Tropical Timber Market Report(2022-1-2)

Recent surge in Covid-19 cases around the world has once again led to renewed concerns, but the woodworking sector is still poised for a good 2022 with ASEAN governments urging their enterprises in the respective countries to seize the opportunity. ITTO tells us more about the latest in the market.


Post pandemic market potentials

With the gradual recovery in the major market countries the Malaysian Timber Council (MTC) has assessed the opportunities for the commodity and wood processing sectors.

Tan Ting Wai, MTC Business Development Division Director said current market demand presents distinct opportunities in terms of consumer products for the West and industrial products for the East. 

In developed countries, governments are boosting demand through a variety of ways which has led to rising demand for consumer products. Countries which rely on exports are seeing a surge in demand which has driven up their requirements for raw materials and industrial inputs.

He is of the opinion that there are opportunities in supplying value-added semi-finished and finished products like outdoor furniture to China because the raw material and labour costs are rising as are shipping costs. In addition, the production environment is becoming tough as environmental protection regulations in China are tightened.

In contrast to the situation in China, Tan pointed out the US is the major market for Malaysian furniture accounting for almost 50 percent of total furniture exports. Demand in the US is driven by home building and remodelling and growth in these sectors is expected to be maintained for some time.

In Europe Malaysia’s market share for tropical wood products has dropped due mainly to supply issues during the various lockdowns and has been compounded by a severe lack of shipping containers.


Labour shortage becoming severe

Datuk Zuraida Kamaruddin the Plantation Industries and Commodities Minister wants to initiate government to government negotiations with foreign countries to address the issue of the labour shortage in the furniture manufacturing sector.

The Minister said she has proposed to the Prime Minister and his Cabinet it is necessary to tackle the matter as the country's shortage of labour for the furniture industry was becoming severe.


Digital transformation drive

Digital transformation has emerged as a new opportunity for all businesses and this is behind the Digital Marketing Entrepreneurship Programme (DMEP) and TimbeReality conducted by the Malaysian Timber Council (MTC).

The programme aims to encourage digital marketing as well as e-commerce in the timber industry. The latest contribution to the digital transformation initiative is the digital gallery, TimbeReality. Another, TIMB3R DIP, will help manufacturers upgrade designs and brand image in order to differentiate Malaysian products and face the intense global competition.


Deforestation free

The Malaysian Plantation Industries and Commodities Minister, Zuraida Kamaruddin, has responded to the European Union’s policy draft aimed at eliminating the import into the EU of products linked to deforestation saying the policy, if implemented, will have limited impact on Malaysian shipments to the EU.

Nature Conservation Agreement in Sabah stirs controversy

The domestic press in Sabah has reported on a recently agreed Nature Conservation Agreement (NCA) over a reported two million hectares of Sabah forest. 

According to the press the aim stated by the group involved is to restore and protect the forests from mining, logging and industrial agriculture and monetise a natural assets, carbon.

A large group of NGOs has called on the State government to make public the details of the (NCA) as some have raised questions on its jurisdiction and scale.



Association convinced new EU deforestation free trade proposal will not disrupt exports

According to the Chairman of the Association of Indonesian Forest Concession Holders (APHI), Indroyono Soesilo, exporters of wood products believe the new draft proposal from the European Union aimed at reducing deforestation will not hamper Indonesia's exports.

He said Indonesian products meet the legality criteria determined by the EU and that the products exported to the European Union come from legal timber and are not the product of deforestation.

The Association reports forest and wood product exports to the EU reached US$1.24 billion as of October 2021 exceeding both 2020 and 2019 levels.

It is Indroyono understanding that the EU draft proposal states that companies must provide geographic coordinates showing the origin of the raw material processed for export to the EU market.

The EU draft proposal would prohibit agricultural commodities and their derivatives from entering the EU market if they are produced from raw material from deforested or degraded land.

In related news, APHI Executive Director, Purwadi Soeprihanto, said the deforestation rate was reduced to only 115,000 hectares last year which is very encouraging and the Association supports a permanent moratorium on the issuance of permits for harvesting in peatlands and primary forests.


