Review of investment environment in wood processing for selected competitor countries in the last 10 years.
Chile
Key drivers of investments
- Economic growth
- Government incentives
- Increasing supply of low cost wood
- Low processing costs
The forestry sector in Chile enjoyed a substantial subsidy from the Government in the form of the reimbursement of 75 percent of planting costs. The Decree Law 701 operated from 1974 until 1994. During these 20 years several locally owned companies started buying cheap land and planting radiata pine on it. The result of the government subsidy to planting combined with cheap available land was a large forestry resource established at a very low cost by private companies, which could then start to invest in wood processing ventures.
The development of the wood processing industry was based around the pulp industry, and was driven by the two largest companies, Arauco and CMPC. As the availability of fibre grew, so did the investment in new pulp mills but also new sawmills and re-manufacturing plants.
Chile enjoyed a "golden" economic period between 1985 and 1998 when the economy grew at annual rates of 6 to 7 percent. The wood processing industry was no different and benefited from the buoyant economy and the increasing wood availability to expand its capacity and to develop new products and markets.
For decades it was a strong belief in the Chilean industry that the country needed to move away from exporting raw materials to exporting manufactured goods in order to become a developed country. This belief, combined with low cost competitiveness in the log export business compared with New Zealand has driven the industry to increase the processing and re-manufacturing of forest products in the last 10 years.
According to CORMA’s estimates, investment in the forestry sector totalled US$ 4.1 billion for the period 1991-1998 and it projects future investment for the period 2001-2008 to be around US$ 3.7 billion. These figures include both local and foreign investment in forests and processing plants with an emphasis on the pulp and paper sector for future investment but also including timber processing. (FAO ACPWP, 2001)
Another factor to consider has been the role of the government. CORFO, the corporation for developing production, has provided access to credits for individuals or small companies wanting to start a small processing plant or upgrade an existing one. Without having an impact at large-scale company level, CORFO has helped develop the industry at the small-scale level. Another contributor to the development of the wood processing industry in Chile has been Fundacion Chile, a partnership between the Chilean government and the American ITT Corporation. It provides technical expertise in several export-oriented businesses. One of its major successes has been the introduction of the salmon farming industry, which today is one of the largest in the world. In the forestry area, it has developed for example a furniture company, leading the way for other entrepreneurs to follow. Typically it develops a company where it identifies export potential, and once the company is up and running it sells it to private enterprise. This model is a very effective way to transfer technology and develop new opportunities for a particular industry that otherwise would not be considered by private companies.
One of the key aspects in the development of the Chilean wood processing industry has been its aggressiveness in seeking and developing new products and markets. In the year 2000, a total of 941 companies exported 385 different forest products to 98 countries (INFOR, 2001). Here again, another government agency – Pro Chile – provides free assistance to small producers wanting to export. Effectively, each Chilean embassy acts as a branch of Pro Chile.
After 1994, the government subsidy to plantation establishment for the big companies was terminated. However, it continues now with the aim of extending forest plantation establishment by small landowners, which is a new development in Chile. The government agency that oversees this project is CONAF, the National Forestry Corporation, which also monitors all the forest management and the fire control programs, plus the administration of the National Parks and other protected areas.
In terms of foreign direct investment, the main source for the last 10 years has been through the Foreign Investment Statute (D.L. 600) first established in 1974. The statute offers a series of unique and special guarantees. By means of this mechanism, the investor signs a legally binding investment contract with the Chilean State. Such a legal document constitutes a most important guarantee for the investor because the government cannot unilaterally modify the terms of the contract, even if it subsequently adopts new legislation. (Ministerio de Economia de Chile, 2001)
Sweden
Key drivers of investment
- Increasing availability of wood
- Devaluation of currency in 1992
- Opportunities for large scale production and economies of scale
- High technology and knowledge development
In terms of solid wood processing, the Swedish forestry industry has gone through a period of structural change in the last 10 years. The main driver for this change has been achieving economies of scale in production and distribution of forest products, especially timber.
