For all the four species mentioned above a conceptual paper examining the expected returns for these species incorporating viable alternative options were prepared and presented at a National Seminar on commercial cultivation of timber trees in 1997. A summary of the economic feasibility discussed at this seminar is presented here.
In formulating the options for the planting of timber species various factors were taken into consideration which included different planting cycles, planting densities and agro-silviculture requirements, and in the case of Hevea clones and period of latex extraction.
In each of the option, plantation size of 2,000-ha for estate and 40-ha for consolidated smallholdings were considered. A 15-year cycle was proposed for the mono-crop options to realize earlier timber yield. For the agroforestry options proposed for smallholdings involving integration of Hevea with timber species a 20-year cycle was recommended to take advantage of longer latex extraction.
The study assumes the sale of sawlogs and roundlogs as the pricing point as the study is to examine the viability of commercial planting of timber species from the grower’s viewpoint. No processing of timber is assumed although the economics of wood processing into sawntimber is highlighted in the case of Hevea to provide insight on its expected returns and margin where it is considered important for the purpose of clarification.
Sawlog volumes per tree at final harvest vary between timber species from 0.4 m3 for Hevea (under high density planting 15-year cycle) to 1.0 m3 for sentang (20-year cycle under mixed plantation). Details of sawlog and chiplog volumes for the various species at final harvest are shown in Appendix 1. It is assumed that optimal requirements with regards to soil condition and appropriate agro-management practices are met for each individual species.
Log prices differ by the various timber species and year of harvest. The prices of Hevea sawlog are based on existing quarterly prices since 1988 and are statistically projected through regression analysis. The projected Hevea sawlog prices are RM 95/m3 after 15 years and RM 115/m3 after 20 years. The price of teak is projected at RM 600/m3 which is based on plantation grown teak in Thailand (RM 700/m3), Indonesia (RM 1000/m3) and Myanmar (lowest grade RM 1,5000/m3) which are grown over a longer rotation varying from 40 - 60 years. Projected price of sentang at the end of 15 years is estimated to be RM 450/m3. This is based on mixed hardwood prices which at present average around RM 290/m3. For acacia which is also based on the current mixed hardwood prices but due to its shorter rotation and smaller size the price is conservatively projected at RM 150/m3. Chiplog prices are assumed to be similar for all wood species at RM 40/m3 at the end of 15-year cycle and RM 45/m3 at the end of a 20-year cycle.
It is assumed that combined silvicultural techniques and agronomic management practices have been properly applied for each option to produce the projected timber and latex yields. Contrary to the general perception of ‘plant and forget’ these options require appropriate agro-silvicultural inputs to produce the desired yields under the proposed short period of 15 and 20 year rotation.
Generally these species are well adapted to Malaysian climate and require good, deep and well-drained soil. However, Hevea being a domesticated species needs selected clonal planting materials and good agronomic inputs in the early years of establishment. In the case of sentang and teak greater care is required to control pest problems in the early stage of planting. As for acacia, although well adapted to a wide range of sites, proper and timely silvicultural treatments (pruning and thinning) are required to produce timber of sawlog quality.
Latex yield is based on RRIM large-scale clonal trial. As commercial yields are expected to be lower than the yields from the clonal trials these have been accordingly adjusted. Further yield discounts per tree have been made under high density and hedge planting before arriving at the final yield taking into account the final stand and response to stimulation.
Tapping under the high density option is proposed to commence in the 9th year to encourage girthing for better wood yield. Stimulated latex yield under this option (700 trees/ha at initial planting) is projected at 2,200 kg/ha/year while that under mixed planting is 1,370 kg/ha/year.
This is based on RSS 1 price of 300 sen per kilogram. The weighted price for latex and lower grades used for computation of revenue after allowing for appropriate discount is 270 sen/kg.
This varies with the options used (Appendix 1).
This is assumed to range from RM 18/m3 to RM 22/m3 depending on the year of harvest based on current harvesting cost. Where non-commercial thinning is carried out, this is estimated to be RM 250/ha.
