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How increasing transparency and cooperation in the tropical hardwood plywood trade could reduce market fluctuations and price volatility and reinvigorate the trade

MAY 2004

International Organizations Center, 5th Floor, Pacifico-Yokohama, 1-1-1, Minato-Mirai, Nishi-ku, Yokohama, 220-0012, Japan

Tel 81-45-223-1110 Fax 81-45-223-1 Email itto@itto.or.jp Web w.itto.or.jp © ITTO 2004

Reviving tropical plywood

How increasing transparency and cooperation in the tropical hardwood plywood trade could reduce market fluctuations and price volatility and reinvigorate the trade

Lamon Rutten and Tan Seng Hock

ITTO Technical Series No 20 International Tropical Timber Organization

Reviving tropical plywood

How increasing transparency and cooperation in the tropical hardwood plywood trade could reduce market fluctuations and price volatility and reinvigorate the trade

ITTO Technical Series No 20 by Lamon Rutten1and Tan Seng Hock2

1United Nations Conference on Trade and

Development, 388 Avenue de Genève, 0120 Divonne, France; Tel 41-2-917-5770; Fax 41-2-917-0509; Lamon.Rutten@unctad.org

2c/o Samling Strategic Corporation Sdn Bhd,

Fax 603-2162 9301; Email tansh@samling.com.my

Level 42 Menara Maxis, Kuala Lumpur City Centre, Kuala Lumpur, Malaysia; Tel 603-2382 3902;

The International Tropical Timber Organization (ITTO) is an intergovernmental organization promoting the conservation and sustainable management, use and trade of tropical forest resources. It has 59 member governments, which collectively represent more than 75% of the world’s tropical forests and about 90% of the global tropical timber trade. Development projects in member countries are one important mode of operation; the Organization has funded more than 700 projects, pre-projects and activities at a total valueof more than US$258 million. At any one time it employs, through its project program, more than 500 field staff in the tropics.

ITTO has developed a series of internationally agreed policy documents for achieving sustainable forest management and forest conservation and assists tropical member countries to adapt these to local circumstances and to implement them in the field. ITTO also collects, analyses and disseminates data on the production and trade of tropical timber and funds a range of projects aimed at developing value-added industries at both the community and industrial scales.

Cover photos courtesy Samling Corporation, Malaysia © International Tropical Timber Organization 2004

This work is copyright. Except for the ITTO logo, graphical and textual information in this publicationmay be reproduced in whole or in part provided that it is not sold or put to commercial use and its source is acknowledged. This report was commissioned by ITTO and funded by the governments of Japan, Switzerland and the USA through the ITTO Bali Partnership Fund. However, ITTO does not necessarily endorse or support the findings or recommendations presented herein.

ISBN 4 902045 09 5

Foreword

The Asian currency crisis in 1997–98 marked a turning point for the international trade in tropical plywood. In the five years prior to 1997, 2.7-m Indonesian plywood, the largest category of tropical plywood in international markets, was fetching around US$700/m3and, in one short period, reached as high as US$780/m3. In 1997, though, the impact of the currency crisis in Asia caused prices to plummet to as low as US$250/m3, in the vicinity of which they continued to languish for some considerable time.

The value of international trade in tropical plywood is estimated at US$6 billion a year, more than twice the size of the global market for tropical logs. Given the size of this trade, the massive decline in plywood prices – coupled with increasing competition from other wood-based (and non-wood-based) panel products – has had a major impact on many ITTO producer member countries. Companies have collapsed, workers have been laid off and foreign earnings have shrunk. Nor has the resource itself benefited: lower prices undermine efforts to achieve sustainable forest management, at least partly because less money is available for forest management.

ITTO is dedicated to the conservation and sustainable management, use and trade of tropical forest resources. Major fluctuations in the price of tropical timber, therefore, are of concern to it because they affect the development of the trade and have a negative impact on the resource. Recognizing the seriousness of the situation, ITTO commissioned an analysis of the sector in 2002. That analysis, which was presented to the International Tropical Timber Council – the Organization’s governing body – in 2003, forms the basis of this report.

It is a must-read for plywood manufacturers, traders and international trade policy-makers. It shows that price volatility and inadequate price discovery mechanisms are major handicaps in the international trade of tropical plywood, thereby pointing the way to a potential lifeline for the industry. It concludes that there is no magic bullet, no simple solution to problems in the sector. Rather, the report outlines a set of measures and practices that should strengthen the industry and help it to face its challenges. Some actions can be implemented by individual companies and others via cooperation between companies through associations at the country level; others may need an expansion of ITTO’s activities.

The two authors, Tan Seng Hock of Samling Corporation in Malaysia and Lamon Rutten of the United Nations Conference on Trade and Development (UNCTAD), bring considerable experience to this study. Mr Tan has been marketing tropical plywood for many years, while Mr Rutten has spent most of his professional life in trade analysis and previously produced a report for UNCTAD on the plywood futures market.

The tropical plywood sector remains in a fragile state. It is ITTO’s hope that this report will help to catalyse the action that is needed by all players if the sector is to flourish once more.

Manoel Sobral Filho Executive Director International Tropical Timber Organization

Acronyms

ABIMCIBrazilian Association of Mechanically Processed Timber

APAEngineered Wood Association APKINDO Indonesian Wood Panel Association APPFASEAN Panel Products Federation

ASEAN Association of Southeast Asian Nations

B2B Business-to-business B/C British Plywood Veneer Standard

BDMC Guangdong (General Chamber)

Building and Decorative Material Chamber

CBOTChicago Board of Trade CIFCost, insurance and freight CMEChicago Mercantile Exchange CNFCost and freight

COFICouncil of Forest Industries, Canada

FAOFood and Agriculture Organization of the United Nations

FIAOForest Industry Administration Office (China)

FOBFree on board FOEXFinnish Options Exchange GSPGeneralized System of Preferences

ITTO International Tropical Timber Organization

JASJapan Agricultural Standard JISJapanese Industrial Standard

JPICJapan Plywood Inspection Corporation

MDF Medium-density fibreboard OSB Oriented strandboard SFAState Forest Authority (China) SFEShanghai Futures Exchange SHCEShanghai Commodities Exchange TAGTrade Advisory Group

UN/ECE United Nations/Economic Commission for Europe

UNCTADUnited Nations Conference on Trade and Development

USDAUS Department of Agriculture WTOWorld Trade Organization

Foreword3
Acronyms4
Table of contents5
Executive summary7
Problems with lack of transparency in the plywood market7
Recommendations9
1Introduction12
2Industry structures and practices in major producer and consumer countries14
International trade structures and practices14
Producer countries16
Consumer countries19
3Primary causes of market fluctuations and price volatility30
Price volatility30
4Market transparency and the risks associated with price volatility36
The current state of plywood market transparency36
The relevance of price risk exposure36
Experiences with efforts to create organized plywood markets37
5Recommendations40
Industry interaction40
Moving into value-added activities43
Developing a more organized marketplace45
Annex 1: The role of tropical plywood in the wood-based panels sector47
Annex 2: Online industry and market information sources for the tropical plywood industry49

Table of contents ITTO

Figure 1The international channels of trade14
Figure 2Japanese distribution channels for panel products: key players20

List of figures

January 1997 to March 200331

Figure 3Prices for Indonesian 2.7 m plywood, FOB Indonesian ports,

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