTS IN INDONESIA 1983-1990 1. The Government of Indonesia (GOI) aspires to promote the exports of timber in various processed forms, notably plywood, sawnwood and secondary processed wood products (knockdown furniture, joinery, moldings, etc.), and to discourage exports of logs. In the last three to four years, GOI has taken steps to implement policies to achieve this goal and, as a result, the share of processed timber in total timber exports has been rising. Current GOI projections indicate that in volume terms: (a) log exports will be completely phased out by 1985; (b) sawnwood exports will almost double by 1986; and (c) plywood exports will more than triple by 1985. , In the face of several constraints, these targets are not likely to be achieved within the time period indicated. The purpose of this brief note is to review the current timber situation in Indonesia and to assess the prospects for Indonesia's forest-product timber exports over the next few years. I. Trends in Indonesia's Forest-Product Exports 2. Indonesia's exports of forest products began to grow rapidly in the late 1960s and reached a peak in 1973. Having declined very sharply in the 1974-1975 world-wide recession, they subsequently recovered (see Table 1). Until recently, Indonesia's forest-product exports consisted predominantly of logs, except for relatively small quantities of teak sawnwood exports (see Table 1). The exports of non-teak sawnwood began to rise in the mid-1970s. In the last few years exports of plywood have reached significant proportions, while veneer exports have also begun to expand. Nevertheless, even as late as 1979, only 13% of total forest-product exports was in processed form (measured in roundwood equivalent volume). 3. Since around 1979, Indonesian exports of forest products have entered a new era, with exports of logs declining and expo ts of processed timber i creasing. Log exports declined from 18.2 million m in 1979 to 7.2 million m in 1981 (Table 1). In contrast, exports of plywood and veneers increased sharply, although sawnwood exports did not. As a result, the share of processed timber in total timber exports (again, measured in log equivalent volume) increased to 37% in 1981, sharply up from 13% in 1979. II. Recent Changes in Forestry Sector Policy 4. One of the important principles of Indonesia's forestry sector policy since the late 1960s has been the promotion of domestic processing. This principle was incorporated in the legal decrees of the late 1960s and early 1970s, and was also written into all the forestry concession agreements. The general objective has been to maximize the long-term benefits arising from forestry-related activities to the Indonesian economy. The two most important specific objectives have been (a) to make sure that an adequate resource rent is collected from logging activities and (b) to encourage the growth of domestic wood processing industries. Despite the long-established policy principle of domestic processing, however, the government had not enforced the principle until 1978 and consequently had failed to achieve the stated objective. -2- Table 1: INDONESIA: LOG PRODUCTION AND EXPORTS OF LOGS, SAWNWOOD, VENEERS AND PLYWOOD, 1967-1981 Log Exports Production Logs Sawnwood Veneers Plywood ------million m3------ ---------------1,000 m3------------ 1967 - 1968 1969 7.08 3.72 34 1970 10.78 7.83 44 1971 13.81 10.82 81 - - 1972 16.92 13.35 107 - - 1973 26.30 18.50 330 - - 1974 23.28 16.87 278 - - 1975 16.70 12.88 395 - 1 1976 23.80 18.11 656 - 13 1977 26.63 18.93 594 6 14 1978 25.55 19.46 757 38 85 1979 18.21 1,269 15 195 1980 14.58 1,130 37 245 1981 6.60 1,207 177 597 Source: 1967-1978 - FAO, Yearbook of Forest Products. 1979-1981 - SEALPA Secretariat for exports. -3- 5. Around the beginning of 1978 GOI decided to take serious steps to increase the fiscal revenue from the forestry sector and also to give stronger incentives to local processing. In February 1978, GOI increased the export tax (ADO) on logs from 10% to 20% of the government-determined "check prices." In the summer of 1979, a new export tax, at the rate of 5%, was imposed on sawnwood. The objective of this new tax was to extract a modest resource rent from sawn timber exported. 