SOUTH AFRICA.

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SOUTH AFRICA

ACPWP 44

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1. GENERAL ECONOMIC SITUATION - 2002

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South Africa is regarded by the international investment community as an emerging market. Although the `fundamentals' of the economy are healthy and the management of the economy sounder than it has ever been, this linkage and the highly developed banking sector (which makes inflows and outflows of capital easy and rapid), had serious consequences for the economy, and particularly the local currency, the Rand, during the latter part of 2001. Economic instability in Argentina and Brazil and political turmoil in Zimbabwe also had a negative impact on the economy and the currency. Figure 3 highlights the rapid depreciation of the Rand in 2001 and subsequent recovery. At its worst level the currency had depreciated 34 percent against the currencies of its major trading partners and was, according to The Economist, 70 percent undervalued against the US dollar.

With imports being expensive and exports internationally very price competitive, supply and demand forced a turnaround in the exchange rate and during 2002 the Rand was the best performing currency against the US dollar, appreciating in value by some 24 percent.

On the positive side, this depreciation reduced imports through an increase in import substitution, and expanded exports. Tourism also boomed, the end result being that the economy grew by 3 percent in 2002 against 2.8 percent in 2001.

On the negative side, inflation soared from a year-on-year 7.4 percent at the end of 2001 to 14.6 percent by the end of 2002, much of it `imported inflation', caused by the weak Rand. As a result of tight monetary policy, the South African Reserve Bank put up interest rates by 400 basis points during 2002. The prime overdraft rate is now 17 percent, the highest it has been for a number of years. The inflation spike now seems to be over and inflation will fall during the course of 2003, as will interest rates.

An extremely positive element of South Africa's financial situation during 2002 was that the Reserve Bank's net open foreign currency position was reduced further to US$1.7 billion by year end. It had been no less than US$23.2 billion at the end of 1998. In addition, strong trade surpluses were experienced during 2002. This bolstered forex reserves which, by year end provided for 20 weeks worth of import cover (R66 billion or US$7.4 billion), double the level of five years ago.

Government spending, and hence the budget deficit, has also been tightly controlled and is well within accepted norms, being only 1.6 percent of GDP.

Another positive aspect for the South African economy has been the increase in the price of gold which increased by 25 percent during the year and is expected to reach +/- US$350 per ounce by the end of 2003. Although gold exports as a percentage of total exports have been falling since gold was first discovered in the latter part of the 19th century, bullion still accounts for 12 percent of exports. With a war in Iraq looming, this estimated gold price may be an underestimation. If a war should occur the likely increased price of oil will however impact the economy negatively in the short-term and offset any gains made from higher sales from gold exports.

Another positive note is that Gross Fixed Capital Formation has increased in recent years. From a contraction in 1999, real GFCF increased by 0.8 percent in 2000, 3.6 percent and by 7.6 percent year-on-year growth in the third quarter of 2002 (to R42 billion or US$4.7 billion).

On the negative side, unemployment still remains a huge problem with an official unemployment rate of almost 25 percent being recorded in December 2002. Widespread poverty, high levels of crime, the economic meltdown in Zimbabwe and the HIV/Aids pandemic sweeping the country will all have a serious impact on the economy unless successfully tackled. It is hoped that this shall be the case.

2. PERFORMANCE OF THE FORESTRY INDUSTRY - 2002

South Africa's world-class forestry industry is a highly productive sector. Although South Africa is home to 1 100 indigenous tree species, it is not well endowed with indigenous forests because of its arid climate, but has a thriving commercial forestry industry based on plantations of exotic species. The areas in which the South African forestry industry operates, along its eastern and southern seaboards, are climatically ideally suited to the growing of trees and plantations are intensively managed.

South African plantations cover 1 351 760 ha, 1.1 percent of the country's total land area. This is less than 0.1 percent of the world's afforested area, yet the plantations account for 0.5 percent of the world's roundwood production, making them five times more productive than the average forest worldwide. Three quarters of these forests are currently certified as being sustainably managed. South Africa also has a well-developed and world-class forest products industry and downstream value-addition sector.

Plantations are owned by 1 800 registered tree growers. Forestry companies owned 53.4 percent of commercial plantations in 2002, with public ownership accounting for 8.6 percent, SAFCOL (the state owned South Africa Forestry Company Ltd) 16.4 percent and private individuals 21.6 percent. These figures do not include over 18 000 small-scale emergent black farmers, many of whom are women, growing trees on a micro scale and covering an area of 44 000 ha. This is part of the forestry industry's efforts to promote rural development and economic empowerment through small-grower afforestation schemes.

