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FRA CHILEAN FOREST OPERATIONS TOUR

November 4-11, 2006 SOME OBSERVATIONS

Neil A. Ward

FRA Director of Communications Forestry and Forest Industry Background Well-known as they are, the basic geographical features of Chile need reiteration to explain the features of its industry. It is, to an extent barely exceeded by New Zealand, a geographically isolated country, sealed off from its logical trading partner, Argentina, by the most formidable mountain range in the Western Hemisphere, and with its main population (and agricultural) center, the central zone, similarly isolated from Bolivia and Perú, to the north, by a high desert region (where copper and nitrates, still the foundations of the economy, are mined). These barriers tend to isolate Chile, not only economically but also ecologically. It is, like New Zealand, at this point relatively free from invasive pests. Also, like New Zealand, it is unusually dependent on remote markets, accessible only by ship. The forest industry in Chile today arose, not as a cause but as a successor to a national plan to recover degraded marginal farmland in the country’s central zone, generally in the Andean foothills. Radiata pine was selected, and only subsequently did it become apparent that it had commercial potential. With encouragement from the Pinochet dictatorship (1973-1990), investment in developing the pulp industry and industrial forestry to support it increased, and by the time democracy was reintroduced, the development of this industry had the support of most mainstream political factions, including the center-left coalition that has won every national election since then. According to INFOR, the government forestry research organization, there are, 2.2 million hectares in plantation forestry today, and another 13.5 million hectares in native forest. Of the native forest portion, 4 million hectares are owned by the government and unavailable for commercial management. Another 4.4 million hectares are considered, for various reasons, likewise off the table. The remaining 5.1 million hectares of native forest—mostly abandoned agricultural land that subsequently afforested itself spontaneously—is available for management and harvest under very strict regulation, a management plan prepared by a licensed forest engineer being required, regardless of the size of the tract. Conversion of native forest to plantation forest (or other agricultural use) is strictly forbidden. Plantation forestry is restricted to lands previously used for agriculture, and the notion that plantation forestry is not displacing native forest seems to be critical to its acceptance—by the

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Chilean public, by the government, and by the environmental organizations, domestic and international, that claim an interest in Chile’s forest policy. Again, according to INFOR, the 2.2 million plantation hectares account for 98% of Chile’s total forest harvest by volume, with the 5.1 million native forest hectares supplying the other 2%. INFOR says this 2% is managed mostly through non-mechanized operations, although it does support significant industry, such as half the furnish of LP’s oriented strand-board and panel operations in Panguipulli. To place Chile’s forest industry in perspective: As of 2002, the forest sector employed 123,000 people directly and another 305,000 indirectly, for a total of 428,000 (out of a total population of 15 million). CORMA, the association representing the major plantation forestry companies, offers the estimate that, including spouses and other dependents, the forest industry supports 9% of Chile’s population. Within Chile’s “Region VIII” (the “Bío Bío” region, which includes Chile’s second largest city, Concepción), where the forest sector is most active, that figure rises to 30% of the population. CORMA does not fail to point out that forest industry as a wealth-creator has multiplier effects that radiate into other sectors. In 2005, according to CORMA, the total industrial harvest was 30 million cubic meters (= approximately tons). That year, Chilean exports of forest products, including pulp (34% of total forest product export value), sawn wood (12%), moldings (11%), panels (9%), other secondary manufactured wood products (8%), and “other” (26%), had a gross value of US$3.495 billion. It may be observed that the emphasis in export policy is on high value-added products. That year, 27% of the export value went to the U.S., followed by China (11%), Mexico, Japan, and Italy. Exports to other South American countries are notably absent among the top five markets. It might be noted that the U.S. exported about US$14 billion in value in forest products in 2005; we were and are, however, a net importer, while Chile imports only about one fifth as much value in forest products as it exports. In 2005, forest industry exports represented about 10% of the value of the country’s total exports; that relationship to total exports has not changed significantly since 1985, although in absolute terms, both forestry and other Chilean export sectors have literally increased by ten-fold during that 20-year period. Chile produced 3.1 million tons of market pulp in 2005, double New Zealand’s 1.5 million tons, although a small fraction of the U.S.’s 53 million tons.