6. There are currently about 11 separate government charges on log * exports, and the "tax" burden on log exports in Indonesia now seems to be as high as 40-45% of the FOB prices of logs. In fact,, the official "tax" b rden on log exports (calculated on the assumed average ceck price of US$150/m and assumed market price (FOB Kalimantan) of US$130/m , and ignoring some T mall local taxes which are not listed above) appears to be around US$55/m , or about 42-43% of the actual FOB price of export logs. 1/ 7. In April 1980, the ministers of agriculture, trade and industry announced their joint decision to restrict log exports through the linking of log export quota allocations to the "industrialization" performance of the concessionaires. The quantitative export restriction system works through the method of determining allowable quotas for annual cuttings (RKT) and exportable log quotas (SEHH) for each concession holder (HPH) on the basis of the concessionaire's recent performance in local processing. 8. The overall effects of these policy initiatives since 1978 have been remarkable. Indonesia"s log exports were down sharply in 1979-1982 while processed timber products have increased rapidly since 1978 (see Table 1). Export log prices climbed sharply in 1979 and stayed at high levels until the fall of 1980. At the same time, a substantial differential was created between the prices f export logs and local market logs. Export prices ranged around US$125-135/m (FOB Kalimantan) during a good part of 1980 while logs f almost comparable quality were available in the local market at US$60-70/m , or roughly at half export prices. This order of price differential, which has persisted po date, has provided a powerful incentive for local processing. Furthermore, the determined attitude of the Indonesian Government signaled both the log-importing countries and the potential investors at home that the government meant business. This was reflected in the rush of applications for government approval on wood processing projects, especially plywood production projects. 9. Despite the increased applications for plywood plant construction, 4 GOI apparently suspected that many of these plywood project proposals might be no more than gestures made in order for the logging companies to continue to obtain log export quotas. Thus, in April 1981, more stringent measures were r announced to ensure an expansion of an integrated wood processing industry 1/ For details of the government-imposed charges on logs, see Kenji Takeuchi, VMechanical Processing of Tropical Hardwood in Developing Countries: Issues and Prospects of Plywood Industry Development," World Bank Commodities Division Working Paper No. 1982-1 (January 1982), Annex D, pp. 98-99. The data are as of April 1980. -4- through a joint decree of four directors generr . (DG)--i.e., for Forestry, Multifarious Industry, Domestic Trade and Foreign Trade--on "the promotion of integrated wood processing industry with plywood industry as the core, development of forest exploitation and determination of log export allocations." Essentially, the policy was revised by this decree to give log export quota allocations only to the forest concessionaires which have integrated processing facilities, with "concentration" on plywood production, either already in operation or under active construction. This meant that those concessionaires who had filed applications for construction of plywood factories would not be given log export quota allocations until the proposed projects were under active construction. 10. Finally, a few significant changes in timber policy were announced in February 1982 in the form of modifications to the April 1981 joint decree. The objective of the latest policy is to phase out log exports completely and to establish an integrated wood processing industry with plywood production as its core by 1985. Under this policy the companies that are already producing plywood and other processed products would not be given any quotas for log exports, but the companies which have integrated wood processing facilities under construction and those which are recognized to have such facilities under construction before January 1, 1983, would be given log export allocations for three years only. It is important, to note that the3e regulations and the plan for complete ]..ase-out of log exports by 1986 do not apply to Irian Jaya which would continue to export logs, although the total allowable export volume of logs from 3Irian Jaya is likely to remain subject to a maximum limit (currently 230,000 m a year). III. Government Projections for Timber Production and Exports 11. Currently, GOI plans indicate that log exports, which have come down substantially already (to 4.0 million m in 1982), would be reduced in steps to be phased out completely by the end of 1985. At the same time, these plans call for a rapid increase in the volume of logs to be processed at 1 cal mills; total log produStion is projected to rise from lome 23 million m in 1981/82 to 33 million a by 1985/86, and to 39 million m by 1988/89. Current GOI projections for log supply and its distribution to sawmilling, plywood- making and export sectors for the period 1981/82 to 1988/89 are shown in Table 2. 