Where latex exploitation is only for a short period of 7 years this is assumed to be contracted at a weighted latex and scrap price of 103 sen/kg. In the case of mixed plantation where tapping is carried out by the smallholders over 15 years tapping cost is imputed based on rates as stipulated under the MAPA-NUPW wage agreement.
As in all viability studies results of analyses depend on the key assumptions made. However, should there by any significant changes in the assumptions made this may invariably affect the outcome of analyses in the document. To date, while prices of Hevea wood are available there are no reliable records on prices of plantation-grown teak, sentang and acacia in Malaysia. The prices assumed in this study are based on current mixed hardwood prices in Malaysia as well as those available from neighbouring countries currently extracting fully grown plantation timber. It has to be pointed out that those involved with the planting of teak and sentang seem to suggest that these prices are somewhat conservative.
The projected price of Hevea sawlog based on current price trend is low relative to other timber species. Judging from the impressive value-added and price of Hevea sawntimber the price of the domestic Hevea sawlog is perhaps artificially depressed. This is probably due to hevea sawlog being traditionally treated as a residual resource during replanting. Nevertheless, the analyses are based on available price records. The scenario may change should the domestic prices of Hevea sawlog increase.
This study assumes other things to remain equal. In today’s dynamic economy the supply and demand situation on wood could change and this would affect the viability of planting Hevea, sentang, teak or acacia. If wood supply increases relative to demand when large scale plantings are implemented this may lower the prices. On the other hand, shortage of supply with the present rapid growth of the domestic wood-based manufacturing industries and the declining supply of raw material from the natural forest could affect log prices favourably. External demand and supply factors have also not been taken into account in this study due to the lack of data.
The financial measures of the projects like Net Present Value (NPV), Internal Rate of Return (IRR) and Benefit/Cost Ratio (B/C ratio are used in this study to examine the return on investment and financial viability of the various options (see Appendix 2).
Option 1: Hevea wood-latex extraction (high density 15-year cycle; 7 years latex extraction; 2000-ha estate and 40-ha consolidated smallholding)
At the assumed price of RM 95/m3, a total net revenue of about RM 60 million (RM 30,000/ha) can be expected under this option for a 2000-ha size estate. The computed IRR of 15% which is above the 10% cost of capital indicated that the project is viable. An NPV at 10% discount of RM 7.1 million (RM 3,500/ha) could be expected from this investment. A B/C ration of 1.3 indicated that for every ringgit invested a return of RM 1.30 could be expected.
At assumed prices of RM 200/m3 and RM 300/m3 (the latter price being comparable to that of mixed medium hardwood but still lower than light red meranti - a species also used for furniture making as Hevea) the computed IRRs are 18.3% and 20.5%, respectively.
This option is also viable under consolidated smallholding conditions although the IRR is lower at 12.8% with a per hectare NPV of RM 2,100 and B/C ratio of 1.2 based on the assumed price of RM 95/m3. At assumed prices of RM 200/m3and RM 300/m3 the IRRs are expected to improve to 16.7 and 19.2% respectively.
Option 2: Hevea plantation for wood extraction only (15-year cycle; 2000-ha plantation and 40-ha consolidated smallholding)
Under estate conditions this option is found to be only marginally viable at the projected log price of RM 95/m3. The computed IRR was 11.1%. A net revenue of RM 42.6 million with an NPV of RM 1.4 million (RM 700/ha) can be expected from this investment which assumes no further downstream activity. At the assumed price of RM 300/m3 (comparable to that of mixed medium hardwood) the computed IRR is 20.9%.
Under smallholding conditions based on the projected price of RM 95/m3 this option is not viable as the NPV is negative and IRR at 7.3% falls below the cost of capital.
Option 3: Sentang plantation (15-year cycle; 2000-ha plantation and 40-ha consolidated smallholding)
Based on the assumed log volumes and projected prices of RM 150/m3 during commercial thinning (at 20th year) and RM 450/m3 at final harvest investment in sentang plantation is expected to provide a net revenue of RM 144.2 million (RM 72,100/ha) for a 2000-hectare plantation. The computed NPV is RM 17.9 million or RM 8,950/ha. This positive NPV and an IRR of 16.4% indicate that the project is viable.
