ANNEX 2 – COUNTRY REPORTS

AUSTRALIA⁴

National political situation

The Liberal/National Coalition (conservative) Australian Government has now been in office for more than 10 years. The next election is due before October 2007 and the timing of the retirement of the Prime Minister (The Hon John Howard MP) is a major issue of speculation and could have significant implications for the direction on a number of policy issues of relevance to the plantation products and paper industry including carbon trading and taxation.

The Government is generally seen as good for business with a strong emphasis on low interest rates, low inflation and tax reform. Significant tax cuts were made in the 2006 Budget. The need for investment in infrastructure (particularly roads, railways and ports) and education and training is becoming of increasing importance as these two factors are perceived as acting as major constraints on the expansion of the Australian economy. The Government has also focused attention on reducing the regulatory burden on business.

Contrary to the situation at the national level, the Australian Labor Party continues to hold power in all the States and Territories. The States and Territories have primary responsibility for land management issues through regulation of private land uses and management of large areas of public forest (including plantation in most states). All States have implemented policies further restricting the harvesting of timber in public natural forests.

Economic situation

The Australian economy has remained relatively strong with low inflation, low interest rates and low unemployment. Interest rates have increased slightly recently as the Reserve Bank responds to the spending pressure of a strong economy. The relatively high level of the Australian dollar, particularly against the US$ dollar, has presented significant challenges for exporters and those products with import competition including paper, woodpanels and sawntimber.

The new housing construction market, the primary driver for the sawntimber industry, which had been strong for an unusually long period finally began to soften in late 2004 and has been flat throughout 2005 and 2006 with significant implications for sawntimber demand.

The past 5-10 years has seen continued investment in new processing capacity in the wood products (sawn timber and panels) and paper industry in Australia. Much of this expansion has been driven by the increased wood availability resulting from the maturing of the softwood plantation resources established in the 1960s and 70s. As a result of this expansion there is now relatively little uncommitted wood available in Australia unless new areas of plantation are established. The major exception is the large area of short rotation eucalypt plantations in SW Western Australia, Western Victoria and Tasmania which will be coming on-stream in the near future and are currently destined for export in chip form.

There are numerous proposals under consideration for the establishment of new pulp mills in Australia. Probably the most advanced of these is the Gunns Ltd proposal to build a A$1 billion bleached eucalypt kraft mill in Tasmania. Gunns is currently the world's largest exporter of hardwood woodchips and the proposed mill would consume a significant proportion, but not all, of Gunns' current export volume.

Review of the taxation of plantation forestry

In May 2005 the Government announced a Review of the Taxation of Plantation Forestry. The current taxation arrangements have been a fundamental factor in the significant plantation expansion that has occurred over the last ten years or so. New plantation establishment has averaged around 80 000 ha per annum over that period. The majority of these plantations are short rotation hardwoods (Eucalyptus globulus) intended for the export pulpwood market.

The Review of taxation arrangements is at least partly in response to various objections to plantation expansion. These objections include economic arguments ("plantations should not be treated favourably", "plantations are not a good investment") and land use change arguments ("plantations are not a good use of productive land"; "plantations are not good neighbours").

The plantation industry has been arguing strongly for the retention of the current arrangements beyond the current sunset in June 2008. However, the industry also supports modification of the system to encourage greater investment in longer rotation (solid wood) plantations. The short time horizon of the majority of investors and the lack of a secondary market for immature plantations has resulted in the current emphasis on short (10 year) rather than longer rotation plantations.

The review has still not reached a conclusion.

Fuel prices

The current very high world oil prices and resultant high transport fuel prices in Australia are having a significant adverse impact on the wood products and paper industry in Australia. Transport, and therefore fuel, is a major component of the cost of logs delivered to mills and finished products delivered to markets. This is particularly the case in Australia where there are large distances between some plantation regions and the major city based markets and export ports.

SFM certification

The past 12 months has seen continued activity in relation to Sustainable Forest Management (SFM) certification in Australia although there have been relatively few additional certifications following the major increase in the previous year. Some ten major Australian forest owners are certified to either the Forest Stewardship Council (FSC) or Australian Forestry Standards (AFS). The FSC certified forests are virtually all privately owned plantations while the AFS certified areas include both public and private plantations and public native forest. More than one third of the Australian plantation resource now has SFM certification.

Moves are afoot to create FSC Australia and develop an FSC National Initiative. However, this exercise is likely to encounter significant difficulties, as has been the case previously, because some Australian ENGO's refuse to accept FSC certification of native (natural) forest harvesting operations in Australia. In a perverse reversal of the situation in many other parts of the World, these ENGOs will only support timber production in plantations.

The Australian Forestry Certification System (AFCS) is accredited under the Programme for the Endorsement of Forest Certification (PEFC) scheme. The changes made to the PEFC scheme have raised some challenges for the AFCS as making changes to the AFCS is not a simple process because of the consultation and approval processes required. The potential for the UK CPET process and other European Governments' purchasing policies discriminating adversely against the AFCS and has required significant effort from Australian industry and government and even delegations from Australia to Europe.

Despite the progress outlined above there has been little change in market demand for certified wood products with virtually no labeled product to be found in the marketplace.

Sustainability action plan

On behalf of the plantation products and paper industry, A3P has developed and launched a Sustainability Action Plan. The Plan was developed following extensive consultation with A3P members and stakeholders, including the major environmental NGOs.

The Plan covers 21 major issues including greenhouse emissions, certification, chemical use, water use, investment, safety and sustainability reporting. Key features of the Plan include quantified, measurable targets and a commitment to regularly reporting progress.

The development of the Plan has enabled more constructive engagement with the environmental movement and will help the industry demonstrate that it is competently managing important issues.

Illegal logging

As part of its 2004 election policy the Australian Government made a commitment to investigate ways of preventing the importation of illegally harvested timber into Australia. Not surprisingly this is proving more difficult that the Government expected because of definitional, administrative and trade implications.

WWF is promoting a statement on the importation of illegally logged timber into Australia and A3P has been endeavoring to work constructively with them on this initiative. There appears to be much less focus on dogmatic promotion of FSC certification as the only mechanism for preventing illegal logging

Water

Much of Australia continues to be gripped by the worst drought on record which has provided increased impetus to moves to reform the system of water management and allocation in Australia. In June 2004 the Australian Government and the Governments of South Australia, Victoria, New South Wales and Queensland signed the National Water Initiative (NWI). The NWI outlines a range of commitments to reform (reduce) water allocation for agriculture and return water for environmental flows. Most of the changes will be introduced via a regionally based planning and management approach.

Unfortunately, despite our best efforts, the NWI identifies change of land use to industrial scale plantations as an example of a potential 'significant water interception' activity which may be subject to regulation depending on further consideration of significance and the level of commitment of water in the catchment concerned.

The State governments are now grappling with the implementation of the many complex aspects of the NWI and the technical complications associated with quantifying plantation water interception appear to have delayed any precipitate action to regulate plantation expansion in most areas.

Climate change

The Australian Governments' position of non-ratification of the Kyoto Protocol has not changed and seems unlikely to do so. This has led the State Governments to continue to talk-up the possibility of a State-based emissions trading system. To date only the New South Wales government has made any substantial move in this direction with its electricity benchmarks scheme which requires generators to improve their efficiency from the greenhouse perspective and permits trading of credits (including forestry sequestration credits) to achieve this.

Australia is part of the Asia-Pacific Partnership on Clean Development and Climate (AP6). This initiative will focus on industry government partnerships that expand investment and trade in cleaner energy technologies. The eight work programs include cleaner use of fossil fuels, renewable energy and distributed generation, power generation and transmission. Some energy intensive sectors are covered such as steel and aluminum, though not pulp and paper.

The Australian Government is investing significant funds through industry partnerships in low emissions technology, particularly carbon geo-sequestration. Recent political debate has also turned to the potential of nuclear energy including Australia's current role as a supplier of unprocessed uranium and possible expansion into enrichment, power generation and waste disposal/storage.

Energy market reform

The process of reforming the Australian energy market from a publicly owned system with limited interconnection between State based systems into a fully integrated and market based system is continuing slowly. There are major concerns for energy users that the failure to invest in new infrastructure and undue influence exerted by the large electricity generators may result in significant cost increases and/or a deterioration in the reliability of supply in the future.

BRAZIL⁵

Who we are?

The Brazilian pulp and paper industry, represented by Bracelpa, comprises 220 companies, 35 of which are frequent exporters – located in 450 municipalities, in 16 states. Its pulp production reached, in 2005, 10.1 million tons ranked as the 7th biggest pulp producer, and the paper production 8.6 million tons, 11th producer. Brazil is the nº 1 producer and exporter of bleached hardwood market pulp.

Emerging issues

Brazil is one of the poles of the growing pulp industry, thanks to the high productivity of its planted forests.

Its growth has nevertheless to overcome several obstacles:

Capital Costs: The interest rates in Brazil are stratospheric, when compared to the rate applied in the world market, even when obtained through the development bank.

Infrastructure: As the mills are mostly located in the countryside far away from industrial and urban areas with regular infrastructure, they have often to compensate this structural deficit in social terms, providing support in healthcare, even building local medical centers, in education, with classes for all levels, in sanitation, with drinking water and sewer treatment, and communication, logistics structure as ports, road pavement, and other items of high costs.

Taxes: Brazil is probably the only country where industrial investment is taxed. Its level is quite high and is therefore considered a high obstacle, affecting mostly the capital-intensive industry, including the paper industry, which has not installed new machines for years.

Low per capita consumption: The paper per capita consumption in Brazil of 40 kg/inhabitant per year is too small to justify the investment in the pulp and paper industry just for the domestic market.

High monetary valuation: The continuous valuation of our currency, the Real (local currency), against other hard currencies, is impairing considerably the company’s results, since these companies are obliged to export, as the domestic demand is too small.

The domestic investment portion, when shown in dollars, for instance, is not competitive, due to the heavy currency valuation rate, which reached 30 percent in the last 2 years.

Business developments

In spite of the previously mentioned disadvantages, during the last years, the sector has heavily invested, in the technological development of processes and added value products, as well as in environmental improvements and streamline business procedures.

As a consequence, the companies reached a higher international quality standard in productivity and environmental protection both in industrial and forest activities demanding engagement for developing and absorbing new technologies and thus producing differentiated products.

In the last 10 years, our industry invested US$12 billion to enlarge its industrial and forestry activities, emphasizing the pulp production, whose production capacity increased from 6.2 million tons/year to 10.1 million tons in 2005 and the paper capacity which increased from 6.2 million tons, reaching 8.6 million tons in 2005.