1/ The plans call for a 50% increase in log "consumption" in the sawmilling industry in the four years up to 1985/86 and a tripling of the log requirements by the plywood sector in the four years. 12. The above plans in turn reflect the projections for installed capacity and market demand (domestic and export) growth for sawmilling and plywood-making sectors; these are shown in Table 3. The projections for installed capacity and demand (market potential) presented in Table 3 indicate that: (i) a surplus in sawmilling capacity is expected to persist for several 1/ The projections were prepared by the Coordinating Team for Forest Product Industry, and, strictly speaking, have not yet been officially adopted by the government. However, the industry is now using them as broad guidelines for its further development, according to APKINDO. -5 - Table 2: INDONESIA: GOI PROJECTIONS FOR SUPPLY OF LOGS, 1981/82 - 1988/89 (million m3 To For To Plywood Export Year Sawmills Mills in Logs Total ---------------------million m3----------------------- 1981/1982 13.6 4.1 5.6 23.3 1982/1983 15.0 6.1 4.1 25.3 1983/1984 16.4 8.3 3.3 28.0 1984/1985 18.4 10.4 21.5 31.3 1985/1986 20.4 12.4 0.0 32.8 1986/1987 22.4 12.9 0.0 34.3 1987/1988 24.4 12.9 0.0 37.3 1988/1989 26.4 12.9 0.0 39.3 Note: Log supply calculated at 80% of optimal capacity. Source: Coordinating Team for Forest Product Industry, 1981. Cited in Karsudjono Sinduredjo, "Concise View on the Development of Wood- based Industry in Indonesia," Jakarta, February 1982 (mimeographed). Table 3: INDONESIA: GOI PROJECTIONS FOR CAPACITY AND DEMAND (DOMESTIC AND EXPORT) FOR SAWNWOOD AND PLYWOOD SECTORS, 1981-82 - 1988-89 (-000 M3) Demand (market Potential) Installed Capacity Sawn Timber Plywood Year Sawmill Plywood Domestic Export Domestic Export 1981-1982 12,300 1,552 4,800 2,000 900 900 1982-1983 12,700 1,957 5,100 2,400 1,200 1,500 1983-1984 15,020 3,233 5,400 2,800 1,500 2,100 1984-1985 15,020 4,975 6,000 3,200 1,800 2,700 1985-1986 15,020 5,846 6,000 3,600 2,400 3,000 1986-1987 15,020 7,000 7,200 4,000 2,700 3,200 1987-1988 15,250 7,000 7,800 4,400 3,100 3,400 1988-1989 16,500 7,000 8,400 4,800 3,440 3,600 Source: Coordinating Team for Forest Product Industry, 1981; cited from Karsudjono Sinduredjo, op. cit. -7- years; and (ii) plywood-making capacity would fall short of demand for several years. Furth rmore, the plans call for an3 increase in sawnwood exports from 2.0 million m in 1981/82 to 3.6 million m i 1985/86 (16% per year) and an increase in plywgod exports from 0.9 million m (including veneers) in 1981/82 to 3.0 million m in 1985/86 (35% per year). Domestic consumption of sawnwood and plywood is also expected to increase rapidly until 1985/86; sawnwood at 5.8% per year and plywood at 28% per year. 13. There are several problems with the current GOI projections for exports and production. First of all, all the figures shown for FY1981/82-in Table 2, and the figures for demand (market potential) for FY1981/82 in Table 3 appear to be too large, when compared with information from other sources. Timber statistics in Indonesia are notoriously unreliable; or, at least, figures differ widely, depending on the sources used. However, data on exports usually are relatively more reliable, with discrepancies between sources being relatively minor. For production and consumption, it may be more useful to focus on the projected growth rates than on the absolute levels projected. 