Under smallholding conditions (40-ha) the option is also viable with an IRR of 15% and NPV of RM 0.32 million or RM 8,000/ha. While computations show that this option is viable based on the assumed price of sentang smallholders may not find this option attractive given the long gestation period of 15 years before revenue is realised.
Option 4: Teak Plantation (15-year cycle; 2000-ha plantation and 40-ha consolidated smallholding)
The plantation of teak is also found to be viable based on the assumed log volumes and projected prices of RM 250/m3 during commercial thinning (at 10th year) and RM 600/m3 at final harvest. This option is expected to generate a net revenue of RM 177 million (RM 88,350/ha) with an NPV of RM 23.8 million for a 2000-ha estate (RM 11,900/ha). The computed IRR was 17.3%.
This option is also found to be viable under consolidated smallholding condition with an IRR of 16.2%. Net revenue under a 40-ha holding is computed to be RM 3.3 million (RM 82,500/ha) with an NPV of RM 0.46 million or RM 11,500/ha. Despite the positive returns (if projected prices are realised) as in the case of sentang smallholders could ill afford the long gestation period before realising revenue.
Option 5: Acacia plantation (15-year cycle; for 2000-ha plantation)
Return on investment measured by the IRR at 14.5% indicates that this option is also viable. This option is expected to generate a net revenue of RM 17.4 million (RM 8700/ha) and the computed NPV for a 2000-ha estate is positive at RM 5.1 million or RM 2,550/ha. The computed B/C ratio of 1.38 indicated that for every ringgit invested a net return of 38 sen can be expected.
Option 6: Mixed plantation, hevea-sentang and hevea-teak (20-year cycle; 40 ha consolidated smallholding)
Analyses of returns for mixed cropping of Hevea-sentang and hevea-teak combination under consolidated smallholding conditions indicate favourable returns at the assumed latex and log yields and their respective prices. The computed IRRs are 16.1% for the Hevea-sentang combination and 15.8% for Hevea-teak.
Total net revenue for a 40-ha holding is RM 4.3 million (RM 106,750/ha) with an NPV of RM 0.45 million (RM 11,250/ha) for Hevea-sentang. Net revenue for hevea-teak is marginally lower at RM 4.2 (RM 104,500/ha) million with an NPV of RM 0.44 million or RM 11,000/ha. The computed B/C rations for both combinations are about 1.5 suggesting a 50 sen net return for every ringgit of investment.
A review of the findings of all the options is carried out in this section. For this purpose the options have been categorized under three sections: Mono-culture plantation for wood extraction; Hevea plantation for wood and latex extractions; and Mixed plantation.
Under the mono-culture option for Hevea wood, sentang, teak and acacia teak plantation appears to provide the highest return given its assumed relatively higher projected price of RM 600/m3 compared to RM 450/m3 for sentang and the much lower prices of RM 150/m3 for acacia and RM 95/m3 for Hevea wood.
Sensitivity analyses on large-scale planting of sentang and teak indicate that the options are still viable under 20% adverse changes in expenditure and revenue. For acacia it is marginally viable if the projected revenue drops by 20%. In the case of Hevea (under large scale planting) given the low price of Hevea sawlog a 10% adverse change in revenue or expenditure projections could make the project non-viable (i.e. assuming the establishment of plantations for the sale of sawlogs without any further downstream activity). Conversely, the IRRs would improve to 15.2% and 20.9% if prices of Hevea sawlogs increased to RM 150 and RM 300/m3, respectively. At the latter price, despite being lower than the assumed price of sentang and teak, the IRR could to be more attractive. Sensitivity analyses based on 10% and 20% changes in revenue and expenditure estimates on various options are as shown in Appendix 3.
It must be emphasized that this study assumes the sale of sawlogs (roundlogs). Obviously, given the vast projected price difference between the assumed price of sentang (RM 450/m3) and teak (RM 600/m3) compared to Hevea at RM 95/m3 (which at present is artificially depressed being treated as a residual resource) investment in the later option may erroneously be considered as unattractive. Profit in the Hevea wood trade is actually very lucrative compared to the other species but the margin lies in processing and in further downstream wood-based manufacturing industry.