Between 1990 and 1995 there was a massive increase in production, fueled by large investments made in the sawmilling area. In 1992 after the devaluation of the krona, there was a strong increase in exports of sawnwood from 4 million cubic metres to 11 million cubic metres in 1998. The market conditions that allowed this expansion were the collapse of the Soviet Union and a reduced presence of Canada in European markets. (Elowson, 1998)
During the last five years there has been a tendency to fewer and bigger sawmills. The number of sawmills that produced more than 100,000 cubic metres has increased by 50 percent to 33 sawmills in 1998. Half of these had annual production of timber in excess of 150,000 cubic metres. At present, six large sawmill projects in Sweden are under way, all of them with planned production capacities of 250 – 300 thousand cubic metres per year. (Elowson, 1998)
Parallel with the increased size of the sawmills, there has been an increase in the level of processing of products, with substantial investments in drying, stress grading, planing and laminated wood. According to the Swedish Forest Industries Association, investments in sawmilling in 2000 reached US$ 188 million and are projected to be the same for this year. (FAO ACPWP, 2001)
In terms of market development, Europe is the main market for Swedish timber. It accounts for more than 80 percent of the volume exported. The largest single market is the United Kingdom with nearly 25 percent of the total volume. The second largest market is North Africa and the Middle East with more than 10 percent of the exports. Outside these areas, only Japan is a significant market (2.7 percent), and there are some investment strategies directed to grow this market, such as precision sawing and gluing of blanks. The U.S. market has been growing rapidly in the last 3 years for Swedish timber exports together with other European producers, although it has not reached yet a significant level (only 1 percent of total sawnwood exports in 1999). (Elowson, 1998)
A strong export oriented pulp and paper industry in Sweden has helped continued development of the forest industry in general.
United States
Key drivers of investment
- Strong economic growth
- Strong demand growth and huge market size
- Highly developed wood processing industry
The United States is the largest producer of forest products, accounting for about 27 percent of the world’s industrial wood production. (U.S. International Trade Commission, 1999) Production of wood and wood products are heavily influenced by general construction levels and softwood lumber and structural wood panels production is closely related with housing starts.
The U.S. lumber market in 1999 was composed of 2/3 structural lumber and 1/3 non-structural totaling 127 million cubic metres. (Taylor, 2000)
The strong economic growth of the United States during the last decade has resulted in increased demand for lumber and other wood products. This buoyant market situation has triggered increasing imports of lumber and other wood processed products from different parts of the world. Canada is still by far the number one supplier of wood and wood processed products to the U.S. (US$20 billion in 1998). (U.S. International Trade Commission, 1999)
Softwood lumber imports increased 17 percent in volume between 1994 and 2000 to reach 45 million cubic metres. Canada alone supplied 96 percent of this volume. Other suppliers were Brazil, Chile, New Zealand and Mexico.
Although Canada is still the dominant supplier, other countries are increasing their shares of the market at high rates especially in the last 5 years. The fastest growing exporters have been Brazil, Sweden, Austria, Chile and New Zealand.
The value of U.S. forest product exports was US$ 22.6 billion in 2000. The value of exports peaked in 1995 at US$ 23.3 billion, had it lowest value of the last five years in 1998 (US$ 19.5 billion), and recovered in the last two years. Between 1994 and 2000 the difference between U.S. exports and U.S. imports increased by US$ 8.5 billion (from $ 3 to $ 11.5 billion). In 2000 the U.S. was a net importer of wood and wood products ($ 11.5 billion). (World Trade Atlas GTIS, 2001)
The U.S. forest products industry is mature and capital is more likely to be generated from within. Although some large corporations have high volumes of production, most lumber producers are small firms. In 1997, the largest lumber producer accounted for 7 percent of total U.S. production, the 5 largest producers accounted for 21 percent, and the 20 largest firms accounted for 39 percent. The remaining production is manufactured in mills numbering in the thousands. The wood panels industry is more concentrated, with total number of producers in the hundreds. (U.S. International Trade Commission, 1999)
Foreign investment in U.S. companies accounts for less than 5 percent of total production, and it is mainly from Canadian and European companies. U.S. investment is concentrated in Canada, accounting for 10 percent of Canadian lumber production and 15 percent of wood panel production. The larger U.S. producers have ownership or some form of partnership in manufacturing facilities in South America, Europe, Asia and Oceania.
The U.S. government provides little direct support to the wood products industry. Although forest resources are abundant and economically accessible, timberlands under public ownership have continued to be withdrawn from logging. The forest products industry owns about 15 percent of the timberland in the U.S. and is heavily dependent on individual private landowners (59 percent) and the Federal and State Governments (26 percent) for its supply of raw material. (U.S. International Trade Commission, 1999) Continued environmental pressures have limited the expansion of the forest industry in the last decade.