14. Secondly, the GOI projections for growth rates for consumption of sawnwood and plywood, which may have been somewhat too ambitious when they weE made two years ago, now appear to be clearly too optimistic as they were prepared without anticipation of the current grave recession. Even though income elasticities of demand for sawnwood and plywood are relatively high for developing countries, the projected growth rate of 8.4% per annum for sawnwood consumption for the period from FY 1981/82 to 1988/89, for example, would be too high, as it is now assumed that the Indonesian economy will grow only at about 4-5% per annum. (Consumption of sawnwood actually declined from 2.9 to 2.3 million m between 1977 and 1981. See Table 4.) The projected growth rate for plywood consumption is 21% per annum for the same period. Supply of plywood in Indonesia had been quite limited until recently, and, therefore, as supply has increased rapidly in the last few years, consumption has also increased sharply--e.g., 35% per annum in 1977-1981, starting from a small base (Table 4). In the next few years, as production expands rapidly, plywood consumption is likely to continue to rise rapidly. Nevertheless, it is hard to believe that consumption would grow at such a high rate as 21% per annum over the next 7-8 years now that the economic growth rate is likely to be 5% or lower per year, as compared with the 8.1% growth in 1976-1981. 15. Thirdly, turning to the export side, a growth rate of 13.4% per annum from 1981/82 to 1988/89 is implied by the GOI projections for sawnwood exports, and a growth rate of 22% per annum is implicit in the plywood exports. Given the current gloomy outlook for world economic growth and the problems of quality with Indonesian products, the implied growth rates for exports of sawnwood and plywood also appear to be too optimistic. 1/ 1/ Very recently, APKINDO (the Indonesian Plywood Producers" Association) substantially reduced plywood demand and supply projections for 1983. However, the revisions to the projections for the subsequent years appear to be minor. Table 4: INDONESIA: EXPORTS, CONSUHPTION AND PRODUCTION OF SAWNWOOL PLYWOOD (INCLUDING VENEERS) AND LOGS (million a3) Actual Estimated Projected 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1990 Sawnwood (NC+C) Exports 0.59 0.76 1.28 1.20 1.21 1.37 1.45 1.60 1.70 1.90 2.50 Consumption 2.92 2.74 2.12 2.21 2.30 2.38 2.45 2.60 2.70 2.90 3.70 Production 3.51 3.50 3.40 3.41 3.51 3.75 3.90 4.20 4.40 4.80 6.00 Plywood & Veneers o Exports 0.01 0.09 0.19 0.28 0.66 1.20 1.40 1.70 1.80 1.80 2.80 1 Consumption 0.27 0.38 0.50 0.73 0.89 1.00 1.20 1.40 1.60 1.70 2.20 Production 0.28 0.47 0.69 1.01 1.55 2.20 2.60 3.10 3.40 3.50 5.00 Logs (NO+C) Exports 18.93 19.46 18.16 15.18 7.20 4.00 3.50 2.00 0.50 1.00 1.50 Production 26.63 25.55 25.97 23.74 17.17 15.92 16.62 16.82 16.37 17.83 24.00 NC - nonconifers. C - conifers. Source: 1977-1980 (actual) - FAO Yearbook of Fbrest Products, 1980. 1981 (actual) - Autbor-s estimates based on industry information. 1982-1990 (projected) - Author's estimates. * -9- IV. Alternative Projections for Timber Production, Consumption and Exports. 16. Table 4 presents a set of alternative projections for exports, consumption and production of sawnwood, plywood (including veneers) and logs for (CY) 1983-1990, along with historical data for 1977-1982. The consumption projections for sawnwood and plywood assume an economic growth of 5% per annum for the 1980s decade in Indonesia. The export projections for sawnwood and plywood take into account the potential growth in overseas market demand and assume a slow but steady improvement in the competitive position of Indonesian producers in terms of product quality and marketing capability. The log c export projections assume that the GOI's plan to phase out log exports by 1985 will be carried out; except for the log exports -from Irian Jaya which are assumed to increase steadily. While Irian Jaya is exempted from the policy of phasing out log exports, the total volume of log exports is subject to a maximum limit, currently 230,000 m3 a year. As the forest resources in Irian Jaya are poorer in commercial potential (lesser known species and lower density of commercial species) than other forest areas in Indonesia, it would be more sensible for GOI to relax the limitation on log exports from Irian Jaya to promote the lesser known species as exports of processed products from Irian Jaya are not likely to increase rapidly. The log export projections presented in Table 4 thus assume that the limitations on log exports from Irian Jaya will be either removed or relaxed substantially. 