Cape timber supplies on a short fuse
Time is running out for the government to find a way to implement a Cabinet decision taken six years ago to re-establish 22 500ha of forestry in the Western Cape that is the lifeblood of the local sawmilling and secondary processing industries.
by Theo Stehle
|The George sawmill in the 1940s. The mill has subsequently been modernised and is still the largest employer in the George area.|
Sawmills in the Western Cape are under threat of closing down as the timber source they are dependent upon is in danger of ceasing production in 2020. At stake is the backbone of the southern Cape economy, local primary and secondary timber processing industries, capital infrastructure investments, and the livelihoods of a few thousand employees and contractors.
With the exception of the two largest roleplayers in the Cape timber industry, the State lessee MTO Forestry (also known under its trading name Cape Pine), the private firm PG Bison (part of the KAP group), and a few smaller sawmills with access to their own sustainable timber supplies, all sawmills in the region are threatened with extinction. Even the two major firms will have to downsize/adapt their operations considerably from 2020.
This time the culprit is not only the economic recession that has already forced a few of the smaller, less efficient operations out of business. No, the main culprit is steadily dwindling timber supplies despite rising domestic demand. At the core of the local timber supply problem is the State’s exit from much of its commercial saw-timber plantations in the Western Cape, and its lack of decisive action to re-commission half of this area following Cabinet’s decision in 2008 to partially reverse its plantation exit strategy.
This strategy was put in place in June 2001 when Cabinet approved the de-commissioning of 45 000ha of State commercial timber plantation areas in the Western Cape (Boland and southern Cape) as they were uneconomical and negatively affected the profitability of Safcol. The affected State plantations are located along the coastal mountain belt between Wolseley in the Boland and Plettenberg Bay in the southern Cape.
Although it was widely acknowledged that some of the plantation areas with poor growth potential were not viable, many stakeholders even then questioned the decision to exit such a large portion of the forest estate.
By 2005, Safcol’s subsidiary in the Western Cape, MTO, had been privatised and won the bid to operate the State plantations in the province. In terms of its lease MTO was required to implement the Government’s forestry exit strategy on the 45 000ha by 2020. But improved market conditions and looming saw-timber shortages induced MTO to reassess the viability of the exit areas for continuation of forestry, and in 2005, it tabled proposals for a reversal of many of the exit areas.
By that time, Government had realised that the original decision was short-sighted because it did not take into account the wider socio-economic implications and strategic considerations. Consequently, an in-depth viability study was commissioned. This was undertaken by the VECON group, and was largely based on site potential. Most of the VECON recommendations for re-commissioning of exit areas were accepted, which led to a Cabinet decision in 2008 to bring 22 500ha (half of the original exit area) back into timber production.
MTO initially hoped to persuade Government to incorporate the areas to be re-commissioned in a re-negotiated sustainable lease. Reasons advanced were that it could perform more optimally in a bigger economy of scale, and that, by virtue of these areas forming an integral part of its existing forest estate, serviced by existing infrastructure, MTO was in the most favourable position to operate these areas cost-effectively.
However, one of the conditions stipulated by Cabinet in 2008 was that the implementation of the exit reversal must not amend the basis on which the MTO forestry package had been privatised in 2005.
In any event, Government clearly has no intention of allowing the expansion of MTO’s share of the State forest resource to the exclusion of other contenders, because of its aim to transform and broaden the base of participants in the industry.
Competition for scarce forest resources in the region is intense, and this is illustrated by the lengthy investigation (2006-2011) by the Competition Commission, involving MTO, sawmiller AC Whitcher and the Steinhoff group, over the merger of MTO and the Boskor sawmill in the Tsitsikamma area. The disastrous 2005 wildfires in the Tsitsikamma raised the level of competition for scarce resources even further, because the normal supply of timber from MTO’s plantations had been reduced.
The Competition Tribunal finally ruled that the merger could take place on condition that a certain amount of timber had to be sold on the open market instead of being supplied to Boskor. This resulted in MTO handing the mill back to Swartland Boudienste in 2012, as it felt it could not comply with the conditions.
The Competition Commission (CC) was critical of the privatisation of such a large chunk of State forest in favour of a single enterprise (MTO), as happened in 2005, notwithstanding its diversity of shareholding and BEE compliance. The CC had earlier intervened in the privatisation of Safcol’s subsidiary, Komatiland Forests, for similar reasons of preventing monopolisation. Seemingly, this consideration is at the root of its expressed intention to be part of the tender adjudication process for the exit reversal areas, thereby indicating a preference for broadening the base of participants in the forest industry.