Russia
Key drivers of investment
- Privatisation of state-owned timber processing complexes
- Recent devaluation of currency (1998)
In recent years, profound political and economic changes have taken place in the Russian Federation with its rapid transition to a democratic open country. Large-scale privatisation has taken place and transition to a market economy is being realized. However, for a number of reasons this transition has been accompanied by a slump in the economy. Industrial production has been drastically reduced (several times). (FAO ACPWP, 2001)
The forest products industry has been operating at about 30 to 40 percent of capacity and peak production levels were reached in the mid to late 1980s. (U.S. International Trade Commission, 1999)
There are three main forestry areas in Russia: European Russia, Eastern Siberia and the Russian Far East. The average timber cut in recent years has been about 80 million cubic metres. About 60 percent of this comes from European Russia, where forest resources are more accessible than the vast forest resources of the rest of the country. Transport costs are an important cost component of Russian forest product production. The average log is transported 1,600 km (the longest in the world). (U.S. International Trade Commission, 1999)
The investment situation in the Russian forest products industry in the last 10 years may be defined as a painful transition from a centralised planned economy to a free market one. After a long-term recession with alternating periods of stability and depression, a severe crisis in 1998 caused the devaluation of the ruble.
Until recently, the entire Russian forest products industry was characterised by large integrated manufacturing complexes built and managed according to Soviet principles of extreme scale economies. Since the collapse of the Soviet Union, the lack of working capital and company profitability have been, and continue to be, of significant concern. Lack of capital for new equipment and maintenance has resulted in many plants being unable to operate efficiently or having to cease operations.
Although a transition to a free market economy has been made, forest ownership and significant parts of the industry continue to be under State control. Ownership issues are still not clearly defined and are preventing private investment especially on joint government-private holdings. There are major problems relating to the lack of a legal framework, lack of commercial orientation and lack of clear, enforceable property rights.
The variations on the exchange rate of late 1998 changed radically the competitive capacity of manufactured Russian goods on the international market. Also, an increase in oil prices (one of Russia's main exports) contributed to economic stability.
Some major private companies are starting to make new investment, especially in the pulp and paper industry, and more importantly introducing Western management and financial practices. In addition, various major foreign forest products companies have recently purchased financial interests in Russian forest products businesses, again especially on the integrated pulp and paper plants. The Russian government has plans to raise US$ 1 billion in investments to restructure and increase the efficiency of its forest industry during 1999-2006. (U.S. International Trade Commission, 1999)
In 1998 Russia exported US$ 3 billion of forest products, mostly of items not highly processed. Finland and Japan accounted for 70 percent of exports of forest products. (Chaudhry, 1999)
Although recently improved, the investment environment of the Russian forestry industry has been highly unattractive during the last 10 years and industrial commentators predict that some major changes and improvements are necessary, especially in the areas of transparency and corruption, and infrastructure, before it can be considered an attractive country to invest. At present, European Russia is the best-positioned region of the country to attract foreign investment in the forestry industry.
Australia
Key drivers of investment
- Increasing availability of wood from plantations
- Strong economic growth and internal demand
There has been a boom in investment in the Australian forestry industry in the past 5 years (Ausnewz, 2001), characterised by both new foreign and domestic investment.
The softwood processing industry is continuing to build on its capacity to provide low cost wood products and compete in highly competitive domestic and export markets. In recent years, Carter Holt Harvey and Weyerhaeuser have purchased processing facilities. Australia’s major local companies have also strengthened their positions focusing on achieving economies of scale and international competitiveness.
Until recently, Australian producers have been protected by the growing internal market and the relatively high cost of importing sawntimber. Both factors are likely to change in the near future. Increasing international trade trends will likely lower prices of imported timber, although internal demand is expected to remain flat or decline. The increasing availability of the softwood resource supply will be a key driver in the future development of the Australian processing industry.
Australia’s role in international forest product trade has been traditionally as an importer of softwood and hardwood timber, and pulp and paper products. The majority of exports have been hardwood chips. The maturing plantation softwood resource has the potential to alter this role through import substitution and export of a greater range of products.
In the last 5 years, Australian companies have undergone a turbulent period in terms of ownership change and corporatisation of big companies, mergers and acquisitions. All this should be a reflection of a process of preparation to confront future challenges.
The biggest challenge for the Australian wood processing industry is to develop export markets for its growing softwood resource. In this regard, multinational companies established in Australia may have an advantage due to already positioned channels of distribution and brand names on overseas markets.
Contact for Enquiries
Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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