BRIEFING PACK by tac49996

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Changing International Markets for Timber
     – What Malaysian Producers Can Do

           Timber Trade Forums in Kuala Lumpur,
       Kuching and Kota Kinabalu in January 2007
C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

4    Introduction

5    Overview Factsheets:
 6   EU and International Market Drivers
10   Wood Products Trade – China, South East Asia and Europe

14   Buyer Country Factsheets:
15   Market Report – The United Kingdom
18   Market Report – The Netherlands and Belgium
20   Market Report – France
22   Market Report – Germany
24   Market Report – Italy

26   Producer Country Factsheets:
27   Producer Country – Maylaysia
33   Producer Country – Indonesia
38   Producer Country – Vietnam
43   Producer Country – China’s Imports                                                    The ‘Changing International
47   Producer Country – China’s Exports                                                    Markets For Timber – What
                                                                                           Malaysian Producers Can Do
49   Other Useful Information:
                                                                                           Briefing Pack’ is designed and
50   Useful Web Addresses for Information on Illegal Logging and Related Information       published by Publications UK
51   European Hardwood Federation Statement on Illegal Logging                             Limited, specialist publishers
52   European Timber Trade Association Environmental Code of Conduct of FEBO               to trade associations across
54   Signatures as of February 9th 2006                                                    the world.
55   FLEGT: Industry Statement                                                             Publications UK Limited, 4th
                                                                                           Floor, Barratt House, 341-349
58   FLEGT Briefing Notes
                                                                                           Oxford Street, London W1C 2JE
58   Briefing Note No. 01: What is FLEGT?
60   Briefing Note No. 02: What does FLEGT mean for member states?                         Tel: +44 (0) 20 7408 9615
62   Briefing Note No. 03: What is legal timber?                                           Fax: +44 (0) 20 7408 9610
64   Briefing Note No. 04: Why the focus on legality, not sustainability?
65   Briefing Note No. 05: Bilateral, regional and multilateral approaches.      
67   Briefing Note No. 06: Verification of legality.

69   Briefing Note No. 07: Voluntary Partnership Agreements.
71   Briefing Note No. 08: What are the WTO implications?
73   Briefing Note No. 09: A timber legality assurance system.
    C H A N G I N G I N T E R N AT I O N A L M A R K E T S          FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O


    The UK Timber Trade Federation (TTF), Dutch Timber Trade
    Association (NTTA) and Malaysian Timber Council have joined
    forces to implement a programme of market research and trade
    forums to communicate changes in requirements for legal and
    sustainable timber, in close collaboration with the Sarawak
    Timber Association and Sabah Timber Industries Association.

    Asian exporters face many challenges meeting international market
    requirements, but new EU legislation1 and public and private
    sector purchasing policies are now combining to require legal and
    sustainable timber. This new demand is resulting in measurable
    price premiums for verified legal and sustainable hardwood2.

    With funds from the UK Department for International
    Development, the TTF, NTTA and MTC have commissioned this
    briefing pack on International and European markets by leading
    specialists, and is organising a series of Trade Forums in Malaysia
    in 2007 according to the following timetable.

    •   Monday 15th January: Kuala Lumpur meeting

    •   Wednesday 17th January: Kuching meeting

    •   Friday 19th January: Kota Kinabalu meeting

    •   Saturday 20th – Sunday 21st January: Forest visit in Sabah

    The programme has been developed in close cooperation with the
    European Commission and bilateral talks between Malaysia and
    the EU on Forest Law Enforcement, Governance and Trade

    The Forums will consist of one day of formal presentations and
    discussions of the changing markets and how to meet their
    requirements and business-to-business networking opportunities,
    concluding with a press conference.

    Andy Roby
    Head of Environment and Corporate Social Responsibility
    UK Timber Trade Federation
    21st December 2006

      | Forest Law Enforcement Governance and Trade (FLEGT) Voluntary Licensing


EU and International Market Drivers

Wood Products Trade – China, South East Asia and Europe

    C H A N G I N G I N T E R N AT I O N A L M A R K E T S       FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

    Emily Fripp

    Introduction                                                                Drivers of Change – International,
    The last five years has seen rapid change and developments in the           Regional and National Initiatives
    way that international trade is conducted. Demands and
    requirements of buyers are changing, driven by NGOs, public                 Originating from the G8 Action Programme on Forests of 1998-
    sector policies and consumer concerns. Global concern is focused            2002, an increasing number of initiatives have arisen at all levels –
    on the broader issue of illegal logging and the associated                  international, regional and national and across all sectors – public,
    international trade in illegal wood products, with an emphasis on           private and NGO. Such initiatives include:
    good governance.
                                                                                •   International & regional initiatives: the Forest Law
                                                                                    Enforcement and Governance (FLEG) conferences in East Asia,
    Illegal Logging and Market Change                                               Africa (in 2003) and (in 2005) Europe and North Asia; bilateral
    Illegal logging can be defined as “the breaking of laws on cutting,             agreements between individual consumer and producer
    processing and transporting of wood products”, this includes                    countries to improve enforcement and monitor trade; and the
    not having the right to manage and harvest the forest resource, i.e.            EU’s Forest Law Enforcement, Governance and Trade (FLEGT)
    the required ownership and access rights. Illegal logging includes:             Action Plan (2003)
    harvesting in protected areas (such as national parks); over
    the allowed permit quota; processing logs without the required              •   National initiatives (consumer-side): centre primarily on the
    papers and permits; exporting without paying export duties and                  development of public timber procurement policies, which aim
    stumpage royalty.                                                               to ensure that only legal (and sustainable) timber products are
                                                                                    bought. Other initiatives include policies such as import bans,
    By definition, the scale of illegal logging is difficult to estimate, but       for example Malaysia has banned the importation of
    it is believed that more than half of all logging activities in the most        Indonesian logs and scantlings.
    vulnerable forest regions – South East Asia, Central Africa, South
    America and Russia – may be conducted illegally. Worldwide,                 •   National initiatives (producer-side) include: working with
    estimates suggest that illegal activities may account for a tenth of            donor organisations to improve the legislative framework;
    the total global timber trade, representing an annual loss to                   developing multi-sector action plans to be implemented by
    producer governments of least $15 billion a year1 in revenue and                Inter-Ministerial Taskforces; modifying forest concession
    taxes. The global value of 2002 total wood products trade,                      allocation systems; improving tracking and monitoring of
    including pulp, paper and paperboard trade is $186 billion2.                    timber harvesting and exports, strengthening and capacity
                                                                                    building of relevant institutions; and introducing trade
    Illegal logging results in a wide range of negative impacts including:          restricting policies, such as Indonesia’s law which bans the
    environmental damage and often accelerated deforestation;                       export of logs, scantlings and sawnwood and Cameroon’s ban
    costing governments billions of dollars in lost revenue; promoting              on the export of logs of certain principal species.
    corruption; undermining the rule of law and good governance;
    funding armed conflict and having detrimental impact on local               •   Private sector & NGO initiatives include: developing
    forest-dependent communities.                                                   individual procurement policies building on corporate social
                                                                                    responsibility targets of individual companies, working with
    As logging timber illegally is invariably cheaper than producing                timber trade federations to consolidate their actions (for
    legitimate products, it distorts global markets and undermines                  example through the EU Timber Trade Action Plan) and
    incentives for sustainable forest management. World prices are                  working directly with their producers to ensure that their
    currently depressed by between 7% and 16% (depending on                         supply chains are traceable and free of illegally sourced wood
    product) by the prevalence of illegal products in the market, as                products and ensuring supply chains are subject to
    estimated by the American Forest & Paper Association in 20043.                  independent monitoring and auditing, both for private
                                                                                    companies and in some cases with national governments.
    Illegal logging is both a producer and consumer concern,
    recognising that the problem is both supply and demand driven,              •   Banking and financial sector include: the development of
    which therefore requires a number of solutions applied throughout               funding policies for forestry related projects, including the pulp
    the supply chain of wood based products.                                        and paper industry, working collectively to agree and sign up
C H A N G I N G I N T E R N AT I O N A L M A R K E T S     FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

    to the Equator Principles and developing ways to improve the          and to improve forest-related governance within countries in
    ethical investments made and the use of due diligence and risk        order to enforce forest law, better enforce property rights and
    assessment screening for their investments4.                          promote the independence of the judiciary. The Task Force and
                                                                          Advisory Group last met in the Philippines in March 2006.
International & Regional Initiatives                                      Asia Forest Partnership (AFP)
The 2002 World Summit on Sustainable Development in                       The Asian Forest Partnership (AFP) overlaps considerably with the
Johannesburg urged governments to “take immediate action on               FLEG terms of membership and issue coverage. Eight countries –
domestic forest law enforcement and illegal international trade in        Cambodia, China, Indonesia, Japan, Thailand, Vietnam, the UK
forest products….” Many recent activities have been developed             and the US – have participated both in the Asia Forest Partnership
based on the G8 Action Programme on Forests, launched in May              and the FLEG Task Force established after the Bali ministerial. At
1998. A key international initiative is the EU Action Plan on Forest      present the AFP is a soft process: FLEG has harder political
Law Enforcement, Governance and Trade launched by the                     support than the AFP in the form of the 2001 ministerial
European Commission in 2003.                                              declaration and commitment from developed governments.
                                                                          However the AFP has stronger support from the timber industry.
European Commission’s Action Plan on Forest Law                           In terms of participation from Asian states the two initiatives have
Enforcement, Governance and Trade (FLEGT)                                 similar support (with 10 Asian governments participating in the
This EU Action Plan was developed and subsequently endorsed               AFP by the end of 2003, compared with 9 for FLEG).
by the EC Council in October 2003. The Action Plan includes
support to timber producing countries, public procurement,                Other Regional Initiatives
private sector initiatives, financing and investment and legislative      There are numerous other initiatives and alliances in the region
instruments. The Action Plan also includes a review of the options        that are in various stages of development. For example, Japan
for passing a more stringent legislation in the future. The plan aims     (one of the four main global buyers) is moving forward, working
to develop bilateral or regional FLEGT partnership agreements             with industry, GFTN and other NGOs, and producer countries,
with producer countries. The proposed development of a legality           such as Indonesia, to develop an action plan to tackle the trade
licence scheme, working indirectly with the private sector supply         in illegal logs. Also The Nature Conservancy (TNC) and the
chain issues and providing technical and financial assistance             World Wide Fund for Nature (WWF) formed an Alliance to
to producer countries, will have a direct impact on the way               promote forest certification and combat illegal logging in
that timber trade between the EU and participating producer               Indonesia, made up of many partners including government, the
countries is undertaken5.                                                 private sector and NGOs.

Voluntary Partnership Agreements (VPAs)
In January 2006 the European Union ratified a regulation which
                                                                          National Initiatives
mandates the European Commission to develop Voluntary                     Consumer Governments Procurement Policies
Partnership Agreements (VPAs) between the EU and individual               With the public sector accounting for approximately 20% of
timber-producing countries (“FLEGT Partner Countries”).                   purchases in most developed countries, the development of public
VPAs will aim to reinforce Partner Countries’ ability to control          sector procurement policies is a significant move to ensure that
illegal timber production and offer a mechanism to exclude illegal        consumer demands and markets exclude illegal products. Seven
timber from EU markets. A key component of the VPAs will be               EU member states – Denmark, France, Germany, Belgium,
the use of legality licenses which will be applied to all exports         Austria, the Netherlands and the UK – currently have or are
as proof of legality. Under a VPA no export from the partner              developing systems which will require proof of legal origin for
country to the EU will be permitted unless it is accompanied by a         central government purchases of sustainably produced timber and
legality licence. The VPA may include a package of assistance,            wood products. The Japanese Government has just published a
designed to work with the partner country to meet the                     timber procurement policy along similar lines to those developed
requirements of the legality licence and good forest governance,          in Europe. These procurement policies are sending strong signals
including technical assistance and institutional and policy               to the market place where private sector suppliers are in turn
support. Potential partner countries for VPAs are Ghana,                  developing their own procurement policies or working with their
Cameroon, Gabon, Congo Brazzaville, Malaysia, Vietnam and                 suppliers to ensure that the documentation required by
Indonesia. Consultations are currently underway with the                  government is supplied.
potential partner countries.
                                                                          European Member States – Money Laundering
FLEG (Forest Law Enforcement and Governance)                              As consumer countries review domestic policy and regulations for
Regional Processes                                                        options to control the import of illegal timber and wood products,
FLEG regional processes began in Asia in 2001, Africa in 2003 and         interest has arisen in the potential use of money laundering
in East and North Asia (ENA) Region (hosted by Russia) in 2005.           legislation. Recent analysis by Chatham House, UK, suggests that
The output of the Asia FLEG was a Ministerial Declaration which           in some countries it could (in theory) allow judicial action against
made a range of high level commitments including to: intensify            the proceeds of activities carried out abroad which would be illegal
national efforts, and strengthen bilateral, regional and multilateral     if carried out in the importing country. There are, however,
collaboration to address violations of forest law and forest crime,       practical difficulties, not least the need to train enforcement
in particular illegal logging and the associated illegal trade; develop   agencies unfamiliar with the structure of the timber industry and
mechanisms for effective exchange of experience and information;          timber markets.
    C H A N G I N G I N T E R N AT I O N A L M A R K E T S    FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

    Producer Country Initiatives                                             countries are verified legal by 2010. The project works directly
    Producer countries are developing initiatives to move towards            with individual supply chains, providing technical and financial
    meeting national and international concerns over illegal logging         assistance to improve the chain of custody systems and ensuring
    and rapid rates of deforestation. This is the result of cooperation      legality can be verified. Supporting research and consultation
    with donor agencies, regional initiatives such as the FLEG               processes are key components of the project.
    processes, bilateral Memoranda of Understanding (MoU), and
    pressure from the domestic and international private sector. The
    loss of national revenues from non-payment of forest charges is
                                                                             Working with NGOs
    also a significant driver behind the change, in addition to the          NGOs have been a key driver in forcing the market players to
    desire to maintain international market access, the commercial           change the way that trade is done, for example in prompting
    image of producers and to remove the unfair competition of               private sector companies to address weaknesses in the traceability
    illegal products in the markets.                                         of their supply chains, and for governments to develop public
                                                                             sector timber procurement policies. Some pertinent NGO
    Producer countries are addressing weaknesses in their legislative        initiatives for Africa and the trade with Africa include:
    structure and policies, and institutional needs and structures. In
    some countries, for example Malaysia and Indonesia, action plans         WWF/GFTN Buyer Groups
    including an MoU between the two countries, have been                    Demand-oriented Buyer Groups are made up primarily of retailers,
    developed that seek to mitigate illegal logging through solutions        distributors and end-users of forest products committed to
    focused on the drivers of illegal logging (for example, over capacity    sourcing ever-increasing quantities of certified forest products.
    in the industry) and including a review of legislation and policy        Buyer Groups now exist in almost 20 countries and are widely
    reform, institutional capacity and requirements.                         recognised as having been a dominant force in generating demand
                                                                             for certified forest products. Buyer Groups have been in existence
                                                                             in Northern Europe for some time, but these were primarily
    Private Sector and NGO Initiatives                                       focused on trade with South East Asia and Latin America.
    Timber Trade Federation Codes in Europe and US
    Many Timber Trade Federations across Europe and in the US have           WWF/GFTN Producer Groups
    been working on behalf of their members to raise the standards of        Producer Groups are associations of forest industry producers,
    corporate governance and transparency in the timber trade and            processors and traders committed to achieving or supporting
    to stop the trade in illegal timber. Trade Federations have              responsible forest management and credible forest certification.
    developed Codes of Conduct (see Box 1) and Responsible                   Producer Groups are a key delivery mechanism for a phased or
    Purchasing Policies to help the trade steadily eliminate high risk       stepwise approach to credible certification. Producer groups exist
    suppliers from their supply chains.                                      in Indonesia, Malaysia, PNG, Vietnam, Japan and more recently
                                                                             China. Five companies from mainland China and three companies
    Box 1: UK TTF Code of Conduct                                            from Hong Kong qualified as its first official members in November
    From 2002, the UK TTF, has required all of its members to comply         2005.
    with a Code of Conduct, which commits members to “sourcing
    their timber and timber products from legal and well-managed             Tropical Forest Trust (TFT)
    forests” and notes that “members recognise that the independent          Working directly to link buyers with producers is the principle
    certification of forests and the process chain is the most useful tool   behind the work of bodies such as the Tropical Forest Trust (TFT).
    in providing assurances that the timber they deal in comes from
    legal and well-managed forests.” In 2004, the UK TTF finalised an        Box2: Tropical Forest Trust
    independently audited Responsible Procurement Policy (RPP) to            The Tropical Forest Trust (TFT) approach links the supply chain
    help members implement the Code of Conduct, and 25% of its               from the forest to the consumer through its three membership
    members (by number) are signed up as of June 2006.                       categories: Producing, Supplying and Buying members through
                                                                             Supplying members – who manufacture and/or trade in wood
    The Netherlands Timber Federation (NTTA or VVNH), for                    products that are sold to Buying members. TFT members invest
    example, aimed to have 25% of the total amount of imported               a fixed percentage of their product’s gross margin to fund TFT
    timber coming from sustainably managed sources by 2005 and has           activities tailored to suit their needs, based on the volume of
    developed a code of conduct that stipulates:                             uncertified timber they are currently trading in. Members get a
                                                                             return on their investment by securing a more ethical wood
    “NTTA members shall exclusively bring timber on the                      supply. Before the project achieves certification, members have
    Netherlands market in conformity with current legislation                some assurance that their supply chain originates in a project
    (agreed nationally as well as internationally)” and that “NTTA           that is demonstrably moving towards certification with TFT
    members only do business with suppliers who signed the                   assistance and monitoring. TFT members have the opportunity
    declaration of legality.”                                                to secure a long-term supply of certified timber and wood
                                                                             products once the project is certified.
    In March 2005, the European Commission agreed to fund a five
    year project, the EU Timber Trade Action Plan (TTAP). TTAP is a
    project, managed by the Tropical Forest Trust, linking the Timber
                                                                             Verification, Tracking and Monitoring Systems
    Trade Federations of the UK, the Netherlands and Belgium. It aims        Many private sector companies, service providers and some
    to ensure that 20% of tropical timber imports to these three EU          governments in producer countries are developing their own
C H A N G I N G I N T E R N AT I O N A L M A R K E T S             FOR     T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

systems for tracking and verification of timber in their supply
chains. Companies such as SGS, Track Record and Helveta, have
been working with both public and private institutions to develop
tracking and verification systems. For example Sumalindo Lestari
Jaya in Indonesia has installed barcode tracking to prove that its
timber is both legally and sustainably harvested. The key is the
barcode that is stapled to either end of the log. For anyone with a
scanner and access to the right database, this tag identifies the
forest where the tree was cut, its current location and ultimate
destination, its species, diameter and length, etc.

In Papua New Guinea SGS verify the exports of timber to ensure
that government export taxes are paid. This assessment does not
cover whether the trees have been legally harvested nor does it
track timber back to the forest of origin.

Increasing Role of Civil Society
Civil society has played a key role in the advocacy of sustainable
forest management and more recently in forest governance,
monitoring and transparency.

In Cambodia Global Witness used to be the independent observer,
charged by government to provide an objective source of
information on illegal logging. In Malaysia Traffic is undertaking
some routine monitoring of the timber trade.

Financial Institutions’ Initiatives
Efforts have increased to monitor and control finance and
investment for the timber and related industries in countries where
illegal logging is rife. This is especially applicable for the larger
operations, such as pulp and paper mill, which often require
considerable direct foreign investment, frequently derived from
both private and public financial institutions.

For private banks, the Equator Principles, agreed by ten of the
world’s largest financial institutions in 2003, include a
commitment to respect the environment and social safeguard
policies of the International Finance Corporation in low and
medium-income countries, which currently include policies on
forestry, natural habitats and indigenous peoples. In addition, a
number of individual banks such as Citibank, HSBC and ABN
AMRO have developed policies, which, for example, prohibit the
financing of companies/projects in primary or high conservation
value forests and act as a guide to ensure that the environment, in
this case forests, are safeguarded in their investment projects. In
2005 HSBC forged an alliance with the Tropical Forest Trust to
help HSBC implement their forest policy.

  | Duncan Brack, March 2005, as above, taken from the World Bank’s 2002
    Forestry Strategy Paper.
  | AF&PA 2004, “Illegal” Logging and Global Wood Markets: The Competitive
    Impacts on the US Wood Products Industry.
  | AF& PA, November 2004, “Illegal” Logging and Global Wood Markets:
    The Competitive Impacts on the US Wood Products Industry.
  | HSBC Forest Land and Forest Products Sector Guidelines, May 2004.
  | E Fripp, 2004, Illegal Logging: FLEGT and Trade – What will the impact be?
    RIIA and ERM.

     C H A N G I N G I N T E R N AT I O N A L M A R K E T S      FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Rupert Oliver, James Hewitt, Emily Fripp & Andy Roby

     Global Trends – EU with China and                                          This potential trade leverage is supported by the drivers and
     South East Asia                                                            initiatives outlined in the Overview of Market Drivers Factsheet,
                                                                                such as private and public sector timber procurement policies,
     Forest cover in Asia, approximately 570 million hectares (ha),             Producer and Buyer Groups and regional and international
     accounts for 14.5% of global forest cover and 18.5% of the land            initiatives under the FLEGT processes.
     area of Asia1.

     Traditionally, key export markets for forest products from South
                                                                                Key Market Statistics
     and South East Asia have been Japan and the European Union.                The total RWE3 volume of forest products imported by the EU-25
     However China is now a major import market as well as a major              from China, Indonesia, Malaysia and Vietnam during 2004 was
     supplier and competitor in export markets. Globally, Japan and             around 10 million m3. In value terms the trade amounted to €4,500
     China are the leading importers of tropical timber – China for logs        million. Figure 1 illustrates the RWE volume of bilateral trade flow
     and Japan for plywood and further processed wood products2.                between the four Asian countries and six key European markets
     The United States is also now buying larger volumes of wood                (Belgium, France, Germany, Italy, Netherlands, and the UK). Figure
     products from South and South East Asia, notably wood furniture,           2 shows the total RWE volume exported from the four Asian
     plywood and mouldings.                                                     countries by product. Key bilateral trade flow between the four
                                                                                Asian and six European countries (Tables 1, 2 and 3) is as follows:
     In recent years, the timber industry (producers, importers and
     manufacturers) have had to respond to a changing market place,             China: the UK is by far the dominant European market for Chinese
     particularly in terms of the sources of timber (changing availability      wood products, estimated to account for around 1.26 million m3
     due to over exploitation, greater role of plantations, ethical sourcing)   on a RWE basis in 2004. The vast majority comprises wood
     and the demands of consumers and the growing role of civil society.        furniture, with smaller volumes of plywood. Germany is the second
                                                                                largest European market for Chinese wood products, accounting
     It seems that it was correctly reported at the end of 2004 that the        for around 510,000 m3 on a RWE basis in 2004.
     global forest products sector appeared to be heading towards a
     boom that could last several years with prices of logs and plywood         Indonesia: Indonesia’s exports to Europe comprise mainly of
     set to remain buoyant, given strong demand from China, India and           plywood with smaller volumes of decking, window and flooring
     Japan. Economic and population growth creating strong global               products. Key European markets are Belgium, UK, Netherlands,
     demand, are the driving forces behind healthy market prospects,            and Germany, each accounting for between 500,000 and 700,000
     both globally and for domestic markets in producing countries.             m3 on a RWE basis in 2004.

                                                                                Malaysia: the UK is Malaysia’s largest European export market for
     The Power of Trade                                                         wood products in both volume and value terms. In 2004, the UK
     Trade plays a key role in driving sustainable forest management            imported 820,000 m3 of wood products from Malaysia valued at
     (SFM) and certification. If significant demand exists for SFM and          €260 million. This comprised mainly wooden furniture (dominated
     certified products, influence exists over production. While                by rubberwood) and plywood, with smaller volumes of sawnwood
     European interest in sustainability issues has helped boost demand         and mouldings. The Netherlands is the second largest European
     for wood products, it has also increased pressure on suppliers –           export market for Malaysian wood products, taking 440,000 m3
     particularly from tropical regions – to provide evidence of legal          and €150 million in 2004. Much of this volume comprises
     and sustainable sourcing. In order just to retain existing market          sawnwood used in the Netherlands window frame market and
     share in Europe, it will become increasingly necessary for suppliers       plywood for construction.
     of tropical hardwoods to demonstrate commitment to
     independent legal verification and forest certification.                   Vietnam: Vietnam’s exports to Europe are dominated by furniture
                                                                                products, traditionally garden furniture but with volumes of interior
     Suppliers in China and South East Asia account for a relatively high       furniture increasing in recent years. Again the UK is the dominant
     proportion of total EU wood imports and the trade between the              European export market, accounting for around 170,000 m3 on a
     EU and Asia is substantial both in volume and value terms (see key         RWE basis in 2004. France is the second largest European market,
     statistics below).                                                         accounting for around 90,000 m3 on a RWE basis.
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Figure 1: EU member states’ timber imports from selected South East Asian                           Figure 2: EU member states’ timber imports from China, Indonesia, Malaysia and
countries (2004)                                                                                    Vietnam as a group (2004), by product.

                                                                                                            Arrow width directly proportional   Key to imports from supplier countries
         Arrow width directly proportional   Key to product groups                                                  to RWE volume
                 to RWE volume
                                                Sawnwood                                                    minimum shown 300,000 m3 RWE
         minimum shown 200,000 m3 RWE                                                                                                            Indonesia
                                             Veneer & Plywood                                                              1,000,000   m3 RWE     Malaysia
                        1,000,000 m3 RWE         Furniture                                                                 300,000 m3 RWE         Vietnam
                        300,000   m3 RWE          Other           Source: Based on Eurostat                                                                          Source: Based on Eurostat

Table 1: Bilateral trade between six EU countries and South East Asian countries (RWE volume million m3)

                              Belgium                           France                          Germany                     Italy               Netherlands                     UK

China                             0.27                           0.31                              0.54                     0.23                       0.31                     1.26

Indonesia                         0.69                           0.25                              0.51                     0.24                       0.54                     0.59

Malaysia                          0.27                           0.11                              0.11                     0.10                       0.44                     0.82

Vietnam                           0.04                           0.09                              0.08                     0.03                       0.05                     0.17

Table 2: Wood product imports by six EU countries from four South East Asian countries by product (RWE volume million m3)

                            Sawnwood               Veneer & Plywood                             Furniture            Other Timber

Belgium                           0.21                           0.56                              0.17                     0.34

France                            0.08                           0.11                              0.35                     0.22

Germany                           0.08                           0.22                              0.34                     0.59

Italy                             0.10                           0.08                              0.16                     0.27

Netherlands                       0.41                           0.10                              0.27                     0.57

United Kingdom                    0.10                           1.01                              1.04                     0.69

Table 3: : Wood product exports by four South East Asian countries to six EU countries by product (RWE volume million m3)

                            Sawnwood               Veneer & Plywood                             Furniture            Other Timber

China                             0.04                           0.76                              1.52                     1.63

Indonesia                         0.18                           1.03                              0.70                     1.30

Malaysia                          0.85                           0.47                              0.38                     0.36

Vietnam                           0.00                           0.00                              0.55                     0.05

     C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Belgium: Belgian imports of South East Asian wood products
                                                                          Trends and Observations in the
     derive mainly from Indonesia and include a wide range of             EU-China/South East Asian Trade 4
     products such as plywood, decking, window, moulding and
     flooring components. In 2004, Belgium imported 690,000 m3 of         The trade in wood products between these two regions has
     these products from Indonesia on a RWE basis, with around            evolved very rapidly in recent years and :
     270,000 m3 derived from both China and Malaysia.
                                                                          •   China has grown very quickly into both an importer of
     France: French imports of South East Asian wood products                 primary wood products and an exporter of value-added
     comprise mainly wood furniture with small volumes of a wide              wood products, ranging from sawnwood to finished furniture.
     range of other products including decking, sawnwood, plywood
     and joinery components. Imports derive mainly from China and         •   Europe has developed extremely rapidly into a major export
     Indonesia which respectively accounted for 310,000 m3 and                destination for Chinese wood products, in particular, but has
     250,000 m3 on an RWE basis in 2004.                                      also expanded its consumption of wood products from other
                                                                              Asian producing countries.
     Germany: Germany imports a wide range of wood products from
     South East Asia including joinery components, finished furniture     •   Production of furniture in Vietnam, in particular, has
     and furniture components, plywood, sawn lumber and decking. In           developed very quickly in recent years, with a significant
     2004, Germany imported 540,000 m3 on a RWE basis from China              increase in exports to Europe. Vietnamese producers have
     and 510,000 m3 from Indonesia, with lesser volumes from                  already advanced in having certified garden furniture in
     Malaysia and Vietnam.                                                    response to EU buyer requirements.

     Italy: Italy is generally a less important market than the other     •   Indonesia, which was an extremely important supplier of
     European countries for South East Asian wood products. This              plywood and sawnwood to Europe has lost market share in
     reflects the country’s strong domestic wood processing and               the past few years, partly due to decreased access to logs (due
     manufacturing industry, particularly for furniture, and its heavy        to the severity of accumulated forest loss and the increasing
     reliance on African and East European supply sources.                    frequency of efforts by the authorities to clamp down on
     Nevertheless, Italy sources a diverse range of wood products from        illegal production and trade in timber supplies), but also due
     the Asian region, mainly in relatively small volumes, including          to the very rapid rise in Chinese plywood production capacity.
     sawnwood, plywood, furniture and joinery components. Chinese
     furniture is just beginning to penetrate the market.                 •   The downturn in timber exports from Indonesia since the
                                                                              early 2000s has been off-set by a significant increase in the
     Netherlands: The Netherlands is a key market for Malaysian dark          country’s pulp and paper exports during the same period.
     red meranti sawnwood, notably from Peninsular Malaysia, and
     also for a wide range of plywood, decking, flooring and other        Major explanatory factors behind these changes in market
     joinery products from Indonesia. Increasing volumes of these         trends include:
     products are also now being sourced from China. On a RWE basis,
     the Netherlands imported 540,000 m3, 440,000 m3 and 310,000          China and South East Asian Drivers:
     m3 from Indonesia, Malaysia and China respectively in 2004.
                                                                          •   China’s rapid growth and economic development. The
     UK: the UK is the largest single European market for South East          unprecedented pace at which China’s economy and industry
     Asian wood products taking significant volumes of wood furniture         has expanded has resulted in it becoming the principal driving
     and plywood. Imports of South East Asian wood furniture have             factor in the global production and trade in wood products.
     risen particularly strongly into the UK in recent times due to the
     dominance of large furniture distributors and retailers in this      •   Growing political commitment to eradicate illegal logging.
     market. Furniture in other European markets tends to be sold             This has been supported by positive change in the private
     through smaller distributors less willing to buy large container         sector, but progress is slow.
     loads of standardised product, creating an obstacle for Asian
     suppliers. In 2004, RWE volume of wood furniture imported by         •   Pressure from China to change the way trade is carried out.
     the UK from the four Asian countries amounted to 1.04 million            Wood-based product manufacturers in China tend to be
     m3, the majority derived from China with smaller volumes from            willing and able to adapt rapidly to changing market
     Malaysia, Indonesia and Vietnam. The UK is the largest market for        requirements. The more enquiries they receive for credible
     South East Asian plywood, traditionally sourced from Malaysia            certification of their chains of supply, the sooner apparent
     and Indonesia, but increasing volumes now derived from China. In         demand for illegal timber will reduce in producer countries.
     2004, the imports of plywood from the four Asian countries
     reached 1.01 million m3 on a RWE basis.                              •   Indonesia’s government stepping up activities to enforce
                                                                              actions against illegal logging. The new Forest Law, which
                                                                              was ratified in September 1999 aims to provide a rational basis
                                                                              for utilisation and control of the forest estate. The law’s stated
                                                                              objective is to promote forestry based on the principles
                                                                              of sustainability, democracy and transparency. However,
                                                                              on-going conflicts between provincial and national authorities
    C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

      have dramatically reduced its effectiveness to tackle illegal           through recognition of their wide variety of performance and
      forest operations.                                                      looks, as well as high strength and natural durability valued in
                                                                              the flooring, windows and decking sectors.
•     Declining resource base in Asia, especially in Indonesia.
      According to the WWF, over 40% of Indonesia’s forests have         •    High value end of the furniture sector has potential for
      been cleared in the last 50 years and close to a fifth of forest        tropical hardwoods, with an emerging fashion to combine
      cover was lost between 1985 and 1997 alone.                             different woods and materials to produce interesting contrasts
                                                                              and textures. With competition fierce in all sectors there is a
•     Government action for reforestation in Vietnam. The                     constant search for “that new look”. This has encouraged
      government has established a target to increase forest cover to         greater interest in a wider pallet of species, including “exotic”
      16 million hectares (48% of land area) by the year 2010.                tropical hardwoods. There has also been a strong fashion for
      Nevertheless, native forests continue to be degraded and                dark modern “oriental” styles in office furniture, which has
      illegal logging remains a problem in many areas.                        also increased demand for darker species.