17. The log production projections have been derived by estimating the volume of log requirements in sawnwood and plywood production. Table 5 shows the wood accounting in roundwood equivalent units underlying the projections given in Table 4. A. Sawnwood 18. There is no agreed estimate for the existing sawmilling capacity, nor is there a firm basis for projecting future capacity increases in the sawmilling sector. Table 6 reproduces the status of sawmilling capacity in 1981 as reported by the President of the Indonesian Plywood Producers' Association (APKINDO). Accordin to these data, existing sawmilling capacity is as large al over 12 million m a year, as compared to actual production of 3.5 million m in 1981. On the other hand, according to a recent FAO report, total "in-take" capacity of sawmills existing as of the end of 1979 was 7.2 million m , implying an output capacity of no more than 4.0 million m . 1/ 19. Setting aside the uncertainty as to the precise level of sawmilling capacity in Indonesia today, if all of the 127 mills listed as "under construction" and "in application" in Table 6 are completed, there would be additional capacity of 3.6 million m /year within the next few years. It appears that only one half of this additional capacity is needed to meet the anticipated increases in demand by 1985. In view of the uncertainty in export market growth and the possible financing difficulties in these projects, expansion of sawmilling capacity is likely to be slower than was anticipated. 1/ L. Waring, "Primary Wood Based Industries," Forestry and Forest Products Development Indonesia, FAO, February 1981 (FO: INS/78/054 Working Paper No. 11), p. 5. Table 5: INDONESIA: PRODUCTION, EXPORTS AND CONSUMPTION OF SAWNWOOD, VENEERS, PLYWOOD AND LOGS IN ROUNDWOOD EQUIVALENT (million m3 - roundwood equivalent) Actual Estimated Projected 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1990 Sawnwood (NC&C) Exports 1.1 1.4 2.3 2.2 2.2 2.5 2.7 2.9 3.1 3.5 4.6 Consumption 5.3 5.0 3.9 4.0 4.2 4.4 4.5 4.8 4.9 5.3 6.4- Production 6.4 6.4 6.2 6.2 6.4 6.9 7.2 7.7 8.0 8.8 11.0 Plywood (incl. veneers) Exports 0.0 0.2 0.4 0.6 1.5 2.8 3.2 3.9 4.1 4.1 6.4 Consumption 0.6 0.9 1.2 1.7 2.1 2.3 2.8 3.2 3.7 3.9 5.1 Production 0.6 1.1 1.6 2.3 3.6 5.1 6.0 7.1 7.8 8.0 11.5 0 Logs (NC&C) Exports 18.9 19.5 18.2 15.2 7.2 4.0 3.5 2.0 0.5 1.0 1.5 Consumption 7.7 6.1 7.7 8.5 10.0 12.0 13.2 14.8 15.8 17.0 22.5 Production 26.6 25.6 25.9 23.7 17.2 16.0 16.7 16.8 16.3 17.4 24.0 Mmo Items Total Exports 20.0 21.1 20.9 17.8 10.9 9.3 9.4 8.8 7.7 8.6 12.5 Consumption 5.9 5.9 5.2 5.7 6.3 6.7 7.3 8.0 8.6 9.2 11.5 (Discrepancy) (-0.7) (+1.4) (+0.2) (-0.2) (0.0) NC - non-conifers. C - conifers. Source: 1977-1980 (actual) - FAO Yearbook of Fbrest Products, 1980. 1981 (actual) - Author-s estimates based on industry information. 1982-1990 (projected) - Author-s estimates. - 11 - Table 6: INDONESIA: THE STATUS OF SAWNILLING CAPACITY, 1981 Number Installed Phase of Development of Plants Capacity 1,000 m3/year 1. In production. 12,322 - Owned by logging concessions 202 6,296 - Others, incl. hand-saw operation NA 6,026 2. Under construction 27 814 3. In application 100 2,766 4. Total NA 15,901 Source: DG Forestry and DG Multifarious Industries; cited from Karsudjono Sinduredjo, op. cit. - 12 - B. Veneers 20. GOI has decided that production of "green" veneers for export is not considered to constitute an integrated processing; only production of "dry" veneers constitutes an integrated processing operation that qualifies the company in question for log export allocations for the limited time as announced. Therefore, in the projection exercise, veneer exports that might continue are included in the projections for plywood. C. Plywood 2J. Currently, plywood capacity in Indonesia is estimated at 2.7 million m /year, involving 40 factories. Table 7 shows the status of plywood projects as of April 1982. When the 39 factories currently under construction are completed (say within the next two years), Indonesia's total capacity would be 4.4 million m a year by 1984. If all the other projects that are in various stages of license application are completed, total capacity will be 8.8 million m /year. However, even if these projects are formally approved immediately, it is unlikely for all of the projects to be completed in three years. Considering the past record of project implementation in Indonesia, no more than 100 factories (with capacity of 6 million m 3/year) are likely to be in actual production by the end of 1985. 