People who live in glass houses should not throw stones

Malaysian plywood in world trade

In the introduction to the Prime Minister’s Year 2004 Budget speech, a mention was made that in the league of the world’s largest trading nations, Malaysia ranks number 17. One commodity which has helped Malaysia this position as major world trader is timber. Among the wood-based industries in Malaysia, the plywood industry has the second longest history, the oldest being sawmilling. The first plywood mill was established in 1946. It expanded rapidly based largely on export and achieved considerable growth over a period of about 30 years till about the 90’s when it declined, due to a myriad of reasons, amongst which was the strong competition from other supplying sources, such as Indonesia and Brazil, combined with the fall in demand in the major East Asian markets.

For Malaysia, the changing raw material supply scenario and the emergence of substitute materials has also contributed to contraction in the plywood industry. Malaysian plywood manufacturers have to contend with other sectors like the sawmilling and moulding (and to a lesser extent the furniture sector) which are also using some of the same raw materials. Particleboard and Medium Density Fibreboard have made strong inroads into the global plywood market as they are cheaper as they can be produced from poor quality wood or residues, or even other biomass.

The world plywood market has been depressed since the past five years with the generally poor global economic outlook. Apart from falling prices, the industry has unfortunately been faced with rising costs of production due to increases in log prices and other production inputs such as adhesives and tooling, combining to chip away at the already thin profit margins. Inspite of the not-so-bright outlook, the Malaysian plywood industry has still been able to hold its own. Its resilience has been due in great part to its ability to adjust to changing market conditions.

An article in The Jakarta Post article of 10 September 2003 entitled "Prakosa targets Singapore, Malaysia to curb log smuggling", was carried by several local papers on 11 September 2003. The Jakarta Post reports an assertion by APKINDO, the Indonesian Plywood Manufacturers’ Association that exports of plywood from Indonesia plunged by 15% in the first quarter of this year as China and Malaysia had "flooded the export market with cheaper plywood made from logs taken illegally from Indonesia". Is there any truth to this allegation about Malaysia? Are Malaysian plywood exporters as unscrupulous as to do just about anything to keep and expand their market share?

Indonesia’s plywood industry

Indonesia is an undisputed world leader in plywood exports. From exclusively supplying sawlogs and peeler logs to sawmills and plywood mills in Taiwan, Korea and Japan, Indonesia became the world’s largest exporter of plywood in 1982. APKINDO’s marketing strategy in the 80’s resulted in Indonesia’s dominance in the worldwide plywood export market. In February 1995, the Indonesian and Malaysian plywood suppliers reached an agreement to cooperate in price stabilisation measures. Ongoing dialogues between APKINDO and the Malaysian Plywood Manufacturers’ Association (MPMA) continues up till today.

The severe economic downturn in Indonesia which began with the Asian currency crisis in the third quarter of 1997 has brought major changes to plywood marketing arrangements in Indonesia. Some of the same problems besetting the Malaysia plywood industry are also faced by Indonesia. However the Indonesian plywood industry remains a dominant force to be respected.

The reason for the drop in Indonesian plywood exports, as reported in The Jakarta Post could very well have been caused by Indonesia’s own policies. APKINDO itself had reported in the International Tropical Timber Market Report of August 16-31, 2003 (www.itto.or.jp) that "Indonesia's exports of wood products could fall by about 50% this year because of the various restrictions imposed by the government. By only allowing registered exporters to trade, APKINDO spokesman, Abbas Adhar said exports will fall sharply."

It is a well-known fact that Indonesia had also reduced concession volume allocations from 12 million m3 in 2001 to under 6.9 million m3 in 2002 (ITTO’s Annual Review and Assessment of the World Timber Situation, 2002). This restriction would have further decreased production and offers another plausible reason for the falling Indonesian exports in the first quarter of 2003. As we know it, there was a further worsening of the already weak worldwide plywood market due to market disruptions and economic slowdown owing to the SARS epidemic in the Far East and the effect of the Iraq War on the Middle East markets. The truth be told, both Indonesia and Malaysia have been steadily losing share in plywood markets to China, in the EU, Taiwan and Japan (and also China itself which used to import our plywood)!

Malaysia’s defense

The Malaysian government banned the importation of round logs from Indonesia effective 25 June 2002 and enforcement efforts have been stepped up to implement thus ban and to stamp out any smuggling activities. Malaysia is also ready to work together with Indonesia to put a stop to the illegal trade in logs. Available trade statistics do not support Indonesia’s allegation that Malaysia had flooded the export market with cheaper plywood. Malaysia's plywood production has never been able to match that of Indonesia's which is almost double Malaysia's volume. There has not been any noticeable increase in Malaysia’s plywood production. In fact, there has been a gradual decrease in Malaysian plywood production, from 4.4 million m3 in 2000 to 4.2 million m3 last year. A comparison of Malaysian plywood exports for the first three months of years 2001-2003 also does not show any significant changes. In addition, statistics culled from FAO publications of the world’s top-ten plywood exporters also indicate that Malaysia's plywood export was only around 3.58 million m3 last year, compared to Indonesia's 6.3 million m3.

Apart from inability of Malaysia to flood the export market with plywood in terms of volume, it is also incorrect to say that Malaysian plywood is cheaper. The same ITTO report mentioned above shows that Indonesian plywood prices have generally been decreasing. Usually, both Indonesian and Malaysian prices are closely related. A comparison of Malaysian and Indonesian plywood prices for the first quarter of this year shows the slight price differentials - for 2.7mm ply, Malaysian plywood has consistently been higher priced and generally, for 3mm ply, Malaysian plywood has not fallen below Indonesian plywood prices. A reading of ITTO’s Annual Review and Assessment of the World Timber Situation, 2002 (page 23) also reveals that "Prices for plywood continue to reach new lows due to depressed construction sectors in major importing markets and growing substitution by softwood plywood and other panels. Plywood prices from all of the exporting countries three (Indonesia, Malaysia & Brazil)..have generally been declining since 1996".

New Challenges

New challenges now confront the plywood industry, which are beginning to have an impact. There are new Japanese labelling requirements for products meeting formaldehyde emission limits, which have already seen an impact on Malaysian exports to Japan, particularly plywood. Of the total exports of RM3.8 billion (USD 1.0 billion) worth of plywood in 2002 (or 3.61 million m3), about 50% were exported to Japan. Formaldehyde-based glues are commonly used in Malaysia's plywood manufacture. In addition, Malaysia also exports MDF and particleboard to Japan and these products also contain formaldehyde glues. High cost and delays in getting companies certified to the new standards eg. JAS for plywood mills have caused a lowering of exports to Japan.

Indonesia, and Malaysia in second place, are the biggest plywood suppliers to Japan. Both countries would do well to work together, as we are sailing the same "choppy seas". The expression "people who live in glass houses should not throw stones" comes to mind.