EU drivers:                                                              Further information on the situation in China, Indonesia, Malaysia
                                                                         and Vietnam is documented in four individual Factsheets.
•     In Western Europe there has been a reduction in demand for
      logs and rough sawnwood. A decline in Western European             EU Buyer Market Changes and Initiatives
      tropical hardwood processing capacity in response to more          Five buyer market factsheets for the UK, Netherlands/Belgium,
      restricted access to logs, falling levels of furniture             France, Germany and Italy, outline the market structure, trends
      manufacturing in Western Europe, competition from Eastern          and drivers that are affecting the market place and impacting on
      Europe and the Far East (both in the supply of raw materials       the trade with China and South East Asia.
      and finished products markets), and resulting from concerns
      of consumers on the negative impact of timber production on        Some key facts can be deduced from the factsheets, which
      the environment.                                                   highlight key differences as well as similarities among the five buyer
                                                                         markets studied.
•     In Western Europe there is increased demand for wood
      components and finished wood products from Eastern                 •    Overall, in all buyer countries in Europe, the role of the agent
      Europe. This reflects lower labour costs in Eastern Europe              is changing. Agents are moving into the import business, with
      combined with efforts by Western European businesses to                 more direct buying by agents.
      increase competitiveness.                                          •    In some countries, such as France and the UK, the trade is
                                                                              consolidating, with more powerful retail customers, working
•     In Eastern Europe manufacturers tend to rely on domestic                directly with the producers in their supply chains, such as Point
      wood sources and import only small volumes of tropical                  P and B&Q. In other countries, such as Italy, the trade remains
      hardwood. The vast majority of tropical hardwood imported               highly fragmented with numerous small producers, dependent
      into Eastern Europe derives from Malaysia and Indonesia, but            on a few large import agents to source wood products that
      this remains at a low level.                                            meet their specific requirements.
                                                                         •    France is far less dependent on imports – it, like Germany, has
Positive factors for Asian hardwoods                                          a substantial domestic resource. Whereas the Netherlands,
Following the aforementioned comments, it may seem that certain               Belgium and the UK are heavily import dependent.
trends are working against increased use of Asian hardwoods in           •    There is a shortage of legal and sustainable timber in the EU
the European market. However, there are positive trends, as                   market, and this will get worse as more public and private
follows:                                                                      procurement policies take effect. This is therefore a big market
                                                                              opportunity for the fast movers in the trade. The confusion
•     There are indications that underlying hardwood consumption              and diversity across the EU over what constitutes legality will
      has been growing in the European joinery and building                   be unified to some extent through the application of the EU
      sectors. This reflects growing interest amongst architects,             FLEGT legality licence scheme.
      designers and the general public in the “natural” look and in      •    Europe is largely self sufficient in timber, however; while
      sustainability issues, notably energy efficiency.                       tropical hardwoods are not a necessity industrially, for
                                                                              plywood or for carpentry, they remain a luxury item that is still
•     Wooden flooring, kitchens, doors and decking remain                     demanded in the EU market.
      popular throughout Europe. Wooden windows have been                •    Importers are developing closer relationships with their
      regaining market share over uPVC in several key northern                suppliers as they seek to get legal and sustainable timber and
      European markets.                                                       wood products.

•     There have been a wide range of marketing initiatives
      launched by the European timber trade in recent years                | FAO Global Forest Resources Assessment 2005.
      focusing specifically on the building sector, influencing and        | UNECE/FAO Forest Products Annual Market Review, 2005-2006 and ITTO
                                                                             Annual Review and Assessment of the World Timber Situation 2005.
      supporting the above trends. Much marketing targeted at the        3
                                                                           | RWE = Round Wood Equivalent.
      construction sector has focused on softwoods and temperate         4
                                                                           | Market observations taken mainly from Forest Industries Intelligence Limited
      hardwoods, however; tropical hardwoods have also benefited             and

     Market Report – The United Kingdom

     Market Report – The Netherlands and Belgium

     Market Report – France

     Market Report – Germany

     Market Report – Italy

C H A N G I N G I N T E R N AT I O N A L M A R K E T S                    FOR     T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Rupert Oliver

Market Overview                                                                         Figure 2: UK tropical timber imports, roundwood equivalent volume by main supplier
                                                                                        (2004). (Note: excludes wooden furniture and estimates of rubberwood content).
Due to the UK’s limited forest resource, particularly for
                                                                                                                                                                             Vietnam 0%
hardwoods, the country is heavily dependent on imports. Imports
                                                                                                                                                      Malaysia 29%                                Others 38%
of secondary wood products and finished wood furniture have
been rising in recent years. However the majority of wood
products imported into the UK continue to arrive as primary wood
products (taken to include logs, sawnwood, plywood or veneers).
Over the last five years, total UK imports of primary wood
products have averaged close to 5 million tonnes1. Around
960,000 tonnes (19%) of this comprises hardwood, including
458,000 tonnes of tropical hardwoods. UK tropical hardwood                                                                                                 Indonesia 23%                    China 11%

imports comprise plywood (304,000 tonnes), sawnwood (131,000                                                                                                                                             Source: Based on Eurostat

tonnes), logs (19,000 tonnes) and veneers (4,500 tonnes), as
shown in Figure 1. See figure 1.
                                                                                        Figure 3 indicates that if furniture and various other semi-finished
Figure 1: UK imports of primary hardwood product by product type2.                      and finished products such as mouldings and flooring are included,
                                                                                        China emerges as the leading Asian timber supplier to the UK.
                                                                                        See figure 3.
                     Tropical         Logs         Logs      Temperate
                    hardwood        2% (0.02)    8% (0.07)   hardwood
       Sawnwood                                                          Sawnwood       Figure 3: UK timber imports 2004, estimated RWE volume, supplying country,
       14% (0.24)                                                        31% (0.55)
                                                                                        by product.
                                                                                             Roundwood Equivalent Volume

                                                                                                                                                    1.0                                                     Other
                                                                                                                           (million cubic metres)

                                                                                                                                                    0.8                                                     Plywood
       Plywood           Veneers
      32% (0.70)        0% (0.01)       Veneers 1% (0.02)    Plywood 12% (0.27)                                                                                                                             Veneer
                                                                                                                                                    0.4                                                     Logs

Figure 2 indicates the main sources of UK imports of primary                                                                                        0.2

tropical wood products (logs, lumber, plywood, and veneer). On a                                                                                    0.0
                                                                                                                                                           China     Indonesia   Malaysia     Vietnam
Round Wood Equivalent (RWE) basis in 2004, Malaysia, Indonesia,
                                                                                        Source: Based on Eurostat
and China emerge as the main suppliers accounting for
respectively 29%, 23% and 11% of the total market. This reflects
the three countries’ dominance of the UK tropical hardwood                              In recent times, the UK has become the most important European
plywood sector. Tropical hardwood plywood occupies an                                   market for Asian furniture. However, only a relatively small
important niche in the UK construction sector where it is valued                        proportion of this may be manufactured with tropical hardwoods.
for applications requiring high strength and durability. Since 2004,                    In the UK interior furniture sector, fashion has changed and moved
China has been gaining market share in the UK plywood market                            away from darker mahogany colours and towards lighter coloured
from Indonesia, Malaysia and Brazil.                                                    species such as oak and birch. Also, a proportion of Asian interior
                                                                                        furniture imported into the UK comprises rubberwood.
The UK also imports a significant volume of sawnwood from
Malaysia (around 80,000 m3 in RWE per year), with much smaller                          However, tropical wood remains important in the UK garden
volumes from Indonesia (around 8,000 m3 in RWE per year). The                           furniture market. Teak is particularly popular, although supply
main species imported in sawnwood form are meranti tembaga                              problems in Myanmar mean that much more is now manufactured
which is valued as a utility joinery species, balau/bangkarai which                     from plantation teak, notably from Indonesia. Other important
is valued as a decking species, and declining volumes of heavy duty                     species in this sector are red balau and a range of other tropical red
keruing. Only negligible volumes of Asian tropical hardwood logs                        woods derived from Vietnam and neighbouring countries. UK
and veneer are imported. See figure 2.                                                  demand for FSC certified garden furniture has been an important
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S    FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     factor encouraging some Asian manufacturers to procure a wider           BREEAM for private sector construction in return for grants
     range of hardwoods from further a-field, for example from                derived from the UK government’s Challenge Fund.
     plantations in South Africa.
                                                                              BREEAM also provides the basis for the WWF’s One Million
     Recent trends in the UK wood trade with Asia include:                    Sustainable Homes Campaign launched in August 2002. The
                                                                              campaign is the outcome of a stakeholder dialogue process
     •   In Round Wood Equivalent (RWE) terms, UK imports from                initiated by WWF designed to build consensus on the definition of
         China have risen five-fold in the last six years, principally in     a sustainable home, to identify and understand the current
         terms of furniture, to reach around 1.7 million m3 in 2005.          barriers, and achieve a commitment to action.

     •   On the same RWE basis, UK imports from Vietnam have risen            UK timber trade associations have been very active promoting
         four-fold since 1999, mainly of exterior furniture, to reach         responsible procurement policies. From 2002, all members of the
         around 160,000 m3 in 2005.                                           Timber Trade Federation have been required to comply with a
                                                                              Code of Conduct. The code commits members to “sourcing their
     •   Imports of Indonesian wood products have declined 50%                timber and timber products from legal and well-managed forests”
         in the same period on a RWE basis, hitting 450,000 m3 in             and notes that “members recognise that the independent
         2005. This is due to various factors including: the dramatic         certification of forests and the process chain is the most useful tool
         decline in availability of Indonesian plywood; competition           in providing assurances that the timber they deal in comes from
         from Chinese product, and environmental campaigns                    legal and well-managed forests.”
         targeting Indonesian products.
                                                                              In 2004, the TTF finalised a Responsible Purchasing Policy (RPP)
     •   Trends in UK imports of Malaysian products are more                  to provide a tool to assist members with implementation of the
         complex, rising from 550,000 m3 to 800,000 m3 on an RWE              Code of Conduct. The RPP requires companies to systematically
         basis between 2000 and 2004, before falling again to 700,000         assess suppliers against a set of Sustainable Forest Management
         m3 in 2005. Imports of Malaysian plywood increased between           criteria, and to implement actions to improve their environmental
         2002 and 2004 due to reduced availability of competing               performance.
         product from Indonesia. However last year, more restricted
         log supply and increased competition led to a fall in UK             The British Woodworking Federation (BWF) launched a code of
         imports of Malaysian plywood. Since 1999 Malaysia has had a          conduct in 2002 which requires that “all members will be expected
         growing share of the UK wood furniture market.                       to use their best endeavours to purchase new timber or wood
                                                                              based products from supply sources which can confirm, by
                                                                              independent certification such as the FSC, PEFC, or any other
     Market Initiatives Legal and                                             recognised system, that such products come from well managed
     Sustainable Supply                                                       and sustainable sources.”

     Independent research by Forest Industries Intelligence Limited in 2004   The UK is home to the 95+ Group, the oldest component of the
     indicated that the UK has progressed further than any other European     WWF Global Forest and Trade Network in Europe, first
     country to develop environmental timber procurement practices.           established in 1991. The group is estimated to be selling US$6.4
     This research showed that 80% of 1000 surveyed organisations             billion worth of wood products each year, equivalent to 20% of the
     linked to the timber trade were identified as implementing or            British timber and paper market. Membership currently stands
     promoting some form of environmental timber procurement                  at around 60 companies, including some of the UK’s biggest
     policy. These organizations included: the UK’s central government;       building materials suppliers, construction companies, timber
     nearly 800 private companies; two leading timber trade                   importers and DIY retailers. Members are required to implement
     associations (Timber Trade Federation and British Woodworking            an Action Plan with the aim of “continuously increasing the
     Federation); the UK branch of the WWF Global Forest and Trade            proportion of forest products (as designated within the scope of
     Network; and two professional associations playing a lead role to        the policy) that originate from known, legal and credibly certified,
     influence timber procurement decisions (the Royal Institute of           well-managed forests.”
     British Architects and the Building Research Establishment).
                                                                              Recent research for the TTF and the UK Government, DFID,
     The UK government has developed a timber procurement policy              showed that independently certified softwoods and panel
     with the objective of ensuring that all purchases by the public          products are now being offered as standard in the UK market.
     sector are derived from verified legal sources, and which gives          Certified hardwoods are less readily available – particularly
     preference to timber from verified “legal and sustainable” sources.      from tropical Asia and Africa – and insufficient to meet current
                                                                              levels of demand. As a result price premiums of around 8% have
     The Building Research Establishment’s “Environmental Assessment          been achievable.
     Method” (BREEAM)3 awards credits for the use of wood in
     recognition of its superior inherent environmental credentials.
     Additional “bonus” credits are made available for independently
                                                                              Concluding Comments
     certified wood. All buildings constructed with public money in the       Asian countries have traditionally been key suppliers of hardwood
     UK are currently subject to BREEAM. A growing number of                  plywood to the UK, with the balance in supply recently shifting
     construction companies are being encouraged to implement                 away from Indonesia and Malaysia towards China. Asian
C H A N G I N G I N T E R N AT I O N A L M A R K E T S                FOR     T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

countries, notably China, are also emerging as dominant players
in the UK market for finished wood products, particularly
furniture. Imports of tropical hardwood logs, lumber, and veneer
from Asian countries make up only a small proportion of primary
wood imports into the UK. They do, however, supply a key niche
market as raw material for the UK’s higher value bespoke
furniture and joinery sectors.

There are significant opportunities for Asian shippers looking to
expand markets in the UK. Provision of reliable assurances that
timber derives from legal and sustainable sources is becoming an
increasingly important determinant of market access in the UK.

1 | Due to problems in volumetric data collection by UK Customs, experience has

     shown that import data based on tonnes is more accurate than data based on m3.
  | Pie slices and percentages refer to annual average weight 2000-2004; estimated
    RWE volume shown within brackets in units of million cubic metres. All figures
    supplied by James Hewitt, Independent Consultant.
  | Also known as Ecohomes.

      C H A N G I N G I N T E R N AT I O N A L M A R K E T S     FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Gunther Hentschel, VVNH/NTTA, Emily Fripp

     Market Overview                                                           Belgium and the Netherlands. Only China exported small volumes
     Belgium and the Netherlands are a prime destination for Asian             of veneer to both countries in 2005.
     timber products in Europe. Despite the important domestic
     consumption, a significant proportion of the imports from Asia are        Asia, and in particular China, is an increasingly important supplier of
     re-exported to other EU countries without further processing.             furniture to Belgium and the Netherlands. Higher quality products
                                                                               are being imported, e.g. teak garden furniture from Vietnam, but the
     In 2005, the main product group per country of Belgian timber             large volumes are in lower-class products from China, such as
     imports was plywood from China (50%), plywood from Indonesia              seating furniture made of particleboards. Vietnamese producers
     (60%), sawnwood from Malaysia (80%) and furniture from                    have, on the whole, replaced Malaysian furniture. The strong Asian
     Vietnam (70%). The Netherlands mainly imported plywood from               competition is speeding up the consolidating process of the furniture
     China (30%), joinery and profiles from Indonesia (50%), sawnwood          industry in Belgium and the Netherlands.
     from Malaysia (80%) and furniture from Vietnam (90%).
                                                                               Asia is an important supplier of raw material for windows, decking
     In terms of RWE volume, Belgian timber imports from China are             and flooring for the Belgian and Dutch market. Dark red meranti
     rising steeply whereas the country’s timber imports from Indonesia        is an important species for lower-class windows, whereas the
     and Malaysia are on a downwards trend. In contrast the                    African species are generally used for higher grades, especially in
     Netherlands’ timber imports from all three countries are rising. In       Belgium. Also merbau and keruing are important species for
     terms of import value (2005), the Netherlands purchased roughly           window manufacturing. Dutch buyers do accept pinholes, for
     10% more from China than Belgium, 50% more from Malaysia and              instance in bukit-meranti, that are not accepted by the Belgian
     twice as much from Vietnam.                                               buyers. As prices for merbau have risen tremendously (due to
                                                                               pressure from environmental groups to increase enforcement in
                                                                               Indonesia and to remove illegal supplies of merbau from the trade),
     Trade with Asia                                                           buyers are replacing merbau with African species. PVC windows
     The trade between Belgium/the Netherlands and China continues             are becoming more popular in Belgium, taking market share from
     to grow rapidly. During the period 2000-2005, Belgian imports             aluminium substitutes.
     rose almost six-fold and the Netherlands imports more than three
     -fold respectively. Rapid increases in imports of plywood and             In terms of Asian species, bangkirai is still most commonly used for
     furniture are predominantly responsible for this trend, but Belgium       decking, but reportedly the quality is decreasing. Suppliers
     also significantly increased its imports of joinery.                      compete with African and increasingly Brazilian products
                                                                               (massaranduba, itauba), some of which are available FSC certified.
     The growth in trade with China has impacted on trade with                 Brazilian producers are competitive in price, but unlike Asian
     traditional supplying countries – Indonesia and Malaysia. Between         suppliers, poor performance in shipping is an issue for European
     the years 2000 and 2005, Belgian imports dropped by approximately         buyers. The Netherlands’ imports of decking, mostly in profiled
     30% from Indonesia and 50% from Malaysia. The sectors most                decking, from Brazil and Indonesia are growing steadily. The key
     affected were plywood from Indonesia and sawnwood from                    supply areas in Asia are Sabah, Sarawak and Indonesia.
     Malaysia. In contrast, the Netherlands’ imports from Indonesia grew
     steadily over the past years, in particular in mouldings and furniture.   Wooden flooring is increasingly popular in both countries. Oak,
     Imports from Malaysia remained generally stable.                          beech, ash and Scots pine are the dominant species for the sector,
                                                                               along with some merbau, kempas and keruing. The market for
     As it is in other European countries, Vietnam is expanding its            merbau flooring, in particular, has seen recent growth. Both solid
     position as a key garden furniture supplier to Belgium and the            and engineered flooring are being imported from Asia. European
     Netherlands.                                                              timber, in particular oak from France, is being processed into
                                                                               flooring in Asia and shipped back to Belgium and the Netherlands,
                                                                               where it is taking a large market share. Prices of Asian products for
     Structure of Trade and Trends                                             all of the above sectors have been rapidly increasing, in particular
     Veneer production in Belgium is generally decreasing while there          for meranti and merbau. Consequently buyers are turning to
     is an increase in the amount of finished veneers being imported.          African alternatives in the window sector, and African and
     Asia generally neither supplies finished veneer nor veneer logs to        Brazilian substitutes for flooring and decking.
          C H A N G I N G I N T E R N AT I O N A L M A R K E T S                                       FOR     T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Figure 1: Belgium - Imports of Timber from Asia in 2005 (product by exporting                                        Figure 2: Netherlands - Imports of Timber in 2005 (product by exporting
country).                                                                                                            country).

                                                        0.7                                                                                                                 0.7
 Roundwood Equivalent Volume


                                                                                                                     Roundwood Equivalent Volume
                                                        0.5                                            Other                                                                0.5                                            Other
                               (million cubic metres)

                                                                                                       Furniture                                                                                                           Furniture

                                                                                                                                                   (million cubic metres)
                                                        0.4                                            Plywood                                                              0.4                                            Plywood
                                                                                                       Veneer                                                                                                              Veneer
                                                        0.3                                                                                                                 0.3
                                                                                                       Sawnwood                                                                                                            Sawnwood
                                                        0.2                                            Logs                                                                 0.2                                            Logs

                                                        0.1                                                                                                                 0.1

                                                        0.0                                                                                                                 0.0
                                                              China   Indonesia   Malaysia   Vietnam                                                                              China   Indonesia   Malaysia   Vietnam

Source: Based on Eurostat                                                                                            Source: Based on Eurostat

China supplied about 12% of the total Dutch plywood imports                                                          requirements and the BRL system is focussing on assessing
compared to 3% originating from Indonesia. About 40% of the                                                          national or regional schemes. Keurhout is managed by the
imported Chinese plywood consisted of tropical hardwood, much                                                        Netherlands Timber Trade Association (NTTA or VVNH) and it is
of which originates from Indonesia. In response to the increasing                                                    up to the NTTA to decide the future of the Keurhout scheme now
supply of cheap, lower quality Chinese plywood, the EU                                                               the BRL is close to implementation.
introduced anti-dumping measures on okoumé-faced plywood.
The EU is currently investigating whether to extend these                                                            In Belgium, the two regional Governments support different
measures to all types of plywood exported from China. Other                                                          certification schemes, one PEFC, the other FSC. However 70% of
issues related to Chinese plywood include the strong social and                                                      the municipalities have committed to buy FSC timber for public
environmental issues with bintangor-faced material originating                                                       projects where available. The Federal Government of Belgium has
from Papua New Guinea. A significant proportion of the business                                                      initiated a green procurement policy and set up an Expert
with Asia is handled through agents. Engagement of European                                                          Commission including key industry and NGO stakeholders. Its task
companies in the region is not as intense as in West Africa, but                                                     is to assess which certification schemes satisfy the environmental
there has been some investment of Dutch and German companies                                                         and social requirements for the Belgian market.
in Malaysia and Indonesia.
                                                                                                                     Both countries are important buyers of certified material in
FSC certified finished products are being imported from China and                                                    Europe. The Netherlands are one of the key markets for the FSC
Vietnam. Vietnam exports FSC certified products made of                                                              logo, which is being reflected in 278 FSC Chain of Custody (CoC)
eucalyptus from South America and domestic plantation teak.                                                          certified companies compared to 7 companies certified against
China also processes temperate FSC material that is exported to                                                      the PEFC standards. In Belgium 55 PEFC and 79 FSC CoC
the Belgian and Dutch markets. MTCC certified products, of which                                                     certificates indicate a more balanced market for both systems.
90 to 95 % is produced on the Peninsular of Malaysia, are imported                                                   The World Wildlife Fund for Nature’s (WWF) Global Forest &
in form of flooring, skirtings, architrays, and blanks, mostly made                                                  Trade Network (GFTN) has a large number of members
of meranti and keruing. Some MTCC plywood is also available.                                                         committed to responsible purchasing in both countries. With 100
                                                                                                                     mainly industry members, the Netherlands is one of the GFTN
                                                                                                                     group’s strongest supporters. Although the focus of the network
Market and environmental initiatives                                                                                 initially has been to procure only FSC timber, other schemes are
In Belgium and the Netherlands various initiatives are aimed at                                                      now being accepted provided the verification of legal and
increasing the market share for certified products and excluding                                                     sustainable timber is credible. In addition to this group, a WWF-
timber from unverifiable sources. In particular the Netherlands                                                      supported “FSC-Company-Group” exists in Belgium consisting of
have been a key initiator regarding “responsible” timber                                                             14 members of the timber industry and related sectors.
procurement and public awareness on environmental issues within
Europe. NGOs in both countries traditionally play an important                                                       The Belgian and the Netherlands’ major trade associations
role in pressuring industry and policy makers to act progressively                                                   have published “Codes of Conduct” that commit their
in areas of environmental and social concern.                                                                        members to only purchase legal and sustainable timber. The
                                                                                                                     trade bodies of both countries are engaged with supplier-
In the Netherlands, the Government is close to publishing criteria                                                   support programmes that facilitate implementation of timber
and indicators on sustainable forest management (SFM) standards                                                      tracking and legality verification for their key supply chains in
that are acceptable for public procurement standards. Unlike the                                                     potentially “controversial” countries, including Malaysia,
UK procurement policy, the Dutch process known as BRL                                                                Indonesia and China.
addresses social criteria alongside the environmental and
economic criteria. However, in late 2006 the Government
announced that it would use the UK standard on legality in its
timber procurement policy. From 1996 Keurhout has used the
“Minimum requirements for sustainable forest management and
certification” of the Dutch government – the early version of
the BRL. The Keurhout system assesses different SFM and
chain of custody (CoC) certificates against the aforementioned
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S                       FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Ole Pedersen

     Market Overview                                                                          this period, lauan from the Philippines was the dominant species,
     Trade with Asia is dominated by processed product in particular                          until first the log export ban. After which, sawn lauan took over the
     furniture. Over the last five years trade with China and Vietnam                         market, subsequently replaced by dimension stock, and eventually
     has been increasing significantly, in both volume and value terms.                       all lauan export was banned. Meranti from Malaysia and Indonesia
                                                                                              was also a leading joinery species. The use of this species grew in
     Wood furniture imports from tropical countries have increased                            importance after the lauan export was banned. The Asian dominance
     from €370 million in 2002, to €395 million in 2003, to €500 million                      of the joinery market ended in the early nineties, as Brazilian curupixa
     in 2004. Of this trade, China is the main exporter contributing                          and tauari became available, kiln-dried, at very competitive prices.
     approximately €180 million, followed by €130 million from
     Indonesia, €40 million from Malaysia, and €60 million from
     Vietnam. While imports of wood furniture are rapidly increasing,
                                                                                              Trade Summary
     the domestic furniture industry is in decline.                                           During 2004, France imported an estimated RWE volume of
                                                                                              310,000 m3 of timber from China at an import value of
     In terms of RWE volume, trade with China, Indonesia, Malaysia,                           approximately €180 million1. Similarly, 250,000 m3 and €130
     and Vietnam accounted for approximately 14% of tropical timber                           million from Indonesia, 110,000 m3 and €40 million from Malaysia,
     imports to France in 2004, as shown in Figure 1. In comparison                           and 90,000 m3 and €60 million from Vietnam were imported into
     tropical hardwood imports from Africa accounted for 58% in                               France. The breakdown of trade by product in value and volume,
     2004. See figure 1.                                                                      are presented in Figures 2 and 3. See figure 2 and 3.

     Figure 1: France – Tropical Timber Imports 2004, (estimated RWE, total                   Figure 2: France – Tropical Timber Imports 2004, (estimated RWE supplying
     approximately 1.8 million m3). (Note: excludes wooden furniture and estimates            country, by product).
     of rubberwood content.)                                                                                                                                                  0.35
                                 Indonesia 8%          Malaysia 4%
                                                                                                 Roundwood Equivalent Volume

                   China 2%
                                                                     Vietnam 1%                                                                                                                                                Other
                                                                                                                               (million cubic metres)

                                                                                                                                                                              0.20                                             Plywood
                                                                                                                                                                              0.10                                             Logs


                                                                                                                                                                                     China   Indonesia   Malaysia    Vietnam
                                                Others 86%
     Source: Based on Eurostat                                                                                                                                                                 Exporting Country               Source: Based on Eurostat

     Trade Structure                                                                          Figure 3: France – Tropical Timber Imports 2004, (import value, supplying
                                                                                              country, by product).
     Asia became a major supplier of tropical timber to France from the
     1970s onwards. Since then, a network of commercial relationships,
     have been in existence between producers in the Philippines,
                                                                                                                                                                              150                                              Other
     Malaysia, Indonesia and France. New relationships are now being                                                                                                                                                           Furniture
                                                                                                                      Import Value
                                                                                                                                                        (million Euro, cif)

     created with suppliers in China, Vietnam, and Thailand. France’s                                                                                                                                                          Plywood
                                                                                                                                                                              100                                              Veneer
     trade relationship with the Asian timber supply market therefore
     dates back some 40 years. The trade is carried out directly between                                                                                                                                                       Logs
     major producer-exporters and the major importer/distributors,
     and with the importer/manufacturers.
                                                                                                                                                                                     China   Indonesia    Malaysia   Vietnam
     From the early 1970s into the early 1990s, Asia was the leading                                                                                                                           Exporting Country               Source: Based on Eurostat

     supplier of tropical hardwood timber to the French joinery industry,
     and a substantial supplier of logs to the plywood industry. During
C H A N G I N G I N T E R N AT I O N A L M A R K E T S         FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

In both volume and value, the trade with China has grown                      Greenpeace estimates that a quarter of all tropical timber
significantly over the last five years in particular, increasing by           imported into France is used in public and/or publicly financed
four-fold or 400%. Furniture is the major product imported,                   works and buildings etc. In response to this pressure, Government,
accounting for approximately two-thirds of the imports,                       trade and industry are now taking a number of initiatives to source
approximately €120 million.                                                   timber responsibly – legal and sustainable timber.

Trade with Indonesia has been very stable in both volume and                  In 2004, the French government decided to develop a timber
value over the last five years. Furniture and plywood, with some              procurement policy to favour independently certified products,
joinery, make up the main products traded.                                    originally for tropical timber but now for all timber. A Prime
                                                                              Minister advice notice (“circulaire”) was adopted in April 2005.
From Malaysia, the trade is predominantly furniture, sawnwood and             The procurement policy is compulsory for State buyers and
joinery and has been relatively stable over the last five years. Similarly,   recommended to local authorities. The focus is for only
furniture dominates the trade with Vietnam (more than 90%),                   sustainable timber to be sourced. The timber should of course be
with a rapid increase in both volume and value over the last five             legal, but this is seen as a conditionality of sustainability rather
years.                                                                        than the main aim of the policy. The proposed scheme requires
                                                                              some form of certificate or label, validated by an independent
France also imported an estimated RWE volume of 400,000 m3 of pulp            body, for two categories of timber products: 1. logs, sawnwood,
from Indonesia during 2004 at an import value of €30 million.                 veneered wood, plywood, and 2. all other products. It imposes to
                                                                              provide specific information for products of category 1 : origin of
However, overall, French timber imports are dominated by                      species, name of species, name of supplier. However, there is an
softwood, accounting for 66% of the market. This market share is              expectation that the requirements will become more stringent
relatively lower in terms of value, with a greater share coming               over time. The French aim to meet the objectives of 50% of
from temperate and tropical hardwoods.                                        publicly purchased timber being legal and sustainable in 2007 and
                                                                              100% in 2010 (though it should be noted that the definition of
                                                                              sustainable is not as rigorous as in other Member States’ public
Market Drivers                                                                procurement policies).
There have been a number of drivers in the market, including
change in consumer taste, availability of standard products for               The French timber association, Le Commerce du Bois (LCB), has
exterior use such as decking, price and environmental and                     launched a corporate environmental responsibility guide, “La
procurement drivers.                                                          Chartre Environnementale” for its members to adhere to. This
                                                                              document consists of three chapters: procurement policy, sales
So far as interior décor is concerned, consumers have moved                   policy, and commitments to apply the guidelines. LCB supports all
towards light-coloured timbers, and away from the darker                      internationally recognised certification schemes (PEFC, FSC, SFI
mahogany-type woods. This is true for mouldings, kitchen                      and CSA) and call for mutual recognition between these schemes.
furniture, interior doors, and shop-fittings, etc. In these markets           A number of importers, distributors and manufacturers have
temperate hardwoods and softwoods have gained market share,                   taken the initiative to ensure the procurement of timber and
as well as light-coloured African timbers.                                    related products in an environmentally responsible manner.
                                                                              Examples of such initiatives are:
The Asian ramin species, previously used for these products, is
now CITES protected, and commercially restricted. The Asian                   •      Lapeyre has obtained the FSC label for all their standard windows.
species mostly used in France, the redwoods meranti and palapi                •      Indubois/Nordisk – DLH Group are selecting their suppliers
are used primarily for exterior joinery products. Another redwood                    to conform with environmentally responsible procurement in
of substantial interest to the French market is merbau, gaining                      their Good Supplier Programme (GSP).
market share in the French parquet market.                                    •      Carrefour (together with 8 other manufacturers/retailers)
The French consumer, producer and distributor are amongst the                        have signed up to the WWF-Buyer Group, to ensure
least species-loyal on the world market; they are more driven by                     environmentally responsible sourcing.
price. If the meranti and palapi species continue to maintain a
certain market share in France, in certain niche market segments              The WWF Buyer Group in France was established in June 1999.
– in spite of higher prices than competing products notably from              Buyer groups provide a framework for the promotion of
Brazil – this is essentially because of consumer preference for               sustainable forest management and certification. In addition buyer
certain specific characteristics of these species.                            groups provide a means for awareness and incentive-raising
                                                                              among timber importers.
Environmental NGOs & Procurement Policies
Environmental pressure groups, such as Greenpeace, Friends of                 In conclusion, future imports to France will depend on suppliers
the Earth and WWF are active in the French market, putting                    providing a product that is competitive in terms of quality and
pressure on the government, timber importers, manufacturers and               species etc. and in price, and the availability of supply from
distributors to ensure procurement of timber takes place in an                environmentally responsible sources.
environmentally responsible manner. Through considerable press
coverage, there is growing public awareness and support for
change in the way that timber is procured.                                        | Note: According to French Customs data, imports (French Timber Market
                                                                                    Review) come to €144 million in 2004.