Prospects in the furniture and craft industries

The Indonesian Furniture and Craft Industry Association (HIMKI) Secretary General, Heru Prasetyo, expressed optimism on prospects for the furniture and handicraft industry even in the face of the Covid-19 pandemic.

Between January and November 2021 production by the furniture and craft industries expanded over 30 percent year-on-year.

The HIMKI supports small scale furniture and crafts enterprises through training and developing marketing especially through participation at trade shows and exhibitions.


Silvicultural technique accelerates merbau growth

The Ministry of Environment and Forestry (KLHK) has released details of a silvicultural technique to accelerate the growth of merbau. The Director General of Sustainable Forest Management, Agus Justianto, said this innovation was developed collaboratively to achieve sustainable forest resource management.

He further stated that the launching of the merbau initiative will result in an increase in the productivity of the natural forest and sustainable management of forest resources, especially in Papua and West Papua Provinces.

The domestic press reports that Indroyono said "Through intensive silviculture the target for natural forest wood productivity of 120 cubic metres per hectare with a 20-year cycle for meranti and a 30-year cycle for merbau can be realised.”


New Business approach in the forestry sector

At the 2021 National Conference of Association of Indonesian Forest Concession Holders the Minister of Environment and Forestry, Siti Nurbaya, expressed her gratitude for the support of APHI members in accelerating the reorientation of businesses in the forestry sector.

She said that the government still needs support so that businesses can contribute to forestry development, especially in relation to Law No. 11/2020 concerning Job Creation.

In response the Chairman of APHI, Indroyono Soesilo, stated that APHI members will continue to support the government programmes and will encourage dialogue on how best to configure a new competitive and sustainable forestry business system to meet the requirements of the Job Creation Law.

He said that one of the ways to reorient forestry business was to harness forest ecosystem services, a concept developed by the government.


Strengthening sengon timber network

The Ministry of Trade has plans to expand sengon (Albizzia - lightwood) exports by facilitating business meetings between sengon timber producers (mainly small farmers in Central Kalimantan) as well as producers throughout Indonesia.

At a recent meeting of stakeholders 25 sengon farmers assisted by Fairventures Worldwide and member companies of the Indonesia Light Wood Association (ILWA) dicussed the ministry plans. At the same meeting a ‘Letter of Intent’ was signed between Fairventures Worldwide and ILWA as a commitment by both parties to develop a lightwood value chain especially in Central Kalimantan.

Fairventures Worldwide works in partnership with communities and small farmers in Central Kalimantan to take advantage of vacant land by planting fast-growing trees such as sengon, which can provide an alternative income for local communities. Sengon production is sustainable in line with current market requirements.

In 2020, Indonesia's lightwood exports reached US$ 1.74 billion with Japan, the US, South Korea, Saudi Arabia and Taiwan as the main markets.


No more permits for primary and peat forest harvesting

The policy of stopping the new permits issuance in primary forest and peat has been shown to contribute in reducing deforestation and forest degradation. 

Deputy Minister of Environment and Forestry, Alue Dohong, stated that the policy of terminating new permits in primary natural forests and peat affects in drastically reducing in the rate of deforestation.

In an official statement, Alue said "Indonesia has succeeded in reducing the deforestation rate by 75 percent compared to the previous year to 115,000 hectares in the 2019-2020 period."


APHI to support carbon sink target

The Association of Indonesian Forest Concessionaires (APHI) has indicated its members are ready to support the achievement of the target of higher carbon absorption than greenhouse gas (GHG) emissions from the forest and land use sector (Net Sink FoLU) in 2030 as decided by the government.

To support the achievement of the FoLU Net Sink, businesses will implement forestry multi-business according to the Chairman of APHI, Indroyono Soesilo.

Under this multi-business scheme forest owners and companies will not only focus on timber but also on the utilistion of non-timber forest products and environmental services. 

According to Indroyono, with a multiple forestry businesses the value of forest will rise which will reduce the pressure for land use conversion.


Indonesian cooperation with Brazil and Congo

During discussion held at the Secretariat of the Delegation of the Republic of Indonesia at the UNFCCC COP-26 cooperation with Brazil and the Democratic Republic of the Congo was agreed in forest management and climate change.