Chile’s principal industrial

forestry region.

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Forest Productivity In addition to the area under plantation management, another 2 million hectares, mostly outside of the central zone where most industrial forestry is now conducted, is expected to join the industrial land base in the next decade, although its yields are expected to be much lower than those of the 2.2 million hectares now under management. INFOR sees a ramping up of harvest volume by about 20% over the decade following 2015, as harvest begins on this new land, but government and industry planners all reiterate that future yield growth will come more significantly from genetic research and other silvicultural improvements than from any expansion in the land base. Additional land acquisitions for forestry in the central region would

compete with agriculture—notably vinticulture and other fruit growing, but also livestock and wheat—and current planning assumptions do not foresee forest industry outbidding agriculture interests for those lands. (We heard the figure US$2,000 per acre (not hectare) as a typical price for forest land in Chile.) INFOR told us, as a general benchmark, that radiata pine, which presently accounts for 80% of Chile’s annual harvest, is grown normally on a 25-year rotation for lumber, generally with a thinning for pulpwood and in many cases a pruning to improve wood quality. A pruned radiata log is merchandised in great detail, with the knotty heart typically spliced into

finger-jointed molding and the clear exterior wood directed to lumber or veneer. We found it notable that, although pulp is the industry’s leading export product, as far as silviculture is concerned Chile treats pine pulpwood as a by-product, and makes big investments in improving log quality. Eucalyptus accounts for 17% of Chile’s production. Smaller landowners, who appreciate its ability to regenerate naturally after harvest, prefer the nitens species, but industry—which sets a premium on reaping the advantages of genetic improvement—prefers globulus, which does not stump-sprout. Although there is a growing market for eucalyptus lumber (marketed internationally as “Chilean cherry”), for eucalyptus, the silvicultural emphasis seems to be on pulpwood, and merchandising systems are not as sophisticated as they are for pine. A typical eucalyptus sawtimber cycle is 14 to 16 years, and a pulpwood cycle is 10 to 12 years. Although we did not bring back yield-per-acre data, and I don’t find any such data in the statistical tables provided to us, if rotations are any guide, Chilean

Radiata logs at Nueva Aldea.

Eucalyptus plantation.

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forest productivity is 30% to 40% lower than Brazil’s is, for both eucalyptus and pine (taeda and ellioti in Brazil, rather than radiata). The remaining 3% of Chile’s wood production comes from niche exotics, such as the Douglas fir grown south of the main forestry region, and native species. Plantation-Based Industry in Chile Three large companies dominate industrial forestry in Chile: Arauco, CMPC, and Masisa; the first two are significantly larger than the third, and they were the two we had most exposure to. Arauco and CMPC have many similarities, and although we noticed differences between various facilities, few of them can, on our brief exposure, be attributed to distinctive management philosophies on the part of one or the other. On the score of harvesting radiata pine, however, at least one observation seems to distinguish them: Arauco likes to draw merchandising into the centralized mill environment; CMPC prefers most merchandising to take place at the logging site, and equipment configurations and landing operations on logging jobs, respectively, reflect those preferences. Reflecting its philosophy of pulling merchandising into the plant, Arauco has designed its large Nueva Aldea (formerly known as “Itata”) manufacturing complex to optimize merchandising and utilization. This complex, which started up in 2003 or 2004, consists of four units at a single site: a saw mill, a plywood plant, a pulp mill (not yet in production in late 2006), and a merchandising unit to assign logs or log components to the respective destination within the facility. The goal, we were told, was to use all wood delivered to the complex inside the complex; at present, only 4% of wood received is eventually processed elsewhere in some form. Although we viewed the sawmill and plywood mill—the pulp mill not being on line at that time—we spent most time with the merchandising personnel and watched a remarkably complex system of scanners and utilization software analyze, buck, and direct incoming logs. The unit receives tree-length radiata logs up to a maximum length of 16.5 meters, with a diameter range between 8 and 72 centimeters; an optical scan characterizes each log and optimizes utilization, bucks it to length, and sends it to the bin corresponding to a particular cutting pattern, so that a batch of logs with similar specs goes to a particular sawmill line (or the plywood plant) as ordered. Our walk through the large sawmill at Nueva Aldea revealed a substantially mechanized, high-production facility (Arauco also runs 13 other sawmills in Chile). It saws only radiata pine, can accept logs with up to a 20% curve (provided a minimum diameter is met), and can saw 6 logs per minute on every line. We heard the conveyor characterized as the fastest in South America.