The forestry industry is dominated by the private sector, with state interests (including SAFCOL) currently undergoing restructuring and privatization, mostly in favour of black empowerment groups.

South Africa's forestry industry is labour intensive by international standards, employing some 60 000 people. By contrast, the forest products industry, particularly the pulp and paper sector, is highly capital intensive, but employs a further 50 000 people. The industry has been an important catalyst for rural development and economic improvement in the poorer areas of the country, owing to its geographic location. However, employment is increasingly becoming an important industry issue, as the past ten years have seen massive reductions in direct employment by the large timber companies, as they embarked on a process of outsourcing their forestry operations (silviculture, harvesting and transport) to contractors. Although this has had some negative consequences, on the positive side it has led to a significant increase in the number of small and medium scale entrepreneurial businesses, many of which are black owned, servicing the industry's needs.

Afforestation

South Africa grows a wide variety of commercial tree species on an area of 1.4 million ha. Pinus (softwood) species account for 52 percent of the area planted, eucalyptus species for 39 percent, wattle 8 percent and other hardwoods for 1 percent. On average, 80 000 ha are harvested annually with 82 000 ha planted annually (2 000 ha of new afforestation and 80 000 ha of replantings).

In terms of management objectives, 56 percent of the area is grown for the production of pulpwood, 37 percent for sawlogs and the balance of 7 percent for other products such as mining timber and poles.

New afforestation reached a peak of 45 000 ha in 1991 and since then has been falling, primarily due to restrictions placed on its expansion through new licensing procedures which have been introduced.

The future yields from currently afforested land would probably support a net increase of 40 percent in the sector's output, equivalent to an annual growth rate of 1.35 percent over the next 25 years. Possible future growth exceeding this implies the necessity for future afforestation, although this opportunity is limited. Any such future expansion would, in all likelihood, be limited to around 200 000 ha and would be achieved through the expansion of small grower development schemes, particularly in the Eastern Cape.

Production from plantations

Roundwood sales from plantations in 2001 were 16 607 000 m3, down marginally from the previous year, constituting sawlogs (4 530 000 m3), pulpwood (10 720 000 m3), mining timber (468 000 m3), poles (545 000 m3) and other products (344 000 m3).

The value of these sales in 2001 was R2.7 billion or 5.4 percent higher than in 2000. However, in US dollar terms, due to the depreciation of the Rand, the value of this production actually fell by 11.9 percent from US$407 in 2000 to US$358 in 2001.

Export of unprocessed timber from plantations

By value, a mere 1.6 percent of forest products were exported in unprocessed form from plantations in 2001, the balance of 98.4 percent being processed into value added goods before being exported. These exports comprised pruned sawlogs valued at R153 million or US$18 million.

Contribution to GDP

The forestry industry's somewhat mundane performance in 2001 resulted in its contribution to the South African economy remaining the same as in the previous year. In terms of its contribution to the Agriculture, Forestry and Fisheries sectors' GDP, its contribution in 2000 and 2001 was 9.9 percent and to total GDP, 0.3 percent.

Sustainable forest management

The environment has become increasingly important and while the industry has been practicing sustainable forest management (SFM) for a good number of years, this has been given a huge boost by its drive for forest certification. Indeed, from a base in 1996 when no areas were certified, South Africa has become a world leader in commercial forestry plantation certification with currently 74.4 percent of its forests (1 005 500 ha) being certified as being sustainably managed. Of the total afforested area, 56.0 percent is FSC certified, 18.3 percent ISO 14001 certified and a further 3.6 percent or 49 000 ha certified under both the abovementioned certification programmes. During the course of 2003, the area that is currently only ISO 14001 certified will also gain FSC certification. It is likely that the total area certified will increase further as more and more commercial farmers get FSC certification through `group certification schemes'.

The industry is also actively involved in the process of developing criteria, indicators and standards for SFM through its participation on the National Forests Advisory Council's (an advisory body to the Minister of Water Affairs and Forestry) Committee for SFM. It is the government's intention to write the CI&S that are developed into the National Forests Act as regulations. This will pave the way for the development of a national standard.

The industry also supports important environmental research and in 2002 published the second edition of its "Environmental Guidelines". This second edition is far more comprehensive that the first and, in the current absence of a local national standard, is being used for the physical environment component of the audits required for FSC certification.