1/ The GOI can quickly process all the pending applications for construction of plywood mills without worrying that all these projects might be implemented e):peditiously and result in huge excess capacity. If indeed an excess capacity should develop, market competition would weed out the 1ost inefficient operations. 22. Table 8 summarizes the export volume and value projections for sawnwood, plywood (including veneers) and logs for 1983-1990, along with historical data for 1979-1982. Total export earnings are estimated at only around 840 million dollars in 1982, and projected to increase slowly to 1.13 billion dollars in 1986. Export revenues from log exports will continue to decline, to $52 million in 1985, but will then begin to rise as log exports from Irian Jaya pick up in the subsequent years. Both export earnings from sawnwood and plywood are expected to rise over the entire period. However, the expected increases from processed exports are never likely to make up for the export earnings loss resulting from the log phase-out policy until 1990 and beyond, although there would be other obvious benefits from increased local processing. 2/ 1/ According to the latest projections prepared by APKINDO (dated November 1982), the number of mills is projected to r ach 95 with total capacity (based on two shift operations) of 7 million m /year. 2/ The immediate benefit of the slower exploitation would be conservation of forest resources (resulting from slower exploitation than otherwise). The benefits of local processing would be increases in the value added and foreign exchange earnings per unit of logs, linkage effects, employment effect and regional development effect. For discussions on the benefits of local processing, see Kenji Takeuchi, op. cit. - 13 - Table 7: INDONESIA: THE STATUS OF PLYWOOD CAPACITY DEVELOPMENT AS OF APRIL 1982 Number Phase of Development of Plants Capacity 1,000 m3/year 1. Operation 40 2,732 2. Under construction 39 1,678 3. License granted 36 2,152 4. Provisionally licensed 20 597 5. On application 34 1,622 6. Total 169 8,780 Source: APKINDO ÿþTable 8: INDONESIA: EXP0RTS 0F WOOD PRODUCTS, QUJANTITY, VALUE AND UNIT VALUE, la 1979-1981 (ACTUAL), 1982-1986 AND 1990 (PRO.JECTED) Actual Estimated Projected Unit 1979 1980 1981 1982 1983 1984 1985 1986 1990 Logs Quantity million m3 18.2 15.2 7.2 4.0 3.5 2.0 0.5 1.0 1.5 Value mil ion $ 1,550.3 1,514.8 547.0 340.0 311.0 190.0 52.0 118.0 225.0 Unit Value $/m 85.2 99.7 76.0 85.0 89.0 95.0 104.0 118.0 150.0 Sawnwood Quantity million m3 1.28 1.20 1.21 1.37 1.45 1.60 1.70 1.90 2.50 Value mil ion $ 253 .3 249 .8 210 .0 226 .0 253 .8 312.0 374 .0 494 .0 815 .0 Unit Value $/m 183.8 208.2 174.6 165.0 175.0 195.0 220.0 260.0 326,.0 Veneers /b Quantity million m3 0.02 0.04 0.18 0.19 - - - -- Value mil ion $ 4.0 7.2 23.0 29.0 - - - - - Unit Value $1m e 200.0 e 180.0 e 130.0 153.0 - - - - - Plywood /b Quantity million m30.13 0.25 0.60 1.00 1.40 1.70 1.80 1.80 2.80 Value mil ion $ 31.7 55.4 139.8 245.0 343.7 425.0 468.0 514.8 994.0 Unit Vaue $1. 243.9 221.6 e 231.7 245.0 245.5 250.0 260.0 286.0 355.0 Total Exports Roundwood equivalent million ni3(r) 20.9 17.8 10.9 9.2 9.4 8.8 7.7 8.6 12.5 Value million $ 1,821 1,828 920 840 908 927 894 1,127 2,034 la Value and unit value figures are in current US dollars. 7FFor the years 1983-1990, veneer exporta are included in plywood exporta. "e" means estimated. Source: 1979-1980 - FAO, Yearbook of Ròrest Products 1980, except for values for veneers. 1981 - Author's estimates based on industry information. 1982-1990 (projected) - lor quantities, see Table 4; unit values and values estimated on the basis of the latent price forecasts of the 1Bank Comnmodities Division. - 15 - V. Capital Requirements Implications 23. No comprehensive data on investment requirements are available on a project-by-project basis. However, by assuming an average value of investment requirements per annual cubic meter of plywood production capacity, rough orders-of-magnitude estimates can be made for the proposed development program. 24. According to APKINDO, a typical plywood plant in Indonesia consists of a 3-line plywood processing mill accompanied by a blockboard manufacturing line and a sawmill. 