Merchandising line at Arauco’s Nueva Aldea

complex.

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Although the production line at the Nueva Aldea sawmill, like that of the utilization unit, seemed to be governed by sophisticated optical scanning equipment, as well as mechanized wood handling, there was no shortage of personnel visible on the floor. But that was not our impression at CMPC’s still newer sawmill at Mulchén, about 100 miles south, then completing its first year in operation, receiving 70,000 cubic meters of logs per month and outputting 36,000 cubic meters of lumber. The Mulchén sawmill, which runs two lines, requires 14 personnel per shift: one “supervisor” to control each line and the other 12, apparently, on various maintenance tasks. We saw none but the two supervisors, in their enclosed control chambers, during the visit. The same could not be said of the kiln, re-sawing mill, and pallet stock mill at the same site, which seemed to have much higher personnel requirements; indeed, the re-saw facility seemed to have left many easily automatable tasks mysteriously manual. The total Mulchén complex, we learned, employs between 400 and 500, including all shifts. Safety reminders were highly visible at Mulchén, but the rate of injuries seemed high. There had been an injury the day previous to our visit; the previous injury-free period had been 22 days; and the “benchmark” or target “injury-free” period was said to be 70 days. Personnel In spite of the disquieting safety statistics at Mulchén, our general impression of personnel in Chile’s industry was positive. I spoke with two young technical managers in the control room of the Nueva Aldea sawmill and learned from one of them that Arauco allowed him flexibility in work hours to allow him to pursue his engineering degree in Concepción (although it did not subsidize the fees). They both seemed to think the company provided opportunities for personal growth and advancement, at least at the professional level. Community Relations – Just What Is “Forestry”? As noted, plantation forestry seems to have excellent public acceptance—although some of the more radical international ENGOs are pushing back at it—and much of the reason for its acceptance seems to lie in its geneology: it is viewed as a system for recovering lands abused by agriculture, not as displacing native forest. Plantation forestry’s benchmarks are those of the agricultural sector, not those of native forests. Measures to protect streams and soil, as well as clearcut size, for instance, appear to be gauged by the public and by public policy in metrics established through agriculture. By any objective measure, the plantation forestry practiced in Chile exceeds that benchmark, with its (relatively) long rotations and low use of chemicals. It did surprise us—as it had in New Zealand and Brazil—that plantation managers seemed content to allow a high degree of stream siltation during harvest, through narrow stream buffers and large clearcut sizes, as if

Stream crossing near logging job.

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merely having a record superior to that of agriculture would be sufficient to deter any ENGO wishing to embarrass the industry by photographing visible stream siltation. The pine plantation sector, in any case, has established a vigorous, pro-active public relations program, directed to the Chilean public, called “Bosques Para Chile” (“Forests for Chile”), which aggressively promotes the conservation and economic benefits of pine plantation forestry. As may be expected, industries based on native forest timber, such as LP-Chile’s OSB mill, are aware of the double-standard to which they are subjected, since their management options are benchmarked, not against agriculture, but against an almost mythical “untouched native forest,” and seem aware that to some extent they are expected to “run interference” on forest practices for plantation forests with the international ENGOs; and the failure of Forestal Trillium, which attempted, in the 1990s, to base a sawmill business on native forest harvest in Patagonia, in the face of domestic and international ENGO resistance, must lurk heavily in the background. We learned, in any case, that native forest harvesting interests—marginal as they are—have their own association to push for favorable treatment from forest policymakers. The other “community relations” issue is that of employment, particularly as it touches on native peoples. Chile’s 15 Regions (or “states”; there were 13 when our group passed through, but two new ones were created in December 2006) are generally known by Roman numerals, but they have official names, as well. Region IX, the third most productive timber Region, is known officially as “Araucanía,” since it holds the densest population of native Mapuche peoples, who were known for most of the post-Conquest history as the Araucana. (The speculation that the “Arauco” forest products company’s name is an attempt to brand a natural resource business with a sense of birthright may be justified.) We learned that creating employment for Mapuche peoples was an explicit goal for industries operating in Region IX. A front-page headline in the Concepción daily El Sur on November 8 indicates that negotiating tactics can be heavy-handed: “Violent Incendiary Attacks – Arauco: Forestry Interests Demand Respect for Rule of Law.” The article notes that arsons of forestry equipment, trucks, and “installations” in Region IX “have been a theme for Arauco since the ends of the last decade.” Elsewhere, the article notes: “The public prosecutor presumes involvement of an organized group, with ties to the conflict over native people’s lands,” which elsewhere the article mentions as having been active since 2003. Without attempting to sort out the merits of the Mapuches’ and the plantation managers’ claims over land rights, it is enough to point out that some of the “featherbedding” we observed, at least in harvesting operations, was owing to commitments by the companies to provide jobs to Mapuches. In particular, the activity of