     C H A N G I N G I N T E R N AT I O N A L M A R K E T S                                                                   FOR           T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Gunther Hentschel, Rupert Oliver and Klaus Schwarz (GD Holz)

     Market Overview                                                                                                                                   Trade with Asia
     Germany’s economy, since the elections for the new Government,                                                                                    The growing trade with China has significantly changed the
     has begun to show signs of recovery. However domestic                                                                                             traditional trade patterns between Germany and Asia. German
     consumption is still modest compared to the prosperous export                                                                                     imports from China have more than tripled since the year 2000. In
     business. Germany is the world’s leading export economy and sales                                                                                 particular, the furniture and plywood sectors experienced rapid
     in timber products have increased steadily since 2002.                                                                                            growth. Although the quality is often not as good as that of
                                                                                                                                                       Indonesian and Malaysian products, low production costs currently
     During 2004, Germany imported an estimated RWE volume of                                                                                          guarantee a prosperous market for Chinese products in Germany.
     540,000 m3 of timber from China at a value of approximately
     €280 million. Volume and value of trade in 2004 with Indonesia                                                                                    In particularly Malaysian producers seem to have suffered from the
     was 510,000 m3 and €180 million; 110,000 m3 and €40 million for                                                                                   Chinese growth. Despite its long trade relations with Germany,
     Malaysia; and 80,000 m3 and €60 million for Vietnam. In terms of                                                                                  exports to Germany dropped in 2003 to a level approximately 50%
     estimated RWE volume during 2004, the main product group                                                                                          of that in the late 1990s. Only a slight recovery has occurred in the
     imported from China, Indonesia, Malaysia and Vietnam                                                                                              past two years. However with increased effort on forest
     respectively was plywood (20%), joinery and profiles (30%),                                                                                       certification, Malaysia continues to distance itself from the other
     sawnwood (50%) and furniture (90%). In terms of estimated RWE                                                                                     regional producers in terms of “environmental quality” and is thus
     volume, imports from China are increasing rapidly whereas                                                                                         creating new market opportunities.
     imports from Indonesia and Malaysia are declining slowly. See
     figure 1 and 2.                                                                                                                                   Traditionally Indonesia has been the dominant producer of the
                                                                                                                                                       region in terms of trade with Germany. More than 500,000 m3 of
     Figure 1: Germany – Tropical Timber Imports 2004, (% of estimated RWE                                                                             timber products are currently being exported to Germany. However,
     volume by exporting country, total approximately 1.0 million m3, excluding                                                                        a lack of response by producers to address environmental concerns
     wooden furniture and estimates of rubberwood content).
                                                                                                                                                       raised by the German traders and the shortage in supply of verified
                                                                                          Vietnam 0%
                                                                    Malaysia 8%
                                                                                                                       Others 45%
                                                                                                                                                       legal wood products is jeopardising the future of trading relations
                                                                                                                                                       between Germany and Asian suppliers, in particular Indonesia. To
                                                                                                                                                       date, this has not translated into decreasing total import volumes,
                                                                                                                                                       which remain at the same level as for the last ten years.
                                                                                                                                                       However, Germany’s trade relations with Vietnam are growing
                                                                                                                                                       and it is becoming an important supplier of garden furniture. With
                                                                                                                                                       80,000 m3, Vietnamese producers have increased their sales in
                                                                                                                                                       Germany by over 400%, compared to the volumes in 2000.
                                                                   Indonesia 41%
                                                                                                            China 5%
     Source: Based on Eurostat

                                                                                                                                                       Structure of Trade and Trends
                                                                                                                                                       Overall veneer production in Germany continues on a downwards
     Figure 2 : Germany – Tropical Timber Imports 2004, (estimated RWE,
     supplying country, by product).                                                                                                                   trend, and is now almost insignificant in terms of export trade.
                                                             0.6                                                                                       Many producers have moved production facilities to South East
                                                                                                                                                       Europe to take advantage of lower production costs. Tropical logs
      Roundwood Equivalent Volume

                                                                                                                                                       for veneer production almost exclusively originate from central and
                                                             0.4                                                                 Furniture             Western Africa. Imports of finished veneers from Asia are marginal
                                    (million cubic metres)

                                                                                                                                 Plywood               and less than 500 m3 (in total) was purchased from Thailand, China
                                                                                                                                                       and Indonesia last year. A total 10,000 m3 of logs have been imported
                                                                                                                                 Logs                  from the region for special products such as teak for ship-building,
                                                             0.1                                                                                       mainly from Myanmar, Malaysia, Indonesia and Thailand.
                                                                     China         Indonesia     Malaysia        Vietnam                               Although overall German imports in the furniture sector
                                                                                      Exporting Country                    Source: Based on Eurostat   decreased, imports from Asia are growing significantly and
                                                                                                                                                       compete with the traditionally important German domestic
C H A N G I N G I N T E R N AT I O N A L M A R K E T S     FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

production. In particular Chinese and Vietnamese products are             supply chain. A high proportion of the domestic timber industry
gaining market share. Other key suppliers are Indonesia, and to a         is now PEFC chain of custody certified and offering PEFC
lesser extent Malaysia and Korea. This sector is currently                certified products.
consolidating in response to the economic downturn in Germany
and rising levels of competition from Asia and also Eastern               With the emergence of the FSC, focus shifted from an emphasis on
Europe. As with veneer producers, a significant number of                 tropical hardwood bans to the promotion of sustainable practices.
German furniture companies have relocated production facilities           A WWF buyers group (Gruppe 98) was set up in 1997 as a means
to Eastern Europe, notably Poland because of significant cost             of focusing and identifying market support for the FSC. This group
advantages. However more recently there have been signs of                has remained focused on the large retailing sector, with OBI
improvement. Furniture industry sales were marginally up in 2004,         probably the most prominent member from the perspective of the
boosted by improved export performance.                                   wood industry. In 2002, the membership terms of the group were
                                                                          amended so that companies now have to make specific
The flooring, decking and window sectors are other key markets            commitments to ensure that timber from illegal or controversial
for Asian timber products and all sectors have seen increasing sales      sources is excluded from their supply chains.
to Germany. Despite very sluggish construction activity, in 2003,         Many local government authorities have acted on their own
the country remained the largest EU market for hardwood                   initiative to implement timber procurement policies. Around 400
parquet flooring absorbing 23 million m2. While flooring                  local authorities in Germany – including several representing large
consumption is focused on lighter species, notably oak and beech,         German cities such as Cologne, Bonn, Berlin, Hamburg, Bremen,
small volumes of darker tropical woods are also used. Merbau is           and Munich – are members of the “Climate Alliance”. While the
the most commonly used Asian hardwood for flooring, although              main aim of this alliance is to minimise greenhouse emissions, its
in absolute volumes it is not a core species for the sector. Bankirai     manifesto includes a policy commitment to purchase only FSC
is an increasingly important species for decking, but also keruing        certified wood products from the tropics.
is growing in demand in the car industry for trailer construction.
                                                                          The former Government was a strong supporter for FSC
Demand for wooden window frames has been falling in response              certification in both public procurement and management of the
to the slowdown in construction activity and are increasingly             state-owned forests. Since the election of the new coalition
being replaced by plastic frames. The share of wood in window             Government in October 2005, the emphasis has changed to a
production continues to fall. In 2004 wood accounted for 21.4%            more pragmatic approach. The Ministry for consumer protection,
and in 2005 it is expected to fall to 20.8%. In comparison PVC has        food and agriculture (BMVEL) is drafting a catalogue of
grown to more than 55%. The predominant wood species for                  requirements for public procurement regarding minimum criteria
windows is dark red meranti – often used in laminate form –               for legality and sustainability. The Ministry aims to support any
followed by European pine.                                                international certification scheme but PEFC in particular. 75% of
                                                                          the German forests are certified against the PEFC standards, but
The role of agents in the trade with Asia is still important and          the scheme continues to struggle with recognition by
probably accounts for about 30%-40% of the overall imports, but           environmental groups.
it is decreasing. The importers’ business dominates the trade with
China and it is increasingly important for the entire region.             The new Government dismissed the “Virgin Forest Act” proposed
                                                                          by the former administration that aimed at protecting natural
Consumer Taste                                                            forests in any country supplying timber products to Germany.
Asian timber products tend not to be affected by trends in taste of the   However the Green party has since submitted a new application
German consumer. Apart from merbau used in flooring and meranti           for the bill to Parliament. The law would place ambitious
for the window sector, few Asian products have an important aesthetic     obligations on German traders to prove the origin of their
value in Germany. Most Asian products are not purchased for aesthetic     products, including timber harvested in Germany. The political
use, where colour is important, but are used predominantly in             ambitions to act on environmental issues related to timber trade
construction, plywood and mouldings.                                      seem to have weakened with the new Government. Germany is,
                                                                          however, experiencing continuing pressure from environmental
                                                                          groups within the country and other EU member states to act
Market and Environmental Initiatives                                      more progressively on those issues.
Germany has been a centre of environmental campaigning in
relation to forests for over 20 years. During the 1980s forest            In another sign of the pressure to demonstrate positive action, the
related campaigns focused on tropical hardwoods, with an                  leading timber industry association in Germany, GD Holz,
emphasis on banning trade in these species. Pressure tactics were         published a draft code of conduct on environmental timber
used to cause many large retailers in Germany, such as OBI, to stop       procurement in March 2005. The code, committing members to
selling tropical woods and wood products. Several state and               only buy legal and sustainable timber, was developed with the
municipal procurement policies were also developed at this time           German Ministry BMVEL and is currently awaiting approval by the
to ban the purchase of tropical woods.                                    association’s board. In addition, GD Holz is currently preparing a
                                                                          “sustainability strategy” for its environmental profile. Despite this,
In the five years since its inception, PEFC has succeeded in              numerous German companies have been targeted by environmental
establishing a broad base of support in Germany among                     campaigns, highlighting the fact that the awareness of the risks of
state, community, and private forest landowners, and has made             purchasing timber from unverifiable sources is still lower than in
increasing efforts to gain support from further down the                  other EU markets, notably the Netherlands and the UK.
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S    FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Gian Sergio Morasso

     Market Overview                                                          Figures 1, 2 and 3 show summaries of the trade between Italy and
     Italy is an important market for tropical hardwoods. In 2004,            China, Indonesia, Malaysia and Vietnam. See figures 1, 2 and 3.
     approximately 360,000 m3 of tropical hardwood sawnwood
     was imported and 150,000 m3 of tropical hardwood roundwood.              Trade in furniture from Indonesia, Vietnam and Malaysia is
     Of this, only 10.5% of the tropical sawnwood and 4% of tropical          increasing. China is the dominant source of furniture, increasing by
     logs were imported from Asia. The key Asian countries, in                almost 50% in 2004, followed by Indonesia, Vietnam and Malaysia.
     terms of exports to Italy, are Malaysia, Myanmar and Indonesia.
     Over the last three years Vietnam has begun to export to                 Indonesia is the most significant exporter of flooring to Italy with
     Italy. However, in 2005, imports from Malaysia and Indonesia             more than 1.3 million m2. While trade with Indonesia is increasing,
     declined, in terms of both volumes and value of raw material             imports of flooring from China are increasing rapidly, at a rate of
     and semi-finished products, while the volume of imports of               240% in value in 2004, and 208% in volume.
     finished products from China increased, for some products by as
     much as ten times.                                                       Plywood is predominantly sourced from Finland, Russia and
                                                                              France. Brazilian exports to Italy have increased in 2004, by 48%
     The wood-based industry, producing furniture, doors, windows,            in terms of value and 25% in volume, to about 80,000 m3.
     flooring etc., have traditionally exported a large proportion of their   Meanwhile imports from Indonesia have fallen by 14% in terms of
     production, resulting in a positive trade balance. However a             value and 21% in volume, to approximately 18,500 m3.
     negative trend in the wood products trade developed in 2001 and
     is continuing to this day. In 2004, although there was positive
     increase of 2.5% of exports, imports increased by 2.8%, thus
                                                                              Trade Between Italy and Asia
     worsening the trade balance.                                             Italy and Asian countries have had an important trading
                                                                              relationship since the middle of the last century. In the 1960s and
     The export market for Italian suppliers has been negatively              1970s, large quantities of logs and sawnwood were imported,
     influenced by the euro, depressed markets in Germany (a                  principally from the Philippines, Malaysia, Singapore and
     traditionally significant export market especially for furniture) and    Indonesia. The key species were red lauan, dark red meranti and
     the increasing role of China (in supplying semi finished wood            ramin. Today the situation is very different. Trade is dominated by
     products as furniture parts often at lower prices).                      semi-finished and finished products reflecting the changes in
                                                                              producer country exports, for example the log export bans and the
                                                                              limited availability of many of these species. Ramin, from
     Trade Summary                                                            Indonesia, is very limited and in 2005 the availability of dark red
     In the last three years, trade with China in both volume and value       meranti decreased significantly due mainly to the closure of
     terms has doubled, to approximately €120 million and a RWE               supplying concessions in Malaysia. Imports of finished products
     volume of 230,000 m3, in 2004. Trade is comprised predominantly          such as mouldings, joinery, furniture and flooring are increasing.
     of furniture.
                                                                              Actions taken in Indonesia to mitigate illegal logging have resulted
     Overall trade with Indonesia has remained relatively stable over         in an increase in the price of important species for the Italian
     the last five years, at a value of around €100 million in 2004.          market. Increased demand from China has reduced volumes
     Furniture, joinery and mouldings dominate the trade.                     available to the Italian market and pushed up prices.

     Sawnwood dominates the trade with Malaysia, with a small                 As a result, imports of alternative species are increasing and prices
     proportion of trade from mouldings, joinery and furniture. There         for such species are now also increasing. This is the case, for
     has been a small but steady increase in trade over the last five to      example, of menkoulang. Other key import species are teak,
     ten years. In 2004, trade totalled a value of approximately €40          yellow balau and merbau.
     million and 100,000 m3 in RWE volume.

     Trade with Vietnam is dominated by furniture with a significant
                                                                              The Italian Trade Structure
     increase over the last five years, from €7.5 million in 2000 to €17.5    The Italian wood industry is fragmented, consisting of many small
     million in 2004, to an estimated RWE volume of 30,000 m3.                and medium sized companies (4-5 employees) as builders and
 C H A N G I N G I N T E R N AT I O N A L M A R K E T S                   FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Figure 1: Italy – Tropical Timber Imports 2004, (estimated RWE, total c1.7            Figure 2: Italy – Timber Imports 2004, (import value, supplying country, by product).
million m3). (Note: excludes wooden furniture and estimates of rubberwood content.)
                            Indonesia 10%      Malaysia 5%                                                                                          120
                China 2%
                                                             Vietnam 0%
                                                                                                                                                    100                                               Other

                                                                                          Import Value
                                                                                                                         (million Euro, cif)
                                                                                                                                                    80                                                Plywood
                                                                                                                                                    60                                                Veneer
                                                                                                                                                    40                                                Logs


                                                                                                                                                           China    Indonesia   Malaysia   Vietnam
                                        Others 83%
Source: Based on Eurostat                                                                                                                                            Exporting Country                Source: Based on Eurostat

joineries, milling, wood furniture, naval furnishing etc. Each of
                                                                                      Market Initiatives
these market sectors requires a range of wood products, in terms                      The Italian Timber Trade Federation plays an important role in a
of species, dimensions, quality etc.                                                  highly fragmented trade as an important point of reference for the
                                                                                      industry, providing support and advice on a range of issues
The major actors in the tropical timber trade are the big importers                   including official interventions, CITES, internal and European laws
who sell on to the numerous fragmented industries all over                            affecting wood business and so on. The Italian Timber Trade
the country, each of which has its own needs and demands.                             Federation is only one branch of Federlegno and all main sectors
The importers import directly from Asia, normally buying                              as panels, flooring, furniture, building joinery etc. have their own
through big groups rather than small local producers. Such                            federation.
exporters provide a wide range of products, and also often
supply an inspection service of the material bought and permit                        The Italian trade has seen a number of market initiatives
Italian buyers to obtain a Cash Against Documents (CAD)                               develop. These include:
payment term.
                                                                                      •                Creation of a sector working group by the Ministry of
This fragmented structure, where the needs of individual end                                           Economy to develop an operational manual for CITES, in
users are recognised by the large importers, is different to the                                       cooperation with the Italian Customs and other Ministries.
rest of Europe where the trade distribution and production
systems are more standardised. Thus with numerous specialised                         •                An agreement of cooperation with Greenpeace signed in 2002
demands by end users, and strong competition between the                                               and renewed in 2003 and 2004.
importers, it is difficult to have direct relationships between
suppliers and end users.                                                              •                In 2005 the Italian Timber Trade Federation has established a
                                                                                                       code of conduct for the sector.
Market Trends                                                                         •                Adoption of an ethical code for the purchase of wood
Due to the difficulties in finding material from the Asian countries                                   obtained from forest managed in a sustainable way in
and to the recent high price levels there has been a substitution of                                   observance of national and international laws.
Asian species with other tropical species from West Africa and
South America. There has, therefore, been an increase in the                          •                Establishment of a WWF Buyer Group in October 2001.
imports of species such as okoumé, niangon and kotò that
replaced meranti, menkoulang and ramin. Furthermore, products                         •                Support to the EC Forest Law Enforcement, Governance and
such as decking, traditionally imported from Asian countries, such                                     Trade (FLEGT) Action Plan.
as Indonesia and Malaysia are increasingly being sourced from
Brazil due to lower prices.                                                           •                Cooperation with the Italian authorities in the revision of laws
                                                                                                       affecting wood-based industries.
In addition to competition from other producing countries and
regions, there is also a lack of certified timber from Asia. Following                Figure 3: Italy – Timber Imports 2004, (estimated RWE volume, supplying
campaigns from NGOs such as WWF and Greenpeace demand for                             country, by product).
certified timber has increased. Although currently certified timber
is only required for Government contracts.                                                                                                          0.35
                                                                                           Roundwood Equivalent Volume

                                                                                                                                                    0.30                                             Other
                                                                                                                           (million cubic metres)

Illegal logging is becoming a market issue. The Italian Timber                                                                                      0.25                                             Furniture
Trade Federation is working with the relevant authorities to try to                                                                                 0.20
find a solution, in order to avoid the import of illegal timber and                                                                                 0.15                                             Sawnwood
related products.                                                                                                                                   0.10

Uncertainties in supply, political situations and the potential for                                                                                 0.00
illegal and unsustainable wood products, are all acting against the                                                                                         China   Indonesia   Malaysia   Vietnam
                                                                                                                                                                      Exporting Country               Source: Based on Eurostat
trade in tropical wood products.

     Producer Country – Malaysia

     Producer Country – Indonesia

     Producer Country – Vietnam

     Producer Country – China’s Imports

     Producer Country – China’s Exports

C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Rupert Oliver (Edited by Emily Fripp & MTC)

Introduction                                                          Overall wood supply and exports
Malaysia’s land area is approximately 32.83 million hectares with     Saw and veneer log harvesting levels in Malaysia are now
13.16 million hectares in Peninsular Malaysia (which comprises        hovering at around 19 million m3 per year, with Sarawak
eleven states and the Federal Territory of Kuala Lumpur), 7.37        accounting for around 12 million m3, Peninsular Malaysia around
million hectares in Sabah and 12.30 million hectares in Sarawak.      4.5 million m3, and Sabah around 2.5 million m3. Harvesting
                                                                      levels have fallen from levels of around 30 million m3 which
Total forest area in Malaysia is around 19.52 million hectares, 60%   prevailed in the mid 1990s.
of land area. The proportion of forested land is higher in Sabah
(4.40 million hectares, 60% of land area) and Sarawak (9.24           Long-term sustainable harvesting levels in Malaysia are variably
million hectares, 75% of land area) than in the more developed        estimated at between 8 million and 13 million m3 per annum, while
Peninsular Malaysia (5.88 million hectares, 45% of land area).        indications are that available conversion forest is being rapidly
                                                                      depleted. Therefore levels of log harvesting are likely to continue
Of total forest area, 11.18 million hectares (57%) is designated as   to fall in coming years.
production forest; 3.21 million hectares is designated protection
forest; 2.40 million hectares is designated as one of a variety of    In the past, Malaysian mills often supplemented raw material by
conservation areas (National Parks, Wildlife and Bird Sanctuaries)    importing logs from neighbouring Indonesia. However, this trade
of which a total of 0.25 million hectares are located in the          is now prohibited following imposition of a permanent log export
Permanent Reserved Forests (i.e. production forest and protection     ban by Indonesia in 2002 supported by a log import ban
forest), and 2.98 million hectares (15%) is designated for planned    subsequently imposed by Malaysia.
conversion to other uses (referred to as Stateland Forest).
                                                                      Malaysian wood processing mills have a total installed capacity of
Malaysia is now the world’s largest exporter of tropical hardwood     26.5 million m3, comprising 12.4 million m3 in Peninsular Malaysia,
products by a significant margin. However log production is           6.5 million m3 in Sabah, and 7.6 million m3 in Sarawak. Processing
tending to fall in Malaysia due to tightening regulations on the      capacity has fallen dramatically since the early 1990s when it
harvest of wood from the permanent production forest and a            stood at around 40 million m3. Given the current and future
progressive decline in the remaining area of Stateland forest which   harvesting potential, the downward trend in processing capacity
still accounts for around 40% of total production.                    is likely to continue.

Major forest policy issues now being addressed in Malaysia            Efforts are being made to encourage plantation development as a
include:                                                              means of off-setting declining supply from natural forests. To date,
• Increased promotion of value added products, particularly           Malaysia has established around 320,000 hectares of plantations,
    furniture, to increase economic returns from the forest           of which 140,000 hectares are in Sabah, 80,000 in Peninsular
    resource;                                                         Malaysia and 100,000 in Sarawak.
• Provision of credible assurances of legal and sustainable
    production in Malaysia through development of a national          Chart 1 shows recent trends in Malaysian wood products exports
    certification framework, the Malaysian Timber Certification       (in roundwood equivalent volume terms). The data highlights
    Council, and legality verification procedures in Sarawak;         recent volatility in the overall level of Malaysian wood products
• Contributing to efforts to eradicate illegal logging in the South   exports. A significant dip in exports is recorded in 1998 during the
    East Asian region;                                                Asian financial crises. Another dip occurred in 2001 when Sabah’s
• Improving the investment climate for plantations as a               log supply problems began to be felt in earnest and when the
    supplementary source of wood supply;                              Asian log and plywood market came under intense pressure from
• Diversification of wood products markets to reduce                  cheap Indonesian products. This was at a time when illegal logging
    commercial risk to the industry;                                  in Indonesia was at its height after the collapse of the Suharto
• Increased utilisation of lesser known wood species and              regime. Since 2001, overall export volumes from Malaysia have
    biomass from perennial agricultural cash crops such as rubber     gradually improved, with particularly strong growth recorded in
    and oil palm.                                                     sales to the EU countries and the USA.

       C H A N G I N G I N T E R N AT I O N A L M A R K E T S                                                        FOR     T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Chart 1: Malaysia’s wood-based product exports between 1995 and 2004                                                          Chart 2: Malaysia’s wood-based product exports in 2004


                                                                                                                                   Roundwood Equivalent Volume
                                                                                                                     Others                                                               7                                                                       Paper
     Roundwood Equivalent Volume

                                                            25                                                       India                                                                                                                                        Pulp
                                                                                                                     Thailand                                                                                                                                     Chips

                                                                                                                                                                 (million cubic metres)
                                   (million cubic metres)

                                                                                                                     Taiwan                                                               5                                                                       Other Wood
                                                                                                                     South Korea                                                          4                                                                       Furniture
                                                            15                                                       Japan                                                                                                                                        Plywood
                                                                                                                     Hong Kong                                                                                                                                    Veneer
                                                            10                                                       China                                                                2
                                                                                                                     USA                                                                  1                                                                       Logs
                                                                 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004                                                                            Japan   China Thailand USA   Taiwan   EU South Korea India Others

                                                                                       Year                                                                                                                       Importing Country
     Source: importing country declarations where available, otherwise Malaysia’s export declarations, as in                       Source: based on importing country declarations where available, otherwise Malaysia’s export
     Eurostat and World Trade Atlas and national yearbooks of trade statistics                                                     declarations, as in Eurostat and World Trade Atlas

     Notes: (1) excludes wood chips, pulp and paper; (2) a large proportion of the timber which China declares                     Notes: (1) a large proportion of the timber which China declares as imports from Malaysia may not
     as imports from Malaysia do not originate in Malaysian forests; (3) rubberwood accounts for most of                           originate in Malaysian forest; (2) rubberwood accounts for most of Malaysia’s wooden furniture and a
     Malaysia’s wooden furniture and a substantial quantity of Malaysia’s other wood exports                                       substantial quantity of Malaysia’s other wood exports; (3) Japan dominates plywood production in
                                                                                                                                   Malaysia and Indonesia

     Chart 2 shows the breakdown in wood product exports by major                                                                  revenue and to promote efficiency in the domestic industry. In
     destination in 2004. The EU is significant for taking a relatively                                                            2004, Sarawak exported 4.3 million m3 of tropical hardwood logs,
     wide variety of higher value wood products, including higher grade                                                            down from 6 million m3 in 2000. Log exports have been generally
     sawnwood, plywood and furniture. The USA is becoming                                                                          reoriented away from Japan, first towards China and more
     increasingly important as a market for Malaysian furniture and                                                                recently towards India.
     plywood. But despite recent growth in sales to Europe and the US,
     the bulk of Malaysia’s wood products exports are still destined for                                                           Sarawak’s plywood exports hit 2.8 million m3 in 2004. Volumes
     other Asian markets, notably Japan, China, Thailand, Taiwan and                                                               have been rising since 1999 as Sarawak has diverted more logs
     India. Japan is the dominant market for Malaysian plywood, while                                                              towards domestic plywood production and as availability of
     China and India absorb the majority of log exports. Thailand is a                                                             competing products from Indonesia has declined. In both 2003
     key market for lower grade sawnwood.                                                                                          and 2004, Sarawak’s sawnwood exports stood at around 1 million
                                                                                                                                   m3, with the leading markets being Thailand, Taiwan, Yemen,
     Overall the EU absorbs around 350,000 m3 of Malaysian sawn                                                                    Philippines, China and UAE. Meanwhile Sarawak veneer exports
     wood each year, compared to around 1.7 million m3 destined for                                                                are tending to decline. As logs have become less readily available
     Asian markets, 200,000 m3 for the Middle East, and the remainder                                                              in Sarawak, a larger proportion of rotary veneers are being
     for other markets.                                                                                                            diverted to domestic plywood production. There has also been an
                                                                                                                                   effort by the Sarawak industries to reduce exports of rotary veneer
     Peninsular Malaysia wood trade trends                                                                                         to the Chinese plywood sector which is seen as an important
     Wood products exports from Peninsular Malaysia focus heavily on                                                               competitor in the market for finished plywood products.
     sawnwood, with only small volumes of plywood and negligible
     volumes of veneer. In 2004, Peninsular Malaysia exported 1.03                                                                 Sabah wood trade trends
     million m3 of sawnwood and 182,000 m3 of plywood. Log exports                                                                 Availability of wood products from Sabah is generally declining.
     are banned from the region.                                                                                                   Heavy exploitation in the past has meant that Sabah now suffers
                                                                                                                                   from significant over-capacity in wood processing. State
     Peninsular Malaysia is the only region of Malaysia for which                                                                  authorities are focused on greatly restricting log harvests, and
     European markets account for a large share of export sales.                                                                   diversifying the wood sector and other aspects of the state
     Particularly significant volumes of sawnwood are exported to the                                                              economy. Nevertheless, Sabah has continued to export logs in
     Netherlands each year, mainly kiln dried meranti for window frame                                                             recent times recording exports of 970,000 m3 in 2004, with the
     manufacture. Lesser, but still significant, volumes of sawnwood are                                                           majority destined for China, Japan, Vietnam and Indonesia. In
     exported to Belgium, the UK, Germany and Italy.                                                                               2004, Sabah exports of sawnwood stood at 566,000 m3, with
                                                                                                                                   Thailand, Japan and Netherlands the leading export markets.
     As pressure has mounted on supplies of Indonesian plywood, the                                                                Sabah’s exports of plywood have been rising in recent times,
     UK has become the largest market for Peninsular Malaysian                                                                     reaching 1.3 million m3 in 2005, with Japan, USA, South Korea
     plywood, taking around 64,000 m3 in 2004.                                                                                     and Taiwan the leading markets.