Forest Certifications: Basically all pulp and paper exporting mills have certified forests through FSC and CERFLOR (Brazilian Forest Certification Scheme), recognized by PEFC (Program for the Endorsement of Forest Certification Schemes), guaranteeing the origin and quality standards of our products.

Recycling: The consumption of recycled papers reached 3.4 million tons in 2005, with a recovery rate of 46% of the apparent consume.

Recycling in Brazil, besides the environmental benefit, assumes a relevant social role by offering an income option for millions of unskilled workers.

Increasing Forest Fostering: The expansion of our industry has demanded an increase in the planted forest area.

Besides the forests planted by the industry itself, forest fostering has been an attractive alternative for the small family forest farmers by offering the opportunity to participate in the expansion of the forested area, with an excellent income option.

Social Balance: The pulp and paper sector, with a relevant share in the country development, considers social responsibility as one of the aspects of corporate governance concepts adopted by its industry. Bearing this in mind, our companies do not think and manage their activities according only to the focus on financial and productivity results but take upon account the contribution their actions may bring to society. By incorporating a socially responsible attitude in its actions, the sector is an example for other productive segments.

CANADA⁶

What are the emerging issues facing the industry in your country?

Industry restructuring

• Emerging consensus of secular decline in demand for paper in North America, beginning with newsprint

• Rationalization and consolidation will continue as companies adapt to market challenges

• Market Acceptance

• Working to promote the industry’s environmental and corporate responsibility

• Boreal Campaign

• Environmental campaigns are targeting Canadian industry customers

What are the most important business developments within your industry over the last year?

• Canada-U.S. Softwood Lumber Dispute

• Continued Appreciation of the Canadian Dollar

• High wood fibre prices and availability constraints in eastern Canada

• Rising energy prices, particularly in central Canada (Ontario)

• Challenging markets for pulp and newsprint

2005 Results overall

No matter how a Canadian forest company began 2005—profitable or unprofitable—it did less well as the year went along, especially after energy prices began to soar heading into the summer. Higher energy prices pushed up manufacturing costs, made it more expensive to haul logs to the mill and to deliver finished products, and drove the Canadian dollar to its highest level in 14 years. In June, the dollar sat at the 80-cent U.S. level, and over the next eight months added almost 6 cents. The impact of higher energy and fibre prices, continuing softwood duties, structural demand changes for pulp and many paper grades, a home construction market coming back down to earth, and the strong dollar is forcing many Canadian companies to review the viability of their domestic manufacturing assets. While Canadian lumber and OSB shipments to the United States set records yet again (mainly because the residential construction market was still growing early on), pulp and paper shipments declined 3.5 percent. That decline is likely to continue as the full effect of capacity reductions announced last year is felt. Over 2.7 million tons of paper-making capacity are being removed, the largest drawdown since the 1990–92 recession. Several sawmills also face closure. The expectation is that 2006 will be difficult for most of the same reasons that 2005 was, which will keep the spotlight on the need for transformative change to improve the industry’s underlying fundamentals.

Lumber and panels

It looked for a time as if nothing could stop the long-running North American housing boom, but each rate hike by the U.S. Federal Reserve slowed the housing market. Lumber, plywood, and OSB prices came off their peaks of 2003 and 2004. Nevertheless, the strong start to 2005 helped produce robust shipments of Canadian lumber—just over 35 billion board feet—and OSB. Shipments to the United States exceeded 21 billion board feet and 9.7 billion square feet, both records.

With most forecasters expecting a weaker North American housing market and expanding capacity for lumber and OSB, 2006 is expected to be a more difficult year for both dimension lumber and panels. Large amounts of OSB capacity are being inaugurated or planned, although manufacturers aren’t likely to see a return for some time to the extraordinary margins they enjoyed during the boom. One important offset to all of the difficulties facing lumber producers is the virtual halving of softwood duties for 2006.

Pulp

Canada’s long-fibre softwood pulp is a premium product that makes a strong lightweight paper; however, the high Canadian dollar and rising fibre and energy costs make Canadian firms high-cost producers. In addition, global market pulp prices have been suppressed by a rapid expansion of supply from several lower cost sources: notably, big Latin American hardwood mills flooding markets with eucalyptus pulp. Additional eucalyptus-based capacity will come on stream in 2007. Technological advances have made hardwood pulp almost as good as softwood pulp and certainly sufficient for some uses. As a result, our pulp doesn’t command a large price premium, which is a hardship for producers with high costs, especially with such a strong dollar. Fortunately, global markets are growing, and Canada’s pulp shipments rose by over 3 percent last year. Our exports to China—our principal overseas customer—rose a further 20 percent, to almost 1.65 million tons.

Paper and paperboard

With more people getting their news online and less white paper and fewer forms being used in the business environment, core areas of Canada’s paper industry face difficult adjustments. Newsprint consumption has fallen by 20 percent since 2000 because of circulation declines and publishers’ attempts to economize by cutting page sizes and switching to lower basis weight paper. Canadian newsprint exports to the United States declined by more than 6 percent last year. By idling operations or converting them to make value-added mechanical papers, newsprint producers have been able to keep remaining operations going nearly flat out. A growing number of these value-added mechanical papers are aimed at the catalogue/direct mail market, with improved characteristics that make them a new competitive threat even to some fine paper grades. Shipments of uncoated mechanical paper grew by almost 4 percent, to over 4.1 million tons, while shipments of uncoated fine grades fell 5 percent. Packaging declined a further 4 percent, reflecting capacity drawdowns amid the ongoing shrinkage of the North American manufacturing sector as more consumer goods are imported already boxed from overseas.

2005 Key statistics

Total Revenue $84 billion

Forestry and Logging $9 billion

Wood manufacturing $41 billion

Paper manufacturing $33 billion

Operating profit $4.5 billion

Share of Canada’s GDP 3%

ROCE 1999-2004 Average 7.9%

Employment

Direct and indirect jobs provided 863 900 (339 900 direct)

Forestry dependent communities (2001) 324

Forest Industry average wage per employee $46 300

National average wage per employee $37 900

R&D spending $506 million

Exports

Export sales $42 billion

Net contribution to Canada’s trade balance $32 billion

(Over 60% of Canada’s Trade surplus, 2^nd largest contributor to Canada’s trade balance)

Environmental

1990 to 2004 reduction in greenhouse gas emissions 30%

Energy derived from non-fossil fuel – hydro and biomass 59%

Protected forest 40million hectares

Certified forest 119million hectares

CHILE⁷

What are emerging issues facing the industry in your country?

While taking office last March, the new government has posed new issues. The first one is their interest to create a Ministry of Environment which will require a project to be submitted to the parliament and which will take at least one year to be approved. Meanwhile, another project has been proposed to provide ministerial rank to the present Executive Directorship of the Environment National Commission, in charge of coordinating the government’s environmental policies and strategies. Also, the government is seeking to modify the Environment Framework Law passed in 2004. This is a reflection of the relevance that the new authorities are providing the environment issue with. For the private sector, these announcements are considered as an opportunity for institutional improvement, but also a threat, as new actors and proposals might bring about uncertainty.

In addition, the new government has activated the Native Forest Law Project, whereby incentives for promoting its sustainable management are being sought. The project has been under discussion in the parliament for 14 years, and despite multiple modifications, it has not been approved yet, even, after a broad agreement reached two years ago through a joint effort made by the public and private sectors as well as environmental groups.

A harder pressure is being observed on the environmental groups’ side, using the new on stream local industrial pulp projects as a drive. Pressures are basically questioning developments in press articles, which are tied to new investment being made in the same sector in Uruguay.

What are important industry business developments?

New investment: As Pine and Eucalyptus plantations approach their harvest age, the forest industrial sector is now coming into a new industrialization stage, characterized by capacity expansions in pulp, wood based panels, lumber and remanufactures. In the 2006 second semester, two new pulp projects will enter operations. One is a new mill with 700 thousand MT capacity which will produce bleached Radiata pine and Eucalyptus pulp; the other one is an expansion with an added capacity of 780 thousand MT of Eucalyptus bleached pulp.

Although exports topped in 2005 with a new US$3.5 billion record, and are expected to further expand by 6 percent during 2006, forest products companies, as well as other export oriented companies, have lost competitiveness by the strong Peso appreciation v/s the US$ Dollar.

Over these last years an expansion of small owners’ plantations has been observed, which has meant that the afforestation rate between 2002 and 2004 has expanded from 46 200 to 68 200 hectares. If reforestation is included, annual plantation rate has grown from 88 thousand to almost 131 thousand hectares in the period.

At the end of 2005 the country reached two new trade agreements. One Free Trade Agreement with China and a Partial Reach Agreement with India. Presently both proposals are in the stage of ratification in the parliament and are expected to enforce during this year’s second semester. On the other hand, at the beginning of the year, the final negotiations to reach a Free Trade Agreement with Japan were initiated; they are expected to come to an end next September.

COLOMBIA⁸

Emerging issues facing the industry in the country

Trade

Colombia is finishing negotiations of a Free Trade Agreement with USA. The agreement must be approved by Congress in both countries. The paper industry must be prepared for that strong competition in the near future.

Venezuela, one of the main markets of Colombia’s paper industry announced that they will leave the Andean Community. This decision may affect the exports to this country since once more bilateral trade will be subject to tariffs.

Energy

In the middle 1990’s Colombia changed from a state owned system to a mixed one where both private and public sectors compete in the provision of electricity. The national regulation commission is studying a charging system known as “charge for capacity” which will result in higher prices. The necessity of such system derives from the low investment in infrastructure expansion.

Colombian Economy

Today, the Colombian economy is expanding in all sectors, driven mainly by construction and industry. The country is showing improvement in competitiveness and has achieved important progresses in R&D and in opening new markets. The rise of investment rates in recent years support a bigger growth scenario in the future. 

The positive economic environment can be summoned with the following numbers:

• GDP grew 5 percent,

• Industry rose in 7 percent,

• Investment increased more than 20 percent

• Foreign trade according to economic performance: exports growing rate is near 30 percent meaning US$20 000 million per year; imports are rising fast, mainly capital goods whose yearly growing rate is over 48 percent.

• Inflation is stable at 5 percent

Pulp and paper Industry in 2005

Paper production grew 3.7 percent, a rate that is less than the whole industry’s, and reached 919 thousand tons. Imports rose 5 percent and exports 6.4 percent. Within imports, several cases have been detected where prices are lower than those of the regular marker price.

The apparent consumption increased 3.8 percent.

Pulp production reached 385 thousand tons which is 1 percent higher than in 2004.

Waste paper recovery for recycling increased 16 percent reaching 562 thousand tons.