The three countries have management over a huge area of tropical forest and it was agreed there are many areas for collaboration according to the Deputy Minister of Environment and Forestry, Alue Dohong. 

Specifically, the three countries shared ideas on each other's strengths in

climate action and forest management. They also identified each other's capabilities that could be combined. In this collaboration, Indonesia offered expertise in reducing deforestation, controlling and handling forest and land fires as well as its experience in social forest management for communities.

Brazil has extensive experience in implementing payments for ecosystem services (PES), managing climate funds through the Amazon Fund as well as cooperating with low-emission agricultural and livestock management practices, waste management and sanitation which, said Alue, will be valuable for Indonesia.



Fading prospects for the timber industry

2021 will be remembered as the year of the fading prospect for timber industry. In contrast to other extractive industry the entire process starting from the purchase of logs to the delivery of products to the port is regulated and controlled by the respective departments of the government. 

Even the container has to be sealed by Forest Department officers before leaving the factory otherwise the container will not be allowed into the port for shipment.

Timber exporters have been complaining against restrictive practices but the regulators say that a relaxation of current practices is not feasible under the current circumstances.

In addition to the tight control of export procedures inside the country, there are also other challenges in importing countries such as the measures adopted by the EU and the US against Myanmar Timber Enterprise and the market concerns on the verification of timber legality.

In addition to the various regulations, the Covid-19 control measures are also disrupting production.

A few mills decided to close temporarily and few ceased operations and sold-up. In most cases manufacturers had to switch production for the local market. 

The export of veneer and flooring to India, China and some ASEAN countries is expected to continue but the export of teak products to EU and USA will decline sharply in the coming years.

The current administration has ordered a halt to the export of the sawnwood as of 1 January 2023 which is another challenge and millers and manufacturers feel that it is the time to stop or start a new business line.



Economy shows signs of recovery

Data from the National Statistical Office indicates the Indian economy grew 8.4% year on year in the third quarter of this year but this was from a very low base in 2020. 

The good performance was supported by increased vaccination and a rise in agricultural output, public spending and a revival of the services sector.

As the number of people vaccinated rises and as the impact of the fuel duty cuts introduced by the government take effect confidence is expected to rise spurring demand, however, there is concern that once the effect start being seen, rising higher prices and uncertainty due the new Covid-19 variant Omicron could slow the pace of recovery.


India's furniture market set to surge

According to data provided by a Bengaluru market research firm ResSeer, pent-up and deferred demand is forecast to drive furniture sales to new highs over the next five years. 

The report says online furniture sales will triple and there will be an almost doubling of annual spending on furniture.


Manufacturing at 10-month high

India’s manufacturing activity grew at its fastest pace in 10 months in November as companies expanded the sourcing of production inputs encouraged by strengthening demand. 

Data released by the IHS Markit showed Purchasing Managers’ Index (PMI) rose to 57.6 in November from 55.9 in October. A reading above 50 indicates expansion in economic activity and a number below that signals contraction.

Covid school closures hurts India’s ‘pencil village’ One small area in Kashmir supplies almost 90 percent of the wood that is used to manufacture pencils but, because of school closures and lockdowns demand has collapsed.

Most of the pencils in India are made from poplar timber and in addition to supplying local demand there is a thriving export business delivering pencils to more than 150 countries.

Due to the drop in demand and covid control measures, the owners of pencil factories reduced their workforce by more than half. The timber suppliers and the factory workers have to wait for demand to pick up.


India’s response swift and substantial says IMF

In October the International Monetary Fund concluded consultations on the economy with India. A recent press statement says “India’s economy is poised for a rebound after enduring a second wave of Covid-19 infections this year that further constrained activity and took a heavy toll on its people“.

New infections have fallen significantly and vaccination rates have risen to surpass a billion doses, although a resurgence is possible even if it seems unlikely today. The IMF says India was among the fastest-growing economies in the world in the decade before the pandemic which created unprecedented challenges. The two Covid-19 waves caused health and economic crisis however, the economy is gradually recovering.

The IMF note that the authorities’ economic response, was swift and substantial as it included fiscal support such as scaled-up support for vulnerable groups, monetary policy easing, liquidity provision and accommodative financial sector and regulatory policies.

