The Chief Executive of the Papua New Guinea Forest Industries Association, Bob Tate, claims that PNG’s forestry sector is coming under increasing pressure. He points to a drop in demand from China and moves by the PNG government to lift industry turnover taxes.

Photo by Rocky Roe © Cloudy Bay Sustainable Forestry

In an interview with Business Advantage PNG Tate expressed concern about the PNG forestry industry’s outlook, particularly in the context of the slowdown in the Chinese economy. China remains the industry’s biggest export destination.

‘Further bad news from China could see a very rapid weakening of export timber prices,’ says Tate. He adds that Chinese buyers are also becoming very product selective. ‘So instead of you (being able to) sell everything to China they are becoming much more quality selective about what they will buy,’ he says.

This, in turn, is increasing the amount of stock being rejected, which is creating significant cost pressures for any producers unable to sell what they have. For a country that relies so heavily on timber exports, the current conditions do not augur well.

Tax versus trade

The Forest Industries Association’s Bob Tate

Taxation is another looming issue, according to Tate.

He says government proposals to impose more taxes on industry turnover will ‘push our turnover taxes to 38% of gross revenue’.

He says: ‘The government has embarked on some bizarre initiatives in the forestry sector, which have done nothing to boost confidence or streamline and enable exports. We operate in a very trade unfriendly environment.’

Around 36 million hectares, (80 per cent) of PNG’s total land area, is covered by forests. About 15 million hectares has high quality tropical hardwoods that are considered suitable for forestry development.

PNG’s current forestry products are: raw log exports, sawn timber, veneer sheets, domestic log sales, plantation logs, plywood, processed timber exports and woodchips.

Tough conditions to persist

James Lau, Managing Director of Malaysia’s Rimbunan Hijau Group, the largest single player in PNG’s forestry sector, recently told Business Advantage PNG that the forestry sector faced significant difficulties in 2015.

‘Round log export prices declined because of oversupply and poor market conditions, especially in China—PNG’s main market,’ Lau says.

‘Despite these difficulties, we have maintained operations and employee numbers in this sector, but we foresee tough conditions to continue at least into the second half of 2016. Timber processing has continued normally and we hope to expand this sector in the future.’

While Tate and Lau express concerns about external threats to the sector, figures from the Bank of Papua New Guinea suggest a more nuanced picture. In the nine months to September 2015 the Kina value of export sales were down five per cent on the previous corresponding period. However, the 2015 levels were some of the strongest of the last five years.

Special Agriculture Business Leases

The PNG Government recently announced it was cancelling all Special Agriculture Business Leases (SABL) arrangements across the country to reverse what it described as ‘a shocking trend of mismanagement and corruption’.

A significant proportion of forestry activity, 30% of log exports per annum, takes place on land subject to SABLs.

SABLs will be returned to PNG landowners and replaced by Incorporated Land Groups, which will hold the land titles and manage sub-leases to developers. The government said the move was designed to protect landowners from timber companies that conducted logging operations and took the proceeds offshore.

— by Kevin McQuillan and Tony Kaye