Comparative economic assessment of sawn timber production between light red meranti and rubber wood carried out in 1994 showed that despite the low recovery rate of Hevea wood (20%) as against light red meranti (67%) profit per cubic meter of hevea sawn timber was RM 475 compared to only RM 69/m3 for light red meranti. This is primarily attributed to the low Hevea sawlog price then at RM 41/m3 compared to light red meranti at RM 545/m3. The price of hevea sawn timber was lower at RM 765/m3 compared to light red meranti at RM 911/m3. The computed profit margin over cost for Hevea sawn timber was 164% compared to light red meranti at only 5%.
The above analysis was based on tapped rubber trees from existing rubber plantations. For untapped Hevea trees grown specifically for timber the wood volume and recovery is expected to be much higher. This would further reduce cost and increase profit margin if the present price difference between Hevea sawlog and sawn timber persist.
For the above reason the establishment of Hevea solely for log extraction must be integrated with at least sawn timber or fibrewood processing activities to benefit from the lucrative value added. This is appropriate for the big time investors like Guthries and Golden Hope that could afford capital intensive processing plants.
For the smallholding sector the planting of any wood species solely for timber is not advisable as the majority of smallholders could ill-afford the long gestation period before realizing income from wood.
Even though the analysis indicates that acacia plantation is viable it is relatively less attractive as compared to sentang and teak. However, with its known fast-growth rate and adaptability to poor soil conditions the species is recommended for lower-end products such as general utility timber, panel products and fibre material for pulp and paper at shorter rotation. The economic viability can be further enhanced if the planting of this species is integrated with processing facilities such as integrated timber complex or pulp and paper mill. However growing acacia solely for pulp and paper and without integrating with pulp and paper mill and taking into account the cost of land will yield only an IRR 3.3% which is not viable based on earlier study conducted by the Forestry Department in 1992.
Analysis on high density planting over shorter planting cycles indicates that this option is viable with an IRR of 15%. This is a promising alternative to investors desiring earlier Hevea wood extraction. Despite the projected low price of Hevea logs this option provides good returns from the combined contribution of latex extracted seven years prior to log harvesting. Revenue from latex exploited under intensive stimulation is expected to provide good returns and being extracted earlier than wood helps to increase the present value of returns. With existing timber/latex clones that provide both good latex and log volumes this option shows promise.
Presently, being treated as residuals, Hevea log prices have been depressed despite the high value-added when converted to sawn timber. Sensitivity analysis indicates that the investment is viable except in the case where adverse changes of 10% and 20% occur simultaneously in revenue and expenditure or vice versa (Appendix 4). Computation of returns at sawlog prices of RM 200/m3 and RM 300/m3 (still much lower than that of light red meranti - a species also used in furniture making as Hevea) provides IRRs of 18.3% and 20.5%, respectively.
Obviously this option if combined with downstream processing of Hevea wood would provide better returns from value-added manufactured products. Towards this end Guthries and Golden Hope have established Hevea plantations to extract wood to feed their MDF (Medium Density Fibreboard) plants. Apart from benefiting considerable profits from value added the plantation ensures adequate and uninterrupted supply of Hevea wood. Several logging and sawnmilling companies in East Malaysia have also integrated upstream establishing Hevea plantation for wood and latex extraction.
This mixed plantation practice (the planting of Hevea trees interspersed with sentang or teak) is considered appropriate for smallholding and is intended to maximize revenue from sentang or teak logs while ensuring a continuous flow of annual income during the latex exploitation period.
In terms of future value the per hectare gross revenue contribution by sentang or teak accounts for about 52 - 53% of total revenue, with latex contributing 34 - 35% and Hevea wood the balance of 13%. In terms of present value contribution, however, since revenue from latex is accrued earlier latex contribution at RM 17,000/ha accounted for 52% of the total contribution with sentang or teak contributing about RM 12,000/ha (39%) and Hevea wood 9 %. Hevea is therefore still the major revenue contributor under this mixed plantation practice.
The option appears attractive given the bonus income from sentang or teak integrated with the hedgerow planting system of Hevea. The viability of this project depends on the attainability of the projected log volumes and prices. Sensitivity analysis carried out indicates that the proposed option remains viable even at 20% adverse changes in revenue and expenditure.