Mapuche community members employed at

Bosques Cautín’s eucalyptus logging job.

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dressing felled logs on the landing, trimming knots and stubs of branches, is often done manually, rather than using suitable mechanized equipment, for the sole purpose of providing employment for Mapuches in the operating area. We did not discuss this practice with Arauco or CMPC, but a forester with a smaller landowner in Region IX, Bosques Cautín, which supplies eucalyptus pulpwood to Arauco, described a formal commitment his company had reached with “Mapuche community representatives,” to

provide a stated number of jobs to Mapuches whenever they set up a harvesting operation, the number of jobs being established through negotiation. The company, in these cases, provides safety training in chain saw operation and use of axes and machetes. The Business of Logging As far as we could tell from this exposure, most logging contractors in Chile’s plantation sector are large, highly capitalized private enterprises under exclusive contract to one customer, with which they work closely, in a relationship that might be termed “partnership.” We spent the morning of November 9 with Isidora, one of three

large contractors serving a local CMPC wood supply regional unit. Isidora works in two nine-man shifts, with a feller-buncher, bulldozer, three skidders, five excavators (equipped with processing heads), and a knuckleboom loader. Apart from the 9 employees in each shift, the Deere dealer, SALFA, had four full-time service personnel assigned exclusively to each shift, under the terms of its “full-service” contract on the Deere equipment, with additional support from SALFA’s district office. This team is responsible for all routine and emergency maintenance and repairs. SALFA had begun offering this “full-service” contract only in the past year and seems to have adopted it from a similar contract Brazil’s Partek (now Komatsu) unit had pioneered. The contract, which is only available for new Deere equipment, guarantees a certain percentage of “mechanical availability” for each machine per month; it runs for four years, at which time it may only be renewed if the contractor replaces his machines with new ones. Contracted mechanical availability averages varied by machine, but are no lower than 93%. Isidora’s foreman was willing to estimate that his total cost for harvesting and delivering wood roadside at a figure we converted to US$6.90 per cubic meter (= approximately tons), of which about 20% represented the expense of the full-service contract. The CMPC contract administrator on the site provided some general production statistics on the company’s wood supply and harvesting productivity, in radiata pine, in what must have been a speculative total for 2006 (since in mid-November the year had not concluded).

Logging radiata pine on Arauco plantation with

processor.

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Annual Production: 2006 Radiata Pine final felling 4.6 million cubic meters (= approximately tons) Radiata Pine thinning 0.8 million cubic meters Total 5.4 million cubic meters

Mechanization Level Type of

Operation (# of operations)

Percent of Total Volume

Produced

Total

Workers

Productivity (cubic meters per man per month)

Safety (lost days per

1,000 cubic meters)

Skyline (43) 33 624 196 0.35 Skidder (28) 17 334 179 0.12 “Local Community” (3)

3

260

77

0.15

Processor (16) 47 360 650 0.04 1,578 We did not observe a skyline system in Chile, although the second table indicates such systems are quite widespread. I did ask the CMPC contract administrator to comment on the high injury rate associated with that system, and he indicated it was owing to the typical steep terrain associated with skyline systems, leaving workers more vulnerable. I’m presuming those systems are also more associated with manual felling. I have no information about the low-productivity “local community” operations, either, but presume the reference is to heavily manual animal-powered systems, to which we later had some exposure in native forest operations.