FINLAND⁹

The most important forest industry business developments in 2005

On a global level, the profitability of forest industry companies is low compared with many other sectors. A sharp drop in product prices over recent years has been the major cause of the strain on profitability.

Prices of forest industry end products such as paper have been declining for years. At the same time, the industry’s domestic raw material is the most expensive in Europe and the costs of other raw materials and labour have increased. The price competitiveness has been further weakened by rising energy prices and additional transport costs to the principal market areas of the Finnish forest industry in Europe.

Forest industry operates in a global market, where products are priced according to demand; the higher cost levels of the domestic market cannot be transferred to prices. Because of this, in 2005 many Finnish forest industry companies continued to undertake measures aimed at enhancing the efficiency of their business operations and at improving their cost competitiveness.

The forest industry is a significant contributor to welfare in Finnish and European society. The forest sector provides jobs that would in many places be difficult to replace with other industries or services. Jobs in the forest industry enable many rural and sparsely populated areas to remain viable.

Our main objective during Finland’s coming EU Presidency will be to highlight the use of renewable natural resources. The decrease in the environmental impacts of the forest industry is also an indication of sustainable development. The output of Finland’s forest industry has increased significantly in the past decades, while emissions into the air and discharges into water have fallen to a fraction of what they used to be. Although many important targets have already been attained, our aim is to improve our operations continuously in cooperation with our interest groups.

Emerging issues facing the industry in Finland

Rising energy prices

Emissions trading launched in European Union has significantly increased the energy costs of process industries in Europe. At the same time it has weakened their competitiveness compared with industries in countries not participating in emissions trading.

Instead of quotas and restrictions, it would be more productive to promote efficient and low-emission operations. The EU should also not unilaterally commit itself to further reductions in emissions trading, unless the system can be extended to those countries that generate the most emissions. European quotas and restrictions harm the competitiveness of the European market and accelerate the “carbon drain”, i.e. the relocation of production to regions where these restrictions do not exist.

The Finnish forest industry uses low-emission energy on the whole. The principal energy sources are wood, hydro power, nuclear power, natural gas and peat. About 75 percent of the fuel used at the mills themselves is wood-based. Although the forest industry combined uses about one third of all electricity consumed in Finland, forest industry mills account for less than 10 percent of Finland’s carbon dioxide emissions, and less than 15% even if the emissions caused in the generation of purchased electricity are taken into account.

Continued availability of raw material should be addressed in the future

Finland is one of the world’s leading forest industry countries. Although we account for only a small percentage of the world’s forest resources and wood harvesting, we produce a significant proportion of the world’s forest industry output and particularly the world trade in the sector. Finland is the sixth largest producer of paper and paperboard in the world, and the second largest in Europe, second only to Germany. We produce about 15 percent of paper and sawn timber in Europe and have 12 percent share of global trade of paper and paperboard.

In spite of the large forest industry, Finland has a proportionally larger area of protected forests than any other country in Europe: 7.2 percent of all forested land. There are 1.76 million hectares of protected forests in Finland, an area over half the size of Belgium.

Biodiversity Programme for Southern Finland and Ostrobothnia (METSO) was developed to provide forest owners with a range of ways in which to place forest land voluntarily under protection in return for compensation. Voluntary protection measures have been favorably received by forest owners and the industry sees that this is the right path to continue on. During the pilot stage of the biodiversity programme, which runs until the end of 2007, experiences from voluntary protection will be collected and the effectiveness of protection measures based on voluntary measures taken by forest owners will be evaluated.

Towards improved productivity and more flexible labour market practices

In 2005, the Finnish paper industry raised public debate on production cost factors, since only companies that manage to cut production costs and increase productivity can prosper in the global competition. Consequently, the main issues were the increase in labour costs in Finland at a rate greater than in our competing countries, the slowing down of our productivity growth compared with our competitors, and the weakening of our competitiveness.

The paper industry employers in Finland want to launch more flexible ways to operate at the pulp and paper mills and have started to introduce the same operating principles which are already in use in Europe. For instance, the employers want to remove restrictions on subcontracting in the collective labour market agreement regulating the operations at the Finnish mills.

Finnish Forest Industries Federation and the Finnish Paperworkers’ Union agreed to enter into dialogue in a working group concerning the challenges posed by future competitiveness. The purpose of the working group is to generate information that enables the detection of changes caused by globalization. The parties will also investigate the potential for promoting employment, productivity and effective good practices at every mill.

GERMANY¹⁰

General economic situation in Germany in 2005

The German economy was in a process of gradual recovery in 2005, although with occasional setbacks at first. It was not until the second half of the year that a slight acceleration was noted. Self-supporting and wide-ranging economic recovery has still not been achieved. The gross domestic product (GDP) improved by just 0.9 percent compared with the 1.6 percent growth of the previous year. Overall economic development was particularly hampered by the massive increase in oil prices, not least as there was no increase in the euro exchange rate in 2005 to attenuate the situation.

The rise in the GDP was attributable in particular to a powerful growth in exports, while domestic demand remained weak. In view of the continuing fragility of the employment market, consumer expenditure declined, nor was there any appreciable dynamism in equipment investment, although initial signs of a turnaround in this respect were perceived at the end of the year. The revival of investment activity was not, however, sufficient to bring about a tangible improvement in the employment situation in Germany.

Performance of the pulp and paper industries in 2005

In 2003, the five pulp factories in Germany produced 850 000 tons of pulp. The start-up of a new pulp factory increased pulp production in 2005 to 1.4 million tons. Germany is a major pulp producer, the sixth largest in Europe. Exports from Germany amounted to 790 000 tons, while 4.1 million tons were imported.

As in the two previous years, the German paper industry in 2005 fared better than the economy as a whole. In terms of volume it was a successful year and German pulp and paper manufacturers saw a manifest increase in production of over 6 percent compared with the previous year to a total of 21.7 million tons, following a 6 percent increase from 2003 to 2004. This development was partly accounted for by the new capacities, which were used above all for export markets.

The new production volumes were absorbed to a large extent by the market. One indication of this is the fact that machine utilization rose on average from 93 to 94 percent. The 5 percent increase in production capacities was slightly behind the growth in production.

In a long-term perspective, the paper industry remains a growth sector. The increase in production in Germany over the last five years has averaged at 3.6 percent annually – even more than was forecast in the late 1990s.

The record results in 2005 made Germany by far the largest producer country in Europe, rising to fourth place worldwide after the USA, China and Japan and ahead of Canada. The driving force behind this positive development was once again export business where the impressive 9 percent growth to 12.6 million tons being mainly attributable to the high growth rates in Eastern Europe.

The vital domestic market improved by just fewer than 2 percent, slightly more than the previous year. Apparent consumption declined by 1 percent to 19.2 million tons, well below the GDP. The drop in imports of 3 percent to 10.1 million tons was even more pronounced than the decrease in consumption in Germany.

In spite of good sales development, the revenue situation in the paper industry remains unsatisfactory. Although the drop in paper prices slowed down markedly in 2005, the difficult competition and the considerable rises in some raw material prices, transport and, above all, energy, once again meant that cash flow was just 9 percent and pre-tax profits a mere 3 percent, compared with 18 percent and 11 percent respectively in 2001. For a capital-intensive sector like the paper industry, revenue in 2005 was by no means sufficient.

e=estimated

HUNGARY¹¹

In 2005 the Hungarian economy can be characterized by a slightly slackening but still growing performance. The Gross Domestic Product increased by 4.1 percent but the growth was mainly fueled by an overspending of government and accompanied by increasing unemployment. The unemployment rate has reached 7.2 percent. Last year the inflation decreased to a joyful bottom of the decade, amounting to 3.6 percent. The indebtedness level of the country gives cause for alarm. The deficit of the current account amounted to 7.3 percent of the GDP.

Pulp

In Hungary there is only one small straw pulp mill with a capacity of approx. 30 000 tons. This mill was essentially rebuilt in the last two years and it was made suitable for the production of flax pulp. Bleaching was changed into elementary chlorine free (ECF) treatment. The Hungarian pulp production and consumption in 2005 are shown below.

Thousand metric tons [MT]

Paper

The statistics show a decrease in the paper consumption in 2005. However, this figure has to be considered doubtingly. In 2004 the country switched over to the European statistics, so we think that only the production and export data of the following table are today reliable and comparable to the previous years. We will do our utmost to get acceptable figures also on import in the next years. Here is the development of paper consumption and production of the last years, according to the statistical office:

Thousand metric tons [MT]

The breakdown of the paper production by main grades is shown as follows:

Reason for this decline was that the old paper mills of small capacity could not reach the production level of previous years and the output of the bigger mills has not counterbalanced their decrease.

For paper production the industry used 370 thousand tons of recovered paper reaching an utilisation rate of 65 percent.

Main characteristics of the Hungarian paper industry:

− Small size industry

− Small capacity, locally focused production units

− Concentrated, 2 companies represent 90 percent of the production

− Energy prices are high

− Prices are pressed, profit is low

ITALY¹²

Paper and board production in Italy reached 10 million tons during 2005 with an increase of 3.4 percent compared to previous year. Turnover was also up but at a lower rate of 2.2 percent to 7.4 billion Euro.

The different trend of production and turnover can be better perceived with reference to the 5 year period 2001-2005, when production was up 12 percent while turnover down by 2.5 percent. This of course affects profitability which also heavily resents of increasing operational costs, particularly energy.

Natural gas costs, which are the main item of the energy bill for the Italian paper industry, increased by 25 percent in 2005 and a further escalation of 40 percent is taking place in 2006 for an average paper mill due to the indexation with oil prices. The increasing energy costs is coupling with a structural competitive penalisation for Italian companies which are paying on average prices 30 percent higher for electricity and 20 percent for natural gas than in other EU Countries.

Further costs are deriving from the implementation of the EU Emission Trading directive which is causing heavy distortions on the markets and, in our opinion, needs to be revised and corrected.

Another major issue for Italian paper companies in the last year has been the increasing cost of management of waste particularly from the recycling process. Utilisation of recovered paper has reached last year 5.5 Mt with a consequent increase of waste. Unfortunately, at present this waste can be recovered for the production of energy only for 11.5 percent of the total because of strong oppositions at local level to the installation of incineration plants.

Together with recovered paper utilisation also internal collection has notably increased in 2005 to a new record of 5.8 Mt with a collection rate over 50 percent. It has to be noted that the remarkable increases which took place in internal collection transformed Italy from a net importer to a net exporter of recovered paper.

Also pulp imports went up in 2005 to 3.5 Mt (+6.8 percent). Demand for certified products has increased both in tissue and graphic sectors. So far at national level a relatively good coexistence has been possible between the two major systems of forest certification.

JAPAN¹³

What are the emerging issues facing the industry in your country?

