Forestry and Wood based Industry in Indonesia

MARKET INTELLIGENCE REPORT ON

FORESTRY AND WOOD-BASED INDUSTRY IN INDONESIA

August 2006

Current issues

Indonesia's forestry industry has been badly hit by the protracted crisis since 1997/1998 that the country has lost its role as a major player in timber trade in the world.

Many large forestry companies have been beset by heavy debt burden worsened by growing scarcity of raw material from forests destroyed mainly by rampant illegal logging. A large part of trees illegally cut is smuggled abroad. Extensive destruction of the forests has resulted in sharp decline in forest productivity.

In addition, the country's products of processed timber are less competitive as most of the factories are no longer efficient.

As a result many companies operating in the forestry sector have stopped or nearly stopped operation. Many concessionaire have failed to repay their debt in reforestation fund resulting in the revocation of their business licenses. And plywood companies laid off many workers as they could not continue normal operation with scarcity in raw material supply.

The government, concerned with the condition seeks to encourage development of plantation forests (HTI) to reduce the pressure on natural forests. However, many HTI projects could not be carried out because of financial difficulty.

The prospects, however, are still good for forestry industry. Many units of HTI are expected to start producing logs in the coming several years. HTI is expected to be the main source of log raw material.

Meanwhile the country still has large natural forests. They are still highly potential provided that they well managed to be sustainable.

There are various factors hampering expansion of plantation forests such as protests over losses of various living matters, forest fires, degradation of forest quality and financial difficulty. However, development of HTI is the only viable concept to restore the condition of the country's forestry industry.

In this report, we try to study various related aspects of the forestry industry to identify problems and see any opportunities as well as risk of venture in forestry industry.

FOREST CONCESSIONS (HPH)

Forest management in Indonesia

Earlier especially at the start of the Suharto regime in the 1970s, the forestry sector was a major contributor to the country's economic development, and forest concession (HPH) was a dominant system of exploiting natural forests.

HPH system was first introduced in 1967 under the Forestry Law issued that year. HPH holders were required to preserve the forests by observing a number of regulations such as on method of selective cutting, method of using forests (TGHK) and provincial area layout plan (RTRWP).

Sumatra and Kalimantan were the main targets of exploitation as the two islands have large forests with valuable tree species. Many large companies were licensed to exploit forests under 20-year contract. In the 1970's logs became a major export earner contributing substantially to economic development.

However, only a few, which held the HPH license, enjoyed the natural wealth from the Sumatra and Kalimantan forests.

Poor management system marked by arbitrary felling of trees and corruption involving the HPH holders resulted in extensive damage to the tropical forests especially in the middle of the 1980s'.

HPH Companies

In less than 15 years, there was a sharp decline in the size of the country's forests. Illegal logging was rampant especially during and after the economic crisis that followed the monetary crisis in 1997/1998. Illegal logging was out of control amid the political instability that followed the crisis.

Politicians in Jakarta were too busy consolidating themselves to pay attention to handling illegal logging. As a result many HPH companies could not continue operation. In 2005 only 257 units including integrated ones of 594 HPH companies remained active. The other 337 companies were no longer in operation.

The number of active HPH companies declined so was in the width of forest concession. In 2001, there were 375 HPH companies with 46.2 million hectares of forest concession. In 2003, the number dropped to 267 companies with 27.8 million hectares of of concession. In 2005, there only 257 active HPH with 24.8 million hectares of concession.

East Kalimantan has the largest number of HPH companies with 53 units followed by Papua with 48 companies, and Central Kalimantan 43 companies. Papua, however, leads in width of HPH area totaling 8.1 million hectares, followed by East Kalimantan's 5.2 million hectares and Central Kalimantan's 3 million hectares.

There are two categories of HPH namely one integrated with timber processing industry such as plywood factories and sawn timber factories; and one not integrated with timber processing industry. Among the 257 HPH companies only 68 having integrated HPH units with 7.02 million hectares of concession. Most or 189 companies operate non integrated units totaling 17.76 million hectares.

Part of the integrated units are integrated with plywood factories, block board factories and particle board factories and the rest with sawn timber, wood working and moulding factories.

HPH holders and width of areas

The following table shows holders of integrated and non integrated units of HPH.

Among the holders of non-integrated units of HPH, 50 largest companies control 55.6% of the total areas of non-integrated HPH

Table - List of holders of integrated and non-integrated HPH, 2005

50 largest holders of non-integrated units of HPH- 2005

No. Name of company Province Width of HPH (ha)

1 Anuraga West Kalimantan 691,700

2 Membramo Alaa Mandiri,PT Papua 691,700

3 ITCI, PT East Kalimantan 470,200

4 Hanurata Coy Ltd (Sorong) Papua 417,570

5 Essam Timber East Kalimantan 355,000

6 Intisixta,PT Southeast Sulawesi 296,000

7 Rimba Megahlestari Papua 250,000

8 Teluk Bintuni Mina Agro Karya Papua 239,000

9 ITCI Kayan Hutani (IKANI),PT East Kalimantan 218,375

10 Daya Sakti Krida Unggul Central Kalimantan 212,000

Slashing of HPH licenses

The government has started reducing the number of HPH holders and their HPH areas since 2000. Production forests have been reduced in width that the number of trees ready for harvest has also declined. The government, therefore, decided to gradually reduced the number of HPH units and areas given to a company group.

In 2005 and 2006 the government launched anti illegal logging operations twice respectively called conservation forest operations I and II (OHL I & OHL II) The government also adopted firmer measure against failure to observe forestry regulations such as in the payment of reforestation funds. Those having arrears are strongly warned and failure to heed the warning could face their licenses revoked.