Later that day, we met with Daniel Hermosilla, a logging and chipping contractor, supplying eucalyptus chips to CMPC, with a Peterson chipper at the center of his operation. Daniel, who seems to be about 30, speaks perfect English, since his mother is from the U.S. and he himself spent his early teens there and took a forestry degree from California Polytechnic State University in San Luis Obispo. Daniel stated that CMPC was satisfied that his chips exceeded their quality specifications but that he was still meeting resistance in attempting to overcome the mill’s

policy of accepting no more than 10% field chips—although (he says) with a mill expansion coming on, CMPC has encouraged him to buy a second Peterson chipper. The position he attributes to CMPC, however, may indicate something distinctive about CMPC’s planning culture: he says CMPC suspects his competitive price is due to a “subsidy” of some

Daniel Hermosilla’s eucalyptus chipping operation.

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sort that may (presumably) drive him out of business at some point. CMPC, thus, claims to take an interest in the sustainability, not just of its forestland base, but of its contractor force. He indicated that his basic contract rate was adjusted by an inflation and fuel-price index. We asked Daniel about his hiring practices. He said he preferred hiring strongly motivated employees from disadvantaged backgrounds, because they come without a sense of entitlement that he says is increasingly common among the Chilean middle class. He also said he makes use of an employee screening process, which CORMA (the association representing the major plantation-based industries) has certified but is administered by third parties, which evaluates skills and psychological profiles of candidates; he then draws his prospects from that list. On the subject of employment issues (and senses of entitlement), he told us that, even in Chile, tort lawyers are starting to sue for recoveries in excess of no-fault workplace injury insurance claims. In Chile, highway transport of logs is contracted separately, apparently by the mill. The gross vehicle weight limit is currently 90,000 pounds, but CORMA is attempting to identify certain key arteries and to apply to the government for variances, such that those roads’ load-bearing specs would be strengthened and trucks willing to pay a special fee through some mechanism would be allowed to haul up to 120,000 pounds on them. LP and Native Forest Operations Lousiana-Pacific’s operations in Panguipulli, toward the southern end of Chile’s industrial forestry belt, was of interest to us for several reasons, but chiefly as a successful example of an alternative paradigm in Chile’s forest industry. The operation dates from 2002. The original concept was for the U.S.-based LP to form a joint venture with a local plywood manufacturer to convert the no-longer-viable plywood facility into an oriented strand-board and specialty panel plant. Eventually, in the course of capitalizing the venture, this proposal gave way to LP’s becoming sole owner, although much of the management team and other personnel come from the previous plywood business. The OSB production plant itself is a retired U.S. facility transported to Chile and reassembled there. Several elements of LP’s OSB business in Chile run counter to the main trends in Chile’s industry.

1) LP-Chile is focused primarily on Chile’s domestic market, only exporting about 5% of its production (with some going to the U.S. following Katrina).

2) Wooden-framed houses have not traditionally been widely accepted in Chile (or South America), and a major element of LP’s business plan has been (with some success) to invent and promote that market.

3) LP owns no timberlands in Chile, and the business is strongly dependent on the use of native forest timber; the mill’s furnish at this point is approximately 50% native forest and 50% plantation pine and eucalyptus.

4) The business plan is in harmony with a government mandate to conserve and manage native forests—an alternative vision to the plantation forestry model’s assumption that native forests have no place in the supply chain.

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One LP-Chile manager mentioned “waiting for a new set of government incentives,” although he did not elaborate on what form they would take or what outcomes they were meant to foster. It is apparent that at least some parts of this model are working, for the company is now installing a second, larger mill somewhat to the north of the Panguipulli facility, also a reassembled U.S. mill, which is proposed as a higher-efficiency, higher-production mill dedicated solely to OSB, with the Panguipulli mill dedicating itself to shorter runs of niche specialty panel products. With the introduction of this additional capacity, we understood, the unit expects to increase its sales within Chile but also to develop its export business more aggressively. As mentioned earlier, 5.1 million hectares of Chile’s native forest lands—chiefly abandoned agricultural land or other second-growth forest—are technically and legally available for harvest,