MTO has challenged the wisdom of this approach. According to Patch Bonkemeyer, CEO of Cape Pine Investments/MTO: “Viability of the forest resource is largely dependent on crucial factors like economy of scale and critical mass. The relatively low potential (compared to other forestry areas in the country), and the widely scattered nature of the forest estate posing logistic challenges, negatively affects the viability of individual components. Additionally, feasibility and practicality of factors like shared infra- structure (e.g. the road network), fire prevention and fighting, as well as legal liability, when having other land managers managing patches of plantations dispersed within MTO’s estate, were not factored into the equation. This is, however, not to say that it is impossible to find solutions.”
MTO has now accepted that it will have to compete for the exit reversal areas with other bidders, and that it may not be successful in winning the tender. Instead, it has decided to concentrate its efforts on getting the temporarily unplanted exit reversal areas planted up as soon as possible.
As far back as 2007, MTO proactively and in anticipation of the favourable outcome of the VECON report, changed its approach by tabling a proposal to the former Department of Water Affairs and Forestry (DWAF) to act as its agent to replant, tend and manage the already clearfelled areas ear-marked to be re-commissioned. The proposal contained suggested mechanisms for compensation of costs incurred, without any strings attached.
This proposal should be seen in the context that due to a restructuring process beginning in 1993, DWAF, by that time, had no capability left to manage plantations in the region.
One of the key motivating factors for MTO in tabling this proposal was to bring these exit reversal plantation areas – dispersed among its own plantations – into production as soon as possible, thereby preventing fallow land from developing into invasive plant jungles which are a high fire risk.
The proposal was rejected by DWAF.
Since then, MTO has made several further proposals to DWAF’s successor, the Department of Agriculture, Forestry & Fisheries (DAFF), in 2010, 2012 and 2013, in an effort to resolve the issues around the exit reversal areas.
The latest proposal submitted by MTO last year was supported by another large roleplayer, PG Bison, proposing the establishment of an independent, neutral company in which MTO would be but one of several shareholders, to contract for the replanting in the exit reversal areas.
DAFF has not responded favourably to any of these proposals to date.
However, it is worth noting that DAFF informed MTO in writing early in 2012 that it was going to replant the areas itself. This led to DAFF attempting to find an agent in the form of the Western Cape Provincial Department of Agriculture to do the work through its landcare projects, but this never got off the ground. Further attempts to find a way of either doing it with inhouse capacity, or by outsourcing it, have to date not yielded any results either, partly due to unavailability of funds.
In the meantime, MTO, seriously concerned about the deteriorating timber supply situation, particularly in the southern Cape and Boland, has allowed radiata pine compartments in exit reversal areas to naturally regenerate and has subsequently thinned and tended them. The oldest of these regenerated areas are already between seven and 10 years of age. In the hope of reaching an agreement with DAFF, MTO temporarily held back the release of these areas to DAFF, according to Bonkemeyer.
Response from DAFF
Approached for comment by SA Forestry magazine about the status of the exit reversal areas and MTO’s proposals, Ms. Sebueng Chipeta, Chief Director for Forest Development and Oversight in DAFF, responded as follows:
“DAFF would like to start replanting these areas as per the letter sent to MTO in January 2012, however, Government is paralysed because MTO refuses to release the VECON areas as per the lease agreement (harvesting schedule) and therefore DAFF has no areas to replant. It must be noted that MTO has NOT followed the harvesting schedule as per the lease.
“MTO MUST ensure that they comply with the lease agreement in its totality. The lease terms are essentially fixed so they are not (with the exception of rental payments) an area for negotiation. This helps to guarantee that the basic conditions or principles governing the management of land and forests cannot be negotiated away, or somehow traded off against other more immediate and pressing shorter term objectives. This is very important in establishing the lease as an enduring instrument, rather than a short-term negotiating tool.”
To be in compliance with the lease agreement, MTO is now obliged to fell to waste the stands, some as old as seven to 10 years, that it has allowed to regenerate in the exit reversal areas, and hand the bare areas back to DAFF.
Patch Bonkemeyer, CEO of Cape Pine Investments, put forward the following arguments in response:
- “If the exit reversal areas are not brought into production as soon as possible, and especially if we are obliged to fell already established stands to waste, it will not be viable for MTO, or probably any future lessee, to continue with forestry, when re-afforestation has to be done from scratch. For MTO, it will probably already be too late even if we could start planting immediately. It is a very expensive investment, unlikely to yield dividends, especially if present values of initial establishment costs have to be discounted back over such a long term as 25 years, when the areas become harvestable.
