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The crisis in the European tropical timber sector in Central Africa (commentary)

  • European concessionaires in Africa are gradually selling their assets to Asian investors, who have substantial capital and operate in markets that accept lower-quality wood. This has led some Europeans to wonder whether they are truly on a level playing field with some of their Asian competitors.
  • Withdrawal of European companies is associated with decline in FSC certification. Rougier and Wijma represented nearly 700,000 certified hectares in Cameroon, but their Chinese successors are not necessarily maintaining those certifications.
  • A reduction in forest taxation for certified concessions seems to be the simplest solution, providing international donors compensate producing countries for the resulting loss of tax revenue.
  • This post is a commentary. The views expressed are those of the author, not necessarily Mongabay.

In early 2018, the Africa branch of Rougier announced its bankruptcy. Founded in 1923, Rougier is one of the oldest and largest timber companies in Africa, present in five Congo Basin countries, employing 3,000 workers, and holding 2.3 million hectares of concessions. The company is expected to divest all or part of its operating activities, except in Gabon.

The reasons given for the bankruptcy refer to problems common to the exporting sector as a whole. In addition to the congestion in the port of Douala, Cameroon, from where most timber products leave West/Central Africa, there are increasing delays in VAT refunds (exporters collect Value-Added Taxes (VAT) for the government when they perform domestic transactions (purchase of timber, etc.), which ought to be refunded when they export their production; given budgetary constraints, however, African governments tend to postpone such VAT refunds to exporters, which jeopardizes companies’ treasuries).

This has caused many companies to scale back their holdings in the region. The Dutch firm Wijma had to sell several forest concessions in Cameroon to Vicwood, a Hong Kong-based company. Italian-owned Cora Wood, a renowned plywood manufacturer in Gabon, had to sell one of its concessions to a Chinese company to pay off its debts. There are rumours that other European companies may soon be sold in Gabon or Congo, as well.

The end of a cycle

Beyond these economic difficulties, one feels the coming end of a rather virtuous cycle. This cycle was begun by the first forest management plans (FMP) in the 1990s, and prolonged by the rise of Forest Stewardship Council (FSC) certification.

The profitability of logging natural forests has mostly depended, until now, on the collection of a handful of species. With this highly selective exploitation, the forest is minimally damaged by removals that rarely exceed, on average, one or two trees per hectare (10 to 12 cubic meters of wood per hectare), even if the logging roads may be a means of access for settlers in places with high population density. But the concentration of harvests on this handful of species gradually leads to an exhaustion of the “deposit” (i.e. the stock of tall trees of valuable species), as forests are gradually but systematically exploited. This depletion does not mean, in principle, that these species become threatened. The problem is, rather, economic: the volumes remaining at the second felling cycle (after 25-30 years) are generally not sufficient to sustain industrial profitability.

For instance, Rougier’s bankruptcy is linked to the drop in available volumes of two tropical tree species in eastern Cameroon, sapele and ayous, while Wijma’s difficulties are linked to the sharp drop of azobé volumes.

Although there are still many sapele trees in the concessions of northern Congo and okoume in those of Gabon, forestry operations say that the “primary forest rent,” the exceptional volume from the first cut that would need more than a century to recover, is dissipating. Certainly, there are many other species that are potentially exploitable. However, either they are not abundant enough to replace traditional species, or their selling price is insufficient with regard to operating, transport, and processing costs.

The planting of timber species would be the logical response to this depletion of “deposits” in natural forests. But without powerful economic incentives or authoritarian directives from a far-sighted administration, economic operators will not invest in expensive plantations and wait decades for a return. Finally, there is the question of property rights: who will own, in about thirty years, the rights to trees planted within the concessions by operators who will probably no longer be active?

A distorted competition?

In response to these issues, many European concessionaires are gradually selling their assets to Asian investors, who have substantial capital and operate in markets that accept lower-quality wood. This has led some Europeans to wonder whether they are truly on a level playing field with some of their Asian competitors. Large European companies have gradually complied with legal standards by preparing FMPs, and some have gone even further by adopting FSC certification, in order to gain or maintain market share on certain markets and to (hopefully) use price premiums to offset some of their expanded operating costs. Certification is therefore an investment, pushing companies to self-regulate to avoid losing the label. However, apart from Olam, which in 2010 bought a large concession already certified in Congo, no Asian company has seriously sought to become FSC-certified so far.

What’s more, Asian companies are often called out for illegal activities, as in Gabon recently. The export of timber, logs included, in containers that are only randomly inspected facilitates illicit trafficking. Law enforcement is poor, partly explaining the differences in profitability between companies.

