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Down to Earth No. 67, November 2005

Chip mill will put more pressure on South Kalimantan forests and livelihoods

Construction work has started at a wood chip mill on Laut Island, South Kalimantan. It is part of a planned development of the pulp and paper industry in the province which threatens to destroy forests and impoverish local communities.

The new chip mill, which will have the capacity to produce 700,000 tonnes of wood chips, is being built by PT Mangium Anugrah Lestari (PT MAL) on Pulau Laut - a large island off the southeast coast of South Kalimantan province. PT MAL is a subsidiary of Singapore-based United Fiber Systems (UFS). UFS is the international firm heading the development of the province's first pulp mill - a project which has been vigorously opposed by local and national NGOs for the past three years.

UFS has been trying to get a 600,000 tonne pulp project off the ground on the mainland of South Kalimantan since it officially received the go-ahead in 2003. The pulp plant at Sungai Cuka village, in Satui sub-district, has been delayed due to problems financing the project and legal difficulties. Initially, the Pulau Laut chip mill project was expected to generate funding for the Satui pulp plant development and to supply it with its main raw material in future. Now that UFS has taken over production at the Kiani Kertas pulp plant in East Kalimantan, the game plan seems to have changed.

South Kalimantan's forests and the communities dependent on forest resources are expected to suffer the impacts of these developments. The mills are more than likely to source wood supplies from natural forests - directly or indirectly - since supplies from existing plantations cannot meet this new demand. Areas of remaining forest will be cleared to establish more fastwood plantations. This will contribute further to Indonesia's forest crisis. Yet, at the national level, Indonesia is supposed to be reducing the over-capacity of its wood-processing industries.

Supply gap

Both the pulp mill and wood chip mill intend using timber from state-owned forestry company plantations (Inhutani II and III) in addition to UFS' plantation concession, managed by PT Hutan Rindang Banua (PT HRB)1. According to UFS, the Satui pulp mill will be unique in Indonesia as it will only use plantation timber right from the start. However, calculations in a recent CIFOR report show that UFS cannot obtain sufficient raw material from its own subsidiary.

In theory, an area of 160,000ha of well-managed plantation could meet the pulp mill's needs of nearly 3 million cubic metres of timber per year in a sustainable 8-year cycle. HRB officially has a 268,585ha HTI concession. UFS claims that 86,000ha was planted with acacia between 1994 and 1999, but the area and quality of these plantations is in doubt. Fires may have destroyed more than half of the trees planted in some places. Drought and poor plantation management have affected yields too. Less than 15,000ha consists of plantation in good condition, according to local NGO WALHI Kalsel.

The HRB concession is spread between five locations. Nearly 40% cannot be planted with pulpwood. The total area also includes some settlements. There are also overlapping land use permits, mainly for oil palm plantations and coal mining by PT Arutmin. Nine oil palm plantation permits, mostly belonging to the Minamas Group, overlap with HRB's plantation and, once the acacia has been harvested, the land will be taken over for oil palm and not replanted with pulpwood.

The plantation area has been further reduced because local communities have reclaimed land which they had previously allowed HRB to use. At Sebamban village, the village head has allocated land to the community and allowed his people (Balinese transmigrants) to cut down acacia trees to build their houses.

Extensive areas have been over-logged and, since major forest fires swept through Kalimantan in 1997-8, some areas are now coarse grassland (alang-alang). Nevertheless, 73,000ha of HRB's concession is still covered with natural forest. Over half this forest is at risk of destruction. The Finnish forestry consultancy, Jaakko Pöyry, advised UFS in 2004 that 44,000ha of 'waste forest' is suitable for conversion. Furthermore, there are rumours that UFS does not currently have the funds to replant and maintain the HRB plantation. There are other plantations in the vicinity of the proposed Satui pulp plant, but these currently have other buyers - including pulp plants in Riau - and UFS has, as yet, no contract with them. In other words, there is no guarantee of sustainable plantations for the pulp plant.

Converting forests to wood chips

The wood chip plant should start production in early 2006. It is expected to chip acacia logs harvested from HRB's mature plantation areas on the mainland, Inhutani II plantations on Pulau Laut, and sites managed by small-holders and other companies in the area. UFS will probably use these chips in the newly acquired Kiani Kertas pulp plant in the northern part of neighbouring East Kalimantan. Any surplus can be sold to other pulp producers, within Indonesia or for export, at least until the Satui pulp mill is built.