Outlook for the future

Due to the new water use licensing system introduced by the Department of Water Affairs and Forestry, it is unlikely that the forestry estate in South Africa will ever expand by more than 200 000 ha. Most of this expansion will have to be through the growing of trees by small-scale emergent black farmers in the Eastern Cape Province. Progress on developing this potential has been difficult and it is likely than no such expansion will get underway for a number of years. Indeed, in the short-term, the forestry estate is actually likely to shrink, as 57 000 ha of plantations that are owned by SAFCOL are excised from production.

Expansion in the industry will thus have to come primarily from the existing afforested area and in this regard even more effort is likely to be put into research into tree breeding and silvicultural practices. The implementation of research results so far indicate that production from the existing areas could increase by as much as 40 percent over the next 25 years.

On the negative side, legislation has increased the `cost of doing business' over the past few years and planned legislation will continue this trend. As these costs rise, the profitability of the industry is reduced. This is a worrying trend and it is hoped that this will not dissuade growers from continuing to grow tree crops in the longer-term.

3. PERFORMANCE OF THE FOREST PRODUCTS INDUSTRY - 2002

The forest products industry is controlled by the private sector, with only five of the 167 primary processing plants in the country being owned by the state. Pulp and paper is the largest sector and drives the entire industry. This sector alone accounts for 57.6 percent of forest products industry sales and 71 percent of total roundwood intake into processing plants. Sappi and Mondi rank among the largest pulp and paper manufacturing companies in the southern hemisphere and are truly global companies, owning substantial assets in many parts of the world.

This is followed by sawmilling, which accounts for 20.4 percent of roundwood intake into primary processing plants. Decreases in mining activity, combined with the increased use of alternative underground support systems, have led to lower demand for mining timber. This has, however, had a positive effect on the woodchip industry as more hardwood timber has been diverted to this market. There are four major chipping plants currently in operation, all located in Richard's Bay, with another plant currently being planned for Durban. These plants, which process over 3 million tonnes of hardwood roundwood per year, all of which is exported (mainly to Japan), generate revenues of R1.4 billion (US$173 million). Other forest products industries include panel products, pole treating, matchwood and charcoal. Although South Africa is a low cost producer, which makes its products competitive worldwide, the sawmilling industry does lag behind international standards in terms of its use of modern hi-tech milling equipment. However, through necessity, this situation is being rectified.

a. Consumption, production and trade

Considering that South Africa was a net importer of forest products as late as 1985, the growth in the volume and value of forest product exports has been nothing short of spectacular. By 2001, the value of exports had reached R9.5 billion (US$1.1 billion), resulting in a positive trade balance of R5.4 billion (US$641 million). Consequently, forest products contributed 15.6 percent of the country's entire trade surplus of R34.7 billion (US$4.1 billion) in 2001. Despite the fact that, in Rand terms, the value of pulp exports decreased sharply in 2001 (by 23.7%), the value of total forest product exports in 2001 was 8.3 percent higher than those in 2000, primarily due to a 37.7 percent increase in paper exports. The value of imports increased by a lesser extent than did exports, 7.9 percent in Rand terms, and amounted to R4.0 billion (US$477 million) in 2001. The table below highlights the situation.

Table 1. Value of foreign trade in forest products (million Rands)

Product Category

2001

% change 2001 vs 2000

Imports

Exports

Balance

Imports

Exports

Balance

Pulp

216

2 615

2 399

-22.7

-23.7

-23.8

Paper

2 716

3 957

1 241

+11.3

+37.7

+185.6

Solid Wood

1 095

2 723

1 628

+8.2

+20.0

+29.5

Other

15

175

160

+15.9

+3.6

+2.6

Value (R bn)

4.042

9.470

5.428

+7.9

+8.3

+8.6

Value (US$ m)

477

1 118

641

-12.2

-11.9

-11.6

When valued in US dollar terms, once again, the depreciation of the local currency had a marked impact on foreign trade performance as is shown in Table 1 above.

With regard to the composition of imports and exports, by value, the following table highlights the percentage share of the four categories of forest products. As can be seen total imports of pulp are a minor share of imports whereas, at 67.2 percent, imports of paper are the greatest. These paper imports tend to be the higher calendar grades which, due to the properties of the fibre resource available in South Africa, cannot be produced from locally grown fibre.