     Peninsular Malaysia is also the main location for Malaysia’s wood
     furniture industry which has traditionally been heavily reliant on
                                                                                                                                   Forest policy and regulations
     rubberwood. The UK is the dominant European market for                                                                        Under Article 74 (2) of the Malaysian Constitution, forestry comes
     Malaysian furniture.                                                                                                          under the jurisdiction of the respective State Governments. As
                                                                                                                                   such, each state is empowered to enact laws on forestry and to
     Sarawak wood trade trends                                                                                                     formulate forestry policy independently. The executive authority
     In Sarawak, state Policy is to progressively reduce log harvests to                                                           of the Federal Government only extends to the provision of advice
     below 9 million m3, to shift gradually from log exports, and to                                                               and technical assistance to the states, training, the conduct of
     promote more downstream processing. At present, Sarawak state                                                                 research and in the maintenance of experimental and
     policy is to maintain a certain proportion of log exports to ensure                                                           demonstration stations. In practice, the 11 states of the Peninsular
     that domestic market prices are not undermined, to maximise                                                                   Malaysia have adopted a common set of laws and regulations for
C H A N G I N G I N T E R N AT I O N A L M A R K E T S    FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

forest management, while the States of Sabah and Sarawak have           (usually 10 times the value of the products involved) and
retained a higher degree of autonomy.                                   imprisonment (2 to 5 years). Penalties for forest offences
                                                                        committed at night and for repeat offences are double the normal
In order to facilitate the adoption of a coordinated and common         penalty for that offence.
approach to forestry, the National Forestry Council (NFC)
comprising the Chief Ministers of the thirteen Malaysian States         In 1994, a National Committee on Sustainable Forest Management in
and chaired by the Deputy Prime Minister, was established in 1971       Malaysia was established to coordinate implementation of all activities
by the National Land Council (NLC). The NLC is empowered                to ensure that forest resources are sustainably managed. The
under the Malaysian Constitution to formulate a national policy         Committee facilitated the development of an extensive set of
for the promotion and control of utilization of land for mining,        Malaysian Criteria and Indicators for Sustainable Forest Management
agriculture and forestry. All the decisions of the NFC have to be       (MC&I) to assess progress at the national and forest management unit
endorsed by the NLC. The responsibility for implementing the            levels. A task force involving representatives of relevant government
decisions of the NFC lies with the State Governments unless it is       ministries and researchers was established to monitor and assess
within the authority of the Federal Government.                         activities undertaken by respective state forestry departments against
                                                                        the MC&I. With support from the German Agency for Technical
Malaysia’s national forest management objectives were                   Cooperation (GTZ), in 1999 Malaysia finalised a set of internal
established in the National Forestry Policy formulated and              assessment procedures for monitoring, evaluating and reporting on
approved by the NFC and later endorsed by the NLC in 1978. The          sustainable forest management against the MC&I. The MC&I also
Policy provides for the maintenance of a Permanent Forest Estate        provided a basis for elaboration of the first set of standards used by
(PFE) to be managed in accordance with the principles of sound          the Malaysian Timber Certification Council scheme (see below).
forest management. It also provides for the thorough and efficient
use of “Stateland” Forests outside the PFE which are to be              Forest management regime
converted to other uses. This Policy is being implemented by all        Forest management regimes in Malaysia vary according to forest
the states in Peninsular Malaysia, and the objectives of the Policy     type. The practice of selective harvesting of the inland forests in
are also being implemented in Sabah. In the state of Sarawak, the       Malaysia is designed to ensure that the larger trees that remain will
Forest Policy which was approved by the Governor-in-Council in          reach maturity in 25 to 50 years to allow for another round of
1954 and having very similar provisions to the National Forestry        harvesting. Natural regeneration is increased by the gaps created
Policy has remained the basis for forestry practices. The 1954          during forest harvesting. Studies in Malaysia have indicated that
Sarawak Forest Ordinance – amended in 1993 and 1996 –                   regeneration of desirable species occurs naturally in and around
describes the various types of forest land and the procedures for       the gaps left by logging. When necessary, logged-over forests are
establishing and managing them.                                         subject to treatment to ensure enhanced regeneration, for
                                                                        example through enrichment planting of indigenous tree species.
In the early 1980s, the NFC reviewed and consolidated the
complex series of forest enactments that had evolved in the             Reduced impact logging is being carried out in a few forest
various states of Peninsular Malaysia to ensure implementation of       areas in Peninsular Malaysia and in the state of Sabah, while low
the National Forestry Policy. This led to the 1984 National Forestry    impact logging (helicopter logging) is being carried out in the
Act which is now enforced by all the State Forestry Departments         state of Sarawak.
in Peninsular Malaysia.
                                                                        Allocation of forest resources and forest fees
In 1992, the National Forestry Policy was revised to accommodate        In all states of Malaysia, forest management is carried out under
new knowledge and international commitments, particularly to            the terms of concession and license agreements giving companies
include references to the conservation of biological diversity,         the right to harvest forests according to an annual allowable cut
sustainable utilization of genetic resources, and recognition for the   and forest management plan drawn up or approved by the state
role of local communities in forest development.                        forest authorities. Under the 1984 National Forestry Act it is
                                                                        mandatory for every State Forestry Department to prepare, or
In 1993, the National Forestry Act was also amended to further          cause to be prepared, forest management and working plans in the
strengthen its provisions to safeguard and protect the forest           PFE. The concession describes the physical characteristics of the
resources. The penalty for committing any forest offence was            forest area in which the company is permitted to log including its
increased from a maximum fine of US$2,630 or prison term of             major features and boundaries. The forest license constitutes the
three years, to a maximum fine of US$131,580 or prison term of          right to log the concession. It describes the terms, duration and the
20 years with a mandatory term of at least one year. The amended        forestry management techniques to be implemented. The State
Act gave the police and armed forces new powers of surveillance         Executive Council, headed by the Chief Minister of the respective
in the forestry sector with the aim of curbing illegal logging,         state, is responsible for allocating concession areas. Licenses are
encroachment into forest areas and timber theft.                        issued by the relevant state forestry departments.

The Sarawak Forest Ordinance was amended in 1993 and again in           License agreements include clauses legally requiring compliance
1996 to strengthen forest law enforcement and to include                with forest management guidelines drawn up by the state
provisions for planted forests. The most recent amendment               government. State forestry departments guidelines cover issues
introduced new penalties and procedures for dealing with                such as standard road specifications and forest harvesting and are
infractions. Penalties are related to the severity of the offence and   mandatory for all logging contractors, both at the planning and
the value of the forest products. They generally involve fines          implementation levels.
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     The Federal Government’s policy has been to encourage allocation       The effectiveness of Malaysia’s existing controls to eradicate illegal
     of concessions to those with a long term interest in the timber        logging within the country were made apparent in two reports by
     industry. The policy is designed to encourage companies that also      the WWF Malaysia and the World Bank published in 2001 on
     handle timber processing and downstream activities. Federal            forest law enforcement respectively in Peninsular Malaysia and
     Government policy has also been to encourage longer concession         East Malaysia. The report on Peninsular Malaysia concluded that:
     agreements as a means of encouraging responsible forest
     management.                                                            “Offenses such as illegal logging and forest encroachment are
                                                                            treated seriously by the law. The maximum punishments for
     The state forestry departments are responsible for establishing        such offenses are quite severe. In addition to heavy penalties, the
     an annual allowable cut or felling coupe. All forest management        authorities have instituted other measures to curb the problems
     plans will set out the annual felling coupe establishing the           and these include conducting spot checks, helicopter
     quantity of timber that may be extracted from each unit of forest      surveillance, regular training programs for their officers to
     on a yearly basis.                                                     equip them with the necessary knowledge and skills on forest
                                                                            law enforcement, and running public awareness campaigns.
     The harvesting of timber from Stateland forests is subject to          Realising the significance of the problems and the need for
     licensing and is controlled by the state forest departments. In        combined efforts in eliminating them, the Forestry Departments
     Sarawak, all Stateland forests also have management plans,             often work together with other government agencies, including
     although the prescriptions set out in these plans may differ from      the police and the army, in their enforcement operations. Partly
     those specified for the PFE. Under Federal legislation, conversions    due to the strategies mentioned above, the incidence of forest
     of Stateland forest of 500 hectares or more are subject to             crimes over the last several years shows a declining trend. The
     Environmental Impact Assessments.                                      average number of illegal logging cases dropped from 223 for
                                                                            the period 1987-1993 to about 28 for the 1994-1999 period.”
     The state forest departments act as the agent for collecting the
     forest products tax or “royalty”. The royalty is a fee levied on all   The report on East Malaysia concluded that: “the dimensions of
     products removed from the forest. Timber royalty chargeable is         forestry offences in Sabah and Sarawak are relatively small
     dependent on the species of log.                                       compared to the magnitude of the legal timber trade. In each of
                                                                            the two states about 300 cases of forest law infractions are
                                                                            detected annually – an average of one case per day. The annual
     Combating illegal logging within Malaysia                              volume of illegal timber seized in each of the East Malaysian States
     A wide range of measures have been introduced to improve               ranges from twenty to fifty thousand cubic meters – compared to
     enforcement of forest regulations in Malaysia:                         the annual log harvest (1998) of five million m3 in Sabah and
                                                                            eleven million m3 in Sarawak.” The report highlighted that cases of
     •   Detailed procedures have been established to prevent licensed      illegal logging are dealt with severely in the courts, and also noted
         loggers from logging outside concession boundaries or in           that “The Forest Departments of East Malaysia have sufficient
         excess of the allowable cut. The trees to be cut above a           personnel, financial resources and the legislative framework is
         minimum diameter are determined using a pre-felling                adequate to reduce illegal forestry activity to an acceptable level.”
         inventory and marked by state foresters with personalised
         hammer-marks, as are boundaries of licensed areas. Post            On 25 September 2006, the Malaysian Minister for Plantation
         harvesting inspections are undertaken to ensure only trees         Industries, together with Commissioners for Development and
         within the allocated cut have been removed.                        Environment agreed to start formal negotiations towards a
                                                                            voluntary partnership agreement (VPA) with the European
     •   Enforcement teams have been established within State               Union to control illegal logging. This followed a proposal by
         Forestry Departments to patrol sensitive areas and support log     Malaysian NGOs for the government to initiate a nationwide,
         checking procedures.                                               open and honest consultation process, in which all stakeholders
                                                                            can take part. It now remains for the Government of Malaysia to
     •   A system of checking stations has been established throughout      complete the task.
         the country. All log carrying lorries are checked to ensure they
         are carrying appropriate “log removal passes”. Each individual
         log passing through a checking station must carry an original
                                                                            Combating illegal log imports
         tag which will tally with state-approved harvesting plans.         While there is widespread recognition of the effectiveness of
                                                                            Malaysia’s internal controls to prevent illegal logging, there have
     •   Enforcement teams now also set up roadblocks to undertake          been allegations that Malaysian traders and government officials
         random spot checks of log-carrying vehicles.                       have actively colluded in the illegal trade in wood from Indonesia.
                                                                            The most severe allegations came in a report “Profiting from
     •   Public informants are encouraged through advertising               Plunder” by the Environmental Investigation Agency (EIA) and
         campaigns and provision for rewards to report illegal activities   Telapak published in February 2004. The report claimed that
         to the relevant Forestry Department and procedures exist to        “hundreds of millions of dollars of illegal Indonesian timber are
         ensure complaints are acted on within three days.                  estimated to be entering neighbouring Malaysia each year,
                                                                            providing cheap raw materials to a voracious wood industry which
                                                                            can no longer be sustained by the country’s own dwindling forest
                                                                            estate.” The report focused particularly on ramin which has been
C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

listed on CITES Appendix III by the Indonesian government,                 Malaysian traders must adhere to have been extended. New
claiming that the NGOs undercover investigations had exposed               requirements have been established so that import licences are
“wholesale laundering of ramin through Malaysia on an                      issued only to importers that can show proof of bona fide
unprecedented scale”. The report built on an earlier report,               export sources, other than Indonesia.
“Above the Law”, published by EIA/Telapak in 2002 which
focused on corrupt practices within Indonesia itself. With its large   •   Documentation requirements for exporters have been
land border with Indonesia, the East Malaysian state of Sarawak            tightened. For example, in Sarawak, exporters must now
took the full brunt of this joint Indonesian/ENGO onslaught.               demonstrate prior to shipment that they possess appropriate
                                                                           log removal passes issued by the Sarawak Forestry
The Malaysian authorities responded vigorously to the allegations.         Corporation (SFC). Physical inspection is undertaken at the
The foundation of their response was that, while problems                  point of export by Harwood Timber and SFC for the export of
undoubtedly exist, the relevant authorities are doing all they can         logs. Ramin is also subject to physical inspection by the SFC.
to combat the illegal trade with Indonesia. Detailed measures have         Timber cargos leaving Peninsular Malaysia and Sarawak
been imposed to ensure that all wood products imported into                require the prior issuance of an “Export License” by the
Malaysia are derived from legal sources:                                   Malaysian Timber Industry Board and STIDC respectively.

•   In order to support the Indonesian government’s efforts to         The effectiveness of these measures is recorded in a recent report
    impose an effective log export ban, Malaysia introduced a ban      by the EIA/Telapak which notes that: “by August 2003 shipments
    on the import of logs from Indonesia in June 2002. In May          of round logs across the Straits of Melaka from Indonesian
    2003, this ban was extended to cover importation of squared        Sumatra to Peninsular Malaysia had dropped off dramatically.
    logs (i.e. timber measuring more than 60 square inches in size,    Field reports from Riau and Jambi provinces in Sumatra indicate
    known as Large Scantlings and Squares – LSS).                      that illegal cutting was reduced as a direct result, with some illegal
                                                                       loggers and illegal log shippers returning to agriculture”.
•   New powers were allocated to a range of agencies to improve
    enforcement and new coordinating bodies were established.          With respect to Malaysia’s tough documentary and inspection
    For example, coordinating bodies were established in Sarawak       requirements for imports of wood products from Indonesia
    to guide enforcement activities of the forestry department,        EIA/Telapak note that “such measures hold great promise and
    customs department, police, armed forces, road and                 deserve to be replicated elsewhere….If importing countries were
    immigration departments.                                           to follow Sarawak’s example and incorporate the requirement for
                                                                       such paperwork and log markings into their import controls, this
•   These new measures led immediately to a number of seizures,        would offer a powerful means with which to fight illicit trade,
    for example involving boats carrying Indonesian logs but           providing a clear legal basis and practical enforcement tools for
    falsely declared as coming from other sources such as the          customs officers to halt shipments of illegally sourced wood.”
    Solomon Islands.

•   In Sarawak, it is now compulsory for Indonesian wood to be
                                                                       Private sector and voluntary initiatives
    imported into the state through a limited number of controlled     Malaysia has been a pioneer in tropical forest certification. The
    checkpoints. Wood transported through any other entry point        Malaysian Timber Certification Council (MTCC) was established
    would be considered illegal and subject to detention.              in 1998 and started operating its scheme in 2001, with standards
                                                                       based on the ITTO Criteria and Indicators (1998). Currently, 4.73
•   A company – Harwood Timber Sdn Bhd – has been                      million ha of permanent reserved forest in eight Forest
    established in Sarawak as a wholly owned subsidiary of the         Management Units (FMU) in Peninsular Malaysia, and one FMU in
    state-run Sarawak Timber Industry Development Corporation          Sarawak have been certified under the MTCC scheme, the largest
    (STIDC) to manage the import of timber through these               in the tropical world. Another FMU of about 100,000 ha in
    checkpoints. Anybody trading wood in Sarawak must now be           Sarawak is preparing for assessment to achieve MTCC
    registered with the STIDC.                                         certification. A total of 92 timber companies have been awarded
                                                                       the MTCC Certificate of Chain-of-Custody (CoC). MTCC is
•   Certain Indonesian legal documents must be supplied for each       currently implementing a new standard using the Forest
    shipment on arrival at the depots on the Malaysian side of the     Stewardship Council (FSC) template (although it is not endorsed
    border. The documents required are the Indonesian timber           by FSC). The MTCC scheme is acknowledged as providing, at
    transport permit, known as the SKSHH, and the equivalent           minimum, a credible assurance of legality by public procurement
    export permit, the PEB.                                            policies in Denmark, the UK, New Zealand, France and Japan. By
                                                                       June 2006, 28 holders of the MTCC CoC were accepted under the
•   All imported wood is subject to inspections by customs and by      Dutch Keurhout Protocol for Legal Origin. MTCC, which is a
    representatives of other relevant authorities such as STIDC in     member of the Programme for the Endorsement of Forest
    Sarawak.                                                           Certification schemes (PEFC), is taking steps to submit its scheme
                                                                       for PEFC endorsement.
•   Regular spot checks are undertaken of logging trucks on the
    roads. Illegal inland transport routes between Indonesia and
    Malaysia are identified using satellite imagery.
•   Existing extensive documentation requirements that all
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S    FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Exports of MTCC certified products recorded significant gains in
     2005. Malaysia exported 30,382 m3 of certified products last year,
     up 60% from 2004. The products included sawnwood, mouldings,
     laminated finger-jointed timber, plywood and garden furniture.
     Most of the exports were to the EU, notably the Netherlands
     (64.4% of the exports), the UK (25%) and Belgium (6.4%). In the
     UK, MTCC certified kiln dried meranti sawnwood are regularly
     achieving a premium of 2-3% on the CIF price of equivalent
     uncertified products.

     The Forest Stewardship Council has also certified natural forests
     and plantations in Malaysia. Currently, there are two forest
     management units certified by FSC: the Deramakot Forest Reserve
     in Sabah and Perak Integrated Timber Complex (PITC) in
     Peninsular Malaysia. The Deramakot Forest Reserve covers 55,083
     hectares of mixed dipterocarp forest, whereas PITC in Peninsular
     covers a total area of 9,725 hectares of rich and pristine lower and
     upper hill mixed dipterocarp virgin forest. A rubberwood
     plantation – the Golden Hope Plantation – covering an area of
     12,434 hectares located in central Peninsular Malaysia, has
     achieved FSC certification. In addition, 4,417 hectares of Acacia
     mangium in Pahang state, belonging to Asia Prima has also
     obtained FSC certification. In the UK, sales of FSC certified meranti
     sawnwood derived from the Deramakot reserve are regularly
     achieving an 8% premium on the CIF price of equivalent
     uncertified product.

     In Sarawak, with most wood destined for other Asian markets
     rather than the EU and US, there has been less interest in forest
     certification to date. So far efforts have focused more on
     development of reliable legality verification procedures. The
     Sarawak Timber Association (STA) has been engaged in the
     development of an STA Stamp which will independently verify that
     wood derives from legal sources in Sarawak. The process involves
     a third party audit of the paper trail, matched with physical checks,
     to ensure that logs bearing the STA Stamp derive from a legal
     source in Sarawak. The verification procedure builds on relevant
     legal and other business documentation – including the timber
     licence required for all fellings in Sarawak, log and product records
     of the mills, and export documentation. Verifiers will be either
     accredited with MTCC or trained auditors with international
     accounting firms.

     Over the years, Malaysia has evolved an effective regulatory
     system for domestic wood production. Forest departments and
     other enforcement agencies have demonstrated that they have
     sufficient personnel, financial resources and technical ability to
     reduce illegal logging to negligible levels. Recent allegations of
     illegal operations have related to cross-border trade, particularly
     with Indonesia, rather than to domestic harvesting. The Malaysian
     authorities have responded vigorously to these allegations. The
     effectiveness of this response is indicated by the fact that certain
     aspects of Malaysia’s regulatory environment with respect to wood
     imports is now held up by ENGOs as an example of good practice.
     In addition, a growing proportion of the private sector in Malaysia
     is demonstrating commitment to independent verification of
     legality, notably through the MTCC and the STA Stamp.

C H A N G I N G I N T E R N AT I O N A L M A R K E T S    FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Rupert Oliver (Edited by Emily Fripp)

Introduction                                                            Overview of market & trade
The Republic of Indonesia is a sprawling archipelago of more than       Recent trends in Indonesian wood products exports are partly
17,508 islands, of which 6000 are inhabited. Sharing land borders       dependent on swings in policy as the government has struggled to
with Malaysia, Timor Leste and Papua New Guinea, Indonesia extends      bring serious forest sector problems under control. After the fall of
over 3000 miles across the equator between the Indian and Pacific       the Suharto regime in 1998, the new Indonesian government came
Oceans, from mainland South East Asia to Australia. Its land mass       under pressure from the World Bank and IMF to progressively
covers 193 million hectares or 1.3% of the world total, while its       remove log export taxes and increase forest royalties, thereby
shoreline comprises 14% of the world's total. The country is divided    shifting the burden of forestry taxation from point of export to point
into 27 provinces and has a population of around 180 million, making    of harvest. The aim was to make Indonesian domestic log prices
the Republic the world’s fourth most populous nation. About 60% of      reflect international market conditions and the costs of replacing
the population resides on the two islands of Java and Madura, which     timber following harvest. Prior to the changes, Indonesia’s high
account for only 7% of the nation’s land area. GDP per capita is well   export taxes on logs and sawnwood had encouraged rapid growth
below that of developed countries and poverty remains a problem in      in Indonesia’s plywood industry by supplying it with a cheap source
many areas                                                              of wood. However this growth was achieved at the cost of
                                                                        inefficient processing and over-exploitation of forests. Therefore the
Forests have been a key focus of political attention in Indonesia in    government progressively reduced export taxes on logs and sawn
recent times, a reflection of the conflicting demands placed upon       wood between 1998 and 2000.
them to satisfy economic development and environmental
protection goals. The nation’s forests – among the most biologically    This policy created severe short-term disruption as the domestic
rich in the world – also rank among the most threatened. According      industry was unable to absorb rising costs and suffered severely
to the WWF, over 40% of the country’s forests have been cleared in      from lack of raw materials, fuelling unemployment and political
the last 50 years. Close to a fifth of forest cover was lost between    unrest. The policy also created new international demand for logs
1985 and 1997 alone. The most accessible tropical lowland forests       just at a time when the government was reducing centralised
in Sumatra and Kalimantan have come under particularly intense          control over forest resources as part of an overall process to
pressure in the last decade. Deforestation rates have accelerated       increase regional autonomy. The combined effect was a big rise in
since 1996, and are now estimated at 2 million hectares a year. In      illegal harvesting and log exports.
recent times, there has been widespread degradation of forests due
to illegal logging and clearance for conversion to agricultural cash    In an effort to bring the situation under control, the log export ban
crops. Despite high deforestation rates, perhaps 98 million hectares    was officially reintroduced in early 2002. However this regulation
of forest remain. In much of Irian Jaya, and portions of Kalimantan,    proved largely ineffective in stopping the export of logs.
there are still large tracts of intact forest.                          Numerous press reports have shown that, in direct contradiction
                                                                        to the log export ban, the export of logs from Indonesia has
Indonesia’s forest industries have been an important source of          continued both ‘legally’ (i.e. with the use of official documents)
income and employment for large numbers of people – although            and without any documentation at all.
their significance to the overall economy has been declining in
recent years. The Department of Forestry estimated that the total       The high levels of illegal trade mean that official figures for
number of people working directly in the logging and wood               Indonesian wood products exports have in recent years
processing industry peaked at around 562,000 just before the            significantly under-reported the actual volume of trade,
Asian crisis, but then declined rapidly to 392,000 in 2000. Indirect    particularly in logs. This is indicated by a substantial mismatch
job creation is even greater. The Ministry of Manpower estimates        between the declared exports of these products and the
that for each job created in forestry, 1.18 jobs are created            corresponding imports that many importing countries declare.
indirectly. The Ministry predicts that saw milling and plywood          This translates into a loss to Indonesia of some US$400 million
manufacturing has an even higher multiplier of 1.47, while paper        each year. Separately, it is said that Indonesia annually losses
and pulp production’s multiplier is 2.06.                               US$4 billion from illegal logging.

                                                                        Despite the under-reporting, official export data indicates that
                                                                        Indonesia remains one of the world’s leading suppliers of tropical
                                                                        timber, pulp and paper. There has been a significant downturn in
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S                                                                       FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Figure 1: Indonesia – Trend in Indonesia’s wood-based product exports                                                                      Figure 2: Indonesia – Wood-based products exports in 2004.

                                                                                                                                                Roundwood Equivalent Volume
                                                            25                                                                                                                                                                                                               Paper
     Roundwood Equivalent Volume

                                                                                                                                  Others                                                                                                                                     Pulp
                                                            20                                                                    Taiwan                                                                8                                                                    Chips

                                                                                                                                                                              (million cubic metres)
                                   (million cubic metres)

                                                                                                                                  South Korea                                                                                                                                Other Wood
                                                            15                                                                    Japan                                                                 6                                                                    Furniture
                                                                                                                                  Hong Kong                                                                                                                                  Plywood
                                                            10                                                                    China                                                                 4                                                                    Veneer
                                                                                                                                  USA                                                                                                                                        Sawnwood
                                                            5                                                                     EU                                                                                                                                         Logs

                                                            0                                                                                                                                               China   Japan   EU   South   Taiwan Malaysia USA   Hong Others
                                                                 95 96 97 98 99 00 01 02 03 04    95 96 97 98 99 00 01 02 03 04                                                                                                  Korea                         Kong

                                                                 Wood                      Year              Pulp & Paper                                                                                                        Importing Country

     Source: importing country declarations where available, otherwise Indonesia’s                                                              Source: importing country declarations where available, otherwise Indonesia’s
     export declarations, as in Eurostat and World Trade Atlas and national                                                                     export declarations, as in Eurostat and World Trade Atlas.
     yearbooks of trade statistics.

     timber exports since the early 2000s (see figure 1). This has been                                                                         Regulation and control
     off-set by a significant increase in the country’s pulp and paper
     exports during the same period. Factors contributing to the demise                                                                         Since the collapse of the Suharto regime in 1998, there has been a
     of timber exports include the severity of accumulated forest loss in                                                                       tremendous ferment of forest policy reform in Indonesia. The
     Indonesia, the success of China (partly by using illegal Indonesian                                                                        situation is still in a state of flux, and the outcome undecided. The
     timber) in gaining market share from Indonesia, and the increasing                                                                         implications of the reform process have been profound. The
     frequency of efforts by the authorities to clamp down on illegal                                                                           implementation of a workable regulatory environment in
     production and trade in timber.                                                                                                            Indonesia would do much not only to preserve Indonesia’s unique
                                                                                                                                                natural heritage, but also to encourage long term stability in
     Based upon the numbers shown in Figure 1, Indonesia’s wood                                                                                 tropical hardwood markets.
     exports reached around 22 million m3 (RWE) in 2004, having
     dropped from around 23 million m3 in the previous year. The                                                                                Immediately after the demise of the Suharto regime, reforms
     principal importers were Japan, China, the European Union, South                                                                           focused particularly on overhauling the forest concession system.
     Korea, the United States and Taiwan. At the same time, the                                                                                 These reforms were required under the terms of an IMF debt relief
     country’s exports of pulp and paper reached a volume (RWE) of                                                                              agreement imposed in the wake of the Asian financial crises.
     25 million m3, rising from 24 million m3 in 2003. Furthermore,                                                                             Amongst other things, the agreement required Indonesia to:
     during the ten year period between 1995 and 2004, Indonesia’s                                                                              allocate forest concessions through auctions; change the
     exports of pulp and paper have increased from around 5.5 million                                                                           concession system to include performance bonds, new resource
     m3 to 25 million m3, a rise of over 350%.                                                                                                  rent taxes, and higher stumpage fees; eliminate the Indonesian
                                                                                                                                                plywood association (APKINDO) monopoly over plywood
     Figure 2 provides data on Indonesia’s main export destinations for                                                                         exports; and to incorporate the reforestation fund into the national
     wood products in 2004, including pulp and paper. It indicates that on                                                                      budget and to use the fund only for reforestation purposes.
     a roundwood equivalent volume basis, China is the most significant
     market. According to official statistics, China is primarily important                                                                     A new Forest Law (Law 41/1999) was ratified in September 1999
     for sawnwood and plywood, but anecdotal reports indicate the                                                                               replacing the outdated 1967 law with the aim of providing a
     country also takes the bulk of illegally exported Indonesian logs.                                                                         rational basis for utilisation and control of the forest estate. The
     Japan is the second largest market, taking large volumes of                                                                                law’s stated objective is to promote forestry based on the principles
     Indonesian hardwood plywood on an annual basis (roughly US$439                                                                             of sustainability, democracy and transparency. All forest resources
     million in 2004), as well as other products. Collectively, the EU is the                                                                   will be under the direct control of the state, with the exception of
     third largest market, taking a wide range of products including                                                                            those forests (“Adat” forests) still controlled under customary laws
     plywood, furniture, mouldings, joinery products, and pulp.                                                                                 of indigenous groups. Local communities must be informed about
                                                                                                                                                local forestry operations and have a right to compensation if they
     Collectively, the EU imported some 15% of all of Indonesia’s                                                                               suffer loss as a direct result of these operations. The government is
     exports of wood-based products in 2004, excluding chips, pulp and                                                                          required to ensure that at least 30% of each watershed or island is
     paper, which equated to around 3.6 million m3 (RWE – see figure                                                                            retained as forest land.
     3). The most significant market was Belgium, which accounted for
     3% of Indonesia’s total exports and 20% of exports to the EU. After                                                                        The Forest Law requires that forests are allocated into different
     Belgium, came the UK, Germany and Netherlands, each                                                                                        categories – Production, Protection and Conservation – on the
     accounting for around 2% of Indonesia’s total exports and for just                                                                         basis of forest inventories undertaken by the government. The
     over 13% of exports to the European Union. EU imports of                                                                                   government is responsible for ensuring development of forest
     hardwood plywood from Indonesia in 2004 reached a RWE                                                                                      management plans at provincial, district and mangement unit level
     volume of approximately 1.2 million m3. The majority is destined                                                                           in all forest categories of forest, and for supervision of forestry
     for four European markets: Belgium, the UK, Germany, and the                                                                               operations. The central and local governments are allocated joint
     Netherlands. Due to export restrictions, EU imports of rough sawn                                                                          responsibility for monitoring and supervision of forestry activities.
     wood from Indonesia are low, with a significant proportion of
     lumber imported as higher value planed or decking product.
C H A N G I N G I N T E R N AT I O N A L M A R K E T S                       FOR      T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Figure 3: Analysis of Indonesia’s timber exports in 2004 (estimated RWE
volume, total c24 million m3).

                                Germany 2% Netherlands 2%                                    significant restrictions on the ability of government authorities
                    France 1%
             Belgium 3%
                                        Italy 1%
                                                     UK 2%
                                                                   Other EU 4%               at national and local level to expand legal timber production by
      Others 33%                                                                             slating large areas of forest for conversion to other uses and
                                                                                 NAFTA 10%
                                                                                             making these available to logging companies for clear-cutting.
                                                                                             Nor did it prevent a rapid expansion of the HPH system into
                                                                                             the still relatively unexploited forests of Irian Jaya.

                                                                                             The declining dependence of the wood processing industry on the
                                                                          Japan 28%          large HPH concessions and the rising dependence on conversion
                                 China 14%                                                   forests has greatly increased the complexity of wood supply
                                                                                             chains in the country, making monitoring and enforcement all the
Source: importing country declarations where available, otherwise                            more difficult. Many Indonesian plywood and other
Indonesia’s export declarations, as in Eurostat and World Trade Atlas.
Note: excludes chips, pulp and paper but includes wooden furniture.                          manufacturers now rely heavily on third parties for the supply of
                                                                                             logs and often have little information on either the source or the
                                                                                             conditions under which they are harvested.
The Forest Law states that land may be allocated through business
licences for use by individuals, cooperatives, and Indonesian                                Simple economics is another key driver of illegal logging.
private or state-owned companies. Issue of business licences is                              According to a study by the forestry consultancy URS in 2002,
subject to the payment of fees, forest rents, contributions to the                           the estimated cost to a large forest concessionaire to deliver
reforestation fund, conformance with performance bonds, making                               legal wood (including ‘informal’ taxes of 20%) to the mill door
available specific funds for forest conservation, and adherence to                           is US$85/ m3, whereas the cost of illegal timber is US$32/ m3.
forest protection and rehabilitation measures.                                               Without effective enforcement or strong demand for verified
                                                                                             legal timber, legal operators simply cannot compete against
The Forest Law allocates to the state considerable powers of                                 illegal operators.
investigation into forestry operations and enforcement. It
establishes specific prohibitions, for example it disallows any form
of forest encroachment not sanctioned by the state, it states that
                                                                                             Combating illegal logging
there should be no harvesting of trees or use of heavy machinery                             In the last three years, efforts to overcome these problems have
in forests without an appropriate license, and no carriage of wood                           intensified. Government Regulation 34/2002, which provided the
without the necessary legal documentation. For the worst                                     details for the implementation of Forestry Law 41/1999, was
offences, maximum penalties are established of up to 15 years                                designed to clarify the respective roles of the central and local
imprisonment and fines of 5 billion rupiah (c. US$550,000).                                  authorities. It clearly states that the central government has sole
                                                                                             authority over forests and that permits issued at the regional level
While the law seems comprehensive on paper, key aspects lacked                               are no longer valid. However this law has continued to be
clarity and contributed to problems of enforcement. Particularly                             contested in some areas.
problematic was the lack of a clear statement of the respective roles
of the central and local governments, a direct result of serious                             Alongside this measure, the central government has sought to
internal political conflicts prevailing at the time. With the collapse                       re-impose direct control over national harvesting forest operations
of the Suharto regime in 1998, the central government came under                             through the Annual Allowable Cut (AAC). In 2003, Ministry of
intense pressure to extend federalism throughout the country or                              Forestry decree No. 156/Kpts-II and Decree of Director General
risk national disintegration. Some provinces, notably Aceh and                               Forest Production No. 02/KPTS/VI-PHA required a reduction of the
Irian Jaya (now referred to as Papua), were pushing hard for                                 national AAC to the level of sustainable yield. The official AAC was
independence. In an effort to appease these independence                                     reduced dramatically from 21 million m3 in 2001 to only 6.89 million
movements, provincial and district (kabupaten) level governments                             m3 in 2003, then to 5.74 million m3 in 2004 and 5.4 million m3 in
were given greater direct control over their natural resources,                              2005. However in 2006, amidst mounting evidence that the policy
including forests, and began to issue their own forestry decrees and                         was unworkable, there was a partial reversal with AAC again
allocate licences for forestry operations without reference to the                           increasing to 7.9 million m3. District and provincial government
central authorities. This led to a chaotic situation in which forestry                       officials in some regions, for example East Kalimantan, have openly
operations regarded as “legal” by the provincial authorities were                            stated that they will ignore AAC limitations in order to sustain the
treated as “illegal” by the central authorities. The provincial and                          operations of logging and woodworking industries both for economic
district governments also lacked the capacity to enforce forest laws.                        (tax revenue, employment) and political (social stability) purposes.