Logs from a forest concession in Gabon. Photo Credit: Alain Karsenty.

Insufficient investment for innovation

Longstanding operators also pay for insufficient investment in innovation and marketing. While some companies have been able to differentiate by offering sophisticated and attractive products, most processors remain concentrated on “commodities,” i.e. standard-size sawn timber, peeled veneers, or plywood. These companies are condemned to remain “price takers,” with no capacity to offer differentiated products attracting higher prices, instead depending wholly on international timber prices.

There are, however, ways for recovering profitability involving production of finished products, smart use of wooden by-products, and appropriate uses for abundant but poorly remunerative species (using them, for example, for making plywood core, encased in veneer sheets of “noble” species). Optimizing the value chain can also mean recovering wood waste through co-generation processes. While the difficulties of making these kinds of changes to timber supply chains and export operations should not be overlooked in countries where infrastructure is weak and qualified personnel lacking, it remains that some companies have not invested wisely the comfortable profits they made at more prosperous periods.

The European timber industry in Africa has no choice: To survive, it must innovate for adding value to the overall timber production process. Economies of scale through massive production and low-to-medium quality of products is not an option, due in particular to the limited outlets of domestic markets. Industrial wood production costs have been rising steadily due to higher management standards, taxation, and more demanding government regulations. In the meantime, the purchasing power of African consumers is eroding, bringing them away from industrial wooden products. Thus, the “informal sector,” which employs artisanal chainsaw loggers who are less concerned with government regulation, is supplying the growing domestic markets.

The fate of forests in the hands of Asian investors?

Withdrawal of European companies is also associated with decline in FSC certification. Rougier and Wijma represented nearly 700,000 certified hectares in Cameroon, but their Chinese successors are not necessarily maintaining those certifications.

Among the now-dominating Chinese companies, some are (partially or totally) state-owned, and the Beijing government is paying increasing attention to the image conveyed by the exploitation of forests by Chinese companies. One might therefore think that companies with public shares would eventually move towards certification, especially since Chinese companies often re-export part of the African wood processed in China to Western markets.

But this desire to improve the reputation of Beijing-influenced companies stumbles against a well-known practice in Asia of subcontracting parts of forest concessions to small private companies (usually Chinese, as well). The goal of these subcontractors, who are remunerated on the basis of the volumes they deliver each month to the concession holder (with bonuses for volumes delivered in excess of the minimum quota), is to cut timber as quickly as possible and at the lowest cost. This is, of course, incompatible with a FMP.

And tomorrow?

Not all European forestry companies in Central Africa are affected by economic difficulties on the same scale. Some FSC-certified companies seem to be doing well, although they also face the same difficult context. However, with the weakening of these companies and the gradual sale of European assets to Asian investors, we are witnessing a decline in FSC certification, an instrument that, although not perfect, remains one of the only credible indicators of long-term forest management.

International donors who are concerned about forest conservation should consider the “public good” dimension of certification. If FSC-certified areas decline in Central Africa, this is linked to the still-limited number of buyers who agree to pay a “price premium” for certified timber. If the price incentive is insufficient, then an incentive through lowering costs could be considered. A reduction in forest taxation for certified concessions (FSC, or the new PAFC label if it is deemed credible by all parties) seems to be the simplest solution, providing international donors compensate producing countries for the resulting loss of tax revenue.

Using fiscal leverage makes it possible to offer incentives, including to companies currently not interested in certification, as there is no demand on their markets. This will not prevent deforestation from spreading in Central Africa, due to demographic pressures and the will of governments to develop an agro-industry on the model of Southeast Asia. However, it will restore some credibility to the concept of “sustainable forest management” that the current crisis questions.

CITATION

• Karsenty A. & Ferron C., 2017. Recent evolutions of forest concessions status and dynamics in Central Africa. International Forestry Review vol.19, S2. doi:10.1505/146554817822295957

This commentary is a synthesis from a recent article published by the author in French, posted here.

Alain Karsenty, environmental economist, has been research director with CIRAD (Montpellier, France) since 1992. His research and expertise area covers the economic instruments for the environment, including taxation, Payments for Environmental Services (PES), and REDD+. He has an extensive knowledge of land tenure, concessions, forest policies and practices in West & Central Africa and Madagascar, his main areas of fieldwork. As an international consultant, he participated in several policy and economic reforms processes with national teams in Africa. He is the author of one hundred scientific articles and co-authored several books and special issues. He is a member of the scientific board of the French GEF (FFEM).

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