Table 2. Percentage share of imports and exports

Product Category

% Share to Total

Imports

Exports

Balance

Pulp

5.3

27.6

44.2

Paper

67.2

41.8

22.9

Solid Wood

27.1

28.8

30.0

Other

0.4

1.8

2.9

Total

100.0

100.0

100.0

Forest products industry's contribution to GDP

The reduction in the value of output of the forest products industry in 2001, as compared to 2000, resulted in a drop in its contribution to the overall economy. In terms of the manufacturing sector, its contribution dropped from 8.6 percent in 2000 to 7.2 percent in 2001. Likewise, its contribution to the total GDP of the country dropped from 1.4 percent to 1.2 percent. These figures are based on primary processing output only (i.E. They exclude the value of paper production - a secondary process).

When taking the value of paper production into account, the value of the output increases from R11.9 billion (US$1.4 billion) to R17.7 billion (US$2.1 billion). Including the value of paper production, the industry's total contribution to manufacturing output thus increases to 10.8 percent and to total GDP, 1.8 percent.

Intake into primary processing plants

Intakes into primary processing plants during 2001 amounted to some 16.7 million cubic metres, some 2.4 percent less than the intake during the 2000 year. The biggest decrease was that of pulpwood which dropped by 4.8 percent. This decrease was offset to some extent by small increases in intakes into sawmills, mining timber mills and other processing plants. The table below shows the comparative figures for 2000 and 2001.

Table 3. Intake into primary processing plants 2000 vs 2001

Type of Plant

2000 (m3)

2001 (m3)

% change

% to total

Pulp, Paper & Board Mills

12 442 055

11 839 358

-4.8

71.0

Sawmills

3 315 022

3 407 215

+2.8

20.4

Mining Timber Mills

758 052

798 651

+5.4

4.8

Other Plants

567 429

621 276

+9.5

3.7

Total Intake

17 082 558

16 666 500

-2.4

100.0

Production from primary processing plants

The table below indicates that between 2000 and 2001 there were major differences in production outputs, mainly due to volatile markets. Of main concern is the fact that pulp production fell by half a million tonnes (or 23%). Mining Timber production also fell sharply, by 26.5 percent, although this has been a continuing trend over a long period. The other fall occurred in the production of other products. This fall of 18.3 percent was attributed mainly to a 50 000 tonne drop in charcoal production.

The drop in pulp production was offset by the diversion of pulpwood to chipping plants which resulted in an increase in woodchip production of 856 000 tonnes over the previous year, or by 34.6 percent. Sawn timber (lumber) production rose by 18.6 percent to 1.7 million cubic metres and panel production increased by 8.6 percent.

Table 4. Production volumes from primary processing plants 2000 vs 2001

Product

Unit

2000

2001

% change

Pulp

tonnes

2 261 000

1 740 000

-23.0

Sawn Timber

m3

1 446 300

1 716 000

+18.6

Woodchips

tonnes

2 478 200

3 331 000

+34.6

Mining Timber

tonnes

485 400

337 000

-26.5

Panel Products

m3

706 200

767 100

+8.6

Other Products

tonnes

348 600

284 900

-18.3

Value (Rands)

-

R12 858 billion

R11 867 billion

-7.7

Value (US$)

-

$2.033 bn

$1.568 bn

-22.9

In terms of the value of production, this fell by 7.7 percent between 2000 and 2001 in Rand terms but by 22.9 percent in US dollar terms, purely because of the depreciation of the Rand.

Performance of pulp and paper industry

The production of pulp and paper in South Africa is given in Table 5 below and the trends shown in Figures 1 and 2.

Table 5. South African pulp and paper production

Paper production for the first three quarters of 2002 was up 7.1 percent on the same period in 2001. The main reasons for this were the increased production achieved after a rebuild on one of Sappi's coated paper machines and the building of a new paper machine by the Sharma Group in 2001.

Domestic demand for packaging papers was strong due to a good agricultural season. In the printing and writing grades, the higher cost of paper, due to the currency depreciation, caused a drop in demand and some substitution for lower cost grades, particularly in the advertising industry.

Figure 1. Paper and board production trend

Figure 2. Pulp production (excluding dissolving pulp)

The value of paper production is shown in Table 6. The South African Rand depreciated significantly in the last quarter of 2001. This resulted in the value of production in Rand terms increasing significantly and the competitiveness of South African pulp and paper products in international markets improving.

Table 6. Value of paper production

Imports and exports of paper increased substantially in terms of value as is shown in Table 7. Exports of paper were up 3.9 percent on a volume basis on the same period in 2001. Comparative import figures are not available.