A spokesman for HRB acknowledged that there are problems, but insisted that HRB was capable of supplying the chip mill, with additional supplies from Inhutani II and III. Even so, the chip mill may well operate at the expense of natural forests and local NGOs still doubt that it will be supplied from legal sources of timber. There is one productive pulpwood plantation managed by Inhutani II on Pulau Laut - fairly near the proposed wood chip plant site. But both Inhutani II and III are currently supplying timber to Kiani Kertas. Moreover, Inhutani III is not, at present, replanting its plantation concession after felling.

Unlike the planned South Kalimantan pulp mill which is designed only to handle acacia trees, the wood chip plant can process any sort of timber - including mixed tropical hardwood from destructive or illegal sources. However, a new Jaakko Pöyry report, commissioned by an Austrian bank backing the project (see below), now claims that UFS will not use any natural forest wood in the chip plant. Indeed, UFS apparently aims to have its plantations FSC-certified. The report, nevertheless, admits that "the creation of a local market for Acacia mangium chip logs could potentially encourage interested parties outside the concessions, illegally or otherwise, to establish plantations." It goes on to point out that there are some 40,000 ha of natural lowland forest on the northern part of Pulau Laut that could be converted to plantations. Once the commercially valuable wood has been extracted, the rest can be clear felled and shipped along the coast to Kiani Kertas to be turned into pulp.

This plant was part of the timber empire of Bob Hasan, the now-disgraced forestry tycoon, government minister and Suharto crony, jailed for corruption. In recent months the plant has been taken over by UFS, meaning that its growing portfolio of subsidiaries will be competing with each other for scarce plantation pulpwood supplies.

UFS projects in Indonesia
Relevant UFS companies Activity Location Area/capacity
PT Hutan Rindang Banua (previously known as Menara Hutan Buana) PT HRB Industrial timber estate management Five blocks at Riam Kiwa, Satui, Kintap, Teluk Kapayan and Pamukan in the southeast part of the South Kalimantan mainland Officially 268,000 hectares
PT Marga Buana Bumi Mulia PT MBBM Development and operation of new pulp mill (US$863 million) to start in 2007 Sungai Cuka, Satui, Tanah Bambu district, South Kalimantan 600,000 tonne pulp/year (possibly increasing to 1.2 m t)
PT Marga Anugerah Lestari PT MAL Development and operation of woodchip mill (US$38 million) to start in early 2006 Alle-Alle, south part of Laut island, South Kalimantan 700,000 tonne wood chip/year
PT Kiani Kertas (negotiations for purchase in progress)

Pulp mill (set up in Nov 1999 by Bob Hasan; UFS takeover July 2005)

Malinau district, north part of East Kalimantan 525,000 tonne hardwood kraft pulp/year

Pulau Laut villagers get one-sided view

Construction of the chip mill at the village of Alle-Alle, Pulau Laut had started by early August 2005 with land clearance. The governor of South Kalimantan laid the first stone for the US$45 million plant in early September. The plant will be built and operated by UFS subsidiary PT MAL.

Compared with the devastating effects that a chip mill can have on natural forests, the 'footprint' of the plant is relatively small. Some land is required for the factory and yards for incoming timber and outgoing wood chips. As the site is on the coast, and materials will be shipped in and out, few access roads are needed, but new harbour facilities will be constructed. The chip mill, lifting equipment and vehicles will generate noise and dust day and night and it will also produce mountains of sawdust as a waste product. So the lives of the local community will change forever.

DTE's research has found that local people who may be affected by the mill's operations have not been sufficiently informed about potential negative impacts of the mill or the facilities associated with it. PT MAL's information campaign, in 2003, was limited to local government officials and landowners affected by the project, not the wider community. The company claims the plant will employ at least 2-3,000 people in an area where some 7,000 people are unemployed, but this seems unrealistic. PT MAL told local people that waste (sawdust) from the mill was not dangerous and could in fact be used to generate electricity. Alle-Alle and Tanjung Seloka villagers who only have electricity from 18:00 to 6:00 welcomed this. Company representatives also said there would be no noise pollution.