- “The longer planting and managing the re-established exit reversal areas is delayed, the more the age class distribution, and therefore, sustained flow of produce with the required mix of dimensions, will be detrimentally affected. It will take much longer to attain normality because of the gap caused by the delays of 22 500ha of plantation areas not having been replanted as clearfelling progressed. Now large areas have to be re-planted over a short period of time, causing extensive stands all of about the same age.
- “Add to this the severe disruption for a number of years to the even flow of timber supply caused by the disastrous wildfires in MTO’s Tsitsikamma plantations in 2005, and anyone who knows what forestry is about will understand why MTO has been anxious to get the exit reversal areas planted. There is nothing in it any longer for MTO, but for the sake of the health and stability of the local industry, MTO is doing all it possibly can to convince Government that it is in the interest of all industry stakeholders to bring the areas into production. There is not a moment to spare.
- “The irregularity in the supply of timber from the forests to the sawmills due to the accelerated depletion felling of the exit areas is resulting in surpluses currently made available to the local industry, but which the market cannot handle. Come D-Day in 2020, when all the exit areas, including the reversal areas, have been felled, there will be virtually no timber available for the smaller enterprises dependent on the State plantations in the sustainable lease. In 2020, one third of current production, translating to a volume of 240 000m3 p.a., will be lost, which will have a huge economic impact on the region. From 2020 onward, MTO will of necessity have to supply all of the timber from its sustainable lease areas of about 37 000ha to its own mills.”
- “MTO is contesting the legality of Government holding it to the letter of the exit lease contract, while Government itself changed the terms of reference by re-commissioning exit areas without first reviewing the exit lease.”
515 000m3 of lost production
A somewhat theoretical calculation based on conservative average growth data would translate the 22 500ha of exit areas coming back to forestry into an annual volume of timber of 225 000m3 at an annual increment of 10m3/ha (assuming the plantation is close to normal). When this volume is related to the current capacity of the industry, it makes a huge difference whether this area is in production or not.
An estimate of the timber lost to production on the exit reversal areas since 2008 (when the Cabinet decided that forestry should continue on these areas) amounts to about 515 000m3, or around 74 000m3 per year over seven years. This, theoretically, is the growth lost to the industry expressed in timber volume, due to failure by Government to implement the Cabinet decision of 2008. This loss can be considerably mitigated if the tree stands that have already been developed on these areas could be retained.
When asked what steps DAFF has been taking to resolve this situation, Ms Chipeta said that the approval by Cabinet of the exit reversal was conditional upon the Department developing a forestry re-commissioning plan in the context of the contribution it can make towards sustained land reform and improved security of tenure for vulnerable occupiers, and the implementation of sound environmental management practices.
“Since then (i.e. 2008), the forestry re-commissioning strategy was developed,” she said.
In March this year, DAFF, in cooperation with the Industrial Development Corporation as trans- action advisor, commissioned LHA Management Consultants to do a feasibility study for the Western Cape re-commissioning areas “to objectively advise DAFF on how to implement the decision to ensure that the long-term growth and stability of the forest sector in the Western Cape is secured by aligning it with the broad base poverty alleviation and local economic development objectives of Government”.
This study is expected to take four months to complete.
Impact on the timber processing industry
How has the government’s exit strategy, and particularly the delay in implementing the exit reversal decision, impacted on the local, downstream timber processing industry?
The State is by far the largest roleplayer through its lessee, MTO Forestry, by virtue of the extent of its resource in the Western Cape, viz. 37 000ha of sustainable commercial timber plantations, 22 500ha of exit plantations and 22 500ha of exit reversal plantations, all along the foothills of the coastal mountain ranges.
MTO has two of its own sawmills in the Western Cape, Cape Sawmills in Stellenbosch and the George Sawmill. Both these sawmills were estabished about 70 years ago, but have been modernised over time.
The George Sawmill, previously the George State Sawmill, dates back to the late 1930s. It is the largest single industry and employer in George. Its current intake is just over 100 000m3 p.a., but the mill is soon to be upgraded to increase capacity to 135 000m3 p.a. to enable it to handle the excess timber from the accelerated felling of the exit areas. Although MTO offers about 100 000m3 p.a. of round soft- wood timber on tender (standing), as well as about 50 000-60 000m3 p.a. of small sawlogs on roadside, to various small and medium sawmilling enterprises in the area, the industry cannot absorb all of the surplus. This surplus is only temporary (until 2020), thus preventing these sawmills from expanding their processing capacities.