According to the IMF growth is projected at 9.5 percent in the financial year 2021/22 and 8.5 percent the following year. However, taming inflation, projected at 5.6 percent in FY2021/22 will be a challenge.


Still a way to go to recover housing market

According to the results of a survey by Deloitte Touche Tohmatsu India LLP (Deloitte India) the pandemic has altered home buyer preferences. 

The report from Deloitte sets out the key trends that are expected to contribute to the revival of the Indian real estate sector.

The impact of the pandemic control measures had a very varied impact with the hospitality and manufacturing sectors being badly affected and since restrictions were eased the rebound has been equally uneven.

A revival of government infrastructure projects is helping the manufacturing and construction sectors but consumer anxiety is holding back a recovery of the services sector.

However, a recovery is taking root as witnessed by recent high-frequency data but there are some challenges such as high inflation, the need for more job creation, poor wage growth and reduced asset values and these will affect consumer purchasing power.

Despite the anticipated rebound in 2022 output levels are likely to remain much below the pre-pandemic GDP levels according to the results of the survey.

The authors of the survey write “With industries showing immense resilience through innovative ways during the pandemic and India now gradually making its way toward recovery, growth sustainability in 2021 will depend on widespread vaccine deployment and effective government measures”.



Trade highlights

In November 2021, Vietnam's wood and wood product (W&WP) exports to the EU reached US$45 million, up 2.3 percent compared to November 2020. In the 11 months of 2021, W&WP exports to the EU market were estimated at US$528.1 million, an increase of 16 percent over the same period in 2020.

Exports of kitchen furniture in November 2021 are estimated at US$82 million raising the total export of this item in 11 months of 2021 to US$832.8 million, up 24 percent over the same period in 2020.

Vietnam's export of rattan, bamboo and other types of NTFPs in November 2021 reached US$70 million, up 2.5 percent compared to October 2021 and up 23 percent compared to November 2020.

Over the 11 months of 2021 Vietnam's exports of NTFPs of all kinds is estimated at US$771 million, an increase of 42 percent over the same period in 2020.


Wood enterprises speed up production to meet year-end orders

According to the Ministry of Industry and Trade Export and Import Department wood and wood product exports in November reached US$1.15 billion, up 21 percent compared to October 2021, but down seven percent compared to November 2020.

Exports of wood products reached US$840 million, up 35 percent compared to October 2021 but down 17 percent compared to November 2020.

Production in Vietnam has returned to normal and businesses operating in the wood industry are accelerating production to keep up with signed export orders for the last month of the year and the first half of 2022.

Export activity by the timber industry increased in October and November 2021 although the export value is still not equal to the same period in 2020.

Overall, the timber industry maintained good growth in the first 11 months of 2021 thanks to the efforts of enterprises to maintain production when the epidemic broke out in many provinces and cities across the country. Production recovered quickly after the easing of social distancing. 

At the current growth rate it is estimated that exports of wood and wood products will reach US$14.3 billion in 2021, up 14 percent compared to 2020 and completing 98.7 percent of the target set for the year.

The driver of growth for the timber industry has been wooden furniture production. Exports of wooden furniture accounted for 68 percent of the total export value of wood and wood products in the first 11 months of 2021.


Rising imports of oak from EU

Vietnam's imports of oak from the EU increased in the first 10 months of 2021 reaching 80,800 cubic metres, worth US$41.8 million, up 54 percent in volume and 66 percent in value over the same period in 2020 and accounted for 30 percent of total oak imports imported into Vietnam.

Oak a major import species Vietnam's imports of oak in November 2021 are estimated at 24,400 cubic metres worth US$15.4 million, up 10 percent in volume and 10 percent in value compared to October 2021. Compared to November 2020 imports dropped 19 percent in volume and seven percent in value. 

In general, over 11 months of 2021 oak wood imports totalled at 292,200 cubic metres, worth US$164.8 million, up 12 percent in volume and 33 percent in value over the same period in 2020.


Vietnam to plant extra 20,000 ha coastal forest to cope with climate change

Vietnam will plant 20,000 hectares of forests as part of a project to protect and develop coastal forests in response to climate change and to push green growth over the next 10 years.

