PNG's export of raw logs supports growth

Second in the agriculture segment to the palm oil industry in export value, Papua New Guinea’s forestry sector continues to expand on the back of strong regional demand for raw materials. The rate of growth for the industry has accelerated over the past decade as the government has allocated large swaths of land for agricultural development which has allowed companies to fell increasing amounts of valuable tropical hardwoods for export. A very diverse range of timber species are harvested from PNG forests, with no single species generally representing more than 15% of production. This has propelled the country to its current status as the second-largest exporter of tropical timber in the world after Malaysia.

Annual export volumes increased gradually during the 1970s and 1980s, expanded rapidly in the 1990s to a peak of 3m cu metres, then dropped to an average of 2m cu metres a year in the late 1990s and early 2000s, before increasing again over the past decade. Production and exports hit an all-time high in 2011 as a surge of new special agriculture and business leases (SABLs) opened up large tracts of private land for development. The surge in output was not without its detractors, however, as a substantial row ensued in 2012 over the validity of many of the SABLs, which led to a freeze on development.

The ensuing downturn now looks to be a temporary setback in the segment, as timber exports regained momentum and reached a new all-time high in 2014, with a total of 3.79m cu metres of raw logs shipped out on the year, according to data from the Bank of PNG. This easily outpaced the previous peak of 3.53m cu metres achieved in 2011 and marked the third consecutive year of growth. A total of 3.15m cu metres of logs were exported in 2012 followed by 3.32m cu metres in 2013.

Shifting Markets

The vast majority of PNG’s forestry products are currently destined for China, which retains a substantial appetite for wood as both an input to its own domestic construction industry as well as a raw material for the manufacturing of goods for export. Because PNG’s traditional land ownership laws outlined in its constitution have historically restricted large-scale harvesting of domestic timber, the country is one of the few locations in the South Pacific to have its primary growth forests largely intact. As other tropical hardwood repositories like Borneo see forests reduced and draw more scrutiny from environmental non-government organisations (NGO), PNG’s vast swaths of virgin forest are becoming more sought after than ever.

Export Markets

China’s growing appetite for raw materials resulted in the country surpassing other large importers of PNG forestry products, such as Japan around the turn of the millennium, while other regional importers such as Australia, South Korea and the Philippines have also seen their purchases of PNG lumber dwindle in the ensuing years.

In 2014 China imported 3.23m cu metres of logs from PNG, up from 2.75m cu metres in 2013 and 2.58m cu metres in 2012, according to the General Administration of Customs of the People’s Republic of China. Imports were on pace to come in below 2014 totals through the first five months of 2015, with a total of 1.25m cu metres of logs imported through May 2015, compared with 1.42m cu metres over the same period in 2014.

Many of the larger forestry operations are run by Malaysian firms based out of the Malaysian state of Sarawak, on the island of Borneo – also a major tropical timber exporter. The largest single forestry company currently operating in PNG it is Rimbunan Hijau, commonly referred to as RH, and is involved in the export of raw logs as well as milled wood products – including four saw mills producing various lumber products, like plywood and veneer.

This demand has proven to be a windfall for forestry companies operating in PNG as export receipts now dwarf all other agriculture exports except for the country’s only major plantation crop of palm oil. In 2014 forestry product shipments hit a high of PGK962.1m ($364.1m), eclipsing the record of PGK768.3m ($290.7m) set in 2011 with a 32% increase over the 2013 total of PGK729.7m ($276.1m) and one-third greater than the PGK627.1m ($237.3m) registered in 2012. The majority of these exports consisted of raw logs, which accounted for PGK950.3m ($359.6m), or some 99% of the annual total. At nearly PGK1bn ($378.4m) in value, forestry exports are a substantial portion of agriculture and one of the major sources of foreign currency, outside the energy and mineral sectors. Forestry shipments were worth more than the next two most valuable export commodities combined, with 2014 cocoa and coffee exports totalling less than PGK700m ($264.9m).

Accountability

Apart from continued demand for increasingly scarce raw materials, another major contributor to the dominance of Chinese purchases of PNG timber exports is the growing reticence among Western markets to purchase non-sustainable products. This lack of sustainable accreditation has posed a significant hurdle for the PNG timber sector outside of China as the US, EU and Australia have all cracked down on importing illegally logged timber which can exacerbate deforestation and the release of carbon dioxide gas emissions.