The land acquisition process did not come close to upholding the principle of free, prior and informed consent. The company acquired all the land it needs (84ha) from 173 people. However some villagers are dissatisfied with the compensation they received (Rp5,500 per square metre) which is relatively low compared with open market rates of 40,000 - 100,000/m2.

Despite disappointment over the low compensation levels, the villagers regard the project as a source of jobs and improvements to the village's facilities. Their hopes include road repairs, less unemployment, development of telephone and mobile phone communications and revitalisation of the defunct village cooperative to sell farm produce.

The company has failed to point out any negative impacts linked to the construction of a 100m dock to import timber and export wood chips. The water off Pulau Laut is deep and ships with a dead weight of 30,000 metric tonnes will be able to use the harbour, according to the local newspaper, Banjarmasin Post. Since the majority of local people are of Mandar and Bugis origin, whose livelihoods rely on small-scale fishing, it would not be unreasonable to expect that the company should discuss the likely effects before beginning construction.

An environmental impact assessment for the dock completed in May 2005, which has been viewed by DTE, points to six potential areas of concern about the development's environmental aspects. These cover impacts on water quality, the amount and variety of aquatic life in the surrounding area, community health, air quality, soil quality, erosion and sedimentation levels and coastal abrasion.

International backing

There is major international investment backing the pulp and chip mill projects. European companies are planning to supply equipment and expertise as well as arrange financing.

UFS, though based in Singapore, has been owned by Finnish, Swedish and Indonesian investors since 20022, when they took over the pulp mill and plantation companies from Chinese construction company Poh Lian. Originally, the projects were owned by Probosutedjo, former president Suharto's brother-in-law.

It was during Probosutedjo's time that PT MHB got into trouble with the authorities for failing to pay around US$10 million in government reforestation fund loans - a sticking point that persists in negotiations over licences between Indonesia's forestry department and the current owners.

In 2003, environmental campaigners secured the withdrawal from the pulp project of Akzo Nobel, a Dutch subsidiary of the Swedish chemical company, Eka. The company had signed up to build a plant to produce bleaching agents for the plant and its investment represented around 8% of the total pulp investment cost.

According to a 2005 report by CIFOR, a major Austrian bank, Raiffeisen Zentralbank Oesterreich, has arranged 53% of the financing for the chip mill construction (US$21 million). 80% of the finance secured so far for the pulp mill (US$693 million) is coming from CMEC, China. It also said that Andritz (Austria) will supply most of the machinery for the chip and pulp mill, with an overall order worth about US$300 million.

The development of the pulp and paper industry in South Kalimantan also has strong support from the local government. This dates back to a visit by the former South Kalimantan governor, Sjachriel Darham, to World Expo 2000 in Hannover, Germany.

Austrian protest

Austrian environmentalists protested against the involvement of Austrian bank Raffeisen in the South Kalimantan project in early October. For a German language report of the demonstration and pictures see

A report by Austria's Friends of the Earth (Global 2000) on Austrian involvement in the UFS pulp project is available in German at An English version will be available shortly. Contact andreas.baur@global2000 for more information.

1 PT MBBM's EIA includes a fourth company as a timber supplier: PT Kirana Katulistiwa

2 For more information on the Scandinavian interests in UFS see DTE 56.

(Source: DTE field research notes; various documents by and communications with local NGOs Rindang Buana, WALHI Kalsel and LPMA; Review of wood supply for proposed South Kalimantan pulp mill, Jaakko Pöyry, Nov 2004; Environmental Issues, Wood Chip Mill, Jaakko Pöyry, Oct 2005; Brief on the planned UFS pulp mill project for South Kalimantan, Jurgens et al, CIFOR 2005; Friends of the Earth Austria/Global 2000; Amdal tentang Pelabuhan Khusus Wood Chip di desa Alle-Alle, Kab Kotabaru; Banjarmasin Post 9/Sep/05; ST 17/Oct/05; Tidak Ada Chip Mill Tanpa Kayu, DTE, forthcoming; Operational Management Agreement with PT Kiani Kertas, 28/Sep/05)

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