Although the recession has forced Cape Pine to lower its sawn timber prices for a while to counteract the inflow of cheaper timber into the Cape market from sawmillers based in other provinces, the market has since improved considerably. There is a particularly good market for products in the Cape fruit industry.
MTO has some relatively long-term contracts to supply saw timber to old clients, inter alia PG Bison (40 000m3 p.a.). After 2020, however, no timber supplies, even to these clients, will be guaranteed.
MTO currently supplies the following smaller sawmills with softwood roundwood from its leased plantations (including from the Tsitsikamma area in the Eastern Cape): PSP Timbers (Oudtshoorn), George Timber & Pallets via Forpro contractors, Houttek (George), Riversdal Handelshuis, Platorand, Geelhoutvlei, Kurland, Kareedouw Kreosootwerke and A.C. Whitcher. Timber Two near Plettenberg Bay obtains karri gum (Eucalyptus diversicolor) timber from MTO. Besides, George Sawmill supplies sawn timber to a couple of dry mill operations like Houttek, Wood World Sawmills and Fechters.
As soon as the exit lease expires in 2020, the intake of the George Sawmill will be reduced significantly. It will have to transport roundwood from MTO’s plantations further afield that do not currently supply the mill (e.g. Garcia Plantation near Riversdal). There will be no further timber available to the smaller mills.
Bonkemeyer is of the opinion that the Wemmershoek Sawmill could be revived at a cost of R25 million and be turned into a viable operation, if the exit reversal areas – mainly around Grabouw Plantation – could be re-established to supply it jointly with Jonkershoek and some other existing small plantation remnants in the Boland. However, proposals to this effect were also turned down by DAFF. This means virtually a total withdrawal from the Boland, including the closure of the Cape Sawmill in Stellenbosch.
MTO employs 700 people in its Western Cape plantations, of which 500 are in the southern Cape, while the George Sawmill has a staff complement of a further 200. Forestry contractors provide work for another 800 people.
The next biggest timber business in the southern Cape is PG Bison, which took over the assets (plantations and Knysna sawmill equipment) from Thesens (Barlows), and relocated the Thesen Sawmill (with a capacity of 130 000m3 p.a.) to George, where it also operates a pole plant (Woodline). With the acquisition of the Van Reenen plantations, it now has about 8 000ha of its own very productive plantations on the coastal plateau, supplying 70% of its sawtimber and 50% of its pole needs. The balance of 30% and 50% respectively, is obtained mainly from MTO on contracts expiring in 2020. In turn, it also supplies some of Geelhoutvlei Timbers’ raw material, while Botha & Barnard and Fechters buy timber from it out of hand. It employs 570 people and a further 300 are working for its contractors.
When questioned about PG Bison’s interest in the exit reversal areas, a spokesperson said they may consider tendering selectively for exit reversal areas and would also have no objection if MTO won a tender for the exit reversal areas, provided that PG Bison was given fair access to part of the timber.
Both MTO and PG Bison confirm that a good relationship exists between the two firms in spite of strong competition in the market.
What becomes obvious is that there is strong domination of the industry by MTO and PG Bison, and that, if the State does not intervene, these firms will become even more dominant in a shrinking industry.
The stakeholders that have the most to lose are the smaller sawmilling firms. They are competing hard for resources and are not only dependent on the State’s resources controlled mainly by MTO, but also on PG Bison and to some extent on other private resources. Few of them have their own plantations.
Some sawmills, for example Parkes and Fechters in Knysna, Urbans in George, and Grootbrak Sawmills, have closed down in recent years, inter alia because of dwindling resources and the inability to compete for these because of high roundwood prices. Others have had to downsize, retaining their dry mills and purchasing their sawn timber from other sawmills locally and further afield, or they simply cannot expand their operations because of uncertainty of future supply. All of the existing mills have markets for their timber, as demand is growing while supply is dwindling.
The general outlook is one of gloom as all of them know that by 2020, supplies from the State plantations will run out. This affects even the few firms that have plantations of their own, but which are inadequate to satisfy their milling capacity. Should supplies remain adequate and sustainable, most of the sawmillers see a good future for their enterprises.
However, it would be incorrect to blame only the timber availability for the situation. Rising operating costs, higher raw timber prices, inefficient and ineffective milling operations – all these factors have already had the effect, as in the case of indigenous furniture timber concerns, of forcing some sawmills (in some cases only the wet mills) out of business anyway.