1/ The annual capacity of such production complex oI a typical 2-shift op ration will be: plywood 50,000 m (log3input 115,000 m ); biockboard 6,000 m (log input nil); and sawnwood 36,000 m (log input 72,000 m ). The total investment cost of such a production complex, based on the data for a recently completed project in Indonesia, would be about $13 million (including working capital). The foreign exchange requirements (= the import cost of machinery as well as other foreign exchange expenditures) of such a project would be about $9 million. These data imply that an investment of about $260 is required for each annual cubic meter output capacity of plywood (includin- the required investment for the associated blockboard and sawnwood capacity) and that about 70% of the investment requirements would be import- related or the foreign-exchange cost. 25. Excluding the plywood plants that are already in opera tion, new capacity to be created in the future would be about 6.05 million m /year, if all the projects included in Table 7 are carried out. This would imply a total investment of about $1.6 billion (1982$) of which about $1.1 billion would be the foreign exchange component. VI. Policy Issues 26. The most important policy question is whether or not GOI should stick to the latest policy statement on log export restrictions in the face of relatively gloomy demand prospects for exports of plywood. There are several circumstances that would favor a more gradual approach toward the complete phase-out of log exports from Indonesia. These are the depressed plywood demand, the existence of excess capacity for plywood, the availability of log exports from other supplying countries and the relatively poor quality of Indonesian plywood. The following two paragraphs elaborate on these circumstances. 27. Industrial countries" import demand for tropical hardwood plywood (and sawnwood) is currently quite depressed, and any recovery there is expected to be not so vigorous, given the lukewarm economic growth prospects and housing/construction prospects. Furthermore, demand prospects for plywood, imports by the Middle Eastern countries are likely to be less active than in the recent years. In the meantime, there is a large excess capacity for plywood production in Western Europe, Japan, Rep. of Korea, and elsewhere in Asia. 1/ The information used in this paragraph was provided by Mr. Karsudjono of APKINDO through a note dated November 25, 1982. - 16 - 28. As for the prospects for availability of veneerlogs from other sources to the importing countries, this is likely to be reduced, but not so fast as commonly expected because of the following reasons. First, although the Philippines has banned log exports, Sarawak and Papua New Guinea intend to expand log exports. Second, it would appear to be politically difficult for Sabah to reduce log exports abruptly as the state's fiscal revenue is heavily dependent on taxes/royalties related to log exports. 29. Furthermore, it would take some time for the Indonesian plywood industry to upgrade the quality standards of its products to compete successfully with the traditional exporters in the major importing markets, except for China and Middle Eastern countries. 'Table 9 shows Indonesia's exports of plywood by destination in 1980 and 1981. Currently, the Middle East and People's Republic of China are the two largest markets for Indonesian plywood. Since Indonesia does not have diplomatic relations with China (PRC), Indonesia's plywood exports to China (PRC) are shipped to Hong Kong. It is believed that predominant portions of the exports to Hong Kong are destined for China (PRC). In addition to the quantities directly exported to Middle Eastern countries, some unknown but significant portion of exports to Singapore is believed to be also destined to the Middle Eastern market. Buyers from the Middle East and China (PRC) are less particular about product quality, and are more willing to accept Indonesian products so long as prices are "right", although their quality preferences may change in the future. The export projections given above assume a steady but slow improvement in the quality standards as well as the marketing capability of Indonesian firms and thus, only a gradual increase in the exports to the markets with higher quality standards such as EEC, United States and Japan. 