No chip mill without wood

Down to Earth No. 71, November 2006

As Indonesia's first 'stand alone' wood chip mill neared completion on Pulau Laut, campaigners from Down to Earth and WALHI South Kalimantan went to Europe to lobby companies who are supporting this unsustainable venture. The chip mill does not have access to sufficient supplies of plantation timber and does not even have the permits required under Indonesian law.

A new DTE report by Betty Tio Minar, entitled No Chip Mill Without Wood, focuses on the wood chip mill as an example of the problems in Indonesia's wood processing industry. The study is based on fieldwork in South Kalimantan. Minar and Deddy Ratih from WALHI South Kalimantan spent two weeks in the Netherlands, Austria and Germany, discussing the findings with NGOs and companies who are backing the project.

The wood chips produced by the mill, owned by PT Mangium Anugrah Lestari (PT MAL), will be exported to China to feed paper pulp factories there. The construction company, China National Machinery and Equipment Import and Export Corporation (CMEC) has built the PT MAL plant at the village of Alle-Alle on a turnkey basis. CMEC has a contract to buy 80% of the mill's output, with first option on the remaining 20%. The wood chip mill, which has a capacity of 700,000 tonnes per year will require over 1 million m3 of timber annually for full production. This is equivalent to nearly 86,000 hectares of pulp wood plantation.

PT MAL's parent company, Singapore-based United Fiber System (UFS), does control an industrial timber estate in mainland South Kalimantan. But although the PT Hutan Rindang Banua (HRB) concession officially covers 269,595 ha, it overlaps with eleven oil palm plantations, a coal mining concession and community mining operations. This plantation was also the subject of legal action in 2003 against former president Suharto's half-brother, Probosutedjo, who cheated the national Reforestation Fund of at least Rp100 billion (over US$40 million at pre-1997 exchange rates) by claiming to have replanted a more extensive area than was the case.

UFS' 2005 Annual Report states that only 46,000 ha have been planted with acacia and plantation staff have said that as little as 15,000 ha is in good condition. If true, this means UFS can currently only supply its wood chip mill for 1.5 years from its own plantations.


Money does grow on trees

UFS certainly needs to make some quick money to finance its ambitious plans for two pulp mills.

Firstly, it wants to build a 600,000 tonne per year bleached pulp mill in Satui sub-district of South Kalimantan, through its subsidiary PT Buana Bumi Mulia (MBBM). This project has been delayed by the forestry department's attempt to get its Reforestation Fund contributions back from UFS. Now the court case has been settled in UFS' favour, plans could go ahead as early as next year. CMEC had, at one time, committed US$690 million to build the plant. The Austrian company Andritz was to supply equipment for this and the wood chip mill worth US$250 million. The Dutch chemical company Akzo Nobel initially offered to build a chemicals plant. Cellmark (Sweden) would purchase the pulp produced for the first ten years.

Secondly, UFS still seems set on buying the Kiani Kertas pulp plant in East Kalimantan, originally established by disgraced timber tycoon 'Bob' Hasan. It has been operating the mill since July 2005, but has serious problems in meeting its timber demand from Kiani's plantation, PT Tanjung Redep Hutani. Prolonged negotiations to purchase the plant have resulted in several failed deals. These have put a financial strain on UFS to the extent that the company may be unable to pay its workers. There have been a number of recent strikes at Kiani Kertas over pay negotiations and late payment of wages. Union leaders have been dismissed and over 100 workers held a demonstration in late October. Bankers Merrill Lynch (US) and ANZ (Australia) are currently involved in the takeover deal.


Negative social and environmental impacts

The head of the local forestry office told DTE that the chip mill does not have the necessary permits from central government, even though it is scheduled to start operations by the end of the year. "The mill needs a permit from the forestry department and the harbour plans should have been approved by the transportation ministry. The project doesn't even have the governor's recommendation", explained Minar. Neither does the PT MAL project have a valid Environmental Impact Assessment (EIA). WALHI South Kalimantan reports that the head of the local environmental agency, BAPEDALDA, is refusing to consider any EIA until PT MAL/UFS has all the correct documents.

Meanwhile, the construction of the chip mill and dedicated harbour are causing serious environmental and social problems. The communities nearest the PT MAL site depend on marine resources for their livelihoods. Yet coral reefs have been dug up to make the foundations for the port facility. The local fisheries office issued a warning to the company to stop this illegal practice, but the effects are already noticeable.

Local villagers who collect sea grass to weave into mats and baskets complain that previously sustainable supplies of sea grass are decreasing. Large vessels bringing timber supplies in and wood chips out of the port will cut through local fishing grounds causing damage to nets and loss of income for fishermen. Run off from stacks of raw timber or wood chips may also affect waters close to the shore where local women traditionally catch crabs and collect seashells for sale on mainland Kalimantan.

Local people are already disappointed and disillusioned with PT MAL. The process of land procurement has been socially divisive and compensation rates were low. The wood chip plant provides few jobs for local people - only 30 people from the south of the island and 6 from the village of Alle-Alle out of a total of 320 workers. People who sold their land to PT MAL expected jobs - now they have no land and no jobs. The community in Alle-Alle recently formed an association in an attempt to strengthen their position vis-à-vis the company.