• Increase in raw materials, energy, and other production costs, is significantly affecting companies' profits.

• Merger and Acquisitions including distribution will most likely continue in the industry.

• Global Warming is still one of the most important issues for the industry in Japan.

• Efforts to combat illegal logging have been made by the Japan Paper Association (JPA): developed action guidelines at our March 20, 2006 Board Meeting.

• Increasingly intensified market competition are forcing to companies to make critical efforts to strengthen their management through further integrating production, improving productivity, reducing distribution costs, and developing high value-added products, etc.

• JPA set new target for utilization rate for recovered paper:

• By FY2010, achieve utilization rate of 62 percent.

What are the most important business developments within your industry’s economic/business performance for the past year?

• Japanese economy in 2005

• Real GDP increased by 2.7 percent from the previous year.

• Positive real GDP growth rate of 1.9 percent in 2006 is anticipated by Japanese government.

• Performance of the Japanese pulp and paper industry in 2005 over the previous year.

• Paper and paperboard production inched up by 0.2 percent to 30 951 thousand tons.

• Domestic shipments of paper and paperboard remained flat at 30 867 thousand tons.

• Imports of paper and paperboard fell by 10.6 percent to 1 754 thousand tons.

• Exports of paper and paperboard dropped by 13.8 percent to 1 240 thousand tons.

• Recovered paper consumption inched up by 0.3 percent with a utilization rate of 60.3 percent.

• Recovered paper exports increased by 30.9 percent to 3 710 thousand tons, 3 108 thousand tons of which were shipped to China accounting for 83.8 percent.

• 12 listed paper and paperboard companies' sales for fiscal 2005 inched up by 0.5 percent, while recurring profits dropped by 14.7 percent.

Major topics in the industry

• Some companies announced capacity expansion or scrap-and-build to strengthen their competitiveness;

1. Daio Paper Corporation announced in June 2005 to invest 45 billion yen (US$409 million) to install a new machine at its Mishima mill, which produces coated paper with capacity of 288 thousand tons per year. New machine will start operation in fiscal 2007.

2. Nippon Paper Industries Co., Ltd. announced in May 2006 to invest 63 billion yen (US$573 million) to install a LWC machine at its Ishinomaki mill with a capacity of 350 thousand tons per year. The new machine is scheduled to start operation in November 2007. At the same time, Nippon Paper will shut down 6 coated paper machines. The total capacity of the 6 machines is 340 thousand tons per year.

3. Hokuetsu Paper Mills Ltd. announced in May 2006 to invest 55 billion yen (US$500 million) to install a new machine at its Niigata mill. The machine has the capacity of 350 thousand tons per year and produces LWC. Start-up is due at the end of 2008.

n In Japan, the forest certification system named “Sustainable Green Ecosystem Council (SGEC)” was established by private forestry sectors such as the Japan Forestry Association and launched in June 2003. The system has been developed in consideration of the nature of Japanese forests. More information can be obtained by accessing their website, www.sgec-eco.org

MALAYSIA¹⁴

The paper and packaging industry in Malaysia has since 2003/4 been facing stiff competition mainly due to over capacity of corrugators and converters as a result of several relocation of multi-nationals to new markets, mainly to the People's Republic of China, Republic of Vietnam and such other countries of Asia. Although the situation has stabilized and the paper industry is picking up again, the environmental regulatory enforcement has come to a stage that new laws are at the draft stage for a more rigid control for the quality of environment with the Clean Air 1978 Act being amended to be in line with the world (Advance Nations) Standard.

The search for alternative fibre is still in progress apart from those already on pioneer production status, utilizing the fibre of the Empty Fruit Bunches (EFB) of the palm oil trees and the kenaf plants. Both sources of raw materials have proved to be costly and further the fibres produced thereby could readily be utilized for other more lucrative products. The alternative to date appears to be to fall back on the new species of the acacia family plants.

There has recently been a marked change in the climate, especially the last few months of the year 2006, when the dry season which should have been from middle of February has instead become a rainy season with heavy tropical downpours and thunderstorms and an increase in lightning and thunder occurrences. One of the consequences of these was the series of serious flash flooding to affect the towns and villages occurrences unheard of before. In one instance in the suburb of Kuala Lumpur (Damansara Damai near Sungai Buloh Forest Research Institute of Malaysia (FRIM)), it was reported that about 30 motorcars were swept by the fierce flood water and at the 9th milestone Kuala Langat area, water level on the road was about 5 feet. The explanation for all these was that the weather has become warmer by a few degrees and that there is definitely something serious occurring, closely following the tragedy of the tsunami of 2004/5 and the Gunung Merapi Jawa (volcano) becoming suddenly active again.

One of the most important economic planning for the country was the launching of the 9th Malaysia Development Plan, a 5 yearly development plan for the nation to forecast an average of approximately 6 percent GDP growth (2006 - 2010) with effect from 1 April 2006. Malaysia has targeted the year 2020 to reach the status of a developed nation and the end of this 5-year development plan would mark the halfway stage towards that objective.

MEXICO¹⁵

Emerging issues facing the industry

Imports

A number of paper imports have been detected during 2005 which competes against various products that are manufactured in Mexico. These imports have damaged several segments of the paper industry because they have been introduced into the country at prices (and sometimes qualities) far below those of their own domestic markets (dumping). Furthermore, some cases of illegal introduction into Mexico have been found.

These events have resulted in paper machine shutdowns, and in certain cases, closure of complete plants. Additionally, these imports have resulted in a lower level of fiscal revenues for the government.

Energy

The supply of fuel from Pemex – state monopoly – is far away from international parameters of competitiveness in terms of price and quality. For instance, natural gas is marketed at a price which is around three times above its cost, and fuel oil for exports is sold 30 percent cheaper than the one which is delivered to the domestic industry.

Electricity also has a high cost in Mexico coupled with the fact that it has a large variation in terms of quality (i.e. voltage), which results in another important source of low competitiveness.

Water

The high cost of extraction permits and licenses is a constant issue for the paper industry since it is a cost element that places this industry in a situation of low competitiveness against other countries, where this cost is minimal or does not exist at all.

Margin erosion

As a result of high costs of inputs (electricity, gas, fuel and water) and the lack of demand due to the low growth of the Mexican economy, margin deterioration has occurred during the past three years in our industry. This has resulted in investment decisions being delayed or cancelled and a loss of share in both domestic and international markets.

Business developments

Forestry

A pre-feasibility study of the possibilities of the forest industry in the Gulf of Mexico has been developed by the Foreign Affairs Ministry as part of the Plan Puebla – Panama. The objective of this study is to determine the technical, economical and social feasibility of an integral project for the development of forestry regions in Mexico for the production of chips and several types of wood products, in addition to the determination of the feasibility of pulp production from commercial forestry plantations.

A second phase of this study will include a series of alternative scenarios to define the potential for development of the forest industry and the production of raw materials. Under this analysis, three scenarios will be developed: (I) optimization of the current situation, (II) with investment in basic products partially integrated, and (III) investment based on the maximization of the value added due to a high integration.

Environmental

In September 2000 the Paper Industry Chamber and the ecological authorities from the government (SEMARNAP) signed an agreement aimed to reduce the pollution levels of the Paper Industry in the Metropolitan area of Mexico City. As part of this agreement, additional investments for US$60 million have been committed by several paper companies in Mexico during the last year. This amount is 46 percent higher than the original investment committed at the time of the agreement.

After three years of stagnation, the Mexican economy began to grow in 2004 and 2005, albeit at comparatively low rates. The improvement in the United States' industrial output boosted exports and gave a fresh impetus to private investment. Price stability helped to maintain purchasing power and retail sales rose. Yet growth failed to rise above or even equal the 4.2 percent growth rate of 2004, but fell back to 3.0 percent in 2005.

Mexico's proximity to the United States, however, and the implementation of prudent economic policies designed to ensure the stability and solidity of the banking sector (three important pillars of the Mexican economy) enabled the country to achieve stability.

However, China's share of the international markets has also faced Mexico with a formidable competitor for capital flows, making it all the more necessary to carry through structural reforms to enable Mexico to exploit the opportunities offered by economic globalisation.

Forecast

The present government will be leaving a number of major challenges at the end of 2006 that will have to be addressed in order to hasten the pace of economic growth, which is urgently necessary if the country is to generate the number of jobs required and avoid social unrest. The most important challenge is to complete the outstanding structural reforms, for which broad political agreement is needed.

The economic prospects for 2006 indicate a stronger domestic demand driven by private consumption and bank loans, and by the improved performance of the United States' economy. However, because of Mexico's presidential elections in June next year investors must be induced to adopt a wait-and-see attitude. We nevertheless believe that the economic conditions will remain solid and enable us to move towards 2007 with greater dynamism. The risks have to do with oil prices and a possible adjustment to the United States' economy.

GROSS DOMESTIC PRODUCT

A cursary glance at the figures for the industrial sector shows that, in 2005, domestic industrial output as a whole rose by 1.6 percent, manufacturing by 1.2 percent, while Branch 31, Paper and Cardboard, rose only slightly by 0.9 percent. The aggregate national GDP rose by 3.0%.

Consumer National Prices Index

National GDP 2005

THE PULP AND PAPER INDUSTRY IN 2005

PULP

Due, unfortunately, to the age-old problem of the lack of legal certainty in the forestry field, the prospects for this industry remain gloomy, as shown by the figures for total pulp output which rose by a mere 1.4 percent in 2005 above the total output in 2004, to reach 297 000 tons. Conversely, in 2005 imported pulp consumption rose by 4.2 percent to 546 000 tons.

Over the same period, the consumption of imported secondary fibrous raw materials rose by 4.1 percent to 1 364 000 tons. Fibrous raw material imports accounted for 37.8 percent of the total fibre consumption for paper production.

PAPER

In 2005 total paper production in Mexico rose by 2.9 percent, to reach 4 449 000 tons in terms of volume, from 4 324 000 tons in 2004.

An analysis of the different types of paper manufactured by Mexican industry shows the following increases in output: newsprint 1.5 percent, printing and writing paper 4.4 percent, cardboard for boxes 2.3 percent, paperboard 1.5 percent, paper for medical use and facial tissues 5.6 percent, and specialty paper 21.9 percent.

The difficult state of the international pulp and paper market is constantly driving imports to the Mexican market, sometimes unfairly, not to say illegally: for example, the items registered as other types of printing and writing paper, which rose by 14.8 percent; bags and wrapping paper by 22.9 percent, imports of cardboard for boxes rose by 6 percent and specialty paper imports by 12.1 percent.

Lastly, apparent consumption for 2005 reflected a 4.5 percent growth rate of which, as we have seen, imported paper accounted for a significant 34 percent of Mexico's apparent consumption.

