Forest Industry Integration Hits a Knot

Forest Industry Integration Hits a Knot

Clashes between a papermaking giant and villagers over forest rights reflect flaws in China's forestry-paper industry reform effort.

Paper products manufacturer APP China has been locked in disputes over forest property rights with villagers in the southern regions of Hainan, Yunnan and Guangxi. At stake is not only access to the forestlands that the company obtained for paper production, but the future of China's effort to reform the forestry and papermaking industries.

Since its inception in 1992 as a subsidiary of Asia Pulp & Paper Co. Ltd., Asia's largest pulp and paper producer, APP China has relied on close relations with the Chinese government to obtain forestland, working through the administrative measures of local governments. China's forests are collectively owned, but the use rights were allocated to farmers. Due to a lack of clear boundaries for forest use rights, the company was granted plots at relatively low prices without agreements from the villagers who have the use rights.

Meanwhile, China's papermaking industry, the world's second largest, has been grappling with an unbalanced supply system for raw materials. Inputs of high-polluting straw pulp far outweigh the use of wood pulp. Although papermaking contributes only 2 percent of the national GDP, it accounts for more than 15 percent of the country's industrial sewage.

Government policy makers working on forest industry reform view the current separation of forest industry and papermaking administrative oversight as a barrier to balancing the raw materials system.

That's one reason why the Chinese government launched reforms in 2001 aimed at industry integration. The plan was to combine investment as well as operations of the forestry and papermaking industries. Each entity was encouraged to develop vertically along the industry chain, from forest management to papermaking. Reform advocates said the change would help the country meet a huge demand for papermaking materials, as well as protect forests and improve forestland management.

The Chinese government also approved projects to develop rapid-growth, high-yield forests in 18 provinces. The goal of the planting project, launched in 2002, was to increase wood pulp supplies. The policy also offered a good opportunity for papermakers to expand their business into forest management.

APP China was one of the most active players in the tree-to-paper integration movement and, in the government's eyes, a bellwether for advancing reforms. By 2002, the company had announced 90 billion yuan in investments in China, and targeted more than 26,800 square kilometers for forest plantations.

However, as land costs rose and villagers became more aware of their land use rights, APP China faced an increasing number of hurdles. Securing forestland became more difficult.

An official at the Hainan Forestry Bureau told Caijing that many villagers have complained to the bureau since 2003, saying APP China underpaid, and are asking to return the forestlands they claim.

It appears inevitable that such disputes will increase in the future for papermakers such as APP China, which has taken advantage of blurry land use rights rules to obtain forestland. And the disputes are likely to drive up industry costs.

Forestland prices have already risen as a result of forest property rights reforms implemented since last year in 14 provinces and regions including Hainan, Yunnan and Guangxi. Under the reforms, individuals were given rights to use forestland and receive percentages of forest-product earnings. Caijing has learned forestland prices increased dramatically in some regions after land use rights were clarified.

The government is also becoming more reluctant to help APP China. The Hainan forestry official said the provincial government would no longer help the company obtain land. "If they want any plot, they need to negotiate with individual villagers by themselves," said the official.

Going it alone could lead to further belt-tightening at APP China, which has posted thin profit margins in recent years and reported 6 billion yuan in liabilities against 26 billion yuan in assets in 2006. The company currently operates 17 pulp and papermaking companies along with 25 forest plantations.

As a major player in forestry-papermaking integration, APP China's struggles suggest China's ambitious forest and papermaking integration reform may turn cautious at a time when the government continues to promote big plans.

For example, the government's National Reform and Development Commission set a target in 2007 to add 5 million hectares of forest for papermaking materials and boost production capacity by 6 million tons of wood pulp. The commission also encouraged papermaking companies to expand capacity through mergers and acquisitions, which could trigger an industry restructuring wave.

But industry experts doubt whether China can meet that target.

Successful practices in forest-industry countries such as Finland show that resource limits are the major obstacle to forest-papermaking integration, and that the key to promoting reform is to effectively protect forests.

But forest management in China has been weak. Inefficient forest planning and management, as well as inadequate resource protection, have hindered development of the papermaking industry.

Some experts have urged China to conduct a national environmental assessment of forest resources. That could serve as a starting point for developing forest plantations in different regions according to environmental conditions.

Scientific management of forestland is believed to be a precondition for successful integration of the country's forestry and papermaking industries. Ironing out land use rights with villagers in wooded areas is also necessary, as APP China has now learned.

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