Forestry and Poverty Project Newsletter Issue 15 – August 2010

Crunch Time for US Papermakers

Early next month the United States is expected to hand down its decision on a protracted trade dispute over imports of Chinese and Indonesian paper.

The case involves imports of coated paper from China and Indonesia. Its main uses are in glossy magazines, catalogs and retail packaging. The US market is worth roughly USD 2 billion annually.

The case has garnered attention in forestry circles because it has brought together mature-market companies, organized labour and the environmental movement under one banner. All are pushing for the exclusion of emerging producers from the US market. The companies and the unions claim Chinese companies are subsidized by Beijing and the Indonesian companies are dumping.

The Rainforest Action Network has also enjoined the International Trade Commission to back these complaints because it claims Indonesian paper imports are destroying Indonesia’s rainforest.  It conveniently ignores the 35 percent of Indonesian forests that have been set aside for conservation and protection.

Yet the action from the US producers is symptomatic of something much larger: mature market companies are witnessing a massive shift in both demand and supply that is drastically impacting their relevance in global markets.

The US printing and writing paper market has tanked over the past three years. Between 2007 and 2008, demand for printing and writing paper fell 10 percent. In the following year the fall was 17 percent. It is currently stagnating and expected to fall again in 2012.

The current recession and consumer media habits are the key drivers.

Producers in the US and Europe have also left with high levels of overcapacity and low paper prices. High production costs in the US have prompted many publishers to take their printing offshore.  To make matters worse, pulp prices have skyrocketed on the back of surging Chinese demand for paper products.

US producers are pinning this on Chinese and Indonesian firms. Yet the biggest exporter of coated paper to the US is South Korea, which outstrips China’s exports by as much as 30 percent.

The real story is a massive demand for paper products in China. China is now the largest global purchaser of market pulp, which increased by 44 percent between 2008 and 2009.  There have been substantial increases in capacity in paper manufacturing in China on newer, more efficient machines.

Incremental increases in per capita demand in China are having profound impacts on global consumption and astute mature market players – such as Stora Enso, UPM and Oji – have invested in large manufacturing operations in China.

Astute players in the forest products industry – such as Canadian and US lumber producers, and US paper recyclers – are now exporting to growth markets such as China and Vietnam as local demand falls.

US papermakers are nonetheless determined to plug gaps with government-mandated trade measures. In addition to potential duties, the US tax department recently made a decision that a previously overturned pulp industry subsidy – potentially worth USD 10 billion – will be revived.

There is a long-term question for US paper firms and Washington.  What will happen when US firms attempt to export to emerging markets – and are called out for their own subsidies?


Green Campaigners Add ‘Investment’ to Blacklist

Greenpeace has long called for curbs on imports of forestry and agricultural products from Indonesia. It is now attacking investments which create jobs because they are by Asian-owned businesses.

Last month Oji Paper and Canfor struck an agreement with Paper Excellence (a Dutch company that is part of the Asia Pulp and Paper group) for the sale of the potentially idle Mackenzie pulp mill near Vancouver.

The local community was buoyed. Gibsons, the town of 4,000 people neighbouring the mill, has an economy heavily dependent upon the mill.  Anti-forestry campaigners including Greenpeace protested the decision and called for the companies to reject the investment.

The same month, Greenpeace attacked an investment in a new paper mill in Northern Virginia by a related company in the same group.  Virginia’s Governor was supportive of the mill’s contribution to job creation in Virginia.  Locals criticized Greenpeace for their reckless approach to job creation.

The future for jobs in the pulp and paper industry in the US depends on linkage with the cheapest sources of supply to the biggest market, not turning the industry into the sunset industry like steel where US workers cannot compete with lower paid workers in the Asian region.

As with the growth of Canadian lumber exports to emerging markets in China, the Mackenzie mill is projected to export around 80 per cent of its output to Asia.

The Mackenzie mill, backed by an Indonesian investment, will be sourcing from well-managed Canadian forests, and supplying to customers who are unlikely to be interested in the management of the forests – and whether the forests are FSC-certified or otherwise.  In short, neither financiers nor end-users are interested in FSC certification.

Canada’s forest industry recently struck an agreement with Greenpeace and other campaign groups to effectively call a ‘truce’ on Canada’s boreal forest lands. The industry has been gamed – Greenpeace will still do anything within its means to undermine the viability of the industry.