30. In conclusion, it is likely that Indonesia's plywood exports will not grow as fast as the government plans have anticipated. However, this does not necessarily mean that Indonesia would be better cff by cancelling its policy of phasing out log exports because there are definite advantages in reducing the volume of log exports and hence production of logs. For example, there would be an advantage from the viewpoint of resource conservation and environmental protection. As the real prices of high quality logs of preferred tropical hardwood species are expected to rise in the future, conserving these trees in the form of standing trees for later exploitation might even increase the present value of the resources concerned. Another possible plus resulting from lower levels of log exports would be the higher prices received on the export logs during the transition period. Other advantages associated with the development of the wood processing industry would be additional employment, higher value added, and regional development. 31. And yet, one thing is sure: if log exports are brought down to zero, fiscal revenues from forestry would be drastically reduced anld would not increase unless and until the processing industry becomes profitable and yields a sufficient amount of income tax revenue for the government. Therefore, with all things considered, it is recommended (a) that GOI maintain the policy of essentially free exports of logs from Irian Jaya and (b) that GOI even consider delaying the target date of the complete phase-out of log exports (except for Irian Jaya) to, say, 1987 instead of 1985. Table 9.(A): INDONESIA: EXPORTS OF PLYWOOD AND BLOCKBOARD, 1977-1981 (volume - m3; value, FOB - US$1,000) 1971 1978 1979 1980 1981 Destination Volume Value Volume Value Volume Value Volume Value Volume Value 1. U.S.A. 51 81.3 - - 18,969 3,352.4 26,095 5,351.9 66,984 16,993.1 2. Canada - - - - 5 1.6 - - - - 3. U.K. 6,191 1,760.2 25,679 8,086.2 43,946 12,571.0 16,348 3,644.4 63,732 15,322.5 4. Europe 56 20.6 961 162.7 9,427 2,378.8 14,546 2,860.2 22,378 4,454.2 5. Hiddle East - - - - 17,969 4,202.0 150,651 33,321.0 6. Australia - - - - - 531 128.0 15,908 3,661.0 7. Japan - - 17 8.0 316 59.4 8,801 2,907.6 7,328 1,364.5 8. Tatwan, China - - - - - - 19,941 4,618.6 9. Hong Kong 914 714.6 1,995 313.0 35,537 9,471.0 99,810 22,361.2 127,362 28,165.5 10. Singapore 1,689 375.2 682 115.4 17,126 3,522.6 50,491 11,706.0 77,562 17,051.4 11. Korea, Rep. of - - - - - - - - 7,800 1,639.9 12. Othere 7 1.9 - - 14 363.4 10,423 2,215.3 37,500 13,211.5 TOTAL 8,900 2P350.9 29,334 89685.2 125 340 31,720.2 245,015 55,376.5 591,146 139,801.6 Table 9.(B): INDONESIA: EXPORTS OF VENEER, 1977-1981 (volume - M; value, FOB - US$1,000) 1977 1978 1980 1981 1982 Destination Volume Value Volume Value Volume Value Volume Value Volume Value 1. U.S.A. 6,225 346.6 28,465 3,383.3 9,302 1,205.0 29,322 3,865.0 26,590 4,824.2 2. Canada - - 9,630 1,252.0 - - - - - 3. Hong Kong - - - - -. - - 18 13.0 4. Thailand - 701 9.8 3,042 136.5 - - - 5. Japan - - - - 13 11.6 6,291 758.7 23,435 2,521.1 6. Korea, Rep. of - - - - 1,583 236.6 - - 45,723 6,277.7 7. Singapore - - - - 1,331 148.3 2,084 278.3 64,394 7,553.5 8. Taiwan, China - - - - - - - - 16,961 1,790.5 9. Australia - - - - - - - - 3 417.0 TOTAL 6,225 346.6 38,796 4645.0 15,271 1,738.1 37,697 4,90.9 .77,123 22,980.4 TOTAL Plywood & Veneer 15,133 21697.5 68,130 13330.3 140,611 33,458.2 282,712 601278.4 774,269 162,781.9 Source: ASOSIASI PRODUSEN KAYULAPIS INDONESIA (Indonesian Plywood Producers Amn.) - 18 - 32. Finally, if the GOI's all-out industralization strategy in the forestry sector were to be successful, investment in infrastructure would be indispensable. GOI is considering the establishment of timber terminals and processing centers, which in principle would improve the efficiency of the timber processing industry. So far, only one project has actually been decided upon, i.e., the establishment of a wood processing center near the port of Tanjun in Jakarta (Marunda project). The project is conceived as an industrial estate project involving supply of electric power, water purification plant, training centers, quality control institute, and it is hoped to include a range of woodworking and furniture making factories. Similar projects are under consideration for other parts of the country. 33. GOI is also considering the establishment of timber terminals at several key ports in Java, Sumatra, Kalimantan and Sulawesi, which would serve as efficient transshipment points for exports (and domestic distribution) of timber products. Since the plan to phase out log exports is in place and construction of a vast number of plywood mills as well as additional sawmills is well under way, it appears that the establishment of some timber industrial estates and timber terminals at strategic locations would be very urgent, if not too late.