The efforts being made by the industry to take on international competition in a scenario, in which Mexico is totally disadvantaged, can clearly be seen from the 3.3 percent fall in exports. In 2005 the industry exported a total of 248 000 tons, compared with 256 000 tons in 2004.

PORTUGAL¹⁶

Emerging issues

Legislation

A new set of policy instruments is under preparation by Portuguese authorities, covering various areas of activity affecting the pulp and paper industry in different ways. The impact of all the various initiatives is difficult to evaluate, particularly because of conflicting interests between public agencies leading to inconsistency of general policy objectives.

Land use and forest management

A new Forest Strategy has been under public consultation. Additionally, a new proposal for a national Plan on Land Management is also under public consultation, as well as a new Strategy for Biodiversity Conservation and a Strategy for Rural Development. Regional forest land management plans have been elaborated and are now under a decentralised process of adoption. Links between all these land management instruments are not evident. Whenever they are evident, for instance between the forest strategy and the regional forest plans, the strategic orientations will not be possible to implement due to specific conflicts with the regional plans. This situation may lead to a confusing environment for private investment in forestry and conflicts within public agencies.

Water

Within the Water Framework Directive, new legislation is being prepared. Particular concern is related with water pricing mechanism. This issue is under ‘informal’ discussion. Government so far has not discussed with industry sectors (although making available a proposal to the Industry Confederation) and is prepared to charge heavily on water uptake and disposal, pollution charge, and use of public domain related with river, estuaries and sea. The impact of the new legislation is not clear due to possible misinterpretations of the current proposal. In addition to the economic consequences, links with IPPC Directive are inexistent and extra bureaucracy is highly probable.

Energy

Heavily influenced by the severe forest fires of past years the government created conditions for new investments on biomass power plants assuming that they can contribute to “clean” the forest. These new units may create important distortions on raw material availability for the forest based industries, due to green energy prices, impact of CO₂ emission trading schemes on alternative energy sources and local market conditions. Wood procurement for energy is already a developing activity in Portugal.

Forest fires

A new Plan for forest fire prevention, detection and combat has been published and is under implementation. Expectations on its efficiency are high. As paper industries owning forest resources also have private infrastructures and organization against forest fires, special care is required to provide a proper coordination between the new public organization and the industry one.

Wood availability

After the forest fires of the past three years the forest resources are under strong pressure for domestic use as well as for exports. A National Forest Inventory is under progress and results are expected until Summer. Elaboration of forecasts will be of great importance for the industry particularly due to the current development of the legal framework.

CO2 emission trading regime for 2008-2012

The setting up of the emission trading scheme for the first period of commitment, without a proper evaluation of the experimental period, is a demanding exercise for companies operating under strong competitive factors.

BREF

The BREF document on Energy efficiency is now under consultation for comments, while the BREF on Pulp and Paper is on preparation for revision. Being essential documents for the future working environment, this work demands a large effort from the industry.

Forest fires in 2005 were the second worst year ever. Wood supply to the industry may become a major issue in the years to come. Also large areas have to be reforested and that represents a challenge and an opportunity. The need to build a more resilient and more productive forest is obvious, but it requires the mobilization of thousands of small forest owners. Population in the areas affected by last years’ forest fires will also be affected for a large period of time.

Business developments over last year

The SCA owned company Nisa, producing domestic and sanitary paper, announced its closure.

Stora Enso announced its decision to divest in CELBI, a Kraft eucalyptus pulp mill at Figueira da Foz. The process is expected to be finalised in June/July 2006. The announced intention to invest in a new paper machine by Portucel Soporcel Group (UWF), on the meanwhile confirmed as a decided project. Consolidation taking place through the purchase of Portucel Tejo (now called Celtejo). The new group, named Altri, also purchased 50% of Bioelectric, a biomass based energy producing company.

Performance of the paper and wood industry – 2004 / 2005

Provisional data relating to forest fires recorded in 2005 points to 35 647 occurrences, corresponding to a total burned area of 325 thousand hectares, of which 208 thousand hectares were forest stands.

This was a year with a long Summer, that followed a very dry Winter. It was, in fact, the second worst year ever, after 2003, when 426 thousand hectares were burned , of which 286 thousand were forest stands.

Production, imports and exports of the main Portuguese forest raw materials in 2004 are shown in the following table:

80%, on average, is tropical timber

The sawmill industry is substantially affected by the availability of pine logs after decades of forest fires. The installed capacity decreased 60 percent to 65 percent in the last twenty years. Exports of sawn pine wood – which have been important in the past (more than 1 million m³ in 1985) – declined to less than 300 thousand cubic metres in 2004.

Production, imports and exports of wood panels in 2004 are shown in the table below:

(1) 83% is MDF

The pulp industry operated at full capacity in 2005 while the paper and board industry recorded an utilization rate of their production capacity close to 93%.

Country wise, pulp and paper production, imports and exports in the last three years was as shown in the following table (2005, estimates):

1) Over 60% are for graphical uses (uncoated)

The recovery rate for recycled paper was circa 38 percent in 2005, i.e., slightly lower than those recorded in the two previous years. Recovered paper consumption is stable at around 300 thousand tons, corresponding to 26 percent of total fiber consumption on the domestic market.

RUSSIA¹⁷

In 2005 and the first half of 2006, Russia continued to experience robust economic growth, reflected by continued growth in Russian pulp and paper output (Tables 1, 2). The growth in Russia’s paper and paperboard output were 1.7 percent in 2005, (6.8 percent in 2004).

The important forest sector policy developments of 2004-2005 in Russia were as follows:

• the Kyoto Protocol ratification by Russia (and its coming into effect in spring of 2005 with new efforts to monitor carbon emissions),

• debates about private ownership of forests in the context of a new Forest Code to be adopted,

• the use of space satellite monitoring for preventing illegal timber cuttings,

• as well as the continuing “forest wars” (legal disputes over ownership and management of certain Russian pulp mills and forest operations).

Both demand and output of pulp and paper products increased in Russia through 2005 and into the first half of 2006. Owing to relative economic and political stability established in the country since the major currency revaluation of 1998 and more expansionary macroeconomic policy under President Putin since 1999, there has been a continuous increase in output of pulp, paper and paperboard in Russia, more than doubling since 1996, although output has yet to reach previous record levels of 1988-1989 pre-transition periods (in the late Soviet era).

In 2005, the Russian pulp and paper sector continued to expand production of pulp, paper and paperboard, particularly the output of paperboard for packaging. During 2005, Russia’s total output of pulp (both pulp for paper and paperboard and market pulp) increased by 0.2 percent, the output of market pulp increased by 0.4 percent, and the output of paper and paperboard increased by 2.7 percent, including a 4.2 percent increase in output of paperboard.

Exports of pulp and paper products hold a dominant position in the total Russian exports of forest-based products, and the overall structure of forest product exports still has a pronounced raw material character. In terms of roundwood equivalents, roundwood timber exports and sawn wood exports accounted for 79 percent of Russia’s exports in 2003, while pulp and paper accounted for only 21 percent of exports (Table 2).

In 2005, exports of pulp and paper products continued to increase. Exports of pulp, paper and paperboard were progressively increasing since 1990 and reached a peak level in 2005. However, Russian exports as a percentage of production have remained largely unchanged since 1996, with exports comprising about 80 percent of output for market pulp, and around 40% for paper and paperboard. (Table 3). Major export destinations for these Russian products are China (market pulp, kraft linerboard), Ireland (market pulp, Kraft linerboard), India (newsprint), and Turkey (newsprint).

Although the tonnage of Russian paper and paperboard exports greatly exceeds the tonnage of imports, the trade balance in value has continued to deteriorate, as Russia has expanded imports of higher value paper products. The annual trade deficit in paper and paperboard has been negative since 2001, and in 2005 it was more than a US$0.87 billion (Table 4). The higher value of imports of paper and paperboard as compared to their exports is mainly due to the fact that Russia is importing rather expensive products such as high quality materials for container and packaging, coated paper, and tissue, whereas less expensive commodity products such as newsprint and kraft linerboard are being exported.

Reconstruction and restructuring of the Russian pulp and paper industry is continuing, with some progress being made towards higher value products with better processing of wood raw material. As an example, International Paper Company announced recently plans to speed up an uncoated free-sheet machine and add 50 000 tons per year of production capacity at the paper mill in Svetogorsk (about 140 km from St Petersburg). The mill is also reportedly installing a coater on a liquid packaging machine to add 15 000 tons/year of capacity. More than US$200 million have been put into reconstruction of the mill in recent years. Office paper produced by the mill supplies presently more than 60 percent of the Russian market demand. In addition, a new 200 000 tons per year aspen-based BCTMP pulp line is planned next year, according to International Paper, which will supply pulp to paper mills in Europe and elsewhere.

It can be noted that future development of Russia’s pulp and paper sector is linked to expanded production of more technologically advanced products (such as coated printing and writing paper rather than newsprint for example), and also more integrated utilization of forest resources.

Implementation of important environmental projects provides examples of steps being taken towards applying the new Russian environmental laws adopted in late 2002 (based on comparison of environmental indices of individual mills and those of “best available technology”, or BAT). For instance, new systems of wastewater local treatment with the use of KWI floatators were constructed at the Syassky pulp and paper mill, SCA Hagen Product, etc. Furthermore, in connection with ratification of the Kyoto Protocol, a number of mills (the Arkhangelsky pulp and paper mill, for example) initiated work on inventorying of greenhouse gas emissions. Such accounting for carbon and greenhouse gas emissions is being done at the Arkhangelsky mill and elsewhere to prepare for limits on emissions and perhaps trading in carbon emissions.

So-called “forest wars” (a journalistic term for legal disputes among managers and owners of forest enterprises) went on in 2004-2005. The Kotlassky pulp and paper mill and the Bratsky pulp and paper mill were both the objects of disputes as before. However, information came to light in the fall of 2004 that the dispute over ownership of those mills was settled and the mills have become the property of the Ilim Pulp Enterprise. At the same time, the Basic Element Company was involved in a struggle for possession of two other mills, the Arkhangelsky pulp and paper mill and OAO Volga – the Balakhninsky pulp and paper mill. In past years such disputes have involved occupation of plants by armed guards (hence the term “forest wars”), but more civil and legal proceedings now characterize the settlement of such disputes.