Revisionism on Emissions from Deforestation

Greenpeace has routinely claimed deforestation and change in land use accounts for 20 percent of the world’s emissions.  This is the basis for claims that Indonesia is the world’s third-largest greenhouse emitter (which the Indonesian Government has formally rejected), and claims that Indonesia’s pulp and paper and palm oil industries were the leading cause.

The World Resources Institute (WRI, a US-based think-tank), whose previous assessment was that deforestation caused 17 percent of emissions (inflated by Greenpeace to 20 percent) has reduced its estimate to 12.2 percent.  World Growth research suggests this number is still too high.  The downward revision was based on 2005 data from the FAO.  Earlier estimates rested on 2000 FAO data.

New data from FAO for 2010 is expected shortly and signs are it will show further falls in deforestation. The pattern of misuse and misrepresentation of data by Greenpeace is becoming regular.

Australia Taking the “Due Diligence” Route on Timber Imports?

Anti-forestry groups have lobbied the Australian Government to introduce measures similar to the costly EU” Due Diligence” Directive which will oblige all purchasers of timber to demonstrate they have established that timber purchased (either produced in Europe or imported) is legally harvested.

Despite evidence in research commissioned by the Government that the incidence of illegal imports was small and imposition of controls would be ineffective, both the Labor Government and the conservative opposition pledged in a tight election campaign just held where Green preferences were important to legislate to ban illegal timber imports.

The election result is not clear.  Methods proposed to impose the ban suggest they will have difficulty complying with obligations under WTO rules, not to restrict trade on the basis of how traded goods are produced.


Forest Certification Meets the Credit Crunch

Forest certification could face some new roadblocks in 2010 according to a new report by the United Nations Food and Agricultural Organization.

The FAO’s annual Forest Products Annual Market Review (FPAMR) states that economic constraints on forestry businesses in the wake of the global financial crisis may mean that many companies will not renew their forest management certificates.

The report points out that a large number of forest management certificates were issued in 2005 in North America, which was a particularly strong year for the forest industry. These certificates will come up for renewal this year.

In addition to the cost of renewal is the fact that standards under FSC in particular have been tightened.

The report also points out that financial pressures will not only apply to the private sector. Governments, which have often subsidized certification schemes through tax incentives of state-run extension programs are now facing tighter budgets, particularly in the United States.


Logging and Biodiversity – No Clear-Cut Case

Environmental campaigners have long made the argument that once a forest is logged – selectively or otherwise – biodiversity values are lost. However, a new paper published by the Royal Society challenges the assumption that previously logged areas have little biodiversity value.

The study, written by academics in the US and UK, examined species richness in unlogged, logged and repeatedly logged forests in Borneo. The study found that 75 percent of bird species and insect species (using dung beetles as a proxy) were retained even after two rounds of logging.

The results showed that single logging of concessions did not impact upon bird species richness, and that insect species populations (using dung beetles as a proxy) were reduced, but leveled off after a second-logging rotation.

The authors used the results to argue that previously-logged forests should therefore be conserved and prevented from being converted into palm oil plantations in order to preserve biodiversity values.


A REDD Rabble in Bonn

The United Nations climate change negotiations in Germany early in August demonstrated little progress on forestry for developing countries.

According to conference documents, the Kyoto Protocol (which expires in two years) track of negotiations is getting closer to an agreement. Negotiators appear to remain open to accounting for almost anything under sources or sinks of carbon. Still on the table is the ability to account for harvested wood products within a national carbon pool. More importantly, the inclusion of forest plantations is still on the table.

It should be remembered that the Kyoto Protocol only has a significant bearing on developed nations

Yet the negotiations under the Bali Action Plan tell a different story for forested developing countries. The current negotiating text for forestry under REDD is a disharmonious rabble of Western Green positions. All of the text is bracketed, meaning nothing is finalized.

Among the positions still in the text are: a prohibition on funding for any projects that include ‘industrial scale’ logging; exclusions of plantation forests from the definition of forest; and a prohibition on carbon credits being generated that can be used offset other emissions.

The likelihood of much of this text staying on the table, let alone being agreed upon, is small. However, what is more interesting for those interested in forestry and poverty is the contrast between the negotiating texts.

Kevin Conrad, Papua New Guinea’s climate envoy, made it clear during the Copenhagen negotiations that he wanted the same standards for forestry under Kyoto applied to REDD. This is something negotiators should remember if they’re planning on finalizing an agreement in the near future.

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