It also aims to effectively promote the role and functions of forests in coastal defence, environment protection and coastal infrastructure systems as well as prevent desertification and land degradation while conserving biodiversity, reducing greenhouse gas emissions as well as creating jobs for people in coastal areas.

According to a report of World Bank, Vietnam is highly vulnerable to sea level rises and storms along the coast, highlighting the critical importance of mangrove and coastal forests.


Cambodia, Vietnam cooperation on forest sector

Cambodia and Vietnam have expressed their commitment to strengthen forest sector cooperation, mainly combating the cross-border trade of timber and wild animals. 

Cooperation in the field of forest management and the prevention of deforestation and cross-border trading in illegal timber and wildlife were the main topics the two parties discussed during a recent dialogue.



Win the race against Omicron to secure growth

In its latest report on Japan's economic and financial situation the OECD noted that "losing the race against new variants could result in renewed states of emergency being declared delaying the recovery," despite progress in the government's vaccine rollouts.

The OECD projected in its latest economic outlook that the Japanese economy will grow 1.8 percent in 2021 and 3.4 percent in 2022.

Under virus emergencies, people in Japan had been asked to refrain from making nonessential outings although the requests were nonbinding. The OECD added that the Omicron variant could ‘aggravate’ the employment prospects of young people after graduating.


Economy declined 3.6% in the third quarter

The Japanese government says the country's latest economic downturn bottomed out in May 2020 during the first wave of the pandemic. 

A Cabinet Office expert group said Japan's economy took a turn for the worse on the back of trade disputes between China and the US at the same time a state of emergency was in place for much of the country, hurting employment and manufacturing.

The group said the downturn extended for 19 months making it the fourth longest recession since the end of World War Two.

The economy began to show signs of recovery picking up in June 2020 but the recovery remains weak with GDP dropping for three consecutive months to September 2021 and even in comparison with past recovery periods the current upturn appears to be stalling.

Japan's economy shrank slightly faster than initially reported in the third quarter, as a sharp rise in local Covid-19 cases hit private consumption and a global chip supply shortage hurt corporate sentiment. The economy declined an annualised 3.6 percent in the third quarter of this year mainly due to a larger than expected fall in private consumption which makes up more than half of GDP.



National standards on MDF and LVL released

National standards on Medium Density Fibreboard (GB/T 11718—2021) and Laminated Veneer Lumber (GB/T 20241—2021) will be effective as of 1 June 2022. The two new standards are revisions of the standards (GB/T 11718—2009) and (GB/T 20241—2006).

Medium density fibreboard (MDF) is one of the main types of fibreboard in China accounting for more than 80 percent of the national total output of fibreboards. The output of MDF was 53.47 million cubic metres in 2020 in China.

Since the release of GB/T 11718-2009 MDF in 2009 it has played an important role in regulating the production of MDF in China and in improving the quality of MDF products.

In order to promote further development of MDF industry, the GB/T 11718-2021 standard is partially revised according to international standards for MDF and some technical content has been revised.

Laminated Veneer Lumber (LVL) is an important structural material widely used in building I-beams and wood joists and for door frames and furniture framing.

Since the release of GB/T 20241-2006 LVL in 2006 the standard has played an important role in standardising production, improving product quality and promoting the development of wooden structural and packaging industry.

In the revision of GB/T 20241-2021 the relevant standards of ISO are adopted with full reference to the relevant standards of Japan and the EU.


Merchants advised to stock up in advance

The Winter Olympic Games will be held soon and the Chinese government has implemented environmental control measures in many provinces where air pollution is a problem such as in Northern Western China.

All heavy industries in these provinces will be shut down before 1 January 2022 with a focus on Hebei Province (Tangshan, Shijiazhuang, Zhangjiakou and Chengde cities), Tianjin, Shandong province (Jinan, Weihai and Weifang cities), Shanxi Province (Taiyuan, Datong and Changzhi cities) and He’nan Province (Luoyang and Zhengzhou cities). 

The shutdown period is from January 1, 2022 to March 8, 2022.

Timber merchants have been advised to stock up in advance to guarantee their production requirements can be met during the shutdown.