Table 4. Russian exports and imports of paper and paperboard in 2000−2005 (US$ million)

Sources: State Customs Committee, Pulp. Paper. Board Magazine, PPB-express, PPB Exports, PPB Imports, author’s data handling

Table 1. Output of pulp, paper and paperboard in the Russian Federation in 1995 – 2005 (thousand metric tons, [MT])

Sources: Goscomstat of the Russian Federation; PPB-express, author's data handling

Table 2. Structure of Russian exports of forest-based products in 1990 - 2004

¹ The factor 1,6 is used - source: UN FAO
²The factor 3,39 is used - source: UN FAO

Table 3. Exports of market pulp, paper and paperboard from the USSR (1980 − 1990) and from Russia (1993 − 2004), thousand metric tons , [MT]

Sources: Goscomstat of the USSR, Goscomstat of the Russian Federation, PPB-express, Moscow, author’s data handling

SOUTH AFRICA¹⁸

The South African economy - Background

As the South African Economy becomes more and more integrated into the global economy, so its performance becomes increasingly subjected to global economic movements. In this regard currency fluctuations, investment flows and trade protocols are of particular relevance.

In complete contrast to 2002 where the South African Rand depreciated by some 34 percent against the currencies of its major trading partners, more recently it has staged a dramatic and remarkable recovery to the extent that on a US$ basis, the Rand appreciated by some 46 percent to stand currently at around R6.50 to US$1.00 (during 2002 R12.50 to US$1.00). To some extent this vindicated the opinion of the ‘Economist’ magazine in 2003 that the Rand was undervalued by a margin of 7 percent.Rather than being an expression of the confidence in the fundamental strength and health of the South African economy, this appreciation in value must be judged against the depreciation of the US$. In other words the value shift was caused primarily by external as opposed to internal factors.

Some of the implications of this appreciation from a National perspective were the following:

The competitiveness of S.A. products on overseas markets was reduced which has led to a deterioration in the country’s total trade balance which today is in the deficit.

Company profitability and margins have been squeezed, leading to cost cutting exercises and as a result increased retrenchments and unemployment.

• A reduction in investment flows into the country and in instances an increase in investment outflows.

• A squeezed tax base, leading to the maintenance of relatively high tax thresholds, both on business and individuals.

• A slowing down in G.D.P. growth to fewer than 2 percent, although in the last quarter of 2005, this had picked up to around 3.8 percent.

• An increase in the National Budget deficit, from 1.6 percent of G.D.P. to over 3.0 percent.

From the positive side, the currency appreciation has played a significant role in:

• Reducing the inflation rate from a high of 14 percent at the end of 2002 to around 7 percent at the end of 2003, and 5 percent at the end of 2005.

• Bringing down interest rates from a high of 18 percent to around 11 percent on average by the end of 2003, and 8 percent by the end of 2005.

Aside from the currency situation, declining growth in global and local economies has impacted in physical terms on the demand for locally produced products which had impacted negatively on South Africa’s Manufacturing sector performance and Agri-processing businesses. There has however been some solace to the extent that prices for South Africa’s precious minerals has jumped to record highs (Gold US$700.00 plus; Platinum US$1 200.00 plus).

From an internal perspective, most importantly, unemployment remains a huge problem (40 percent + of economically active population), and cost pressures caused through a high level of administered pricing is increasing at a rate higher than inflation. The HIV/AIDS pandemic sweeping Africa and particularly Southern Africa (S.A. infection rate 11% of total population) is also now beginning to have major economic implications.

Overall therefore economic performance has been lacklustre which is of growing concern given the inability of the economy to absorb the growing population in an economically productive manner. The continuing political upheavals in the rest of Africa (e.g. Zimbabwe, Ivory Coast, Burundi etc) are likewise not helping the situation. The South African economy has however displayed considerable resilience in the face of the problems confronting it and remains fundamentally sound, with a positive future outlook.

Performance of the forest sector

The forestry (timber growing) industry

Situation Analysis

South Africa’s world-class Forestry Industry is a highly productive sector. Although South Africa is home to 1 100 indigenous tree species, it is not well endowed with indigenous forests because of its arid climate, but has a thriving commercial Forestry Industry based on plantations of exotic species. The areas, in which the South African Forestry Industry operates, along its eastern and southern seaboards, are climatically ideally suited to the growing of trees and plantations are intensively managed.

South African plantations cover 1 339 282 ha, 1.1 percent of the country’s total land area. This is less than 0.1 percent of the world’s afforested area, yet the plantations produce 0.5 percent of the world’s roundwood production, making them five times more productive than the average forest worldwide. 82 percent of S.A’s timber plantations are currently certified as being sustainably managed, primarily under the FSC banner. This represents the largest single country plantation certified area in the World.

Plantations are owned by 1 800 registered tree growers. Forestry companies owned 60.7 percent of commercial plantations, with public ownership accounting for 16.5 percent, including SAFCOL (the state owned SA Forestry Company Ltd) and private individuals 22.8 percent. These figures do not include over 18 000 small, emergent black farmers, many of whom are women, growing trees on a micro scale and covering an area of 44 000 ha. This is part of the Forestry Industry’s efforts to promote rural development and economic empowerment through small-grower afforestation schemes.

The Forestry Industry is dominated by the private sector, with state interests (including SAFCOL) currently undergoing restructuring and privatisation, mostly in favour of black empowerment groups. The State forest restructuring programme is now 60 percent complete in so far as its commercial forestry holdings are concerned.

South Africa’s Forestry Industry is labour intensive by international standards, employing some 107 000 people. The Industry has been an important catalyst for rural development and economic upliftment in the poorer areas of the country, owing to its geographic location. However, employment is increasingly becoming an important Industry issue, as the past ten years has seen massive reductions in direct employment by the large timber companies, as they embarked on a process of outsourcing their forestry operations (silviculture, harvesting and transport) to contractors. Although this has had some negative consequences, on the positive side, it has lead to a significant increase in the number of small and medium scale entrepreneurial businesses, many of which are black owned, servicing the Industry’s needs. Nearly 80 percent of all forestry production activities are now outsourced.

Afforestation

South Africa grows a variety of commercial tree species on an area of 1.37 million hectares. Pinus (softwood) species account for 51 percent of the area planted, Eucalyptus species for 40 percent, Wattle 8 percent and other hardwoods for 1 percent.

In terms of management objectives, 57 percent of the area is grown for the production of pulpwood, 36 percent for sawlogs and the balance of 7 percent for other products such as mining timber and poles.

New afforestation reached a peak of 45 000 hectares in 1991 and since then has been falling, primarily due to restrictions placed on its expansion through new licensing procedures which have been introduced, under the National Water Act. The severity of these restrictions is such that since 2000, the net addition to the plantation area has been a paltry 1 564 hectares or an average annual addition of 391 hectares. Given the constraints on afforestation the quest for yield improvement has been tantamount. Major successes have been achieved, with 40 percent yield improvements having been evidenced in Eucalyptus planted on specific sites. The Industry wide yield improvement is of the order of 15 percent to 20 percent.

On average, the Industry looses around 12 000 hectares annually to fire, and another 10 to 12 000 hectares annually due to pest and disease problems. On the current increase in planted areas, the Industry is in fact going backwards.

During 2004 and 2005 the Industry experienced its worst fires, losing 70 000 hectares, and was subjected to a major infestation of the Sirex Woodwasp and an outbreak of Fusarium (pitch canker fungus) in Pine plantations and pine nurseries.

To meet anticipated longer term timber demands it is estimated that the Industry should be adding a minimum of 25 000 hectares annually to its resource base.

Plantation output

Roundwood sales from plantations in 2004 were 20 310 000 cubic metres, up marginally from the previous year, constituting sawlogs (5 350 000 cubic metres), pulpwood (13 074 000 cubic metres), mining timber (964 000 cubic metres), poles (506 000 cubic metres) and other products (416 000 cubic metres).

Almost 98 percent of the plantation output is sold to local processing plants for beneficiation, the remaining 2 percent being export of sawlogs.

By value, the plantation output during 2004 amounted to R4,2 billion, which represents a contribution to total Agricultural G.D.P. of very close to 9.0 percent.

Sustainable Forest Management (SFM)

As mentioned above 82 percent of all commercial timber plantations in South Africa are certified under the FSC banner. Of the areas that remain uncertified most fall within the category of small to micro forestry estates, particularly those belonging to the emerging black grower constituency. The cost of certification and the rigorous standards applied in terms of the FSC, make if difficult for these areas to be certified. Given this the Industry is working closely with the FSC to develop a more appropriate mechanism for certification, through what is known as the SLIMF programme (Small and Low Impact Managed Forests), which will be undertaken on a group basis.

The Industry is also actively involved in the process of developing criteria, indicators and standards for SFM through its participation on the National Forests Advisory Council’s (an advisory body to the Minister of Water Affairs and Forestry) Committee for SFM. It is the Government’s intention to write the C,I&S that are developed into the National Forests Act as regulations. This will pave the way for the development of a National Standard.

The Industry also supports important environmental research and recently published the second edition of its “Environmental Guidelines”. This second edition is far more comprehensive than the first and, in the current absence of a local National Standard, is being used for the physical environment component of the audits required for FSC certification. A process is currently underway to develop a S.A. National Standard for Certification.

The forest products industry

Situation analysis

The Forest Products Industry is controlled by the private sector, with only five of the 203 primary processing plants in the country being owned by the state. Pulp and paper is the largest sector and drives the entire Industry. This sector alone, accounts for 60.0 percent of Forest Products Industry sales and 73 percent of total roundwood intake into processing plants. Sappi and Mondi rank among the largest pulp and paper manufacturing companies in the southern hemisphere and are truly global companies, owning substantial assets in many parts of the world.

This is followed by sawmilling, which accounts for 21.4 percent of roundwood intake into primary processing plants. Decreases in mining activity, combined with the increased use of alternative underground support systems, have lead to lower demand for mining timber. This has, however, had a positive effect on the Woodchip Industry as more hardwood timber has been diverted to this market. There are four major chipping plants currently in operation, all located in Richard’s Bay, with another plant having recently being commissioned in Durban. These plants, which process over 4 million tons of hardwood roundwood p.a., all of which is exported (mainly to Japan), generate revenues of R1.5bn (US$232 million). Other Forest Products Industries include panel products, pole treating, matchwood and charcoal.

Intake into primary processing plants

Intakes into primary processing plants during 2004 amounted to some 22.6 million cubic metres, some 11 percent more than the intake during the previous year. The Table below shows the comparative figures for 2003 and 2004.

Table 1. Intake into Primary Processing Plants 2003 vs. 2004

Production from primary processing plants

The table below shows that between 2003 and 2004, with the exception of Panel Products, all other product category production increased, with the overall increase amounting to 13.7 percent.

Table 2. Production Volumes from Primary Processing Plants 2003 vs. 2004

Note: (1): Excludes production of Dissolving Pulp.
(2): Excludes value of Paper Production.