Another weakness of the 1999 Forest Law was its failure to                                   Following allegations of widespread illegal logging in ramin,
effectively regulate the role of the state in allocating new                                 the Ministry of Forestry issued decree No. 168/ Kpts-IV in 2001
forests for exploitation and conversion. In reality, a large                                 on the extraction and trade of ramin. This stated that permission
proportion of the most accessible and valuable forests in                                    to harvest and trade ramin will be given only to companies having
Indonesia had been heavily logged well before 1999. During                                   a Sustainable Forest Management Certificate from the Indonesian
the 1990s, there was a sharp reduction in the availability of                                Ecolabeling Institute, LEI.
logs from the natural production forest areas managed under
concession agreements (so-called HPH) in the main producing
areas of Kalimantan and Sumatra. The 1999 Law placed no
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S     FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     In 2003, Indonesia amended their money laundering legislation             licenses – especially those dealing with selectively felling in natural
     so that illegal logging is specifically recognised as a crime that        forests and creating timber plantations. The Coordinating Ministry
     can result in money laundering.                                           for Law and Security – as a part of its Presidential mandate to
                                                                               coordinate efforts against illegal logging – intends to adopt a
     A key event came in March 2005 with the passage of Presidential           comprehensive framework of actions (identified as part of a
     Instruction No. 4 Concerning Eradication of Illegal Logging. This         multi-stakeholder consultation process) to curb illegal logging.
     law firmly establishes that efforts to tackle illegal logging are a
     national priority. The Minister for Political, Law and Security Affairs
     was given responsibility for coordinating all related agencies in
                                                                               The forest sector
     the national effort and for reporting directly to the President on        The Indonesian wood products sector has been under considerable
     progress every 3 months. The Instruction requires a wide range            pressure in recent years due to the combined effects of reduced
     of Ministries and enforcement agencies to accelerate efforts to           wood supply, rising costs, and increasing competition from other
     eradicate the problem. It gives extensive powers to the police and        Asian countries, notably China and Vietnam. Indonesian wood
     armed forces to intervene in enforcement efforts. The Finance             products have generally become less competitive in the
     Ministry is required to set aside the necessary funds. The                international market due to high transportation costs as logging
     Instruction states that incentives should be provided to                  operations increasingly shift to remote areas where infrastructure
     encourage the general public and private sector to assist in the          is very limited and as the price of fuel has risen dramatically. In
     effort. Provincial governors are required to revoke and revise any        Europe, demand for Indonesian wood products has also suffered
     regional regulations and Governor's decrees that are still in             from damaging negative publicity as environmentalists have
     contravention of federal forestry legislation and to revoke any           sought to raise industry and public awareness of the problem of
     logging and business licenses issued in contravention of this             illegal logging.
     legislation. They are also required to set up provincial task forces
     and to report on their activities to the Minister for Political, Law      Sawnwood and plywood industries are struggling to maintain
     and Security Affairs.                                                     production levels. Hardwood sawnwood production is forecast to
                                                                               decline from 6.3 million m3 in 2003 to 6.1 million m3 in 2004 and
     At the same time, the Indonesian government has been actively             2005. Plywood production (66% produced in South Kalimantan
     engaged with other countries calling on them to assist in their           and 13% in Central Kalimantan) is estimated to have declined by
     efforts to curtail illegal wood product exports. It has agreed            6.4 million m3 in 2003 to an expected volume of 6.1 million m3 this
     Memoranda of Understanding (MoU) to cooperate in tackling                 year. Plywood exports are falling due to declining demand in key
     illegal logging and trade with the UK (August 2002), China                markets such as Japan and availability of similar products and/or
     (December 2002) and Japan (June 2003).                                    wood substitutes from China.

     One prominent initiative emerging from the UK-Indonesia MoU               To adjust to the changing market conditions, plywood mills are
     has been to bring stakeholders together in an effort to reach a           producing more secondary products such as particle board, block
     common understanding of what constitutes “illegal timber” in the          board and MDF, using by-products from plywood milling.
     Indonesian context. A “legality standard” has been developed              However, financial constraints prevent the industry from
     using a multi-stakeholder process managed by the Indonesian               upgrading facilities and equipment. To maintain and/or increase
     Ministry of Forestry in close partnership with The Nature                 revenue, the mills are also producing more value-added products
     Conservancy and with contractors SGS and URS Forestry. The                such as fancy plywood, using imported veneer and the majority of
     standard sets out in detail the various forest sources from which         these products are for export.
     timber may be sourced legally in Indonesia; the forest fees and
     taxes that must be paid; the planning and documentation                   Indonesia is host to a significant wood furniture sector, with the
     requirements for forest management; and the documentation                 majority of manufacturers located on the island of Java. The
     requirements for timber transport, delivery, processing and export.       industry, which is dominated by small and medium sized
     The Indonesia-MoU has also provided for the development, testing          enterprises, has seen substantial growth in the last 6 years. The
     and implementation of systems of verification of legal compliance         overall export value of wood furniture hit US$1,172 million in
     based on independently verified chain-of-custody and                      2004, which compares to an annual average of only US$320
     identification systems. The legality standard has now been finalised      million during the 1990s. In the past the industry benefited from
     by a multi-stakeholder group including industry, government and           relatively low labour costs and ready access to raw materials.
     NGOs, coordinated by LEI (Indonesian Ecolabelling Institute).             However both these advantages are now being undermined as
                                                                               competition mounts from China and Vietnam and forest resources
     At the end of 2006, the World Bank reported that various other            have been depleted. The industry, which absorbs around 5 million
     initiatives on illegal logging are underway. The Ministry of              m3 of logs per year, is becoming increasingly dependent on
     Forestry is now drafting a new law on illegal logging to improve          plantation resources and wood imports. The most commonly used
     law enforcement operations and expedite efforts to curb the               species are now plantation-grown teak, mahogany, pine and
     practice. There is a collaborative program ongoing between the            acacia. Only small amounts of wood derive from natural forests. In
     Ministry of Forestry and South Dakota State University to                 recent times, the industry has been buying increasing volumes of
     develop a new, more sophisticated, forest monitoring system to            temperate hardwoods, notably European oak from Germany.
     be introduced before the end of 2007. The Ministry is also
     working in partnership with Forest Watch Indonesia (FWI) to
     establish a comprehensive GIS database on forest utilization
C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

While other forest industries have struggled in Indonesia, the pulp    problems meant that early progress was slow. Only a relatively
and paper sector has thrived. Low labour costs and access to           small area of forest has been certified. But more recently LEI has
cheap wood resources due to large scale conversion of natural          received funding from the European Commission for a joint
forests to plantations have meant the industry has been                project with Forest Watch Indonesia (FWI) and The Indigenous
highly competitive on international markets. Indonesian paper          People Alliance of Archipelago (AMAN) to further develop
production rose 24% a year from only 403 thousand tons in 1984         domestic forest certification capacity in Indonesia and to extend
to around 7 million tons in 2000. Pulp production grew by 27% a        coverage of the scheme.
year on average between 1992 and 1998 to reach 3 million tons.
Production slumped during the Asian crises, but increased
again to reach 5.5 millions ton in 2001.
                                                                       Numerous factors continue to drive illegal logging in Indonesia,
                                                                       most notably: the difficulties of enforcement throughout a
Private sector initiatives                                             sprawling country with a vast coastline; continuing disputes over
Indonesia has been the focus of numerous private sector efforts        the control and use of forest resources between central and
to help combat illegal logging. Indonesia plays host to the            regional government; corruption; and the economics of the supply
Global Development Alliance (GDA) launched with the specific           chain which mean that there are still only weak incentives to
objective to “strengthen market signals to expand certification        encourage legal operation.
and combat illegal logging, specifically to stimulate demand for
certified forest products and reduce the market for illegally cut      On the other hand, Indonesia’s government has now given the
wood products in Japan, China and other key Indonesian                 highest political priority to tackling illegal logging and
export markets.” The Alliance is a public-private partnership          improvement of forest law enforcement. The problem is now
comprised of the US Government (through USAID), the                    being addressed on a number of fronts including through:
Government of Indonesia, international and local NGOs, the
international forestry research institution (CIFOR), and more          •   the development of international cooperation programs with
than 17 companies. The Alliance is led by The Nature                       major buying countries;
Conservancy (TNC), WWF, and Tropical Forest Foundation.
                                                                       •   efforts to re-impose central government regulations in the
Alliance members have built an independent legal verification and          management of forest resources;
timber tracking system in two forest concessions in East
Kalimantan, covering 350,000 hectares of natural forest. The           •   the use of a wider range of legislative instruments (for
alliance has assisted three forest companies in West Kalimantan, to        example on money laundering);
successfully convert their timber concession practices to meet
Reduced Impact Logging Verification standards as well as legality      •   through multi-stakeholder processes designed to reach a
standards. More than 506,560 hectares of natural forest are now            consensus on the definition of legality and;
covered by the logging verification system.
                                                                       •   by engaging the private sector in the development of
Major timber importers in Europe and North America who had                 procedures for timber tracking, legality verification and forest
stopped buying Indonesian wood products are now negotiating                certification.
contracts with Indonesian companies employing these
certification systems.

The Forest Stewardship Council has been operating in Indonesia
for several years. A million hectares of teak plantations owned by
Perum Perhutani (a parastatal organisation based in Java) gained
FSC certification during the 1990s but subsequently lost it again in
2000. However, the WWF and the Tropical Forest Trust is now
assisting five Perum Perhutani Forest Management Units (FMUs)
to regain FSC certification. At the end of 2006, the Soil
Association was contracted to carry out full FSC assessments at
two of the FMUs. In addition, the FSC have certified a total of 5
forests of 739,368 ha as follows; Koperasi Hutan Jaya Lestari
(KHJL), private plantation of 152 ha, PT Diamond Raya Timber,
private natural forest of 90,240 ha, PT Erna Djuliawati, private
natural forest of 184,206 ha, PT Intracawood, private natural
forest of 195,110 ha, and PT Sumalindo Lestari Jaya Tbk, private
natural forest of 269,660 ha.

The Indonesian Eco-labeling Institute (LEI) launched in 1998 was
amongst the earliest national forest certification schemes
established anywhere in the world. Lack of finance and technical
capacity combined with political instability and severe regulatory
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S      FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Rupert Oliver (Edited by Emily Fripp)

     Introduction                                                               products exports in 2004 totalled $1.1 million, a year-on-year
     Vietnam is a heavily populated country with a high dependence on           increase of 94%. In the first ten months of 2005, Vietnam’s wood
     the forest resource. In July 2006, Vietnam’s population was                products exports set a new record of nearly $1.2 billion, an
     estimated to be 84.4 million people. An estimated 25 million               increase of 43% in comparison with the same period of the
     people live in and near forests and derive approximately 20% of            previous year. Exports of Vietnamese wood products may reach
     their household income from forest products.                               US$2.2 billion by the end of 2006, an increase of 38.4% over last
                                                                                year, according to the Viet Nam Forest and Wood Products
     By 1990, forest cover had declined from a situation with high              Association. Export values have increased tenfold over the last six
     quality forest covering most of the country, to around 28% of land         years and have already reached US$1.9 billion so far this year. By
     area, due to population growth, warfare, over-exploitation, and            2010, wood processors could see an annual turnover of $5.5
     conversion to agriculture. This was compounded by poor                     billion, and Vietnam could surpass China in the export of wood
     regulation and governance of the State Forest Enterprises                  furniture to the US market. The country already ranks third in the
     (established when the country unified after the war). Recent efforts       export of wood products to the Japanese market, following China
     by the government to reengage with the international community,            and Thailand.
     combined with greater political stability and rising awareness of
     the problems caused by over-exploitation of the nation’s forests,          In November 2006, there were more than 2,000 wood processing
     have led to a major drive to improve the regulatory environment            businesses in the country, including around 1,200 involved in
     and to reverse the loss of forest. The government has launched an          export. Around 200 of these have foreign investment according to
     ambitious afforestation programme with the aim of boosting wood            the Ho Chi Minh City Artistic Woodcraft Association (HAWA) and
     supplies both for industry and communities. According to 2005              there continues to be strong inward investment in wood
     estimates, around 12.9 million hectares (39.7% of land area) is now        processing capacity.
     covered by forest1. The government has established a target to
     increase forest cover to 16 million hectares (48% of land area) by         Government policy has boosted investment in the wood
     the year 2010. Nevertheless, native forests continue to be                 processing sector. Controls on inward investment and the trade of
     degraded and illegal logging remains a problem in many areas.              goods are being progressively relaxed. Foreign owned
                                                                                manufacturing companies may now import logs and sawnwood
     A shift from central planning to market economics from the 1980s           duty free if they can demonstrate that finished products will be re-
     onwards has brought about an economic boom in Vietnam. GDP is              exported and not sold into the domestic market. In time, these
     currently growing at a rate of around 8% per year. The wood products       controls are expected to be reduced so that enterprises are able to
     industry has benefited from trade liberalisation, improved political       import and export from Vietnam without restriction.
     stability and from labour rates that are even lower than those in China.
                                                                                Chart 1 highlights some major changes in the wood trade in
     The ready availability of durable tropical hardwoods such as red balau     volume terms over the last decade. It shows the rapid growth in
     and teak, combined with relatively low levels of finishing skills, meant   wood furniture exports since 1995. Exports of wood furniture now
     that the industry focused initially on outdoor furniture. However, as      dominate those of other solid wood products. Until recently, the
     skills have developed and with further foreign investment, the             EU was the most significant market for wood furniture and still
     industry has diversified into a wider range of product lines.              takes around 40% of the total. The US has become increasingly
                                                                                important since 2000 and is now the largest single market. Much
     As natural forests have dwindled in Vietnam, so too has the level          of the remaining wood furniture is destined for Japan.
     of commercial hardwood harvest, falling from average annual
     levels of two million m3 in the 1960-1985 period, to around only           Chart 1 also indicates that exports of other wood products have
     300,000 m3 today, resulting in an industry increasingly dependent          followed a different trend. Exports fell dramatically until 1998, in
     on wood imports.                                                           line with general downward trend in availability from domestic
                                                                                wood resources and increasing consumption in the domestic wood
                                                                                furniture industry. Exports have however increased from 1998, in
     Wood trade and industry                                                    line with increased investment in wood processing, increasing
     Vietnam is expanding rapidly as an export-oriented wood                    availability from plantations, and improving economic conditions
     processing centre. According to the Ministry of Trade, wood                in the Far East after the 1998 financial crises.
C H A N G I N G I N T E R N AT I O N A L M A R K E T S    FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Chart 2 illustrates the profile of wood products exported to major      beset with problems such as conflict with local communities, lack
markets in 2004. If pulp, paper and chip products are included,         of investment, primitive harvesting and inefficient processing
Japan and Taiwan emerge as the largest markets for Vietnamese           practices. In 1991, a Tropical Forestry Action Plan was
wood products. The US and EU are important only as markets for          developed in partnership with FAO. In the same year, the Forest
wood furniture. Chart 3 indicates that the UK is the largest            Resources Protection and Development Act and the first
European market for Vietnamese wood products, followed by               National Forest Policy were introduced. All these measures
France, Germany, Belgium, the Netherlands and Italy.                    heralded a shift away from centralised state forestry, SFEs, to
                                                                        towards households and communities. Although the state has
The production capacity of the remaining natural forests is limited,    maintained ownership over the land, households and
with government now restricting the legally allowable cut to only       communities have been empowered through the issue of
around 300,000 m3 per year, most of which is allocated for              long-term user rights, the provision of technical extension
small-scale production of local handicrafts. While plantations are      support by reformed state enterprises and of credit by a newly
expected to provide increased log supply in future years, much of       established rural banking system. A new Land Law (post 1993)
the volume comprises small diameter material destined mainly for        and the 2004 revision of the Law on Forest Protection and
the pulp and paper industry. Plantations will supply only very small    Development, has reinforced the transfer of long-term land use
volumes of high quality acacia suitable for furniture. Therefore the    rights to households and of forest land to rural communities.
vast majority of wood sourced by the wood furniture industry is
now imported. A significant proportion is also derived from             Along with the reallocation of forest land, a process of forest
“unknown sources”, both domestic and imported. According to a           zoning has taken place, according to the principle function of the
recent report by the US Embassy in Vietnam, Vietnam’s 2004              forest: production; (watershed) protection; and special use.
demand for wood materials for the furniture industry was about          Specific regulations are currently being developed to guide
2.5 million m3 of wood, of which 1.5 million m3 was imported,           management of forests according to function.
700,000 m3 came from known domestic sources, and 300,000 m3
from unknown sources such as logs sourced illegally from                Although an area of forests is being allocated to private interests,
domestic forests, or from other countries in the region, notably        the SFEs will not disappear. The most efficient SFEs will be retained
Laos, Cambodia and Indonesia.                                           and will focus more on forest protection and plantation
                                                                        management than on production of timber in natural forests.
The US Embassy in Vietnam suggests that the nation’s official
wood imports have increased three fold since 2000. Logs are             The long term objective of MARD’s plans is for the state-run
believed to account for around 65% of total imports, with most of       economic sector to remain in charge of around 8 million ha of
the remainder comprising sawnwood. Malaysia is the largest              forests, of which 85% are special use forests, 70% are protective
external supplier of wood, believed to account for around 18% of        forests and 25% are production forests. Farmer families and
the market. Other key Asian suppliers are Laos, Myanmar, and            cooperatives will manage about 8 million ha of forests, of which
Indonesia. Suppliers from outside the region include PNG,               75% are production forests, 30% protective forests and 15%
Solomon Islands, South Africa, the United States, and Brazil.           special use forests.

Garden furniture manufactured in Vietnam often comprises                The process of allocating forest land to private interests is
Myanmar teak, Malaysian keruing, and locally sourced red balau.         taking time and is problematic. According to official records,
Laos was formerly the largest supplier of hardwood logs to              approximately 2.7 million hectares of forest land has so far been
Vietnam, but government controls on exports of logs and rough           allocated to households and collectives, 3.4 million hectares to
sawnwood has forced Laos suppliers to switch to exports of semi-        State enterprises, 1.3 million hectares to Special-Use Forest
processed wood products.                                                Management Boards, 1.1 million hectares to Protection Forest
                                                                        Management Boards, and 95,000 hectares to the armed forces.
Forest resource constraints combined with increased efforts to          But in many cases these forest land allocation figures exist only
combat illegal logging and a shift to interior furniture products has   on maps and in documents, due to a lack of field activity,
meant that Vietnam is now looking to expand its range of raw            planning and an effective framework for allocation and funding.
material suppliers. Rather than sourcing high value hardwoods,          However, reports during 2006 indicate that the process of land
manufacturers may shift to lower cost raw materials, perhaps            allocation has accelerated in recent months.
particle board with a veneer face, or rubberwood. Recently
softwood lumber suppliers have also targeted the Vietnamese
market. Since 2001 radiata pine from New Zealand has become
                                                                        Forest protection and afforestation
more prominent in the market place and Canadian suppliers               In 1993, the Government started Programme 327, “Regreening
Tembec and Domtar have been looking at the potential to sell FSC        Open Land and Barren Hills” for the period 1993-2000, with the
certified softwood to Vietnam.                                          objective to afforest barren land and open treeless hills
                                                                        throughout Vietnam. In 1998, the National Assembly agreed to
                                                                        adopt the ambitious 5 Million Hectare Reforestation Programme
Reallocation of forest land to private sector                           (5MHRP) for the period 1998-2010. The main objectives of
In the early 1990s, the state system of forest management was           which are to: increase the forest cover to 43% by 2010; ensure a
based on State Forest Enterprises (SFE), of which there were about      supply of forest products for development; and implement
400, supervised by the Ministry of Forestry (now Ministry of            efforts for poverty alleviation, by creating forestry-related
Agriculture and Rural Development – MARD). The system was               employment for 2 million people.
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S    FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Implementation has been promoted by a wide range of activities          development of a national action plan and capacity building at
     including the encouragement of household forestry and                   national and local level.
     community forestry, provision through the central government
     budget, direct financial support to households and communities          In addition to national efforts to improve management of forest
     for the management of protection forests and special use forests;       resources, Vietnam has ratified several international conventions
     strengthening local capacity; encouraging joint-ventures and            relating to environmental protection including the Convention on
     foreign investment in plantation forestry through provision of low      International Trade in Endangered Species (CITES) and the
     tax and land use rights, especially in remote areas and the provision   Convention on Biological Diversity (CBD). It has also signed
     of technical support and technology transfer.                           regional agreements on forestry, such as the forest agreement of
                                                                             the ASEAN member states and the Asia Forest Partnership (AFP),
     By 2005, the 5MHRP had achieved around 2.4 million of the               a joint agreement with other ASEAN countries to control illegal
     planned 5 million hectares of improved forest management or             logging and trade. Vietnam also has bilateral agreements with
     rehabilitation. The major achievements have been to enhance             several Asian countries, such as Korea, Lao PDR, Myanmar, and
     protection and special use forests, but efforts to increase timber      China, to collaborate on forestry issues.
     production forests have been slower than planned.
                                                                             Regulation and control
     National Forest Strategy and legislations                               The MARD is responsible for developing legislation on forests, for
     Since 2004 the Forestry Department has been leading efforts to          overall allocation of forest land into different land-use categories,
     prepare a new National Forest Strategy (2006-2020). The strategy will   for preparing national forestry plans, and for establishing the
     articulate a vision for the sector, which will seek to balance social   annual allowable cut. From the perspective of forest law
     objectives, such as poverty reduction, with improving the forest        enforcement, the key agency operating under MARD at national
     sector’s contribution to the national economy and ensuring              level is the Forest Protection Department, with enforcement of
     environmental and biodiversity conservation for selected forests. The   regulations on the ground primarily the responsibility of Provincial
     revised strategy will take account of major macro policy changes; and   Forest Protection Branches.
     aim to harmonise with other relevant strategies, such as Government’s
     Comprehensive Poverty Reduction and Growth Strategy (CPRGS),            Since 1945, the State has promulgated thousands of forest-related
     Public Administration Reform (PAR), decentralisation, and efforts       normative legal documents. At present, more than 500 of these
     aiming to restructure Vietnam’s economy                                 documents remain effective2. The legislative framework for the
                                                                             management of forests and regulation of timber trade is now
     Local press reports indicate that the new National Forest Strategy      undergoing a major period of reform. In November 2004, the
     sets extremely ambitious targets, for example: to increase domestic     National Assembly adopted a revised Law on Forest Protection and
     log supply to 45 million m3 per year; to ensure that around 30% of      Development which came into effect on 1 April 2005. The law is
     production forests meet the highest international forestry standards;   designed to provide the foundation for an updated and more
     to increase forest sector production value by 4-5% annually; and to     coherent legal framework, covering, amongst other things: the
     create an additional 2 million jobs for local workers.                  allocation of long-term forest use rights to individuals, organisations,
                                                                             households and communities; strengthened forest protection;
                                                                             and more effective zoning and sustainable forest management.
     International support
     In pursuit of these goals, the government has secured support from      Various decrees are being developed to cover: the methodologies for
     a range of international donors. A Forest Sector Support Program        forest goods and services valuation to provide a framework for an
     and Partnership (FSSP & P) was established in November 2001, as         effective system of forest leases and taxation; the reorganisation of
     a means of cooperation in the forest sector among 18 (now 24)           the forest protection force; guidelines and operational procedures
     international partners and government. FSSP partners include not        for the management of different categories of forests; and provision
     only multilateral and bilateral agencies, but also international non-   of training programmes and extension services to support rural
     governmental organisations (NGOs) focusing on environment and           communities. In an effort to improve overall monitoring and control
     development issues and research organisations working on                of activity in the forest sector, MARD is working in collaboration
     forestry issues in Vietnam. For the period 2005-2010, international     with other relevant Ministries and agencies to develop a forest
     donor support continues to finance a significant portion of             sector monitoring and information system (FOMIS).
     MARD’s forest sector budget (excluding processing, which goes
     via the Ministry of Trade).
                                                                             1 | UN/FAO Global Forest Resources Assessment 2005

     In 2004, four bilateral FSSP partners and MARD agreed to                2 | See the Forest Manual,
     establish a multi-donor Trust Fund for Forests (TFF). This new fund, prepared by
     is intended to provide financing to promote pro-poor sustainable          MARD as part of the FSSP.
     forest management, and a transition towards a sector-wide
     approach to management of the forest sector.

     Since 2005, Vietnam has been receiving support from the
     European Union to undertake activities on Forest Law
     Enforcement, Government and Trade (FLEGT), including the
C H A N G I N G I N T E R N AT I O N A L M A R K E T S     FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Illegal logging                                                           pressure from large European DIY chains, this report encouraged
Existing weaknesses in the legislative system are reflected in            a strong shift to FSC certification in the wood processing and
continuing high levels of illegal logging. According to official          furniture sector. Some leading garden furniture manufacturers
statistics, between 1998 and 2003 the recorded volume of illegal          based in Vietnam have since become leading advocates of FSC
timber harvested declined slightly over the 6 year period, from           certification in tropical forest regions of the Far East. By the end of
61,012 m3 to 56,747 m3. However, it is widely recognised that             2005, 85 companies in Vietnam had achieved FSC chain of
much larger volumes of illegal harvesting occur and go                    custody certification and the number is continually increasing.
unrecorded. In 2006, an official at the agricultural Ministry is          Many Vietnamese furniture manufacturers are now scouring the
quoted in local press reports: “Despite a fall in the number of cases     world for suitable FSC certified hardwoods, particularly since the
uncovered, timber trafficking by several smuggling rings                  removal of the Indonesian teak plantations from the FSC list in
intensified in 2005. The smugglers don’t shirk from attacking             October 2001. Jarrah and karri from FSC certified eucalyptus
forest rangers, three of whom were killed and eight wounded last          plantations in South Africa has become popular amongst garden
year. Official figures only show the tip of the iceberg of timber         furniture manufacturers.
trafficking.” It is also reported that most of the illegal operations
uncovered and prosecuted involve small-scale offences, while large        In February 2006, a Vietnam Forest and Trade Network (VFTN)
scale timber smuggling operations – some of which involve                 was established with support from the WWF. Four companies
corrupt government officials – have continued unhindered.                 were accepted as its first official members. They include one
                                                                          timber trading company, Thanh Hoa Co. Ltd., and three wood
There are also serious issues to be addressed to prevent imports of       processing and furniture manufacturing companies: ScanCom
illegal wood products. In their November 2005 Briefing                    Vietnam Ltd., Truong Thanh Furniture Corporation, and Dai
“Stemming the Tide”, the NGOs EIA and Telapak highlight a case            Thanh Co. Ltd. These are the first companies in Vietnam to pass
involving a shipment of illegally felled logs from Indonesia into         the VFTN membership requirement demonstrating long-term
Vietnam. In August 2003 Indonesia sent a request to the                   commitments to responsible forest management and trade. In
Vietnamese government that they intercept a barge carrying                order to qualify for the VFTN, all the new member companies
illegally sourced square and round logs (2,064 cubic metres of            have undergone baseline audits and prepared detailed time-bound
bangkarai (yellow balau)) which had already left Indonesian               action plans to improve their environmental performance. The
territorial waters. The logs were intercepted but despite a clear         VFTN will provide technical support and guidance to help these
case of illegality, the authorities released the timber.                  companies implement action plans in order to achieve certification
                                                                          within a five-year period.
In recent months specific measures have been introduced at the
highest level of government in an effort to overcome some of              There has also been progress to develop a forest certification
these problems. Inter-ministerial working groups and special task         framework for Vietnam’s domestic forests, although no forests
forces have been established involving the forest protection              have yet been certified. A set of Criteria and Indicators (C&I) for
department, police, army, and other agencies, with the aim of             sustainable forest management have been devised by a National
improving enforcement procedures both for the domestic industry           Working Group in accordance with the FSC Principles and
and trans-boundary trade. A focal point on illegal trans-boundary         following a wide consultation process. These national C&I were
timber trade has been appointed at the Ministry of Agriculture and        subsequently submitted to the international Forest FSC for
Rural Development. Vietnam and Cambodia have agreed to                    approval, although so far without success. Some preliminary pilot
strengthen their cooperation in forest protection and trans-              assessments of forests against the C&I have been conducted in
boundary conservation in border areas. As part of this initiative,        Kon Tum and Nghe An provinces.
MARD has set up a Task Force to formulate the “Forest Protection
Cooperation Programme” and has assigned the Forest Protection
Department to work with its Cambodian counterpart on the
Programme. In December 2005, Vietnam joined other ASEAN
nations in approving the new ASEAN Wildlife Trade Enforcement
Network (ASEAN-WEN) to assist environmental agencies in the
region in their battle against illegal commercial hunters, traffickers,
and loggers. With support from TRAFFIC (the wildlife trade
monitoring network), the government has created a national
action plan to address the illegal trade of wildlife. And in February
2006, Vietnam and Indonesia issued a joint statement reaffirming
their commitment to work together to tackle illegal logging.

Private sector initiatives
Environmentalist action targeting the illegal trade between
Cambodia, Laos and Vietnam has had an impact on timber
procurement practices in Vietnam. Particularly influential was a
report released by Global Witness in 1999 – “Made in Vietnam –
Cut in Cambodia” – which targeted the largest garden furniture
manufacturers supplying the European market. Combined with
        C H A N G I N G I N T E R N AT I O N A L M A R K E T S                                                                     FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Chart 1: Trend in Vietnam’s wood-based product exports                                                                                       Chart 2: Vietnam’s wood-based product exports in 2004

     Roundwood Equivalent Volume


                                                                                                                                                  Roundwood Equivalent Volume
                                                                                                                                                                                                         1.2                                                                          Paper
                                   (million cubic metres)

                                                            1.2                                                                     Others
                                                            1.0                                                                                                                                          1.0                                                                          Chips

                                                                                                                                                                                (million cubic metres)
                                                                                                                                    South Korea
                                                            0.8                                                                                                                                          0.8                                                                          Other Wood
                                                                                                                                    China                                                                0.6
                                                            0.6                                                                                                                                                                                                                       Plywood
                                                                                                                                                                                                         0.4                                                                          Veneer
                                                            0.4                                                                     EU
                                                            0.2                                                                                                                                          0.2                                                                          Logs
                                                            0.0                                                                                                                                          0.0
                                                                  95 96 97 98 99 00 01 02 03 04    95 96 97 98 99 00 01 02 03 04                                                                                  Japan     Taiwan       EU        USA    China   South   Others
                                                                    Other Wood              Year               Furniture                                                                                                             Importing Country

     Source: based on importing country declarations – Eurostat, World Trade Atlas and national                                                   Source: based on importing country declarations – Eurostat and World Trade Atlas. Notes: (1)
     yearbooks of trade statistics. Notes: (1) data shows estimated roundwood equivalent volume                                                   data shows estimated roundwood equivalent volume by destination country by product; (2)
     by destination country; (2) excludes wood chips, pulp and paper; (3) most of Vietnam’s                                                       most of Vietnam’s wood chip, pulp and paper derive from plantations in Vietnam; most of
     furniture and other wood exports (shown below) derive from imported timber, much of it                                                       Vietnam’s other wood-based product exports derive from imported timber, much of it from
     from natural tropical forest, also from rubberwood.                                                                                          natural tropical forest, also from rubberwood.