Decline in sawnwood imports in Q3 2021

According to China Customs, in the third quarter of 2021 sawnwood imports totalled 21.91 million cubic metres valued at US$5.792 billion, down 19 percent in volume and two percent in value. 

The decline in sawnwood imports in the third quarter of 2021 was because of a drop in supplies from Russia, Canada, the US, Finland and Germany (down 13%, 54%, 42%, 32% and 48% respectively). Imports from these suppliers accounted for over 60 percent of the national total.

The main reasons for the decline in sawnwood imports were the impact of the pandemic control measures on processing plants and the fact that these plants could not secure adequate raw materials. The second factor was logistic problems. 

Another factor was that there was strong demand in the EU, US and Japanese construction sectors where timber prices were rising. 

Sawn softwood imports fell 26 percent to 15.01 million cubic metres, accounting for 69 percent of the national total.

A significant decrease in coniferous log imports was responsible for the overall fall in total log imports in the third quarter of 2021.


Slight increase both in sawn hardwood and tropical sawnwood imports

Sawn hardwood imports rose three percent to 6.9 million cubic metres because of higher imports from the top sources Thailand, Russia and the Philippines (up 6%, 25% and 93% respectively) however, sawn hardwood imports from the US fell 16 percent in the third quarter compared to 2020.

Of total sawn hardwood imports tropical sawnwood imports were 4.46 million cubic metres valued at US$1.421 billion, up one percent both in volume and in value and accounted for about 20 percent of all sawnwood imports.



EU publishes far-reaching ‘deforestation-free’ regulatory proposal

On 17 November 2021, the European Commission announced a Proposal for a new Regulation to reduce global deforestation and forest degradation driven by EU consumption of certain commodities.

If enacted, the law would have a profound effect on EU trade in the regulated wood and agricultural commodities. 

It would represent a very significant extension of state intervention in European commodities trade even compared to the existing controls imposed through the EUTR.

The proposed law would prohibit regulated commodities and derived products from being placed on the EU market unless they can be shown to be ‘deforestation-free’ and ‘forest degradation-free’, produced in accordance with applicable laws, and covered by a ‘due diligence statement’. It would also prohibit their export from the EU under the same conditions.

The proposed regulation would impose mandatory due diligence rules on companies to ensure that only compliant commodities and products enter the EU market or are exported from it. 

The regulation would repeal the EU Timber Regulation (EUTR) which already imposes mandatory due diligence rules on EU timber traders.

Annex I to the regulatory proposal contains a Combined Nomenclature (CN) list of products that would be covered by the Regulation.

The list of wood products closely follows that for EUTR. It includes: nearly all CN44 wood products with a few notable exclusions (such as charcoal, tools, tableware/kitchenware, and packing material used exclusively to carry another product); all CN47 pulp and CN48 paper products with the exception of bamboo-based and recovered products; and categories of wooden furniture under 9403 together with wooden prefabricated buildings (940610). 

As in EUTR (and for reasons which remain obscure) wood seating under 9401 is not included. Of agricultural commodities, the proposed regulation includes cattle, cocoa, coffee, palm oil, and soy together with derived products. In a press conference, Commissioner Sinkevičius did not exclude adding rubber to the list of commodities concerned.

A deforestation-free commodity or product would have to be produced on land that has not been subject to deforestation after 31 December 2020, and for which wood has been harvested without causing ‘forest Degradation’ since that date. 

Criteria for assessing whether commodities are deforestation-free or degradation-free would be applied regardless of the country of origin.

‘Deforestation’ is defined in the proposed regulation as "the conversion of forest to agricultural use, whether human-induced or not". The extension of the requirement to cover products which are forest degradation-free would be particularly significant to the wood products sector.

This requirement is only relevant to timber harvesting and in practice would introduce a mandatory sustainability requirement for wood products.

‘Forest degradation’ is defined in the regulation as "harvesting operations that are not sustainable and cause a reduction or loss of the biological or economic productivity and complexity of forest ecosystems, resulting in the long-term reduction of the overall supply of benefits from forest, which includes wood, biodiversity and other products or services."