Australia, for instance, a major purchaser of PNG forestry products in the not-so-distant past, has shied away from PNG products since 2012, when the country passed the Australian Illegal Logging Prohibition Act. The legislation prohibits both the import of illegally logged timber and the processing of illegally logged raw logs and compels Australian importers and processors of raw logs to carry out due diligence so as to minimise the risk of illegally logged timber being present in their supply chains. In order to prove that due diligence has been undertaken, the importer must submit a declaration to the Customs minister at the time of import.

US policy is likewise dictated by the Lacey Act, first passed in 1900 but amended in 2008 to include timber, paper and other forest products. Meanwhile, the EU presents its own Forest Law Enforcement, Governance and Trade regulations (FLEGT), which are designed to similarly exclude all illegal timber from markets, help improve the supply of legal timber and push to increase the demand for responsible wood products. This was further bolstered by the adoption of the EU Timber Regulation in March 2013 which prohibits placing illegally harvested timber and products derived from such timber on the EU market. Timber which carries a FLEGT licence or a Convention on International Trade in Endangered Species of Wild Fauna and Flora permit are considered to comply with the Timber Regulation.

While these policies have reduced the amount of illegally and unsustainably felled wood products in their respective markets, they have also led timber exporters into the waiting arms of less scrupulous purchasers who are more than happy to fill the demand gap. As the amount of PNG-sourced wood imported to Western countries has declined, this surplus is being picked up by China, which has no such regulations about importing non-certified or illegally logged wood and has subsequently become the trade’s biggest importer.

The SABL Inquiry

The lack of certification and traceability for some of PNG’s exports was highlighted in the recent controversy surrounding the government’s SABL programme, which resulted in breached contracts and a government inquiry detailing significant misconduct within the sector. The SABL programme was tweaked in 2009 to open up land for development, because under PNG law, all land is owned by its ancestral claimants by default. As a result, it can only be leased out to private interests or even the government for other use, and selling it is complicated and often unworkable. As a result of this, approximately 97% of PNG land is owned and managed by customary landowners and extensive (often contentious) consultations between resource owners, government agencies and commercial forestry companies are usually necessary before any forest activity can take place.

SABLs were originally promoted as a way to help navigate customary land titles in a manner that would support local agriculture and foster the expansion of more efficient plantations. However, upon review, the vast majority of SABLs were found to have been used exclusively for timber harvesting, which is a violation of the terms of agreements. In many cases, full informed consent of the customary landowners was never achieved, resulting in further violations of landowner laws. Pressure from landowner groups as well as international NGOs led the government to open a commission of inquiry (COI) in 2011 into the matter, with the summary results tabled in parliament in September 2013.

The inquiry found that of 42 SABLs examined, only four had proper landowner consent and viable agricultural projects, whereas the remainder (more than 90%) were obtained through fraudulent or corrupt means. This figure was later revised in 2014 to 66 of 75 SABLs examined found to be in non-compliance. The commission brought to light “abuse, fraud, lack of coordination and incompetence” in the issuance of SABL licences. Legal requirements were “deliberately breached and proper processes either by-passed or simply ignored”. In all, the COI estimated more than 5.2m ha of customary land around the country had been alienated, mostly for “special agriculture activities” in virgin forest tracts containing tropical hardwoods. It was estimated that more than 400 SABLs have been issued over customary land from the 1980s to the time this COI was set up.

Reforming the System

Final reports submitted by COI commissioners contained recommendations for the government, as a way to rectify SABL, including reclaiming land leased in non-compliant agreements as well as reforming administrative and enforcement policies. A study on the subject by London-based think tank Chatham House released in April 2014 included its own recommendations: increasing enforcement, finalising a new legal standard and creating a transparent chain of custody. As a result of the report, the prime minister promised changes in the regulatory framework and to establish a ministerial committee to decide on next steps, but stopped short of cancelling any of the SABLs involved, as of mid-2015. Although new SABLs are not being issued, clear-felling under agreements issued before May 2011 has been allowed to go on.