                                                                                                                                                  Chart 3: Analysis of Vietnam’s timber exports (2004)
     There remain significant issues to be addressed in Vietnam’s forest
     regulatory environment, both with regard to domestic production                                                                                                                                                                          France 4%

     and the import of forest products. Effective enforcement of forest                                                                                                                                                     Belgium 2%                    Germany 3%
                                                                                                                                                                                                                                                                          Italy 1%
                                                                                                                                                                                                               Others 16%
     regulations is impeded by lack of personnel and other resources,                                                                                                                                                                                                          Netherlands 2%
                                                                                                                                                                                China 5%                                                                                             UK 7%
     and by inadequate coordination amongst a wide range of
     responsible agencies. Officials also lack the tools required – both
     in terms of legal instruments and appropriate manpower – to
     prevent imports of illegal wood products. The last problem is
     particularly significant given that Vietnam is now developing as a
     major importer of wood products – particularly logs and sawn
     wood – from other parts of South East Asia.                                                                                                                                Japan 14%                                                                                    Other EU 23%

                                                                                                                                                                                                                                              NAFTA 25%
     On the other hand, there now seems to be strong political will at
     the highest levels of government to resolve these policy
                                                                                                                                                  Source: based on importing country declarations – Eurostat and World Trade Atlas
     weaknesses and to tackle illegal logging. This is reflected in                                                                               Notes: Notes: (1) data shows estimated roundwood equivalent volume by destination country,
     numerous initiatives introduced over the last 5 years with the aim                                                                           total circa 2.3 million m3; (2) excludes chips, pulp and paper but includes wooden furniture

     of overhauling and rationalising the regulatory environment.
     Efforts to encourage greater community participation in forest
     management should significantly reduce incentives for small scale
     illegal logging within the country and improve the administrative
     environment at local level. The development of task forces
     involving a wide range of enforcement agencies is an indication of
     a serious intent to tackle larger scale illegal operations. Vietnam is
     now actively engaged with other countries in the region to try to
     resolve problems of cross-border illegal trade.

     At the same time, a significant part of the private sector in
     Vietnam, particularly that selling into the European market, is
     already demonstrating a level of commitment to responsible
     procurement practice through widespread engagement in chain of
     custody and supply of certified product.

           C H A N G I N G I N T E R N AT I O N A L M A R K E T S                                                                FOR      T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Rupert Oliver, James Hewitt

                                                                                                                                                Figure 2: China – timber imports other than logs (1995-2004), RWE volume by
Market Overview                                                                                                                                 exporting country
China’s economic liberalisation measures and integration into                                                                                                                                          10                                                                   Others

                                                                                                                                                Roundwood Equivalent Volume
the world economy in recent years have meant that the country                                                                                                                                                                                                               USA
has become increasingly important as a global wood processing                                                                                                                                          8                                                                    Thailand

                                                                                                                                                                              (million cubic metres)
hub. With domestic harvesting restricted, China’s significance to                                                                                                                                                                                                           Russia
                                                                                                                                                                                                                                                                            New Zealand
the wood export sectors of most major producing countries has                                                                                                                                          6
risen sharply since the mid-1990s.
                                                                                                                                                                                                       4                                                                    Canada
                                                                                                                                                                                                                                                                            Other Tropical
High levels of investment in China’s wood processing capacity in                                                                                                                                                                                                            Malaysia
recent years combined with relatively low labour costs have                                                                                                                                                                                                                 Indonesia
meant that a significant proportion of imports arrive in the form                                                                                                                                      0                                                                    Burma
of logs. There has been particularly strong growth in imports of                                                                                                                                            95 96 97 98 99 00 01 02 03 04   95 96 97 98 99 00 01 02 03 04
logs from Russia (figure 1). Imports of tropical hardwood logs                                                                                                                                                   Tropical               Year         Non-Tropical
rose strongly from the early 1990s until 2003, but supply
constraints and associated increases in prices slowed the pace of                                                                               plywood and flooring manufacturers also have prominent
imports in 2004 and 2005.                                                                                                                       positions in the logging industry of producer countries outside
                                                                                                                                                Asia, notably in Brazil and parts of the Congo Basin.
Figure 1: China – log imports (1995-2004), RWE volume by exporting country
                                                       18                                                                                       While other parts of South East Asia have seen imports of wood
Roundwood Equivalent Volume

                                                                                                                            Others              products increase in response to rising export demand for finished
                                                                                                                            Russia              products, rising Chinese demand is more due to changes within
                              (million cubic metres)

                                                                                                                            New Zealand         the domestic market. China’s economy is expanding rapidly, with
                                                                                                                                                GDP growth exceeding 9% in both 2004 and 2005 to lead all
                                                       10                                                                   Other Tropical
                                                                                                                                                major economies. China’s housing policy is changing to encourage
                                                        8                                                                   Papua New Guinea
                                                                                                                                                private ownership over state-sponsored accommodation, with
                                                        6                                                                   Malaysia
                                                                                                                                                potentially major implications for housing starts and wood
                                                        4                                                                                       demand. The home mortgage market is growing rapidly and sales
                                                        2                                                                                       of residential homes have increased by 40-50% per year since
                                                        0                                                                                       1999. There is also a nascent but rapidly growing home
                                                            95 96 97 98 99 00 01 02 03 04   95 96 97 98 99 00 01 02 03 04
                                                                                                                                                renovation (DIY) sector in China which will contribute to
                                                                                                                                                increased wood consumption. China’s growth is projected to
                                                                                                                                                continue to lead the world at over 9% in 2006.
As Figure 2 shows, the overall volume of China’s imports of
tropical timber other than logs has changed little since the mid-                                                                               A 2006 report on China’s wood market by the private research
1990s. However during the same period there has been a                                                                                          organisation RISI indicates that of the 63 million m3 of sawn wood,
significant rise in imports of secondary wood products from a                                                                                   plywood, particleboard and MDF manufactured in China, only 8
wide range of temperate countries including Russia, USA, and                                                                                    million m3 is exported. Of the 63 million m3 of the wood products
the EU. This is due both to resource limitations and efforts to                                                                                 manufactured in China, around 33 million m3 is estimated to be
tackle illegal logging in tropical countries and to a general shift                                                                             consumed in the construction sector, while 30 million m3 is
in the global wood manufacturing industry away from western                                                                                     destined for the furniture sector.
countries into China.
                                                                                                                                                Only a minority of furniture manufactured in China is exported.
China’s share in the timber exports of many producer countries is                                                                               According to data compiled by the US research organisation
sufficiently large to indirectly influence business practices in those                                                                          Cintrafor, China’s furniture production was valued at $42.5
countries’ timber sectors. In addition, through the diaspora of its                                                                             billion in 2005 while exports amounted to around $14.5 billion
different ethnic groups, China has extensive, but not always
comfortable, direct links with the commercial sector of timber                                                                                  1
                                                                                                                                                                | Speaking at the AHEC China & South East Asia Convention in June 2005
exporting countries in East Asia. A number of China’s leading                                                                                                   |

     C H A N G I N G I N T E R N AT I O N A L M A R K E T S       FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     (34%). According to the President of China National Furniture               that China’s import statistics fail to record 50% of the true volume
     Association 1, the furniture industry is forecast to continue to            of logs entering China from Russia.
     grow at a rate of 12-15% over the next ten years. This rate of
     growth represents an immense increase in manufacturing                      As indicated in Figure 2, the estimated RWE volume of China’s
     capacity, which is expected to generate continuing strong                   imports of tropical timber other than logs varied between six and
     demand for high-grade timber.                                               seven million cubic metres during the period 1995-2004. China
                                                                                 held its position as the world’s largest tropical sawnwood importer
     China’s annual construction output reached a value of US$200                in 2004, up 4% to nearly 3 million cubic metres. Indonesia and
     billion in 2004 and annual production value of the domestic                 Malaysia account for the great majority of this. However, imports
     furniture market reached US$24 billion. Analysts are predicting             of sawnwood from the Amazon Basin and, to a lesser extent,
     that by 2008, flooring demand in China may hit 2.5 billion square           Burma have increased sharply in recent years – at least partly to
     metres, while the door and window market may hit 500 million                supply the demand which has been created for wood flooring
     units. Over the next four years or so, some forecasts indicate that         (both within China and elsewhere).
     China’s housing construction may increase by 15% per annum. At
     the same time, the 2008 Olympic Games and 2010 World Expo                   In contrast, the RWE volume of China’s imports of timber other
     have triggered extensive construction activity. Over 300,000                than logs and tropical timber has steadily increased since the mid-
     luxury hotel rooms are expected to be remodelled over the next              1990s. Although Thailand accounted for the largest share of those
     few years2.                                                                 imports in 2004, most of China’s imports from Thailand are of
                                                                                 rubberwood. The EU, New Zealand, North America, and Russia
                                                                                 account for much of the remainder. A change in fashion (away
     Trade Summary                                                               from beech) accounts partly for the recent decline in China’s
     China’s timber imports have risen strongly since the mid-1990s,             imports from the EU, but this has partially been offset by increased
     particularly between 1998 and 2002 (when imports of logs from               interest imports of European oak.
     Russia offset the reduction in production within China during the
     implementation of the Natural Forest Protection Programme, (which           China’s plywood industry has expanded very rapidly – partly due
     banned logging in natural forest across much of China from 1998).           to increased (but not always legal) supplies of peeler logs. This has
                                                                                 contributed to a marked decline in China’s imports (particularly
     During 2004, the estimated RWE volume of China’s timber                     from Malaysia) of tropical plywood and veneer. An increase in
     imports amounted to about 43 million cubic metres, 17 million of            MDF accounts for the apparently flat trend in China’s imports
     which comprised logs supplied from Russia. Tropical timber                  from tropical countries shown in Figure 2.
     accounted for roughly one third of the total.
                                                                                 The estimated RWE volume of China’s pulp and paper imports
     Figure 1 shows that China’s imports of tropical logs rose strongly          amounted to 28 and 21 million cubic metres respectively during 2004.
     between 1999 and 2003 and then declined during 2004. Logs
     accounted for half of the estimated RWE volume of tropical                  Figure 3: China – pulp and paper imports (1995-2004) by supplying country
     timber which China imported during 2004. The Congo Basin,
     Burma, and Papua New Guinea each accounted for about 10% of                                                                        16
                                                                                 Roundwood Equivalent Volume

     that log volume.
                                                                                                                                        14                                                                   EU
                                                                                                               (million cubic metres)

     Although Malaysia appears to have accounted for a further third,                                                                   12
     perhaps as much as half of what is declared by China as log                                                                                                                                             Chile
     imports from Malaysia might actually have been exported – or                                                                                                                                            Brazil
     smuggled – from other countries (notably Indonesia).                                                                                6                                                                   Other East Asia
     During 2002, the governments of Indonesia and China signed a                                                                        4                                                                   Japan
     Memorandum of Understanding highlighting the need to combat                                                                         0
     the trade in illegal timber. However, an exposé during 2004 indicated                                                                   95 96 97 98 99 00 01 02 03 04   95 96 97 98 99 00 01 02 03 04

     that the authorities in China appeared to have chosen to ignore a                                                                              Pulp                Year               Paper
     very large increase in imports of merbau (and their subsequent
     processing into flooring to feed the prevailing fashion both in China
     and in export markets). Those logs had been exported from West              Figure 3 shows that China’s imports of pulp have risen very rapidly
     Papua, despite a log export ban imposed by Indonesia.                       since the mid-1990s. The share of China’s pulp imports during 2004
                                                                                 supplied from Indonesia, North America, Russia and South America
     The recent surge in timber exports from eastern Russia – the result         amounted to approximately 20%, 30%, 15% and 25% respectively.
     of a surge in Chinese demand – is understood to be causing a rapid
     decline in the area of forest in that region which is commercially          Some of the increase will have offset a reduction in local
     viable for logging. This has contributed both to a westward shift           production of pulp from agricultural residues by mills which have
     in forest exploitation and a pervasive increase in illegal logging.         been closed instead of being upgraded with pollution-control
     Illegal logging in parts of Russia’s Far East is estimated to be at least   technologies.
     50%. Illegality in connection with China’s imports of Russian
     hardwood is believed to be particularly common. Reports suggest
C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

China is one of the world’s leading importers of waste paper and       procurement, and a report analysing the responsibilities and
pulp based on waste paper.                                             capacities of the various institutions in China relevant to illegal
                                                                       logging enforcement. Other studies have analysed forestry
China’s imports of paper rose during the second half of the 1990s      legislation and regulation in China. TNC has a good level of
and appear to have slightly declined since then. East Asia             cooperation with the State Forestry Administration, obtaining
accounted more than half of the total during 2004. The EU and          log import prices with the SFA’s help, assisting the
North America supplied each supplied a further 15%.                    Administration in developing responsible practice guidelines for
                                                                       Chinese forestry businesses, and facilitating visits of high-level
                                                                       SFA officials to Chinese ports, the China-Myanmar border, and
Market Drivers                                                         Indonesia. In the future, TNC hope to begin work on timber
The market for verified legal and certified wood products in China     tracking technology, training programs for customs officers,
is still in its infancy. At present very few people in the country     promoting certification systems, compiling a lessons-learned
know what forest certification is. However there is emerging           study, and pressing high-level Chinese officials to raise taxes on
political interest in illegal logging, partly because Chinese          hardwood floorings.
government officials seem to have recognised the contribution it
makes to regional insecurity and partly due to peer pressure from      WWF China has been encouraging verified legal and certified
other governments and the efforts of NGOs to raise the issue.          wood for several years, pursuing both supply and demand-side
China is now engaged in the ENA-FLEG process and has                   measures. To induce more responsible purchasing by Chinese
established a forestry collaboration task force with Russia. In        companies, WWF China developed a film on the trade in
addition, there is some emerging demand for certified wood             illegal logs between Russia and China, released to DVD and
products amongst manufacturers that are selling product into the       TV. They have also worked to unify the incongruous trade
international market place. And mounting concern over the level        statistics between these two countries, increasing the accuracy
of energy consumption and pollution are driving increased              so that illegally harvest forest product imports do not slip
political interest in green building, which may in the long term       through cracks in the data. Recently WWF has produced a
provide a foundation for rising demand for certified wood              cost-benefit analysis of implementing wood tracking system in
products in the construction sector.                                   Heilongjiang Province.

There is widespread NGO engagement in China to promote efforts         WWF is also raising awareness of FSC certification in China
combating the illegal wood trade. The NGO Forest Trends has            through publication of a newsletter and brochure on forest
been particularly active. In 2005, Forest Trends helped the State      certification. An East Asia Pacific Forest Certification website has
Forest Authority to organise a multi-agency preparatory meeting        been established including China specific guidelines in both
prior to the ENA FLEG ministerial process. During 2007, Forest         Chinese and English. WWF’s marketing efforts in China are being
Trends hopes to start a major program on responsible trade             supported in part by the Ford Foundation and the WWF-World
between Russia and China. The organisation has recently put out        Bank Alliance. WWF has formed a Cooperation on Forest
livelihood studies and compiled trade statistics on this trade and     Products in China with European furniture giant IKEA. The main
its impacts on the Russian forest base. One product of this work       focus of this Project has been to develop FSC certification
was a workshop near Lake Baikal, Russia in August 2006, which          standards for forests in Northeast China and Inner Mongolia
produced a statement illustrating a strategy for a sustainable,        which now account for around 10% of IKEA’s total wood supply.
mutually beneficial trade in forest products between the two           However the project also includes a communication component
countries. Future plans to develop this work include updating the      involving outreach to potential suppliers who are being
statistics in summer 2007, making them publicly available,             encouraged to adopt FSC chain of custody certification.
tracking large Chinese investments in Russia, and holding another
workshop on Russia-China trade in May 2007. Forest Trends also         One ongoing WWF project is the China and Forest Trade Network
hopes to start up a program on China-Africa trade flows. Other         (CFTN), launched in March 2005, an association of select private
work related to China and illegal logging will continue, with trade    companies that receive advice from WWF on green wood
modelling, market statistics, policy briefs, studies on who benefits   procurement. CFTN currently has eight members and 15
from the trade, working with provincial governments on forestry,       applicants pending. Probably the most significant member of the
and potentially holding more meetings similar to the current one.      group is Kingfisher Asia Ltd which is responsible for Asian
                                                                       procurement of supplies for B&Q, Castorama and other European
The Nature Conservancy (TNC) is playing a role to facilitate green     retailers that are part of the Kingfisher Group. Other members
wood procurement in China. They were instrumental in convening         include two forest bureau’s from northern China, Yihua Timber
the dialogue between China and Indonesia which resulted in a           (Manufacturer); Shanghai Anxin Flooring Co. Ltd.; Yingbin
memorandum of understanding in 2002 to help curb the flow of           (Shunde-Foshan) Timber Co. Ltd. (Manufacturer); 100% Concept
Indonesian illegal timber into China (however despite a draft          Asia Pacific Ltd. (Trading company); and Auma International Ltd.
action plan being drawn up there has been no further action). TNC      (Trading company).
has undertaken detailed research on the issue of illegal logging in
China working in partnership with the State Forest Authority           Some of Greenpeace’s activities in China on illegal logging include
(SFA), Beijing Forestry University, Chinese Academy of Forestry,       a consumer education project on chopsticks, a “good wood
and Chinese timber trade associations. TNC’s research in this          guide” showing companies how to source verified legal wood, and
area comprises three baseline studies: a description of Chinese        a report entitled “Sharing the Blame” which details the role China
imports of illegal wood, a cost-benefit analysis on green public       plays in the global trade of illegal wood.
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S    FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     The Tropical Forest Trust has just opened a new branch in China.
     Under special arrangements for Chinese companies selling into
     the UK through Timber Trade Federation companies, these
     companies may now be nominated by their UK buyers to get
     support from TFT. TFT will then assist these companies to
     develop wood tracking systems and supply certified products. The
     UK Department of Food and Rural Affairs (DEFRA) is subsidising
     these costs .

     The Chinese government has also taken action to counter illegal
     logging in response to concerns over its impact on regional
     security. In March 2006, China’s official Xinhua news agency,
     reported that the Chinese government had cracked down on illegal
     timber imports from Myanmar after decades of Chinese logging in
     the country's northern forests. A report from the southwestern
     province of Yunnan, which borders Myanmar, said that as of
     March 27 measures had been adopted to ensure all logging and
     mineral trade was legal. “All border posts and border inspections
     will adopt measures to prevent people from our side illegally
     crossing the border to log or extract minerals and bring the goods
     from Myanmar into Yunnan,” said the report. Global Witness, a
     UK-based environmental group, gave credence to the reports with
     their own investigation in May 2006 which showed that Chinese
     checkpoints had been sealed to log transports. According to
     Global Witness, “Some timber is still entering China via border
     back roads, however the overall volumes are vastly reduced.
     Sawmills in China’s frontier timber towns are at a standstill and
     thousands of Chinese timber workers have left the border area.”
     Global Witness also report that the Myanmar government has
     officially requested Chinese help in tackling the illegal outflow of
     wood. It is believed that part of the reason for the Chinese
     government’s action is that it has become increasingly concerned
     about drugs and HIV/AIDS flooding across the border and is keen
     to stop instability in Myanmar, which has endured decades of
     military rule, from impacting on China.

     While there is little or no interest in procurement of verified legal
     or certified wood products within China’s huge domestic
     construction market, various government policy initiatives may,
     in the long run, provide a basis for rising demand. As China
     continues to integrate further into the world economy, interest in
     green building is emerging through the launch of governmental
     programs, municipal green building councils, and demonstration
     projects. China’s staging of a “Green” 2008 Olympic Games in
     Beijing and a “Green” 2010 World Expo in Shanghai has
     deepened China’s commitment to a more sustainable building
     sector. At this stage, interest in sustainable building is driven
     more by mounting political concern over massive energy
     consumption than with the less immediately obvious problems
     resulting from illegal logging. However, according to a report by
     AF&PA issued in March 2005, this focus on energy-efficiency has
     encouraged the Chinese government to enter into dialogue with
     several countries on green building standards. There have been
     discussions on such standards with representatives of the US –
     LEED system, Japan’s CASBEE system, and various research
     organisations in the EU and Australia.

C H A N G I N G I N T E R N AT I O N A L M A R K E T S     FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

Rupert Oliver, James Hewitt

Introduction                                                              Although China hopes to become self-sufficient in the supply of
While the majority of wood products manufactured in China are             timber, it will be difficult to replace the varied technical and
for the domestic market, its wood product exports supply a large          aesthetic qualities of the many species which it now imports with
and increasing share of markets in Europe, North America and              domestically grown timber.
both West and East Asia. Effects of this booming trade are
variable and include anti-dumping suits, the relocation of                As with production of IRW in China, depending on the chain of
manufacturing facilities to China, cheaper finished products, and         supply, the legality of the timber which China imports often
intensifying competition for wood producers outside China which           cannot be guaranteed. It is also estimated that, on average, the
in turn boosts improvements both in product quality and in                legality of as much as 40% of China’s wood product exports
management practice.                                                      should be scrutinised more closely.

Due to inadequacies in current international reporting standards,
it is not feasible to assess direct from trade statistics the extent to
                                                                          Overview of the Market and Trade
which China’s wood product exports derive from imported timber            The strong upward trend of growth in China (including Hong
or rubberwood. Nevertheless, it is likely that imports of timber          Kong and Macao SARs) has been evident since 1990 and it has
account for a significant proportion (perhaps 30-50%) of the total        steadily climbed in the rankings of top exporters, overtaking
exported – particularly as face veneers, which determine how a            Germany as the world’s third largest exporter in 1997 and
product is marketed. An introduction to China’s timber imports is         Canada as the world’s second largest exporter in 2000, before
given in the accompanying fact sheet.                                     displacing Italy from the top position. China’s exports of
                                                                          secondary processed wood products (SPWP) climbed by 27% in
The declared volume of China’s industrial roundwood “IRW”                 2004 and have more than doubled over the 2000-2004 period.
production fell between 1995 and 2002 – partly as a consequence           This rapid growth has been helped by its booming exports of
of the Natural Forest Protection Plan (which banned logging in            wooden furniture to the USA, which absorbs almost half of
natural forest across much of China from 1998). IRW production            Chinese SPWP exports.
has since increased – to 45 million cubic metres in 2004 (excluding
fuelwood).                                                                Many companies from the USA, Taiwan POC, Singapore and
                                                                          other traditional Asian producers continue to establish furniture
China’s central government considers that a substantial volume of         and other SPWP joint ventures in southern China because of
legitimate but unreported IRW production also takes place –               low wages and policies encouraging downstream timber
almost 40 million cubic metres in 2004.                                   processing. These manufacturers have been successful in
                                                                          penetrating high-value markets such as Japan, and, particularly,
A number of reputable sources (such as the Chinese Academy for            the USA with their products.
Forestry) suggest that unauthorised logging might account for a
substantial additional volume of industrial roundwood production.         Figure 1 illustrates how strongly China’s exports of furniture
This is indeed a possibility, given that the sum of production plus       and other wood products have grown over the last ten years –
imports minus exports would otherwise imply that end-usage of             to an estimated RWE volume of 32 million cubic metres and
timber in China has declined during the last ten or so years of           export value of US$10 billion during 2004. By RWE volume,
economic growth. However, discrepancies in the numbers can also           furniture and plywood accounted for 40% and 30% of this total.
be accounted for by large volumes of undeclared roundwood                 Figure 1 shows that markets in the USA are driving China’s
entering the country, such as from Russia, Burma/Myanmar and              furniture export sector.

The total area allocated for tree farms in China is said to be greater
than anywhere else in the world. However, partly because the
quality and commercial viability of many of these plantations is
poor and also due to difficulties in water supply, their total output
of pulpwood, or timber at maturity, might be rather less than most
official projections.
       C H A N G I N G I N T E R N AT I O N A L M A R K E T S                                                                                  FOR      T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     Figure 1: China – wood product exports to major destinations (1995-2004)                                                                                 Exports of furniture from China reached a value of US$10.4
                                                                                                                                                              billion in 2004, marking an increase of 39% on the previous year.
                                                                                                                                                              At the same time and as a reminder of the importance of the
           Roundwood Equivalent Volume

                                                                                                                                                              Chinese domestic market, the total value of furniture
                                                                         15                                                                    Taiwan
                                                                                                                                                              manufactured reached US$24 billion and furniture imports
                                                (million cubic metres)

                                                                                                                                               South Korea
                                                                                                                                                              during the same year reached US$726 million.
                                                                         10                                                                    Hong Kong
                                                                                                                                               China          China has become significant as an exporter of parquet flooring,
                                                                          5                                                                    USA            both of tropical species, and, more recently, paler species from
                                                                                                                                               EU             Russia and other temperate hardwood sources.
                                                                              95 96 97 98 99 00 01 02 03 04   95 96 97 98 99 00 01 02 03 04                   The manufacture of particular wood products tends to be
                                                                                 Other Wood               Year             Furniture                          concentrated in a small number of regions.

     Figure 1 shows that the USA and other markets – notably the EU,                                                                                          Regulation and Control
     Japan, and South Korea – account for a substantial share in
     China’s exports of other wood products.                                                                                                                  The authorities in China are generally not regarded as
                                                                                                                                                              demanding the sort of corporate or financial governance and
     Figure 2: China – wood-based product exports to major destinations (2004)                                                                                worker rights as are mandatory in most major importing
                                                                                                                                                              countries. This, coupled with a controlled exchange rate and
                                                                                                                                                Paper         support for enterprises who either procure timber from abroad
     Roundwood Equivalent Volume

                                                                                                                                                Pulp          or are oriented towards exports tends to give China’s exporters
                                                                                                                                                Chips         competitive advantages.
                                         (million cubic metres)

                                                                         10                                                                     Other Wood
                                                                          8                                                                     Furniture     Allegations (by both the EU and the USA) have been upheld
                                                                          6                                                                     Plywood       concerning the dumping of wood products made in China –
                                                                         4                                                                                    notably bedroom furniture (the USA) and okoumé plywood (the EU).
                                                                         0                                                                                    To guard aginst the risk of importing illegal timber, customers
                                                                               USA     Japan   Hong     EU    South   Taiwan   Canada Others
                                                                                               Kong           Korea                                           in China’s export markets are beginning to demand credible
                                                                                                  Importing Country                                           chain of custody information from their suppliers back to the
                                                                                                                                                              forests of origin. The number of FSC chain of custody
     Figure 2 analyses China’s wood-based exports during 2004 –                                                                                               certificates issued to companies based in China has risen from
     including wood chips and paper.                                                                                                                          only 80 at the start of 2005, to 195 in September 2006.
                                                                                                                                                              Judging from a brief review of the FSC database, the vast
     The UK is the largest single European market for Chinese wood                                                                                            majority of products supplied by these companies are solid
     products (including furniture) accounting in 2004 for around                                                                                             wood products typically found in DIY retail outlets in Europe
     32% (1.26 million m3) of the estimated RWE volume imported                                                                                               and North America (such as tools, BBQ items, fan blades,
     from China by the EU-25 countries (4.0 million m3). Other key                                                                                            window shades, doors, shelving, and outdoor furniture). The
     export markets in Europe are Germany (540,000 m 3 RWE in                                                                                                 first 3 PEFC chain of custody certificates were issued to Chinese
     2004), France (310,000 m3), and the Netherlands (310,000 m3).                                                                                            companies in 2006.

     Much of the plywood which China exports is a composite of                                                                                                There are now indications that the Chinese government is more
     species (mainly poplar grown in China for the core and a face                                                                                            aware of the issues surrounding illegal logging. The government
     veneer made from imported logs).                                                                                                                         is currently engaged in the Europe and North Asia Forest Law
                                                                                                                                                              Enforcement and Governance (FLEG) process. As part of this
     China is the world’s leading exporter of wooden furniture and the                                                                                        process, a Russia- China forestry collaboration task force has
     world’s leading manufacturer of plywood and fibreboard.                                                                                                  been established. In December 2002, the governments of
                                                                                                                                                              Indonesia and China signed a Memorandum of Understanding
     Today, the quality of wood products exported from China is often                                                                                         to combat illegal trade in forest products. In addition various
     world class and the situation is improving all the time. It can of                                                                                       NGOs, including WWF, Greenpeace, Tropical Forest Trust, and
     course be variable and the quality of the products often improves                                                                                        the Environmental Investigation Agency are all active in China
     around the time when quality audits are undertaken.                                                                                                      and are working with both producers and governments to begin
                                                                                                                                                              to address some of the concerns of overseas buyers. These
     One great advantage of Chinese producers is that many mills seem                                                                                         initiatives are discussed in more detail in the fact sheet relating
     able to adapt rapidly to changing requirements and to maximise                                                                                           to China’s imports.
     their use of wood raw material. There are at least 50,000 medium
     to large furniture manufacturing companies in China, which
     employ some 5 million workers.


Useful Web Addresses for Information on Illegal Logging and Related Information

European Hardwood Federation Statement of Illegal Logging

European Timber Trade Association Environmental Code of Conduct of FEBO

Signatures of Industry Statement

FLEGT: Industry Statement

FLEGT Briefing Notes.

     C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O

     U SEFUL W EB A DDRESSES                                  FOR I NFORMATION ON

     Belgium Timber Traders Association
     Chatham House website - information on illegal logging
     Danish Tropical Timber Purchasing Policy
     European Commission – FLEGT Action Plan
     Environmental Investigation Agency
     Forest Ethics
     Forest Trends
     Global Forest Watch
     Global Witness
     Malaysian Timber Council
     Malaysian Timber Certification Council
     Sabah Timber Industries Association
     Sarawak Timber Association
     Spanish Timber Importers Association
     Tropical Forest Foundation (TFF)
     Tropical Forest Trust (TFT)
     The Forest Dialogue
     The Netherlands Timber Federation
     The World Bank
     UK Government Timber Procurement
     UK Timber Trade Federation
C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR    T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O



Statement of UCBD                                                      In this connection the principles and measures referred to shall
EU proposal for a council regulation concerning the establishment      at least correspond:
of a voluntary FLEGT licensing scheme for imports of timber into
the European community                                                 •     To those of the Pan-European Operational Level Guidelines
                                                                             for Sustainable Forest Management, as endorsed by the Lisbon
The UCBD or European Hardwood Federation welcomes the                        Ministerial Conference on the Protection of Forests in Europe.
above mentioned proposal and believe it’s an important first step
to prevent the import of illegally harvested timber into the E.U.      Or:

In this connection it:                                                 •     To the UNCED Forest Principles (Rio)

•   Broadly supports – as it already did before – the European         Or:
    Union’s FLEGT (Forest Law Enforcement, Governance and
    Trade) to eliminate illegal timber.                                •     Where applicable, to the criteria or guidelines for sustainable
                                                                             forest management as adopted under the respective
•   Supports the draft Council Regulation concerning the                     international and regional initiatives (ITTO, Montreal Process,
    establishment of a voluntary FLEGT licensing scheme for                  Tarapoto Process,UNEP/FAO Dry-Zone Africa Initiative).
    imports of timber into the European Community because the
    timber trade only wants to trade in legal timber.