Performance of pulp and paper industry

The production of pulp and paper in South Africa is given in Table 3 below and the trends shown in figures 1 and 2.

Table 3. South Africa Pulp and Paper Production

Pulp manufacture showed an increase from 2004 to 2005 as the effect of the new digester installed at Mondi, Richards Bay mill was reflected in the production figures. Paper production declined slightly due to a shut at Mondi’s Merebank mill where a machine making super calendared (SC) paper was converted to uncoated woodfree production. SC paper production has now ceased in South Africa.

Figure 1. Paper and board production trend

Figure 2. Pulp production

The value of paper production increased slightly in 2005 compared with 2004. This was due to an improvement in prices although the rand remained relatively strong during the year.

Table 4. Value of paper production

Contribution to G.D.P.

South Africa’s economic activity base is skewed heavily in favour of the mining sector, as this traditionally has been the backbone of economic activity. Manufacturing sector activity, of which the Forest Products sector is part, is however playing an increasingly important role. Currently the Forest Products Industry contributes 7.0 percent to overall Manufacturing G.D.P. Based on total G.D.P. which includes the Mining and Agricultural sector, the equivalent contribution is only 1.2 percent, showing the predominance of in particular the Mining component.

Foreign trade in forest products

Up until 1985, South Africa was a net importer of Forest Products. Since then due primarily to significant investment in processing capacity the tables have turned and today the Forestry Products Industry is one of the country’s most dynamic and important export sectors, with exports totalling R9,0 billion/p.a., as against imports of R5,1 billion/p.a. The resulting foreign trading surplus of R3.9 billion/p.a. is equivalent to 14.6 percent of the country’s entire trade surplus. The sector is therefore an incredibly important sector of economic activity, which unfortunately is not always properly appreciated. The table below provides the relevant statistics for the 2004 year.

Table 4. Value of Foreign Trade in Forest Products (Rands million)

With regard to the composition of imports and exports, by value, the following Table highlights the percentage share of the four categories of forest products. As can be seen total imports of pulp are a minor share of imports whereas, at 66.0 percent, imports of paper are the greatest. These paper imports tend to be the higher calendar grades which, due to the properties of the fibre resource available in South Africa, cannot be produced from locally grown fibre.

Table 5. Percentage Share of Imports and Exports

Issues of particular interest

Industry profile

As is the case in many other countries, plantation based Forestry does not have a good profile and there is an increasing scrutiny of its activities by Government and ENGO’s alike. South Africa is no exception, although it is the Government rather than the ENGO sector that is the major problem. In S.A. the Government is not favourably disposed towards the growth of the Forest Sector and much of the current legislative programme will compound this. The issue however is not one of reality but is more a perception that has been created through negative publicity and a general misunderstanding. The S.A. Industry is however trying to address this issue, and it is hoped that the work being done both by ICFPA and the FAO will assist in this regard. During 2005 an independent study on the value of the forest sector was undertaken (Genesis report) which hopefully will assist.

Broad Based Black Economic Empowerment (BBBEE)

As a result of the previous Political regime in South Africa which marginalised and excluded the majority of South African citizens from a meaningful position in the economy, steps are now being taken to rectify this situation. One of the mechanisms on the statute books to do this is the BBBEE Act, which is aimed at transforming current ownership, employment equity, enterprise development and procurement in the business sector. This is being done through the development and implementation of Industry Sectoral Transformation Charters. The Forest Sector is currently drafting its Charter. This is placing considerable strain, cost and uncertainty on the Industry, although the need to do this is supported by the Sector.

Illegal Logging

South Africa is in a fortunate position that illegal logging on a large scale is not evident. Virtually all of the wood used for industrial purposes is derived from privately or state-owned plantation forests. These are intensively managed and well controlled, with 82 percent of the forests being certified under the Forest Stewardship Council’s certification system. In recent years however there has been an increasing incidence of theft from Commercial Timber Plantations.

Indigenous forests in South Africa only cover an area of 300 000 hectares and are mainly managed by the State. They are however exploited commercially to a very limited extent to supply wood for the Furniture Industry, although there is an increasing trend to exploit the indigenous timber resource for the curio and carving industry.

Environmental Aspects Such as Carbon Sequestration and Substitution (Kyoto Protocol)

South Africa signed the Kyoto Protocol in March 2002. As host of the World Summit on Sustainable Development, there was urgency for the Government to make its commitment to the protocol well before the Summit began in August. South Africa, as a developing country, is not required to make reductions in green house gas emissions and, in fact, stands to benefit from mechanisms such as the Clean Development Mechanism (CDM). The Government has produced a Draft White Paper on the Promotion of Renewable Energy and Clean Energy Development. This document underlines South Africa’s commitment to making a contribution to greenhouse gas reduction by proposing a target energy generation from renewable sources of 10 000 GWh by 2012.

Outlook for the future

Forestry Industry

Due to the new water use licensing system introduced by the Department of Water Affairs and Forestry, it is unlikely that the forestry estate in South Africa will ever expand by more than 200 000 hectares. Most of this expansion will have to be through the growing of trees by small emergent black farmers in the Eastern Cape Province. Progress on developing this potential has been difficult and it is unlikely that much expansion will get underway for a number of years. Indeed, in the short-term, through the State Forest Restructuring Programme, a new Wetland and Riparian Zone Habitat Delineation Procedure developed by the Forestry Industry, and because of the dictates of the new National Water Act, it is likely that an area in excess of 100 000 hectares will be withdrawn from Commercial production in the near future, putting even more pressure on the future resource availability situation. This will be compounded by the fact that a number of expansions at existing processing plants have been announced as well as a number of new ‘Greenfields’ projects, which collectively could increase the demand for wood fibre by 4 million tons/p.a.

Expansion in the Industry will thus have to come primarily from the existing afforested area and in this regard even more effort is likely to be put into research into tree breeding and silvicultural practices.

On the negative side, legislation has increased the “cost of doing business” over the past few years and planned legislation will continue this trend. As these costs rise, the profitability of the Industry is reduced. This is a worrying trend and it is hoped that this will not dissuade growers from continuing to grow tree crops in the longer term.

Forest Protection issues are becoming of major concern, particularly these relating to pests and diseases. At present South Africa is experiencing a major threat from the spread of the Sirex Woodwasp in Pine Plantations as well as a serious outbreak of Fusarium (pitch canker fungus) in Pine Nurseries, both of which have necessitated urgent and stringent control mechanisms being put in place. In the case of Sirex, in areas, the mortality rate in plantations is as high as 40 percent.

2004 also saw one of the worst fire seasons in history, with over 35 000 hectares of timber plantations being destroyed. A disaster that can be ill afforded from a timber resource perspective.

Forest products industry

Pulp and Paper Industry. On the assumption that economic growth in the longer term will be around the 5 percent p.a. mark, and that the Rand will settle at a rate of between R7.00 and R7.50 to the US$ and will not remain volatile, prospects for growth in the sector are encouraging but tempered. Although raw material availability is envisaged as a problem, additional recycling opportunities and utilization of woodchip exports in local processing may help to assist in this regard. Confidence in the future of the sector has in fact already been displayed, and despite the present pressure on prices, a number of mill rebuilds have been announced. Mondi is in the process of expanding capacity at its Richards Bay mill in a R2 billion project. They have also announced the expansion of A4 copy paper production at their Merebank mill in Durban in a project valued at R1.5 billion. Sappi is currently undergoing an environmental impact assessment for a proposed R3 billion investment in their Ngodwana mill, as well as a large capacity expansion at their Saiccor dissolving pulp mill.

A significant development in the industry has been the completion of the sale of 42 percent of Mondi’s newsprint business to Shanduka Resources. This effectively introduces a major new industry player. This transaction represents the largest Black Economic Empowerment transaction in the pulp and paper industry so far. Although there are a number of Black owned paper mills in the country already the new company will be the largest by a considerable margin.

Sawmilling Industry. After years of protection, the Sawmilling Industry has had a hard lesson on globalisation and the resultant competition that this has brought, particularly from imports of lumber from Zimbabwe. Over the past few years the number of formal sawmills has declined as unprofitable mills have gone out of business. Despite the problems being experienced with the privatisation of SAFCOL, which has lead to concerns about the security of future fibre supply, the sawlog resource is excellent and can be utilised profitably with the right technology. It is likely that current production volumes will be maintained as larger and more efficient mills are brought on stream. Profitability is likely to be improved still further as sawmillers move into secondary value added operations. In terms of fibre supplies, there will be increasing pressure on suppliers to supply sawmillers with sawlogs from FSC certified forests.

Only 10 percent of total production is hardwood sawn timber. The market for this product, particularly for export, has increased dramatically in recent years and this demand is likely to continue. The problem being faced by these sawmillers however that are there is a lack of Eucalyptus Sawlogs available for processing. Although attempts have been made to convert Mining Timber stands to Sawlog stands, these efforts have not been as successful as hoped.

Woodchip Industry. This Industry has grown enormously over the past 10 years and this growth is now likely to tail off, despite a further chipping plant being built in Durban. It is also conceivable that in years to come chips supplies for export could be curtailed and redirected to additional pulping capacity in S.A. itself, which is currently under investigation.

Mining Timber Industry. This Industry has been on decline for the past 20 years, as alternative ground support technologies have been developed, and is expected to decline further in the future. As in the past, excess supply of mining timber fibre will be taken up by the Pulp and Paper Industry or the Woodchip Industry.

Other Industries. The Pole Treating Industry has been expanding over the past few years and growth is expected to continue in 2003 with and estimated 8% increase in volume produced. Although exports are expected to be hurt by the recent appreciation of the Rand, they are still expected to at least maintain their current level.

The domestic market for charcoal is relatively small and extremely competitive and thus any future growth will be in the export market. As with the Pole Treating Industry, the appreciation in the Rand will possibly hurt charcoal exports.

The Wattle Extract Industry had an excellent year in 2002 and they have made major inroads into the largest market for tanning extract, Italy, as plants in East Africa and elsewhere have or are about to close. Prices have increased and future prospects look good.

The Match Industry is a stable and mature Industry and is not expected to neither grow nor shrink in the foreseeable future. The supply of poplar fibre however is becoming an increasing problem and alternative fibre supplies will have to be looked at.

Conclusion

Despite uncertainties and problems being experienced by the Forest Industry in South Africa, there are still many opportunities that exist which will ensure that growth and development continues. The Industry is resilient and competitive and is committed to ensuring that it maintains and grows its contribution to the Economy and society.