The definition of ‘sustainable harvesting operations’ is broad and would effectively impose certain specific silvicultural requirements. According to the draft regulation the term "means harvesting that is carried out considering maintenance of soil quality and biodiversity with the aim of minimising negative impacts, in a way that avoids harvesting of stumps and roots, degradation of primary forests or their conversion into plantation forests, and harvesting on vulnerable soils; minimises large clearcuts and ensures locally appropriate thresholds for deadwood extraction and requirements to use logging systems that minimise impacts on soil quality, including soil compaction, and on biodiversity features and habitats".

As in EUTR, the proposed regulation would impose obligations on ‘operators’; i.e. persons or entities placing the commodities and products in question on the EU market, or exporting them from it, for commercial purposes.

Where a relevant commodity or product is placed on the market by an entity from outside the EU, the operator would be the first entity established in the EU who buys or takes possession of it.

EU importers would therefore qualify as operators. Some obligations would also be set on ‘traders’.

Operators would have to exercise due diligence before placing regulated commodities or products on the EU market or exporting them from it. Due diligence would include the collection, organisation and preservation for five years of verifiable information that the commodities and products are deforestation-free and that they were produced in line with relevant legislation of the country of production.

As part of their due diligence, operators would have to engage in risk assessment and be able to demonstrate that the relevant commodities and products are deforestation free, and that they have been produced according to the relevant legislation of the country of production. 

Where operators are not able to demonstrate that the risk of noncompliance is negligible, they should not place the relevant commodities or products on the EU market or export them.

Operators would also have to carry out risk mitigation, adopting measures to reach nil or negligible noncompliance risk levels. Such measures would have to be adequate and proportional to effectively mitigate and manage non-compliance risk. 

They would include internal control and compliance management, the appointment of a management-level compliance officer, and independent risk mitigation auditing.


Regulatory proposal would significantly alter and extend EUTR obligations

Many of the due diligence requirements will be familiar to timber traders that have been working within the framework of EUTR since March 2013. However, according to the draft regulation, the EUTR due diligence requirements would be ‘adapted and improved’ through the introduction of several new and far-reaching features including:

•a due diligence statement (Article 4). Operators would produce a due diligence statement when satisfied that the commodities or products were compliant, thus assuming responsibility. In the statement, operators would confirm having carried out due diligence, and having found no or only negligible risk. Submitting a due diligence statement would be necessary to place these commodities or products on the EU market or exporting them from it; 

•the geographic information requirement or geolocation, linking the commodities and products to the specific plot of land where they were produced (article 9);

•country benchmarking (Articles 25-26). The European Commission would use a benchmarking system to assess the risk of commodity-driven deforestation and forest degradation by country. The benchmarking system would categorise each country (or subnational region) as ‘low’, ‘standard’ and ‘high risk’.

•a distinct procedure for ‘simplified due diligence’ (Article 12) to apply when sourcing from a country or region assessed as ‘low risk’. Under this procedure operators would be still obliged to undertake the first step of the due diligence procedure (i.e. collect information, documents and data demonstrating products are legally produced and deforestation-free). However, they would not be obliged to undertake risk assessment and risk mitigation.

•increased cooperation with customs (Articles 14 and 24) who would be empowered, for example, to verify the status of the due diligence statement covering individual import or export consignments and to block and destroy any consignment where risk analysis by EU competent authorities has established that there is a high risk of non-compliance;

•minimum inspection levels (article 14): each Member State would have to carry out checks of at least five per cent of the relevant operators, every year. Five per cent of the volume of each of the commodities and products placed, made available or exported from each territory would also have to be subject to checks each year.

Introduction of the new regulation would have profound implications for those countries engaged in the FLEGT VPA process towards development of licensing procedures to allow products to be placed on the EU market without operators having to undertake EUTR due diligence.

Drawing on the results of the EU's ‘Fitness Check’ of the FLEGT Regulation and EUTR (see below), the regulatory proposal includes a provision declaring wood covered by a FLEGT license to have fulfilled the legality requirement.

It also notes that "some VPA components might be integrated where feasible and agreed by the partners into specific cooperation programmes, like Forest Partnerships or others to further support forest governance".

However, the regulatory proposal includes no provision for FLEGT licenses to meet the ‘deforestation-free’ or ‘degradation-free’ requirement.

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