And:                                                                   UCBD/Union Pour Le Commerce Des Bois Durs Dans L’u.e.
                                                                       European Hardwood Federation
•   Is of the opinion that broader EU legislation preventing the
    importation of illegal harvested timber and forest products        Siège Administratif:
    should be considered once the licensing scheme has been tried      Galerie du Centre - Bloc I - 5ème étage
    and tested and has proven credible and efficient in the many       Rue des Fripiers 15/17
    different situations facing exporters to the EU.                   1000 - BRUXELLES
                                                                       t. 02/219.43.73 – 02/229.32.66 | f. 02/229.32.67
EU policymakers should recognise that private initiatives both in      e.
producer countries (verified legal timber from Africa and SE Asia)
and consumer countries too (purchasing policies, Corporate social
responsibility guides, etc.) may achieve the same purpose more
efficiently and effectively.

Poorly framed legislation will add constraints and red tape for
traders and will therefore be counterproductive, and may
unwittingly discriminate against developing countries.

The EU should consider more carefully how its objectives of
eliminating illegal timber imports can be addressed by adopting more
market-based incentives, such as developing and harmonising
government timber procurement policies across the EU, taking
into account that it would be contrary to EU policy on sustainable
development if a renewable resource like timber, or (also called
environment-friendly), were to be discriminated against in favour of
non-renewable materials. Moreover, reference to labelled timber or
timber products should be formulated without any discrimination
between the existing credible certification schemes.
     C H A N G I N G I N T E R N AT I O N A L M A R K E T S   FOR   T I M B E R – W H AT M A L AY S I A N P R O D U C E R S C A N D O


     Adopted during the General Assembly of 29/4/2005

     All FEBO members are requested to adopt and to comply with this
     code of conduct. Its aim is to ensure that all FEBO members,
     respectively the national timber trade federations and their
     associated companies, are taking all possible steps to source their
     timber and timber products responsibly.

     1. Members are committed to sourcing their timber and timber
        products from legal and well-managed forests. Members
        unreservedly condemn illegal logging practices and the related
        trade. They commit themselves to working with suppliers and
        other stakeholders towards their complete elimination.

     2. Members recognise that the credible independent certification
        of sustainable forest management and of the chain of custody
        is the most useful tool in providing assurances that the timber
        they deal in comes from legal and well-managed forests. They
        recognise all certification schemes based on internationally
        recognised criteria.

     3. If there are any doubts about the origin of timber, members try
        to ensure, within the bounds of possibility, that the timber
        has been legally harvested, asking for the supplier’s
        credible guarantees. Until a credible independent certification
        is missing, certificates of legality and of efforts towards a
        sustainable forestry can be granted.

     General secretary:
     Avenue des Volontaires 2, B-1040 Bruxelles/Brussels
     t. +32 2 2293260 | f. +32 2 2293264
     e. | w.

     F L E G T:
     Common European rules
     for fair competition and
     sustainable markets


                                                      S I G N A T U R E S Common European rules for fair competition
                                                                                          and sustainable markets

                           We, the undersigned                As responsible companies dealing in timber
                          companies, in our capacity          products, we believe that concerted political
                        of producers, purchasers or           and trade action is needed to tackle this problem
                   retailers of timber and wood               in order to create a level playing field for timber
     products, are deeply concerned by the problem of         that has been legally acquired.
     illegal logging and the continuing import of illegally
     sourced wood products into the European Union.           We therefore broadly support the European
                                                              Union’s FLEGT (Forest Law Enforcement,
     Illegal logging contributes to deforestation,            Governance and Trade) initiative and the efforts
     causes loss of biodiversity and erodes the rule          of a number of timber trade federations to
     of law. It undermines responsible forest                 eliminate illegal timber from their sector.
     management, encourages corruption and tax
     evasion and reduces the income of producer               However, we acknowledge that self-regulation
     countries. It also has serious economic and social       and voluntary measures alone are not sufficient
     implications for the poor and disadvantaged.             to tackle this problem.

     Cheap imports of illegal timber and forest               Without a clear European legal framework,
     products, as well as the non-compliance of some          companies that want to answer consumer-driven
     players with basic social and environmental              demand and benefit from investment in sustainable
     standards, destabilise international markets, and        practices will always be disadvantaged.
     threaten jobs. This unfair competition based on
     widespread illegal practice harms those European         We urge the European Commission and
     companies, particularly small and medium sized           governments to take immediate action, and as
     businesses, who do behave responsibly and                recommended in the Action Plan, we call upon
     attempt to play by the rules.                            them to:

                                                              Adopt new EU legislation
                                                              which makes it illegal to
                                                              import all illegally-sourced
                                                              timber and wood products
                                                              into the European market.

S I G N AT U R E S A S AT 9 F E B R U A RY 2 0 0 6

       1   AIEM (Spanish Timber Importers`Association), Spain   43 La San Giuseppe SpA, Italy
       2   Albert Schild AG, Switzerland                        44 Lapeyre (Groupe Saint Gobain), France
       3   B&Q, UK                                              45 Lend Lease, UK
       4   Biofusta S.L., Spain                                 46 Lueb + Wolters GmbH & Co. KG, Germany
       5   Biotectura S.L., Spain                               47 Luyten Woonontwerp, Belgium
       6   Bovis Lend Lease, UK                                 48 Marks & Spencer, UK
       7   Castorama France, France                             49 Medialogik GmbH, Germany
       8   Carrefour, France                                    50 Migros-Genosenschafts-Bund, Switzerland
       9   Chartered Institute of Builders, UK                  51 Multiplex, UK
       10 Chindwell Co. Ltd, UK                                 52 Nunez y Canadas S.L., Spain
       11 Clarks Wood Company Ltd, UK                           53 OBI, Merchandise Centre GmbH, Germany
       12 Coop Italy, Italy                                     54 Palm SpA, Italy
       13 Coop Nordic, Denmark                                  55 Palm W+P onlus, Italy
       14 Coop Switzerland, Switzerland                         56 P.E.R. Belle Arti, Italy
       15 Co-operative Retail, UK                               57 PUERTAS LUVIPOL, Spain
       16 Countryside Properties, Plc, UK                       58 Quintelier Gebr. Nv, Belgium
       17 David Craig, UK                                       59 Reefhout/Trajectum Trade en Rego Trade, Holland
       18 De Noordboom cvba, Belgium                            60 Richard Burbidge,UK
       19 Ecobos-P&E bvba, Belgium                              61 Romea Legnami SpA, Italy
       20 Ecobouw cvba, Belgium                                 62 RWD Schlatter AG, Switzerland
       21 Ecostructuur bvba, Belgium                            63 Sainsbury’s Supermarket Ltd, UK
       22 Ecotimber, UK                                         64 Sardinha Leite, Portugal
       23 Ebanisteria Marelli SpA, Italy                        65 Servaege nv, Belgium
       24 ENCE Group, Belgium                                   66 Shadbolt International, UK
       25 Espen AG, Germany                                     67 Skanska AB, Sweden
       26 Eurabo nv, Belgium                                    68 Sommer Holzwerkstatt GmbH, Switzerland
       27 Finnforest UK                                         69 Sonae Indústria, Portugal
       28 Focus Wickes, UK                                      70 TABU SpA, Italy
       29 Friul Intagli SpA, Italy                              71 TAMALSA S.A., Spain
       30 Futuro Verde, Brazil                                  72 Tecnoform SpA, Italy
       31 Graham & Brown, UK                                    73 The Polestar Group Ltd, UK
       32 Habitat, UK                                           74 Timber Trade Federation, UK
       33 Harbo Fritid, Sweden                                  75 Timbmet, UK
       34 Hillerstorp, Sweden                                   76 Travis Perkins, UK
       35 Holz.ConZert GmbH, Germany                            77 Trc, Cameroon
       36 Homebase, UK                                          78 UNITAL (Union of Italian Industries of Wood Furniture)
       37 ICA Sverige, Sweden                                   79 Verband Schweizer Türenbranche, Switzerland
       38 IKEA Group, Sweden                                    80 VVNH, Vereniging van Nederlandse
       39 John Dickinson Stationery, UK                             Houtondernemingen, Netherlands
       40 JYSK Nordic, Denmark                                  81 Westeifel Werke GmbH, Germany
       41 Kinnarps, Sweden                                      82 ZIF sas, Italy
       42 KoppWood, Denmark                                                                                                 57
     P. v. Gardingen/FRP                                                                                                             Note

                                                     FLEGT Briefing Notes
                                                       FOREST LAW ENFORCEMENT, GOVERNANCE                   AND    TRADE

                                                                   What is FLEGT?
                           1. Why do we need FLEGT?                                       The titles of the eight briefing notes in this series are:

                           FLEGT stands for Forest Law Enforcement, Gov-                  1. What is FLEGT?
                           ernance and Trade – the European Union’s response              2. What does FLEGT mean for Member States?
                           to the global problem of illegal logging and the trade         3. What is legal timber?
                           in associated timber products.                                 4. Why the focus on legality, not sustainability?
                                                                                          5. Bilateral, regional and multilateral approaches
                           Illegal logging and the associated trade in illegal tim-       6. Verification of legality
                           ber is responsible for vast environmental damage in            7. Voluntary Partnership Agreements
                           developing countries, and impoverishes rural com-              8. What are the WTO implications?
                           munities that depend on forest products for a living.
                           It also costs governments in developing countries
                           an estimated €10-15 billion every year in lost rev-        year, the European Commission set out a strong com-
                           enue (see Briefing note 2).                                mitment to combat illegal logging and the associ-
                                                                                      ated trade in illegally harvested timber. To build on
                           The FLEGT Action Plan [1] proposes measures to in-
                                                                                      this commitment, the FLEGT Action Plan was adopted
                           crease the capacity of developing and emerging-
                                                                                      in May 2003.
                           market countries to control illegal logging, while re-
                           ducing trade in illegal timber products between these
                           countries and the EU.                                      3. The Action Plan
                                                                                      The Action Plan sets out a range of measures that
                           2. Origins of FLEGT                                        aim to combat the problem of illegal logging. These
                           Illegal logging was first raised as a serious interna-
                           tional problem in 1998 in the G8 foreign ministers’        •     support for improved governance and capacity
                           ‘Action Programme on Forests’. In April 2002, the                building in timber-producing countries;
                           European Commission hosted an international work-          •     development of Voluntary Partnership Agree-
                           shop to discuss how the EU should combat illegal                 ments with timber-producing countries to pre-
                           logging. At the World Summit on Sustainable Devel-               vent illegally produced timber from entering the
                           opment (WSSD), held in Johannesburg in the same                  EU market;
                                  John Weber/ICRAF


                                                                                                                              P. v. Gardingen/FRP

•   efforts to reduce the EU’s consumption of ille-           from entering the EU. VPAs offer an approach by
    gally harvested timber and discourage invest-             which legally produced timber exported to the EU
    ments by EU institutions that may encourage il-           can be identified using licences issued by FLEGT Part-
    legal logging.                                            ner Countries. This scheme, which requires an EU
                                                              regulation, would enable customs agencies to allow
3.1 Improved governance                                       verified legal timber from Partner Countries to enter
                                                              the EU, while excluding unidentified (and potentially
Illegal logging is most prevalent in developing and
                                                              illegal) timber.
emerging-market countries. Development co-opera-
tion between these countries and EU Member States             Initially, the scheme would cover only roundwood and
can therefore play an important role in tackling the          rough sawnwood, because of the complexities of
problem (see Briefing note 5). Support is likely to           ascertaining the origin of processed timber products
focus on:                                                     (see Briefing note 6).

•   developing reliable verification systems to dis-
    tinguish legal from illegal timber (see Briefing          3.3 Reducing consumption and
    note 6);
                                                              investment that encourages illegal
• encouraging transparency through the provision
    of accurate information on forest ownership, con-         logging
    dition and legislation;                                   The Action Plan also includes measures to promote
• building the capacity of government agencies and            the use of legally sourced timber within the EU (see
    other institutions to enforce existing legislation,       Briefing note 2). These include:
    implement governance reforms and deal with the
                                                              •   encouraging Member States to refer to recently
    complex issues related to illegal logging;
                                                                  revised EU public procurement legislation,
• strengthening enforcement by improving co-or-
    dination between forest regulators, police, cus-              which clarifies the options for promoting the use
                                                                  of legal and sustainable timber;
    toms and the judiciary;
                                                              •   encouraging private sector initiatives based on
• assisting policy reform to ensure appropriate in-
    centives for legal forest management, and disin-              the principles of corporate social and environ-
                                                                  mental responsibility;
    centives for forest crime.
                                                              •   encouraging banks and financial institutions to
Such co-operation should complement existing proc-
esses, such as national forest programmes, that al-               take environmental and social factors into ac-
                                                                  count when conducting due diligence assess-
ready address illegal logging and related issues. The
                                                                  ments for forestry investments.
involvement of civil society is important for trans-
parency and to ensure that enforcement actions do
not have adverse impacts on vulnerable communi-               4. Options for the future
ties.                                                         The EU will continue its dialogue with other impor-
                                                              tant timber-trading countries, thereby exploring the
3.2 Voluntary Partnership                                     development of a more comprehensive framework
                                                              to restrict trade in illegal timber. The European Com-
Agreements                                                    mission will also review further measures to support
The Voluntary Partnership Agreements (VPAs) pro-              the objectives of the Action Plan, including the feasi-
posed in the Action Plan are voluntary, bilateral agree-      bility of legislation to control imports of illegally har-
ments between producing countries (FLEGT Partner              vested timber into the EU.
Countries) and the EU. VPAs set out the commitments
and actions of both parties to tackle illegal logging
(see Briefing note 7).                                        REFERENCE
                                                              [1] FLEGT Proposal for an EU Action Plan, 21 May
There is currently no mechanism whereby customs                   2003. Communication from the Commission to
agencies can recognise illegal timber and prevent it              the Council and the European Parliament.

                FLEGT Briefing Notes are prepared by the European Commission to inform discussion of the EU Action Plan for
                Forest Law Enforcement, Governance and Trade (FLEGT), and do not reflect an official position taken by the
                European Union. (April 2004)
     P. v. Gardingen/FRP                                                                                                             Note

                                          FLEGT Briefing Notes
                                                    FOREST LAW ENFORCEMENT, GOVERNANCE                      AND    TRADE

                                 What does FLEGT mean for Member States?
                           1. Why should Member States                                  The titles of the eight briefing notes in this series are:

                           be concerned?                                                1. What is FLEGT?
                                                                                        2. What does FLEGT mean for Member States?
                           Illegal logging causes enormous environmental dam-           3. What is legal timber?
                           age in timber-producing countries and impoverishes           4. Why the focus on legality, not sustainability?
                           rural communities that depend on forest products             5. Bilateral, regional and multilateral approaches
                                                                                        6. Verification of legality
                           for a living. Illegal logging also costs developing and
                                                                                        7. Voluntary Partnership Agreements
                           emerging market economies significant amounts of             8. What are the WTO implications?
                           money. The World Bank estimates that illegal log-
                           ging costs governments of timber-producing coun-
                           tries €10-15 billion per year in lost revenue [1]. This   2. The EU’s potential for
                           overshadows the European Commission’s annual de-          influence
                           velopment assistance budget of approximately €6.5
                                                                                     Although most of Europe’s trade in wood products
                                                                                     is between Member States, the EU is an important
                           Law-abiding forest enterprises cannot compete with        consumer of timber from areas where illegal logging
                           cheap timber from illegal operations, which heavily       is a serious problem. The EU is the largest importer
                           distort trade and undermine legitimate business,          by value of African roundwood and sawnwood, and
                           both within the EU and in wood-producing countries.       the second largest market for sawnwood from Asia
                           Illegal logging is also often closely associated with     [2].
                           corruption, organised crime and, in some cases, may
                           exacerbate national and regional conflicts, as in Cam-
                           bodia, Liberia and the Democratic Republic of Congo.      million €
                           Illegal logging aggravates the loss of biodiversity,
                           for instance through logging of protected areas. It
                           can contribute to deforestation, forest fires and the      1000

                           illegal exploitation of wildlife. It also has negative      800
                           impacts on the livelihoods of forest-dependent peo-
                           ple, who are often among the world’s poorest and
                           most marginalized communities.
                           The continued and pervasive influence of illegal log-
                           ging is undermining many of the European Commis-               0
                                                                                                    Asia          Africa      S America       Russia
                           sion’s development objectives, such as public sec-
                                                                                              The value of export of sawnwood     and roundwood        from
                           tor financing for pro-poor development, peace, se-                 four regions into the EU   and the rest of the world in 2000.
                                                                                              Source: FLEGT Action Plan 2003.
                           curity, good governance, reduced corruption and
                           sustainable environmental management.


                                                                                                                              P. v. Gardingen/FRP

The EU, as a significant timber consumer, has a                   for investments by Export Credit Agencies and
shared responsibility to tackle illegal logging. Efforts          other publicly funded financial institutions, and
to support reforms in the timber sectors of produc-               supporting the development of criteria by private
ing countries are fundamentally undermined if the                 investors. Project screening procedures should
EU continues to accept illegal timber from these re-              ensure that public money does not promote ille-
gions.                                                            gal forest sector activity;
                                                              •   examining possibilities to apply existing crimi-
This gives the EU both the potential and the respon-
                                                                  nal legislation, such as legislation concerning
sibility to tackle illegal logging and the trade in ille-
                                                                  money-laundering or bribery, to the proceeds
gal timber. However, it is also important to work in
                                                                  of crimes related to illegal logging;
collaboration with other major consuming countries
                                                              •   co-ordinating donor funding for forest sector ac-
such as Japan, China and the USA, given their impor-
                                                                  tivities with FLEGT activities, to ensure that FLEGT
tance in the global timber trade.
                                                                  is integrated into the wider context of sustain-
                                                                  able forest sector development;
3. What can Member States do?                                 •   ensuring that relevant legislation and regulations,
Many EU Member States are already involved in ini-                statistics and border controls are compatible with
tiatives to tackle trade in illegal timber. Several are           each other.
developing public procurement policies for timber
products, while others are addressing the issue               4. Impacts of FLEGT
through bilateral aid for forestry projects. The FLEGT        Implementing the FLEGT Action Plan is likely to have
Action Plan offers an opportunity to build on these           impacts both in and beyond the EU. To get a better
efforts.                                                      understanding of these impacts, the European Com-
EU Member States can take a number of positive                mission has commissioned an impact assessment of
steps, including:                                             the proposed voluntary licensing scheme for ensur-
                                                              ing that only legal timber enters the EU (see Brief-
•   developing public procurement policies that en-
                                                              ing note 1). This will cover:
    sure only legal timber is supplied. New EU rules
    have clarified that public procurement policies           •   impacts on the timber trade and wood-process-
    can take into account production methods, if they             ing industries in EU Member States;
    relate to the subject matter of the contract. A           •   impacts on timber trade flows between potential
    European Commission Handbook on Green Pro-                    Partner Countries and the EU;
    curement, due out in mid-2004, will provide guid-         •   institutional, capacity building and additional
    ance on how Member States can take into con-                  regulatory requirements and associated costs of
    sideration the legality of supplies, when purchas-            implementing the Action Plan;
    ing imported timber;                                      •   potential environmental and social impacts in se-
•   promoting private sector initiatives that encour-             lected Partner Countries.
    age companies to use voluntary codes of prac-
    tice for the legal harvesting and purchasing of
    timber. These codes of practice can be supple-            [1] World Bank Revised Forest Strategy 2002.
    mented by independent supply chain audits;                [2] FLEGT Proposal for an EU Action Plan, 21 May
•   examining the environmental and social crite-                 2003, Annex 2. Communication from the Com-
    ria for due diligence assessments carried out                 mission to the Council and the European Parlia-

                FLEGT Briefing Notes are prepared by the European Commission to inform discussion of the EU Action Plan for
                Forest Law Enforcement, Governance and Trade (FLEGT), and do not reflect an official position taken by the
                European Union. (April 2004)
     P. v. Gardingen/FRP                                                                                                              Note

                                              FLEGT Briefing Notes
                                                      FOREST LAW ENFORCEMENT, GOVERNANCE                    AND    TRADE

                                                             What is legal timber?
                             1. Why do we need a                                           The titles of the eight briefing notes in this series are:

                             definition?                                                   1. What is FLEGT?
                                                                                           2. What does FLEGT mean for Member States?
                             The FLEGT Action Plan aims to combat illegal log-             3. What is legal timber?
                             ging, exclude illegal timber from the EU market and           4. Why the focus on legality, not sustainability?
                             promote the use of legal timber. These objectives             5. Bilateral, regional and multilateral approaches
                                                                                           6. Verification of legality
                             depend on a clear definition of legal timber, against
                                                                                           7. Voluntary Partnership Agreements
                             which compliance can be checked.                              8. What are the WTO implications?

                             Agreeing an adequate definition of legality means
                             deciding which aspects of national legislation will       suggests that the definition of legality needs to en-
                             apply when checking for compliance. While it is clear     compass more than just illegal harvesting.
                             that harvesting timber in violation of national laws
                                                                                       Defining legality is important for two major aspects
                             is illegal, there is a range of other illegal practices
                                                                                       of the Action Plan:
                             associated with logging and the timber trade. This
                                                                                       •     Under the Voluntary Partnership Agreements pro-
                                                                                             posed between the EU and timber-producing
                                                                                             countries and regions (see Briefing note 7), a
                                                                                             licensing scheme would be used to identify le-
                                                                                             gally produced timber. Each consignment of le-
                                                                                             gal timber destined for EU markets would be ac-
                                                                                             companied by an export licence. Identifying these
                                                                                             timber consignments as legal requires a clear
                                                                                             definition of legality.
                                                                                       •     The Action Plan encourages Member States’ gov-
                                                                                             ernments to implement public procurement poli-
                                                                                             cies and support the private sector in adopting
                                                                                             policies that exclude illegal timber from their
                                                                                             supply chains (see Briefing note 2). Implemen-
                                                                                             tation of these policies would be facilitated by a
                                                                                             clear definition of legal timber.

                                                                                       Both the definition of legality and the means to verify
                           Ian Dawson/ICRAF

                                                                                       it (see Briefing note 6) should be appropriate to
                                                                                       local circumstances and should be negotiated be-
                                                                                       tween each Partner Country and the EU.


                                                                                                                                         P. v. Gardingen/FRP

2. Illegal practices in the                                              In some countries, inadequate, conflicting or inequi-
                                                                         table laws might make a clear definition of legality
forestry sector                                                          more difficult to achieve. For example, a review of
Forestry is subject to a wide range of legal require-                    Indonesian forest governance found inconsistencies
ments, including legislation and regulations govern-                     and contradictions between laws and government
ing forestry practices, environmental protection, ten-                   department decrees [1]. Furthermore, in some coun-
ure and use rights, workers’ rights, health and safety,                  tries, existing forest laws exclude local people from
and trade.                                                               access to forest resources, forcing them to operate
Illegal practices occur throughout the forestry sec-                     illegally to meet their basic livelihood needs.
tor, from land allocation to export. Illegal harvesting                  Any such concerns must be taken into account in
may include not only harvesting practices that con-                      dialogue and discussions to arrive at a working defi-
travene the regulations, but also using corrupt means                    nition of legality. During discussions on Voluntary
to gain harvesting rights, extraction without permis-                    Partnership Agreements (see Briefing note 7), the
sion or from protected areas, cutting protected spe-                     European Commission and Member States should
cies or extraction of timber in excess of agreed lim-                    determine how producer countries view legality; the
its. Beyond harvesting, illegal practices may also                       definition of legality to be used by each Partner Coun-
extend to transport infringements, illegal process-                      try would be set out in that country’s Partnership
ing and export, non-payment of taxes or charges,                         Agreement.
and misdeclaration to customs.

3. A working definition of                                               [1] Nana Suparna, September 2001. ‘Forest Govern-
legality                                                                     ance and Forest Law Enforcement in Indonesia.’
                                                                             Paper for Forest Law Enforcement and Govern-
Implementing the FLEGT Action Plan would require                             ance, East Asia Ministerial Conference.
a clear definition of legality that is objectively verifi-
able and operationally workable. Stakeholders from
producing countries should be consulted on which
national laws are relevant for a working definition of
       John Weber/ICRAF

                           FLEGT Briefing Notes are prepared by the European Commission to inform discussion of the EU Action Plan for
                           Forest Law Enforcement, Governance and Trade (FLEGT), and do not reflect an official position taken by the
                           European Union. (April 2004)
     P. v. Gardingen/FRP                                                                                                             Note

                                          FLEGT Briefing Notes
                                                   FOREST LAW ENFORCEMENT, GOVERNANCE                       AND    TRADE

                                Why the focus on legality, not sustainability?
                           1. Aiming for sustainability?                                 The titles of the eight briefing notes in this series are:

                           Many initiatives in recent years have aimed to de-            1. What is FLEGT?
                                                                                         2. What does FLEGT mean for Member States?
                           velop mechanisms to promote sustainable forest
                                                                                         3. What is legal timber?
                           management, yet the EU FLEGT Action Plan focuses
                                                                                         4. Why the focus on legality, not sustainability?
                           primarily on the promotion of legally produced tim-           5. Bilateral, regional and multilateral approaches
                           ber. It might legitimately be asked why the Action            6. Verification of legality
                           Plan addresses the legality, rather than the                  7. Voluntary Partnership Agreements
                                                                                         8. What are the WTO implications?
                           sustainability of timber products and forest manage-
                                                                                        in the short term should therefore address the most
                           2. The advantages of legality                                destructive and damaging forestry practices, while
                                                                                        establishing a base from which to progress to
                           as a threshold                                               sustainability.
                           Despite numerous initiatives over the past ten years
                                                                                        The Action Plan aims to foster partnerships between
                           to define, implement and assess sustainable forest
                                                                                        the EU and timber-producing countries. In develop-
                           management, no clear, widely accepted, international
                                                                                        ing these partnerships, it is important to work within
                           definition has emerged.
                                                                                        the context of forestry legislation and regulations in
                           In many countries, there is a substantial gap between        each producing country. In the absence of an inter-
                           current forest exploitation practices and sustainable        national agreement defining sustainable forest man-
                           forest management by any definition. Thus, an im-            agement, the focus on legality is pragmatic and of-
                           mediate requirement for sustainability has proven            fers an opportunity to exclude from the EU market
                           not only difficult to define, but beyond the abilities       products of some of the most damaging forest prac-
                           of many forest owners and managers to meet. Legal            tices. The working definitions of legality would be
                           compliance, which forms an essential component of            set out in individual Partnership Agreements between
                           many sustainable forestry definitions, should be a           EU Member States and Partner Countries (see Brief-
                           more achievable target, and a first step in progress-        ing note 3).
                           ing towards sustainable forest management.
                                                                                        The focus on legality does not offer a solution to all
                           There is no doubt that illegal timber harvesting and         problems of unsustainable forest exploitation. How-
                           its associated trade undermines efforts to achieve           ever, the European Commission is committed to pro-
                           sustainable forest management (see Briefing note             moting sustainable forest management as the more
                           2). There are few incentives to pay the full costs of        long-term goal of policy in the forest sector. The
                           sustainable forest management when the market                Action Plan should thus be placed in the context of
                           accepts cheap timber produced by illegal means.              the overall efforts of the European Commission and
                           Dealing with illegal logging and its associated trade        EU Member States to achieve sustainable forest man-
                                          FLEGT Briefing Notes are prepared by the European Commission to inform discussion of the EU Action Plan for
                                          Forest Law Enforcement, Governance and Trade (FLEGT), and do not reflect an official position taken by the
                                          European Union. (April 2004)

                                                                                                                                                 P. v. Gardingen/FRP

                                       FLEGT Briefing Notes
                                                  FOREST LAW ENFORCEMENT, GOVERNANCE                  AND    TRADE

                            Bilateral, regional and multilateral approaches
                        1. Agreements between                                       The titles of the eight briefing notes in this series are:

                        trading partners                                            1. What is FLEGT?
                                                                                    2. What does FLEGT mean for Member States?
                        Illegal logging and trade in illegal timber can be tack-    3. What is legal timber?
                        led by improved enforcement actions in timber-pro-          4. Why the focus on legality, not sustainability?
                        ducing countries, by voluntary measures to ensure           5. Bilateral, regional and multilateral approaches
                                                                                    6. Verification of legality
                        sourcing of legal timber and through instruments
                                                                                    7. Voluntary Partnership Agreements
                        that prevent trade in illegal timber. For these trade-      8. What are the WTO implications?
                        related instruments to be effective, agreements be-
                        tween trading partners are required.
                                                                                   2. Bilateral approaches
                        The FLEGT Action Plan proposes the establishment
                        of bilateral and/or regional agreements, and, over         The FLEGT Action Plan proposes bilateral Voluntary
                        the longer term, a multilateral framework for inter-       Partnership Agreements (see Briefing note 7) be-
                        national collaboration.                                    tween the EU, as a single market with a common
                                                                                   border, and individual timber-producing countries
                                                                                   (although regional agreements are also envisaged).
                                                                                   These Agreements include provision for a scheme
                                                                                   under which the legality of timber exported to the
                                                                                   EU from producing Partner Countries would be veri-
                                                                                   fied and each verified shipment would be accompa-
                                                                                   nied by an export licence.

                                                                                   A bilateral approach highlights both partners’ com-
                                                                                   mitment and sends a clear signal to the market that
                                                                                   government action is being taken to eradicate ille-
                                                                                   gal timber from international trade. However, the
                                                                                   effectiveness of such an approach might be limited
                                                                                   by trans-shipping through, or further processing of
                                                                                   products in, a third country. For this reason, Agree-
                                                                                   ments formed with a group of similar producing coun-
                                                                                   tries in one region may be more effective.