Grootbrak Sawmills (formerly Searles), with an intake of about 44 000m3 p.a., closed down in 2008, partly because of unavailability of timber from MTO’s plantations before privatisation took place in 2005. Its lifespan was extended for a few years by sawing PG Bison’s timber while the latter’s Thesen Sawmill was being erected in George.
According to Kobus Boshoff, former owner of Grootbrak, the five pillars which support the southern Cape economy are timber, agriculture, fisheries, petroleum refinery (PetroSA), and the tourism/ retirement industry. Timber, which was once the largest sector, has been declining, but is still highly important. He blames the situation of the timber industry mainly on the State’s exit strategy, saying, “300 employees (of Grootbrak) lost their work. For every one person in the primary industry, six people in the downstream processing industries are affected. Moreover, every worker feeds on average five mouths. According to this formula, it adds up to a staggering figure of over 10 000 affected people from the closure of one firm alone”.
Employment figures for some of the smaller mills vary greatly, as is illustrated by the following figures in brackets: PSP Timbers (380); Riversdal Handelshuis (55 & sub-contractors: 20); Timber Two (72); Fechters (97 before downsizing to 14); Kurland (40-50); Wood World Sawmills (50); Houttek (130); Geelhoutvlei Timbers (390).
Geelhoutvlei Timbers is the largest of the smaller mills with an annual intake of 60 000-80 000m3. It supplies mainly industrial timber to the fruit industry, DIY and fencing materials, flooring boards and moulded building timbers, bins and pallets, all of which have a good market. Raw timber is sourced from MTO (45%), PG Bison (45%) and other private sources (10%). The owner, Dave Metlerkamp, built up this firm over decades from very small beginnings. He does have 1 200ha of his own plantations, but after 2020, he will have to drastically reduce his operations. At stake, as with all the other affected mills, is the investment in human resources, mechanical equipment and buildings, which will become redundant. Currently, it is one of the larger employers in the rural district, where poverty is rife.
On the other hand, there is Timber Two owned by David Witherington, which saws only karri gum hardwood, obtained mainly from MTO. The mill has a capacity of 10 000m3, but current monthly intake is only 5 500-6 000m3. The reason is that there is a shortage of hardwoods for building and outdoor uses with the durability and strength of karri, the growing of which is limited to the Garden Route area.
Meanwhile, there is a big demand for this timber in processed form for decks, walkways, guide shafts for mines, not only domestically, but also for export. Sleepers are even exported for Britain’s under- ground railways.
Price wise, karri competes very favourably with the same species in its native country Australia, although the quality is not quite as good. There is no commercial substitute for this timber in South Africa. The alternative of importing a timber like Balau is much more expensive.
Karri is subject to depletion-harvesting from the State plantations, either in the exit areas at an accelerated rate, or in the sustainable lease plantations to be replaced by the more economically grown pines. Parkes, who once grew karri in abundance for its tool handle industry, has virtually replaced all its karri plantations with pine. The tragedy is that, while a value-adding local industry has in recent years been developing on the processing of karri gum, mature saw timber has been leaving the area and the country in large volumes in its raw form for chips for the pulp and paper export market.
David has lamented the fact that raw karri timber derived from MTO clearfellings is still being taken out of the country, whereas many other third world countries now ban the export of their round hard- wood timber.
He is of the opinion that MTO is not putting up enough timber on tender and that instead, large volumes are offered out of hand to speculators for exporting as round logs. He says he could double his intake if only there was an adequate sustainable supply. This conflicts with official government policy advocating domestic value addition.
However, it is not as simple as that, according to a spokesman for MTO. Because of the accelerated rate of felling in the exit areas, at times there is too much timber for the local market to handle, and MTO is forced to sell it to other markets, even if exported in its round form.
While Government policy repeatedly emphasises the need to promote a fair and competitive business environment and transformation, encourage the development of value adding industries and to create jobs – none of these noble ideals seem to be happening in the timber industry in the Western Cape Province.
The decline of the larger and the imminent collapse of the smaller sawmilling enterprises in the region will affect a complex value-adding chain all the way through to the secondary processing indus- tries. As the government dithers over implementation of the plantation exit reversal, the Western Cape forestry industry is struggling to retain jobs, never mind create new jobs.
|Naturally regenerated and managed (even pruned) young radiata pine (Pinus radiata) stands in exit reversal areas that now have to be felled to waste.|
|Patch Bonkemeyer, CEO of Cape Pine Investments.|
|Dave Metlerkamp, owner of Geelhoutvlei Timbers.|
|David Witherington, owner of Timber Two.|
*Published in April 2014