Table 7. Value of imports and exports

b. Financial performance

The volatile exchange rate over the past two years has had a significant effect on the performance of South African forest product companies. Figure 3 shows the monthly average Rand/US dollar exchange rate over the last two years.

Figure 3. Average monthly Rand/US dollar exchange rate

The weak Rand provided good export opportunities for South African companies and strong financial performance was maintained, despite depressed dollar prices on export markets.

c. Outlook for the future

Pulp and paper industry

The South African economy is expected to grow by between 2.5 percent and 3 percent during 2003. This should ensure continued domestic demand for pulp and paper products. The per capita consumption of paper in South Africa of 42.3 kg is low by world standards, indicating a significant opportunity for improvement.

Sawmilling industry

After years of protection, the sawmilling industry has had a hard lesson on globalization and the resultant competition that this has brought, particularly from imports of lumber from Zimbabwe. Over the past few years the number of formal sawmills has declined as unprofitable mills have gone out of business. Despite the problems being experienced with the privatization of SAFCOL, which has led to concerns about the security of future fibre supply, the sawlog resource is excellent and can be utilized profitably with the right technology. It is likely that current production volumes will be maintained as larger and more efficient mills are brought on stream. Profitability is likely to be improved still further as sawmillers move into secondary value added operations. In terms of fibre supplies, there will be increasing pressure on suppliers to supply sawmillers with sawlogs from FSC certified forests.

Only 10 percent of total production is hardwood sawn timber. The market for this product, particularly for export, has increased dramatically in recent years and this demand is likely to continue. The problem being faced by these sawmillers, however, is that there is a lack of eucalyptus sawlogs available for processing. Although attempts have been made to convert mining timber stands to sawlog stands, these efforts have not been as successful as hoped.

Woodchip industry

This industry has grown enormously over the past ten years and this growth is likely to continue, despite the fact that the Japanese have recently reduced the price they are prepared to pay for hardwood woodchips. There are now four chipping plants in operation in Richard's Bay and a further plant, to cater for supplies from Southern ZwaZulu Natal, is soon to be built in Durban.

Mining timber industry

This industry has been in decline for the past 20 years, as alternative ground support technologies have been developed, and it is expected to decline further in the future. As in the past, excess supply of mining timber fibre will be taken up by the pulp and paper industry or the woodchip industry.

Other industries

The pole treating industry has been expanding over the past few years and growth is expected to continue in 2003 with an estimated 8 percent increase in volume produced. Although exports are expected to be hurt by the recent appreciation of the Rand, they are still expected at least to maintain their current level.

The domestic market for charcoal is relatively small and extremely competitive and thus any future growth will be in the export market. As with the pole treating industry, the appreciation in the Rand may possibly hurt charcoal exports.

The wattle extract industry had an excellent year in 2002 and they have made major inroads into the largest market for tanning extract, Italy, as plants in East Africa and elsewhere have closed or are about to close. Prices have increased and future prospects look good.

The match industry is a stable and mature industry and is not expected either to grow or to shrink in the foreseeable future. The supply of poplar fibre, however, is becoming an increasing problem and alternative fibre supplies will have to be identified.

4. ISSUES OF PARTICULAR INTEREST

a. Illegal logging

South Africa is in a fortunate position in that illegal logging on a large scale is not practiced in South Africa. Virtually all of the wood used for industrial purposes is derived from privately or state-owned plantation forests. These are intensively managed and well controlled, with 75 percent of the forests being certified under the Forest Stewardship Council's certification system. There are, from time to time, reports of minor theft of wood from plantations.

Indigenous forests in South Africa only cover an area of 300 000 ha and are mainly managed by the state. They are, however, exploited commercially to a very limited extent to supply wood for the furniture industry.

b. Environmental aspects

South Africa signed the Kyoto Protocol in March 2002. As host of the World Summit on Sustainable Development, there was urgency for the Government to make its commitment to the protocol well before the Summit began in August. South Africa, as a developing country, is not required to make reductions in green house gas emissions and, in fact, stands to benefit from mechanisms such as the Clean Development Mechanism (CDM). The Government has produced a draft Draft White Paper on the Promotion of Renewable Energy and Clean Energy Development. This document underlines South Africa's commitment to making a contribution to greenhouse gas reduction by proposing a target for energy generation from renewable sources of 10 000 GWh by 2012.

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