                                                                                   3. Regional approaches
William Hawthorne/FRP

                                                                                   The FLEGT Action Plan recognises that Partnership
                                                                                   Agreements between the EU and regional groupings
                                                                                   of similar timber-producing countries might over-
                                                                                   come some potential disadvantages of bilateral agree-
                                                                                   ments. The European Commission hopes to build on
     P. v. Gardingen/FRP                                                                                                                        Note

                           bilateral agreements, where possible, and establish                        ure targeting trade flows that include other major
                           regional Voluntary Partnership Agreements with re-                         importing countries is likely to be the most effective
                           gions where illegal logging presents a challenge to                        option.
                           several countries. Where appropriate, the EU would                         The Action Plan envisages exploring with other ma-
                           also promote inter-regional FLEGT approaches in re-                        jor timber consumers ways of working towards a
                           gional trade negotiations.                                                 more comprehensive framework to address interna-
                           Effective regional initiatives require a common un-                        tional trade in illegal timber. Initial dialogue has al-
                           derstanding between participating countries about                          ready been established with Japan and the United
                           the problems of illegal logging, and a joint commit-                       States. In future this might be widened to include
                           ment to finding solutions. They also need institu-                         other major timber-producing and consuming coun-
                                                                                                      tries. Ultimately, it may be appropriate to transform
                           tions that are capable of providing a focus for co-
                                                                                                      this step-by-step approach into a global process or
                           ordinating regional actions, holding discussions, and
                                                                                                      multilateral agreement.
                           ultimately forming agreements with other countries
                           or regions.                                                                Existing multilateral environmental agreements can
                                                                                                      potentially provide lessons for a multilateral approach
                                                                                                      to illegal logging. The Convention on International
                           4. Multilateral approaches                                                 Trade in Endangered Species (CITES) and the Con-
                           In the long term, a multilateral agreement may be                          vention on Biological Diversity (CBD), as well as nu-
                           the most effective means of addressing trade in ille-                      merous agreements in other sectors, can offer use-
                           gal timber. A multilateral agreement would address                         ful practical examples of multilateral approaches to
                           the problem of evasion of bilateral or regional agree-                     the environment and trade.
                           ments, and would also provide an international ba-                         However, because of concerns about sovereignty and
                           sis for defining the legal management of forests. In                       disguised protectionism, progress on a multilateral
                           addition, given the EU’s influence in world timber                         agreement on trade in illegal timber is likely to be
                           markets – important but not dominant – any meas-                           slow.
                                William Hawthorne/FRP

                                                        FLEGT Briefing Notes are prepared by the European Commission to inform discussion of the EU Action Plan for
                                                        Forest Law Enforcement, Governance and Trade (FLEGT), and do not reflect an official position taken by the
                                                        European Union. (April 2004)

                                                                                                                        P. v. Gardingen/FRP

               FLEGT Briefing Notes
                        FOREST LAW ENFORCEMENT, GOVERNANCE                   AND    TRADE

                              Verification of legality
1. Why do we need                                          The titles of the eight briefing notes in this series are:

verification?                                              1.   What is FLEGT?
                                                           2.   What does FLEGT mean for Member States?
The EU, as an important consumer of wood prod-
                                                           3.   What is legal timber?
ucts (see Briefing note 2), is increasingly aware of       4.   Why the focus on legality, not sustainability?
its responsibility to avoid encouraging illegal log-       5.   Bilateral, regional and multilateral approaches
ging by allowing trade in illegally produced timber.       6.   Verification of legality
                                                           7.   Voluntary Partnership Agreements
The FLEGT Action Plan proposes a timber export li-
                                                           8.   What are the WTO implications?
censing system to provide a practical mechanism for
verifying the legality of timber exports from FLEGT
                                                         2. The tracking of timber from the forest to its im-
Partner Countries to the EU. An EU regulation would
                                                            port into the EU. This ‘chain of custody’ verifica-
provide the means of implementation, allowing bor-
                                                            tion aims to ensure that legal timber is not mixed
der control authorities to prevent illegal timber from
                                                            with timber from other unknown and potentially
Partner Countries from entering the European sin-
                                                            illegal sources.
gle market.
                                                         3. The issuing of licences demonstrating that the
The proposed licensing scheme would be negotiated           legality of the timber has been verified.
with exporting countries or regions through bilat-
                                                         The exact manner of verification, and a relevant set
eral Voluntary Partnership Agreements (see Brief-
                                                         of laws, would be identified in Voluntary Partnership
ing note 7). These aim to ensure that participating
                                                         Agreements with Partner Countries. Verification sys-
producing countries export only legal timber to the
                                                         tems should be flexible enough to take account of
EU. Each shipment of legal timber from these coun-
                                                         varying conditions in different countries’ forest sec-
tries would be accompanied by an export permit,
                                                         tors and overall governance environments. They must
checked by Member State customs authorities on
                                                         be practical and usable by both the forest industry
arrival at an EU point of entry. To make the licensing
                                                         and the government.
scheme work, Partner Countries would need to es-
tablish reliable and credible systems to verify the      Each Partner Country would need to nominate com-
legality of the timber covered by their licences.        petent bodies to verify legality, track timber and to
                                                         issue the licences that identify legal timber exports.
                                                         These tasks may be assigned to different organisa-
2. What needs to be verified,
                                                         tions. Where considered necessary to assure cred-
and by whom?                                             ibility, independent monitors might also be ap-
The proposed licensing scheme considers three main       pointed.
aspects of a system for verifying legality:
                                                         In many countries, verification of compliance with
1. Verification that forest harvesting and associated    forest laws and tracking of forest products is con-
   transport and trade are carried out in compliance     trolled by government forest authorities. Elsewhere,
   with a defined set of laws (see Briefing note 3).     governments have contracted these tasks to the pri-

     P. v. Gardingen/FRP                                                                                                          Note

                           vate sector, although issuing licences generally re-         The mechanisms used to verify chain of custody for
                           mains a state responsibility. Papua New Guinea, for          the proposed licensing scheme would need to be
                           example, has contracted out its log export monitor-          cost-effective, in order to avoid adding significant
                           ing to an inspection firm, SGS PNG Ltd.                      extra costs to enforcement activities and legitimate
                                                                                        forest operations. In identifying the most appropri-
                                                                                        ate option, each Partner Country would need to take
                           3. Timber tracking – chain of
                                                                                        into consideration its own conditions and resources.
                                                                                        Chain of custody systems are used in other sectors,
                           The term ‘chain of custody’ refers to the series of
                                                                                        for example to implement phytosanitary regulations
                           processes and ownerships that timber passes
                                                                                        and control trade in ozone-depleting substances.
                           through between being harvested in the forest and
                                                                                        Chain of custody systems used in forestry include:
                           being made into a final product. The proposed li-
                           censing scheme currently applies only to roundwood           •   forest management certification schemes where
                           and rough sawnwood, so the chain of custody is                   assessments are carried out by accredited certi-
                           shorter and simpler than for many processed prod-                fication bodies;
                           ucts. However, even within this simple chain of cus-         •   verification to support supply chain management
                           tody, timber may be felled, transported, stored, sawn            in planning the delivery of raw material to
                           and dried, while being handled by several different              processing plants;
                           owners, before arriving at the EU border. At each            •   existing official government timber and forest rev-
                           point in this chain there is a risk that legal timber            enue management systems for the collection of
                                                                                            royalties, taxes and export duties.
                           may be ‘contaminated’ with illegally harvested ma-
                           terial. Chain of custody therefore needs to be veri-         The simplest forms of control rely on paper-based
                           fied both between and within each processing stage.          documentation, which is cross-checked at various
                                                                                        stages of the chain. The French research agency,
                                                                                        CIRAD-Forêt, has developed a low-cost option in
                                                                                        which log characteristics are recorded using coun-
                                                                                        terfeit-proof documentation; cross-comparison of
                                                                                        records between felling and processing makes it dif-
                                                                                        ficult to substitute logs into the system. Technologi-
                                        transport                                       cal options include the use of barcodes, microchips
                                                                                        and tracer paints [1], and maintaining log records in
                                      Storage and                                       computer databases.

                                        Transport                                       1 Dykstra D, Kuru G, Taylor R, Nussbaum R, Magrath
                                                                                           W and Story J. 2002. ‘Technologies for wood track-
                                                                                           ing; verifying and monitoring the chain of cus-
                                                                                           tody and legal compliance in the timber indus-
                                        European                                           try.’ The World Bank.
                                         Union         Port of entry

                                       A simple chain of custody

                                          FLEGT Briefing Notes are prepared by the European Commission to inform discussion of the EU Action Plan for
                                          Forest Law Enforcement, Governance and Trade (FLEGT), and do not reflect an official position taken by the
                                          European Union. (April 2004)

                                                                                                                             P. v. Gardingen/FRP

                               FLEGT Briefing Notes
                                      FOREST LAW ENFORCEMENT, GOVERNANCE          AND    TRADE

                                 Voluntary Partnership Agreements
     1. What are Voluntary                                      The titles of the eight briefing notes in this series are:

     Partnership Agreements?                                    1.   What is FLEGT?
                                                                2.   What does FLEGT mean for Member States?
     There is increasing recognition that the EU, as a sig-     3.   What is legal timber?
     nificant consumer of wood products, shares respon-         4.   Why the focus on legality, not sustainability?
     sibility with timber-producing countries to tackle il-     5.   Bilateral, regional and multilateral approaches
                                                                6.   Verification of legality
     legal logging and its associated trade. However, there
                                                                7.   Voluntary Partnership Agreements
     is currently no practical mechanism for identifying        8.   What are the WTO implications?
     and excluding illegal timber from the EU market.

     The FLEGT Action Plan therefore proposes the de-
                                                              2. What do Partnership
     velopment of Voluntary Partnership Agreements be-
     tween the EU and individual timber-producing coun-       Agreements contain?
     tries (FLEGT Partner Countries). Legally produced tim-   Voluntary Partnership Agreements aim to reinforce
     ber exported to the EU would be identified by means      Partner Countries’ ability to control illegal timber
     of licences issued in Partner Countries. Timber origi-   production, and offer a mechanism to exclude ille-
     nating in a FLEGT Partner Country and arriving at an     gal timber from EU markets. To develop these Agree-
     EU point of import without such a permit would be        ments, the EU would discuss detailed elements with
     denied entry. To enable EU customs authorities to        interested countries and, where applicable, regional
     exclude illegal timber, and thereby make Partner-        organisations. During these preliminary discussions,
     ship Agreements effective, a new EU regulation is        the EU would seek producer countries’ views on how
     required.                                                to define and verify legality.
Sampurno Bruijnzeel/FRP

     P. v. Gardingen/FRP                                                                                                          Note

                           While the details of each Partnership Agreement              of the difficulties of checking the origin (and there-
                           would vary to take into account the conditions in            fore legality) of processed timber products. However,
                           each prospective Partner Country, some elements are          provision could be made to extend the scheme to
                           likely to be common to all Agreements. All Partner           other product categories, where practicable.
                           Countries would need to agree a definition of legal-
                           ity (see Briefing note 3) and have (or be committed
                                                                                        3. What advantages for FLEGT
                           to developing) a credible legal and administrative
                           structure with adequate systems to verify that ex-           Partner Countries?
                           ported timber is legal (see Briefing note 6). This           Implementing the Voluntary Partnership Agreements
                           implies a commitment to:                                     and licensing scheme would require capacity build-
                                                                                        ing and investment to ensure reliability and credibil-
                           •   ensuring that the applicable forest law is con-
                                                                                        ity without entailing excess cost or penalising legiti-
                               sistent, understandable, enforceable and support-
                                                                                        mate business. In return, there are considerable ad-
                               ive of basic sustainable forest management prin-
                                                                                        vantages for FLEGT Partner Countries. These include:
                               ciples (see Briefing note 3);
                           •   developing credible technical and administrative         •   improved access to EU markets, as public and
                               systems to make sure that harvesting operations              private procurement policies increasingly specify
                               conform with relevant laws, and to track timber              the use of legal timber and the exclusion of uni-
                               from the point of harvest to the point of export             dentified or illegal timber;
                               (see Briefing note 6);                                   •   increased revenue from taxes and duties that
                           •   developing procedures to license exports of le-              should exceed the costs associated with running
                               gally harvested timber.                                      the licensing system;
                                                                                        •   priority for EU development assistance for FLEGT-
                           In some Partner Countries, meeting these commit-
                                                                                            related measures;
                           ments would require considerable institutional
                                                                                        •   additional enforcement tools to combat illegal ac-
                           strengthening and capacity building. In addition,
                           Partner Countries would need to carry out extensive
                                                                                        •   a foundation framework for mechanisms to sup-
                           stakeholder consultation in order to specify which
                                                                                            port the tracking and verification of certified tim-
                           laws or regulations should be included in a defini-
                                                                                            ber from sustainably managed forests.
                           tion of legal timber. To assist Partner Countries in
                           meeting these commitments, EU technical and finan-           Trade with countries that choose not to enter into
                           cial assistance could be included in Partnership             Partnership Agreements will be unaffected by the
                           Agreements. The EU would also help Partner Coun-             framework being developed to exclude illegal tim-
                           tries ensure that FLEGT-related activities are inte-         ber from the EU. However, as purchasers increasingly
                           grated with other initiatives aimed at addressing            adopt policies favouring procurement of verified le-
                           sustainability in the forest sector.                         gal timber, countries which have problems with ille-
                                                                                        gal logging and which choose not to enter into Part-
                           The licences proposed in the Action Plan would ini-
                                                                                        nership Agreements may find their market share in
                           tially cover a limited range of solid wood products
                                                                                        the EU reduced.
                           (roundwood and rough sawnwood). This is because

                                          FLEGT Briefing Notes are prepared by the European Commission to inform discussion of the EU Action Plan for
                                          Forest Law Enforcement, Governance and Trade (FLEGT), and do not reflect an official position taken by the
                                          European Union. (April 2004)

                                                                                                                                              P. v. Gardingen/FRP

                                     FLEGT Briefing Notes
                                              FOREST LAW ENFORCEMENT, GOVERNANCE                  AND    TRADE

                                          What are the WTO implications?
                      1. Why consider the WTO?                                   The titles of the eight briefing notes in this series are:

                      The FLEGT Action Plan emphasises the need for a            1. What is FLEGT?
                      mechanism that allows EU customs authorities to            2. What does FLEGT mean for Member States?
                                                                                 3. What is legal timber?
                      identify legally produced timber and exclude illegal
                                                                                 4. Why the focus on legality, not sustainability?
                      timber from the EU market. The Plan proposes the           5. Bilateral, regional and multilateral approaches
                      development of Voluntary Partnership Agreements,           6. Verification of legality
                      under which legally produced timber exported to the        7. Voluntary Partnership Agreements
                                                                                 8. What are the WTO implications?
                      EU would be identified by means of licences issued
                      by participating producer countries (FLEGT Partner
                      Countries). Unlicensed timber exports from those         nary matter, whether the proposed licensing scheme
                      countries would be excluded from the EU (see Brief-      would be challenged at all.
                      ing note 7). As any restrictions on trade are poten-
                                                                               The licensing scheme would apply only to timber
                      tially subject to World Trade Organisation (WTO)
                                                                               imports into the EU from FLEGT Partner Countries.
                      rules, the question arises as to whether the EU’s pro-
                                                                               The terms would be agreed voluntarily and bilater-
                      posed scheme is consistent with international trade
                                                                               ally between the EU and each FLEGT Partner Coun-
                                                                               try. It is inconceivable that a country which has en-
                                                                               tered into such an agreement would itself mount a
                      2. Likelihood of a challenge                             WTO challenge.
                      within the WTO                                           It is also far from clear what incentive any third coun-
                      Rulings on the WTO-compatibility of trade measures       try would have to challenge EU practices under FLEGT
                      are made only when a complaint is raised within the      agreements. In the absence of any direct or indirect
                      WTO. It is therefore important to ask, as a prelimi-     economic interest, it is doubtful whether any third
Hannah Jaenicke/FRP

     P. v. Gardingen/FRP                                                                                                                       Note

                           country could bring a WTO challenge; any WTO ac-                          age or protect illegal practices such as smuggling.
                           tion is therefore very unlikely in this case.                             Likewise, the FLEGT Action Plan aims to fight against
                                                                                                     illegal timber production and sales.
                           It follows that the likelihood of a challenge is ex-
                           tremely low, if not non-existent. Therefore, the ques-                    According to the FLEGT Action Plan, the legality of
                           tion of whether measures implemented under the                            timber production would be defined with reference
                           FLEGT scheme are compatible with WTO rules is, in                         to the applicable legal rules in the country of export
                           fact, largely theoretical.                                                (see Briefing note 3), and the details of the system
                                                                                                     would be worked out in bilateral agreements (see
                                                                                                     Briefing note 5). Clearly, exports of unlicensed tim-
                           3. The WTO does not protect
                                                                                                     ber from FLEGT Partner Countries would amount to
                           illegal trade                                                             smuggling of illegal timber; there is no obstacle in
                           For the sake of completeness, this briefing note will                     WTO rules to the implementation of bilateral agree-
                           now consider the compatibility of the proposed FLEGT                      ments aimed at countering such illegal practices.
                           scheme with WTO rules.
                                                                                                     The proposed trade measures aimed at fighting ille-
                           The WTO multilateral trading system is based on a                         gal timber production are based on voluntary, bilat-
                           set of rules agreed by all WTO Members. The aim of                        eral agreements and therefore pose no problem for
                           these rules is to liberate trade through the progres-                     WTO-compatibility. These measures would be pre-
                           sive reduction of tariffs and the elimination of other                    cisely targeted – operating at consignment rather
                           protectionist measures. Of course, WTO rules are                          than country or company level – since their goal is to
                           designed to protect legitimate trade, not to encour-                      prevent illegal, not legitimate, flows of trade.
                                   Tony Simons/ICRAF

                                                       FLEGT Briefing Notes are prepared by the European Commission to inform discussion of the EU Action Plan for
                                                       Forest Law Enforcement, Governance and Trade (FLEGT), and do not reflect an official position taken by the
                                                       European Union. (April 2004)

                                                                                                                                            P. v. Gardingen/FRP

                                        FLEGT Briefing Notes
                                                 FOREST LAW ENFORCEMENT, GOVERNANCE                  AND     TRADE

                                         A timber legality assurance system
         1. Background                                                               The titles of the briefing notes in this series are:

                                                                                     1. What is FLEGT?
         An important aim of the European Union’s Forest Law
                                                                                     2. What does FLEGT mean for Member States?
         Enforcement and Governance (FLEGT) Action Plan is
                                                                                     3. What is legal timber?
         elimination of illegally logged wood products from
                                                                                     4. Why the focus on legality, not sustainability?
         trade with the EU. It proposes to do this through
                                                                                     5. Bilateral, regional and multilateral approaches
         voluntary agreements between the EU and timber-
                                                                                     6. Verification of legality
         producing countries where illegal logging is a
                                                                                     7. Voluntary Partnership Agreements
         problem. A key feature of such agreements is a timber
                                                                                     8. What are the WTO implications?
         licensing scheme under which each country that
                                                                                     9. A timber legality assurance system
         enters a voluntary agreement (a “partner country”)
         will implement a system to verify that its wood
         product exports to the EU had been legally produced.                    •   A verification system to provide reasonable
         The EU’s border control authorities would allow                             assurance that the requirements of the definition
         imports only of licensed products from partner                              have been met for each export consignment.
         countries.                                                              •   The issuance of licences to validate the results of
                                                                                     legality verification and chain of custody.
         Issuance of licences by a partner country would                         •   Independent monitoring of the whole system to
         require credible evidence that the products in                              assure its credibility and to provide transparency.
         question had been produced in compliance with
         specified laws.
                                                                                 2. Defining legally-produced
         This note outlines a system that could be used to
         provide such evidence. The basic elements are:
         •                   A definition of legally-produced timber that sets
                                                                                 2.1 Need and coverage
                             out all the laws and regulations that must be       Most timber producing countries have a wide range
                             complied with in the production process.            of laws and regulations that relate to forest
         •                   A secure chain of custody that tracks timber from   management and timber production. A definition of
                             the forest where it was harvested through           legally produced timber should be a subset of these
                             different owners and stages in processing to the    that addresses the key problems resulting from non-
                             point of export.                                    compliance.
         H. Jaenicke / FRP

page 1

     P. v. Gardingen/FRP                                                                                                     Note

                           Since the long-term aim of the FLEGT Action Plan is         management unit level, operations such as
                           sustainable forest management, such a definition            authorised conversion of a forest area to non-forest
                           should address the “three pillars of sustainability”:       use, may not be sustainable in relation to that area
                           namely environmental, economic and socio-cultural           of forest but are, nonetheless, legal.
                           sustainability. It should also cover those laws
                           identified by the timber-producing country to be most
                           important in terms of the degree of harm caused by          2.3 Operational aspects of a
                           failure to comply with them; for example:                   definition
                           environmental harm may be caused by extracting
                           too many trees or damaging water systems; economic          A definition of legality must be unambiguous,
                           harm may result from failure to pay fees on timber,         objectively verifiable and operationally workable. This
                           thereby robbing the forest owner (normally the state);      means that:
                           and social harm may arise from ignoring local and           •   it must be clear which laws and regulations are
                           indigenous communities’ tenure rights. Conversely,              included in the definition and which are not;
                           failure to comply with some laws, such as road traffic      •   there must be clear tests of evidence (i.e. criteria
                           offences may cause relatively little harm or have               and indicators) to determine compliance with
                           minimal impact on sustainable forest management.                each law or regulation;
                           On this basis, a credible definition is likely to include   •   there must be practical ways to carry out such
                           the following elements:                                         tests in the field.

                           •   logging only where there are legal harvest rights,      There should be a process for review and modification
                               by the holder of those rights;                          of a legality definition. For example, a definition may
                           •   complying with regulations on permitted harvest         need to be changed if:
                               levels, and with environmental and labour               •   a law or regulation that forms part of the
                               legislation;                                                definition is amended or repealed;
                           •   payment of timber royalties and other directly          •   a new law or regulation that may be relevant to
                               relevant fees;                                              timber production is issued;
                           •   respect for other parties’ legal tenure rights that     •   experience shows that testing compliance with a
                               may be affected by timber harvest rights.                   particular law is impractical.

                           2.2 Some general principles                                 3. Chain of custody
                           Sovereign right to define legality: Enacting and            To issue FLEGT licenses, the licensing authorities
                           enforcing laws is a sovereign right of any country          need evidence that products to be licensed contain
                           and, similarly, specifying the laws that comprise a         only wood from forests or facilities that have been
                           legality definition is the right of each timber-            verified as legally operating.
                           producing country.
                                                                                       Chain of custody [1] (CoC) refers to the ownership
                           Process to define legality: Since the harm caused by        chain of timber products from forest to export and
                           failure to comply with laws affects different               on to final customer. A secure chain of custody
                           stakeholders in the timber-producing country –              ensures that timber from unverified operations does
                           government, private sector, the general public, and         not enter the production chain.
                           local and indigenous communities – the process to
                           decide which laws should be included in a definition        An important requirement of a chain of custody
                           should generally involve wide consultation.                 system is that auditable records that allow
                                                                                       reconciliation of records of incoming material with
                           Relationship between legality and sustainability:           records of material dispatched from the preceding
                           While compliance with relevant laws is often                point are produced at each point where custody or
                           addressed by standards that describe sustainable            form of a product changes.
                           forest management, SFM generally includes
                           additional voluntary requirements. Therefore, while         Chain of custody may be implemented in several
                           legality compliance may be regarded as an important         ways. Some countries have national timber control
                           stepping-stone towards achieving SFM, it is generally       systems that apply to all movement of wood products.
                           regarded as insufficient by those markets that              Often these are paper based with paint or hammer
                           demand SFM certification. Conversely, at a                  marking of logs. These may create problems of forged


                                                                                                                  P. v. Gardingen/FRP

documents or fraudulent timber marks to cover illegal   proprietary chain of custody systems for stock control
shipments. To counter this, some countries are          purposes and to track and verify the origins of the
starting to implement electronic based systems with     timber they use.
unique log identifiers such as encrypted bar-coded
or RFID tags. Entering details of each log or product
consignment into a database along with its identifier   4. Verification of legal
record makes it easier to detect forgeries of
documents or fraudulent use of log identifiers at
checkpoints, or in mill yards. In cases where pre-      FLEGT licences will be issued on the basis of evidence
harvest tree stock surveys are carried out, such        that all the requirements of a partner country’s
systems can be used to trace logs back to the stump.    legality definition have been met for a consignment
                                                        of timber. Such evidence is typically provided through
National timber control systems can be managed by
                                                        regular audits of activities in forest management
government agencies or outsourced to qualified
                                                        units and, where the definition requires it, at
organisations. Individual companies may also operate
                                                        processing facilities.
                                                        Verification is also needed to assure that timber
                                                        products or components from unverified, and
                                                        possibly illegal, operations are not issued with
                                                        licences. In this case, checks are needed to ensure
                                                        that chain of custody systems are working as
                                                        designed and that inconsistencies – possibly
                                                        suggesting that illegal timber is entering the system
                                                        – are promptly detected and acted on.
                                                        Verification of chain of custody is generally through
                                                        audits at each point where a product is shipped,
                                                        received or transformed – such as sawmills or
                                                        plywood mills – to check that no unaccounted for
                                                        material has entered the process.

                                                        4.1 Requirements
                                                        Legality verification audits may be carried out by a
                                                        partner country’s designated state authorities or by
                                                        appropriately qualified verification organisations.
                                                        Certification bodies are an example of the latter.
                                                        Audits must provide clear and credible evidence that:
                                                        •   export consignments have been produced in a
                                                            manner that complies with all laws included in
                                                            the legality definition;
                                                        •   there are sufficient controls to assure that
                                                            licensed products include only timber from legal
                                                        Verification for FLEGT licensing should, where
                                                        possible, build on existing systems in partner
                                                        countries that serve a similar function. These may
                                                        be controls operated by government authorities or
                                                        the private sector. In either case, verification should
                                                        include tests that ensure all aspects of the legality
H. Jaenicke / FRP

                                                        definition have been complied with.
                                                        Organisations performing verification should be
                                                        appropriately qualified and operate systems that

     P. v. Gardingen/FRP                                                                                                                    Note

                           conform to accepted auditing practices. For external                       For export of large-dimension, high-value logs, which
                           (i.e. non-state) agencies, accreditation to a recognised                   would normally each have a unique record in a log
                           standard such as ISO Guide 62, or equivalent, may                          control database, documentation could be issued
                           provide evidence of such qualifications.                                   on a consignment basis, for example as a result of
                                                                                                      inspections of a sample of logs in port before
                           Each verification system should specify the frequency
                                                                                                      loading. Some countries already operate systems to
                           of audits, and how non-compliances are handled. In
                                                                                                      check that correct export taxes have been paid and
                           the latter case, a distinction needs to be made
                                                                                                      this could also serve as a point at which licences are
                           •                    minor defects detected that can be remedied
                                                                                                      In some situations, however, it will be more practical
                                                relatively quickly, and
                                                                                                      to issue licences to exporting organisation rather
                           •                    major failures, in either legal compliance or chain
                                                                                                      than for individual consignments. Such “operator-
                                                of custody, that should result in withholding a
                                                                                                      based licences” would be valid for a specified period
                                                                                                      and may apply either:
                           The output of verification comprises reports to a
                                                                                                      •   only to the last point in the chain of custody prior
                           partner country’s licensing authority that state:
                                                                                                          to export with verification of legality and CoC
                           •                    whether or not a forest management unit (e.g. a           being part of a national scheme, or
                                                concession) is complying with the country’s           •   to a complete system that included external
                                                legality definition – in which case timber from           verification of legality at forest management units
                                                that unit would qualify to enter the production           and of the chain of custody leading to the export
                                                process;                                                  point.
                           •                    whether or not products for which licences are
                                                                                                      In the latter case, individual operator-based systems
                                                sought include only timber from such legally-
                                                                                                      would need to conform to national criteria defined
                                                verified forest operations.
                                                                                                      by the licensing authority, and would need to be
                                                                                                      checked that they met those criteria prior to
                           5. Licensing                                                               approval.

                           FLEGT licences will be issued by a designated state
                           authority on the basis of evidence provided through                        6. Independent monitoring
                           verification of legal forest operations and chain of
                           custody. Reports from the verification organisation                        6.1 Need for independent
                           would state whether the products for which a licence                       monitoring
                           is sought include only wood from verified legal forest
                           (and processing) operations.                                               The FLEGT Action Plan is needed because of forest
                                                                                                      sector governance problems in many timber-
                                                                                                      producing countries. Where such problems exist,
                                                                                                      they could also undermine the credibility of FLEGT
                                                                                                      licences unless there are appropriate independent
                                                                                                      controls in place.
                                                                                                      Independent monitoring aims to ensure the
                                                                                                      effectiveness and credibility of the licensing scheme
                                                                                                      by introducing a third party to monitor and report
                                                                                                      on its implementation.

                                                                                                      6.2 Appointment
                                                                                                      Independent monitors (IM) are generally expected
                                                                                                      to be contracted to the partner country government.
                           W. Hawthorne / FRP

                                                                                                      To ensure independence, the government agency
                                                                                                      to engage the IM should not be directly involved in
                                                                                                      management or regulation of the forest resource or
                                                                                                      industry. However, because of its knowledge of the
                                                                                                      forest sector, it is important that the forest authority

      Briefing                                                                                      Note

                                                                                                                    P. v. Gardingen/FRP

participates in drawing up and agrees with the IM’s        credibility that international markets seek, but it is
terms of reference.                                        important that they work with local people or network
                                                           organisations in the partner country so that their
The process to engage the IM should follow clear
                                                           expertise is complemented with local knowledge.
guidelines to allow the contracting agency to choose
the best-qualified organisation and achieve value for
money. To ensure a rigorous and transparent process        6.4 Rules and procedures
it is expected that, in most cases, this will be through
competitive bidding procedures.                            Independent monitors’ activities should be guided
                                                           by clear rules and procedures so that all parties –
                                                           the industry, the verifiers and the host government,
6.3 IM Qualifications                                      as well as the monitoring organisation – understand
                                                           clearly the responsibilities and limitations of the
Organisations bidding for IM work should generally
have experience and qualifications relevant to
monitoring the extraction and use of natural               The scope of the IM services may vary depending on
resources and/or the use of proceeds from resource         each producer country’s situation and needs, but
exploitation. Other relevant experience will include       should normally include:
work with anti-corruption initiatives, financial
                                                           •   observation and reporting on verification of
auditing and formal independent observation of
                                                               legality of forest operations;
government activities in situations of weak
                                                           •   observation and reporting on verification of the
governance (e.g., aid distribution, trade monitoring).
                                                               secure chain of custody from forest to export
Experience in the principles of management system
auditing (e.g. ISO 9000) is also useful.
                                                           •   observation and reporting on licence issuance;
IM organisations must also be able to demonstrate          •   observation and reporting on export of forest
their independence from actors in the forest sector,           products.
including the regulatory agencies and the timber
                                                           It should be emphasised that the role of IM is limited
                                                           to assurance that the verification and licensing meet
In many cases, international organisations are likely      agreed criteria, and does not include reporting on
to be needed to provide IM services to give the            forest crime.
         T. Simons/ICRAF

     P. v. Gardingen/FRP                                                                                                           Note


                                   Material flow                Controls                                    Actors

                                       Forest                    Legality
                                                               verification                                            Reporting body
                                                                                                                       Reporting body

                                       transport             CoC verification              Verification

                                        Mill                 CoC verification                 report
                                                                                              report                         report

                                                                                            Licensing                    Independent
                                                                Licensing                   authority                       monitor
                                                                                            authority                       monitor

                                                            Border control               Border control                     Verification or validation
                                                                                         Border control
                                      Export                    check                      authority                        Monitoring

                           Figure 1. Diagram of legality assurance system

                           Observations are expected to be carried out on a              civil society. Any reporting body should include
                           sampling basis and include a mix of accompanying              individuals who have the authority to initiate action
                           verifiers while they work, independent field                  to rectify issues identified by IM reports.
                           observations, observing export licensing, observing
                                                                                         To ensure transparency, there should be clear
                           export control activities, and examining verifiers’ and
                                                                                         procedures set out in the IM’s terms of reference for
                           licence authorities’ records. All observations must
                                                                                         releasing IM reports into the public domain after
                           be properly documented with reference to supporting
                                                                                         reports had been scrutinised and approved for
                           objective evidence.
                                                                                         release by the reporting body.
                           The IM should report at regular specified intervals
                           to a body appointed by the partner country
                           government. In cases where observations identify a
                           significant system failure that might undermine the           ENDNOTE
                           credibility of the licensing scheme, there should be
                                                                                         [1] See Dykstra D, Kuru G, Taylor R, Nussbaum R,
                           provision for submitting special reports that demand
                                                                                             Magrath W and Story J. 2002. ‘Technologies for
                           immediate action.
                                                                                             wood tracking; verifying and monitoring the chain
                           To ensure impartial treatment, there is a case for a              of custody and legal compliance in the timber
                           specially-appointed body to receive reports and                   industry.’, a report resulting from a World Bank/
                           initiate actions arising from their recommendations.              WWF Alliance workshop in Phnom Penh which was
                           This could be a committee comprising                              published in December 2002. This includes
                           representatives of the partner country government,                descriptions of alternative log tracking and timber
                           its legislature and, where appropriate, industry and              chain of custody systems.

                                           FLEGT Briefing Notes are prepared by the European Commission to inform discussion of the EU Action Plan for
                                           Forest Law Enforcement, Governance and Trade (FLEGT), and do not reflect an official position taken by the page 6
                                           European Union. (September 2005)
     Timber Trade Federation, Clareville House, 26-27 Oxendon Street, London, SW1Y 4EL
           t. 020 7839 1891 | f. 020 7930 0094 | e. | w.
                                  Registered in England No. 2515034


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