SWEDEN¹⁹

Restructuring

Restructuring continues within the industry. Some exemples: Mölndal fine paper mill within the Klippan Group has closed down, Grycksbo fine paper mill has been divested from Stora Enso to Accent Equity -- a private equity firm, Utansjö pulp mill, belonging to Rottneros, has shifted production from chemical pulp to CTMP. Rottneros has also entered a new business line when starting to produce trays for frozen food out of cellulose pulp. Korsnäs has acquired the cartonboard producer Assi Domän Frövi. Korsnäs has stopped its production on fluff pulp.

Efficiency and cost-cutting programs

Many companies have launched efficiency and cost-cutting programs which will show their full effect in the coming few years. The programs include lay-offs of personnel.

Investments

Investments in the pulp, paper, sawmilling and wood products industry amounted to 1,13 billion euro in the year 2005, and is forecast to decline to 0,8 billion in 2006. The single largest investment is the new SC-machine in Stora Enso Kvarnsveden, replacing an old newsprint machine. A new sawmilling line has been constructed. Other investment projects are energy or otherwise efficiency related.

Energy

The companies have experienced large increases in energy prices. The Government has announced plans to upscale capacity in the present energy supply system, but the industry deems this insufficient and fears capacity shortage and continued high prices, also as the result of ETS.

Nearly all the pulp and paper mills have entered an energy efficiency program, introduced in the beginning of 2005 for the electricity intensive industry. The companies introduce energy management systems and energy saving measures in exchange of elimination of energy tax.

Forest raw materials, bioenergy

The Government carries out an inquiry of the forest policy, which will be reported in September 2006. The policy equals environmental and production goals in forest management, which should also be the principle for the future. In addition, the forest industry means that production can increase without renouncing environmental goals.

There is a growing interest in using wood as biofuels, and the potential volumes are debated. There is a possible increase both from present and new types of forest fuels.

Timber construction strategy

A timber construction strategy has been adopted to foster increased use of wood in construction. A committee and an administrative office have been established to implement the strategy. Important parts of the strategy are to increase professional skills and knowledge of modern wood construction techniques, support wood construction initiatives and communicate broadly the environmental performance and cost efficiency of using wood constructions.

UNITED STATES OF AMERICA²⁰

As is often the case, market conditions for the paper and wood segments of the U.S. forest products industry trended in different directions in 2005 and early 2006. Overall U.S. paper production declined in 2005 in part because end users were drawing down inventories and partly also because consumption patterns are changing. U.S. paper and paperboard capacity declined by 0.5 percent in 2005 and is likely to contract further. In contrast, the wood sector of the industry enjoyed strong market conditions in 2005 as new home construction reached the highest level in more than three decades. However, new housing starts have moved lower during the early part of 2006, suggesting that lumber and panel demand may soften this year.

Paper and paperboard

U.S. paper and paperboard production has been trending downwards during recent years and has declined 6.1 percent since its peak in 1999 to a 2005 level of 82.6 million metric tons. After posting a strong 4.0 percent advance in 2004, paper and paperboard production eased 0.9 percent in 2005.

U.S. apparent consumption of paper and paperboard declined 5.4 percent between 1999 and 2005 to 90.4 metric tons. Apparent consumption contracted 2.4 percent in 2005, but some of the decline appears to have been related to inventory trimming at printers and box plants.

Apparent consumption of paper and paperboard continued to weaken during the first quarter of 2006, but domestic production firmed (+1 percent) versus year ago because net imports declined.

Trade

U.S. imports of paper, paperboard and converted products increased 1.8 million metric tons (+14.4 percent) between 1999 and 2004. However, imports subsequently eased 642 000 metric tons (-3.3 percent) in 2005, to 18.5 million metric tons. Some of last year's reduction in imports may have reflected weak U.S. markets for paper.

U.S. exports of paper and paperboard declined 2.7 percent between 1999 and 2001, but have been climbing steadily since then, rising a total of 1.8 million metric tons (+16.8 percent) between 2001 and 2005, to 12.2 million metric tons. It seems likely that some of the impetus for the increase derived from the easing of the dollar's exchange rate since early 2002.

Paper and paperboard sectors

U.S. newsprint consumption declined 5.1 percent in 2005 to 9.4 million metric tons, while domestic production of newsprint dropped 4.0 percent to 4.9 million metric tons. The slide, which has continued into early 2006, reflected the migration of classified job ads and real estate ads to the internet. It also reflected circulation declines as more people read newspapers on-line. Finally, in an attempt to curb costs, financially-strapped newspaper publishers have reduced the demand for newsprint by reducing basis weights.

As compared with 2004, U.S. demand for printing-writing papers in 2005 declined by 1.5 percent to slightly below 28 million metric tons. U.S. shipments declined by only 1.2 percent because the U.S. net import share declined modestly last year, a response mainly to soft paper market conditions in the United States and a weaker U.S. dollar relative to earlier years. Although demand for printing-writing papers by 2005 had recovered significantly from its 2001 recession-depressed low, it was still almost 2 percent below its peak of 2000. Moreover, because U.S. imports of printing-writing papers have surged since 2000, the shipments of U.S. producers have fallen even more – by 8 percent during the same period.

Tissue paper production in the U.S. rose a strong 4.6 percent in 2005 to 6.7 million metric tons but held flat versus year ago during the first quarter of 2006.

U.S. containerboard production edged down 1 percent in 2005 to 31.6 million metric tons. The decline was due to weak box demand. Linerboard production for export rose 6.5 percent in 2005 to 2.6 million metric tons. The situation began to reverse during early 2006 as domestic demand firmed in response to strong manufacturing activity and production of linerboard for export eased.

U.S. boxboard production held nearly stable in 2005 at 13.5 million metric tons. Production of boxboard for export was also flat last year at 1.7 million metric tons but exports were off 1.1 percent in the first quarter of 2006 versus the year-ago period.

Wood

The U.S. is the world’s largest producer and consumer of wood products. Some 467 million m³ of timber is harvested annually and, in 2005, 93 million m³ of softwood and hardwood lumber, and nearly 26 million m³ of structural panels were manufactured.

Housing starts in 2005 exceeded 2 million units for the first time since 1978. Residential construction is the main driver for lumber demand. Repair and remodeling markets have been similarly robust. Softwood lumber consumption in 2005 reached 122.3 million m³, a post WWII record. Demand for structural panels also set a new record at 22.6 million m³.

The Federal Reserve Board has raised interest rates by 400 basis points since June, 2003 and may still push them up a little more in response to inflationary pressures in the economy. As a result, housing starts are widely projected to slow to about 1.9 million this year and 1.8 million in 2007.

Trade

Since peaking in early 2002, the U.S. dollar has weakened considerably against other major currencies, improving the U.S. competitive position in world wood markets. In 2005, U.S. exports totaled US$5.9 million, and increase of 3.2 percent over the previous year.

Despite a weaker dollar, and the increase in exports, U.S. producers face increasing competition domestically and globally. The U.S. imports about 39 percent of its softwood lumber consumption, mostly from Canada, but increasingly from off-shore sources. Softwood lumber imports from Europe and Latin America are gaining market share in the United States. They rose to 7.4 million m³ or 5 percent of total softwood lumber consumption in 2005. In May, 2006, the governments of the U.S. and Canada reached a tentative agreement to settle a long-standing dispute on softwood lumber trade. Under the agreement, the U.S. will eliminate countervailing and anti-dumping duties; Canada will impose export duties or quotas only if lumber prices fall below a specified threshold.

With average annual growth in GDP of greater than 9 percent, surging exports in manufactured goods and booming domestic construction, China has been dramatically increasing wood imports. The value of U.S. wood exports to China totalled US$470 million in 2005, up 23 percent compared to 2004, and up more than five-fold when compared with 2000. Some exports are faring particularly well – such as hardwood products, even though the domestic market for hardwood has softened because of the off-shoring of the U.S. furniture industry. China has also become a major producer of plywood, joinery and many other wood products that are exported to the United States. In fact, China has become the second largest supplier of wood products to the U.S. after Canada.

Other developments

The industry has experienced significant restructuring, generally becoming more concentrated. Many of the major players have either expanded through mergers or acquisitions, or have divested to better position themselves strategically. One of the major developments related to industry restructuring has been the divestiture of millions of hectares of corporate industry forest land. The amount of U.S. forest land owned and managed by companies also engaged in the manufacture of wood and paper products has declined from 14 percent (28 million hectares) of the total in 1987 to less than 5 percent (10 million hectares) today.

Certification continues to be a major thrust of the forest products industry. The Sustainable Forestry Initiative Program (SFI)® has more than 60 million hectares enrolled in the U.S. and Canada, with 53 million hectares independently certified to the SFI Standard. The SFI Standard is controlled by a fully independent Sustainable Forestry Board (SFB) and all elements of the SFI Program – many of which have been part of the American Forest & Paper Association -- will be similarly independent under the SFB’s auspices by the end of the year.

Summary

While the U.S. economy is expected to grow 3.5 percent in 2006, construction activity is expected to moderate due to higher interest rates. Demand for wood products will remain strong but will likely taper off from the cyclical high of the past year. Continued consolidation in the forest products industry can be expected as companies position themselves to be more competitive in a globalized marketplace. Markets are likely to drive greater participation in certification programs such as the SFI.

Paper demand has been variable, depending on grade. In general, paper demand is declining due to electronic substitution, competition from plastics, and from the exodus of the U.S. manufacturing base to low-cost nations such as China, which reduces domestic demand for packaging. In contrast to the 1980’s and 1990’s when paper and paperboard capacity grew at average annual rates of 2.0-2.5 percent, U.S. paper and paperboard capacity has declined each year since 2001.

In all likelihood, in 2006, the paper segment of the industry will remain flat or continue to experience slow erosion in newsprint and uncoated free sheet demand, but an increase in coated papers and tissue. The wood products segment will face reduced demand as mortgage rates increase and demand for new housing tapers off.

⁴ Australian Plantation Products and Paper Industry Council (A3P)
⁵ Brazilian Pulp and Paper Association (BRACELPA)
⁶ Forest Products Association of Canada (FPAC)
⁷ Corporación Chilena de la Madera (CORMA)
⁸ Smurfit Cartón de Colombia S.A.
⁹ Finish Forest Industries Federation
¹⁰ German Pulp and Paper Association
¹¹ Dunapack Ltd.
¹² ASSOCARTA (Trade Association for the paper industry representing pulp, paper and board manufacturing companies in Italy).
¹³ Japan Paper Association
¹⁴ Malaysia Pulp and Paper Manufacturers Association
¹⁵ Smurfit Cartón y Papel de México S.A.
¹⁶ Portuguese Pulp and Paper Association (CELPA)
¹⁷ St. Petersburg State Technological University of Plant Polymers
¹⁸ Forestry South Africa
¹⁹ Swedish Forest Industries Federation
²⁰ American Forest and Paper Association