Among large company groups having their HPH units reduced include the Barito Pacific Group, Kalimanis Group and Kayu Lapis Group. The number of HPH units of the Barito Pacific group, was reduced from 29 with concessions totaling 3.02 million hectares to 18 with areas totaling 1.61 million hectares.

HPH in Papua

As forests have dwindled in size in Sumatra and Kalimantan forestry companies move to Papua. Among large companies having HPH units in Papua include Barito Pacific Group, Djajanti and Alas Kesuma.

Barito Pacific Group

This company is owned by tycoon Prayogo Pangestu. The company's daily operation is run by, Prayogo's son Agus Salim Pangestu. The group's logging subsidiaries in West Papua are :

" PT Mangole Timber Unit VI having 150,000 hectares of HPH

" PT Barito Cendrawasih having 228,000 hectares of HPH

Djajanti Group

This company group is owned by tycoon Burhan Uray alias Wong Ming Kiong alias Bong Sung On alias Swan An Bong/Sun On Bong/Sun On Hwang etc.. The group has logging concession under subsidiaries including PT Artika Optima Inti,

PT Sagindo Sari Lestari, PT Budi Nyata (owned by Soejono Varinata, son of Burhan Uray), etc..

Wapoga Group

The Malaysian-based company is controlled by Tan Eng Kwee and Fredy Tang. PT Wapoga Mutiara Timber has three timber concessions covering approximately 800,000 hectares located at the Gulf of Cendrawasih, Manokwari and at Jayapura, all of which are located in Papua (formerly known as Irian Jaya). PT Wapoga Mutiara Industries has an integrated timber complex based in Biak, which operates downstream industry producing plywood, block-board, film face, sawn timber moulding products.

- PT Wapoga II = 155,000 ha

- PT Wapoga Mutiara Timber = 407,350 ha

- PT Wapoga Mutiara Timber Unit I = 178,300 ha

Korindo Group

Korindo is the fourth largest forestry company group in Indonesia, owned by South Korean In Young Sun. The group has two logging companies with concessions in West Papua as follows:

- PT Tunas Sawa Erma 244,850 ha, acquired in February 1993.

- PT Bade Makmur Orissa 462,600 ha, acquired in March 1993.

Alas Kusuma Group

The group is owned by PO Suwandi and Ibnu Hartomo, brother of deceased wife of former President Soeharto. Prabu Alaska is an affiliate of the Alas Kusuma. Group PT Prabu Alaska has HPH totaling 319,600 ha.

Hanurata Group:

Linked to Soeharto family and Indonesian military.

- PT Hanurata Coy Ltd 188,000 ha

PLANTATION FOREST (Hutan Tanaman Industri = (HTI)

In the middle of the 1980s' the government launched an ambitious program to build plantation forests (HTI) in a bid to preserve natural forests. HTI units were built especially in Sumatra and Kalimantan. The program is aimed at reducing dependence on natural forest for wood raw material needed by timber processing industry.

HTI units were built on denuded forest lands. HTI companies were offered subsidy by the government with interest free loan from Reforestation Fund, which was collected from HPH as fee to finance reforestation.

HTI concession was mainly to grow trees for pulp and wood works industries. HTI could be built in cooperation with HPH companies or independently. There were also HTI units called HTI-Trans built in transmigration areas built by migrant families. In Sumatra there were many transmigration centers with migrant families from Java and Bali. HTI-Trans grew mainly trees for woodwork industry.

Forest destruction rate, however, was faster than HTI development. In addition, the program came too late after large parts of forests had been destroyed. As many timber processing factories, which relied on logs form legal sources, could not continue operation for shortage of the raw material.

HTI Development

Until April 2006, the government issued licenses for 248 units of HTI covering a total area of 10 million hectares including 5,963 hectares for pulp HTI and 3,741 hectares for non pulp HTI.

Until the end of 2005, there were 229 licensed HTI companies but only 209 of them were operational covering a total area of 8.04 million hectares. The other 20 companies were no longer active for financial problem.

Development of HTI in concession areas, however, was too slow. Until 2005, the government issued licenses for HTI covering 8.04 million hectares but development in the past 10 years totaled only 3.41 million. Every year, only 100,000 - 200,000 hectares of HTI were built by the HTI licensees.

After the monetary crisis, development of HTI units declined sharply. In 1997, development covered 300,000 hectares, but the completion shrank to only 100,000 hectares in the following year and in 2001 it was only 67,000 hectares.

Government wants to speed up development of 5 million hectares of HTI

Most HTI projects are joint ventures between state forestry company PT INHUTANI I-V and private companies. Out of 4.26 million hectares of HTI areas to be built 3.26 million hectares are under PT Inhutani and its joint venture partners. Most of forest areas managed by PT Inhutani are formerly HPH areas left idle by HPH companies or left by HPH companies not having their license renewed. Inhutani later formed joint ventures with private investors to develop the forest areas.

PT. Barito Pasific Timber Tbk.

PT Barito Pasific Timber Tbk has submitted applications for license to build HTI in Samarinda or Banjarmasin, but the answer is not forthcoming. The HTI project is expected to support its wood working industry to be expanded in Kalimantan. The location is selected on he river side areas of Mahakam and Barito rivers as the rivers will facilitate transport to HTI and factories.

Sinar Mas Forestry to build 1 million hectares of HTI

Sinar Mas Forestry (SMF) will build 1 million hectares of HTI until 2009 to guarantee feedstock for its pulp factories. Currently SMF has only 600,000 hectares land for HTI in five provinces - Jambi, Riau, West Kalimantan and East Kalimantan.

In its early phase, the group will build 100,000 hectares in South Sumatra. It will set aside US$ 1,200 in fund to finance every hectare of the project. Currently the 612,000 hectares of HTI to be built in five provinces will be anough only to supply 50% of raw material needed by its pulp factories. .....................