although they are not very productive or valuable. LP characterizes typical owners as conforming to any of three different types: (1) farmers with a native forest woodlot on their property (typically around 200 hectares); (2) foreigners who have purchased forest land and want to manage and improve it (more likely in the 5,000-hectare range); individual or institutional investors based in Chile’s urban areas who want to hold and manage land as an investment (also in the 5,000-hectare range). Victor Flores, the mill’s operations manager, stated that native forest stumpage is cheaper than plantation stumpage (“your only competition is with firewood markets, at this point”), but harvesting costs are much higher. Limitations include a legally stipulated four-month native forest logging season (in summer), out of which LP stocks its woodyard. When one hears of logging with oxen, one tends to presume low-efficiency operations indicating mere reluctance to commit capital.

That did not appear to be the case with the native forest harvesting operation LP showed us. The 7,800-hectare forest, owned by a German venture capitalist out of motives that appeared to be more recreational than financial, was, as usual, abandoned farm- or pastureland. The larger, steep area, furrowed by ravines, had been taken over by several native hardwood species, mostly oak and something called “false oak.” A smaller portion of the property, which ranged from flat

LP-Chile’s woodyard at Panguipulli.

Privately owned native forest under Río

Cruces’s management.

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to rolling, had not reverted to native forest, and the landowner had planted part of it in the exotics eucalyptus nitens and Douglas fir, as permitted, and kept another part in grassland. In that portion he had built, or preserved, a small house with a fine pastoral view, apparently for the rare occasions when he found an opportunity to occupy his land. The owner had contracted his forest’s management to an independent management firm, Río Cruces, which holds similar contracts with other Chilean owners on a total of 32,000 hectares. The forest we visited had obtained Forest Stewardship Council certification and sold flooring and other hardwood products (apparently to European customers) under what appeared to be a very slickly promoted eco-friendly marketing plan, judging from the promotional packet we examined. We asked Río Cruces’s General Manager, Alex Strodthoff, whether the terms of the FSC certification placed any expensive stipulations on management; he said very few management restrictions were in excess of those which were already mandated under Chilean law; the costs, which he stated were high, were mostly administrative.

In spite of the high-end marketing of the flooring, the larger part of the timber on the tract was low-quality, which was going to LP. The landowner’s motive was clearly stand improvement, not revenue.

Since clearcutting in native forest is forbidden by regulation, Río Cruces, which wants to encourage oak, is doing so by harvesting in swaths about one treelength wide. We observed this harvesting operation, on a very steep slope, with felling done by chain saw and skidding done by a yoke of oxen. Those of us who had never seen oxen hauling on steep slopes before were surprised by their surefootedness on steep terrain, uphill or downhill, on what appeared to be an obscure path; their responsiveness to the teamster; and their rapid progress; although the load—three or four small stems—was lighter than even a small motorized skidder would normally handle. On Forest Certification Documents CORMA provided put the total plantation area in Chile at 1,948,277 hectares, rather than the 2.2 million hectares quoted earlier. Although I can’t positively account for the discrepancy, it may reflect a distinction between land under plantation management and land actually reforested following harvest at the time the information was published.

Teamster bringing a skid load down from the

hillside.

Releasing the load of three crooked stems.

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CORMA says that of that 1,948,227 hectares, 1,374,537 hectares are certified under at least one (generally more than one) of four certification systems recognized in Chile, as follows:

Standard

Total Forest Area (hectares)

Certified Plantations (hectares)

ISO 14001 1,149,862 Forest Stewardship Council 306,948 Program for the Endorsement of Forest Certification (PEFC)

680,323

CERTFOR 1,079,612 TOTAL 1,948,227 1,374,537 CERTFOR is the standard the plantation-based forest industry itself developed and endorsed and is affiliated, like the Sustainable Forestry Initiative®, with the PEFC organization. The inclusion of PEFC certification as a separate certification seems to indicate that the two standards are not congruent and PEFC registry requires some additional level of verification. That 306,948 hectares are listed as conforming to the FSC standard on a listing of plantation (as opposed to natural forest) certifications seems to indicate that FSC still deems its plantation standard to impose a palpable incentive to native forest protection even in a legal environment in which conversion of native forests is illegal.