Panels from certified logs

Right beside the wide and majestic Mahakam river sits the extensive veneer based products factory of Sumalindo Lestari Jaya (SLJ). Founded in 1980 as a natural forest concession holder and plywood manufacturer in Samarinda on Borneo, PT Sumalindo Lestari Jaya (SLJ) is still producing up to 15,000m³/month of plywood at its Loa Janan factory on the edge of this capital city of Kalimantan Timur province (p50). The company also diversified into MDF in 1994, building a factory up-river from Samarinda (see p44), while more recently it has also gone into the production of laminated veneer lumber (LVL) at Loa Janan. All that manufacturing capacity requires a secure and sustainable wood resource and SLJ has expended considerable effort on that front in recent years.

Although the original Sumalindo company has been trading for over 30 years, it is not at all the same company which is in operation today. Mr Lee Yuen Chak, a director of SLJ, explained its recent troubled history and its current efforts concerning forestry and its log supply. "In late 2002, the majority of the company ownership was under Astra International and was in financial trouble. It carried close to US$200m in total debt and was in negative cashflow to the tune of close to US$6m for the 2002 year alone. "Then 75% of the shareholding of the company was sold to Sumber Graha Sejahtera (SGS) in 2002. "Over the last four years the new management has introduced very stringent cost control, changed the product mix and the production processes themselves, as well as investing in machinery and production upgrades, and those strategies had a real result in only 12 months. In 2003, 2004 and 2005, the company's operations recovered strongly and we were able to move back into positive cashflow," said the director. Previously known as the Hasko Group, SGS is a 'timber-centric' group in the words of Mr Lee and, he claims, one of the largest timber groups in South East Asia. "The group, established in the 1970s, has been growing steadily over the years - it is one of the few that has in recent years - and its business is focused on Indonesia," he said. The group also owns PSUT plywood in Sumatra and a company called Palopo in Sulawesi, as well as having a share in Banjamarsin Kalimantan Wijaya (WTUPI), another plywood producer. "We are one of the most dynamic timber groups in the region in terms of product mix, production controls, process and efficiency and these factors enabled us to grow steadily when the wood industry as a whole was suffering huge problems with weak selling prices and rising production costs, together with high levels of competition. "We had successfully turned Sumalindo round and by 2005, the EBITDA [earnings before interest, tax, depreciation and amortisation] was close to US$9m, compared to minus US$6m in 2002. And this was achieved in spite of losing the [national] oil subsidy - otherwise we could have been closer to US$15m." Clearly Mr Lee is proud of his company's financial record since the takeover, but that is not his only concern. Sumalindo has apparently put a lot of effort into combating the common perception that all Indonesian wood products are tainted by the stigma of illegal logging. The company owns several forest concessions and plantations in Kalimantan and this aspect of the business is a particular responsibility of Mr Lee. "The total planted area that Sumalindo owns is close to 20,000ha, mainly planted with gmelina arborea, acacia mangium and falcata species," he said. "The plantation wood is mainly to support the MDF operation but we are also expediting the planting, and revising the silviculture, of gmelina for mechanical wood, that is logs suitable for use in plywood. "In future the supply of large diameter logs will get tighter and gmelina arborea is a good complementary and substitute material for plywood production. The rotation period is around 10-12 years depending on diameter, but 12 years is a realistic target. We have already started peeling gmelina in our mini-rotary spindle-less lathes at the MDF mill, for plywood core stock, with the waste going to the MDF mill and helping to lower feed-stock costs there." However, plantations are obviously not the whole story. With the plywood operation consuming logs to cover its 15,000m³/month output, plus the LVL lines and the MDF factory, obviously SLJ has to utilise logs from the natural forest as well. Here the company has taken a pro-active approach and gained Forest Stewardship Council (FSC) accreditation for at least part of its log supply. This certification was achieved in January 2006 and Sumalindo also has a chain of custody certification from the FSC and BMTRADA valid to 2011 for part of its forestlands. "We have four forest management units (FMU) totalling 516,261ha and the largest of them, SLJ ll, which covers 267,600ha, is the one which was certified," said Mr Lee. "The management rights to this concession were extended by 45 years to 2051 by the Indonesian government in 2004. "I believe we are the largest FMU with FSC certification in the world for tropical forest. It wasn't easy to achieve FSC certification and it took a lot of time, financial resources and knowledge to revise our forestry planning and operational processes and so on in order to meet the FSC principles and criteria," continued Mr Lee. "Certification is a demonstration of our commitment to the social and environmental aspects of our business. We want to send a message to our buyers that there are Indonesian companies which are serious about these issues and we are one of them." As part of the FSC process, Sumalindo has given a commitment to put its other three FMUs through certification too and is currently working on FMU IV, while the plantation side is undergoing a similar exercise. In the natural forest, the system involves selective cutting and natural regeneration. "On average, in one hectare there are only six logs of the required diameter (50cm or above), which will average around five cubic metres each so we can only harvest 30m³/hectare at most. Certain species are also protected and cannot be harvested at all," explained Mr Lee. "The cutting regime allows for natural regeneration on a sustainable 35-year cycle." Smartwood is the auditor for Sumalindo's concessions and makes six-monthly inspections to ensure compliance. Of course companies which go through this process also hope for some financial benefit down the line, but that is also not easy to achieve, said the director. "We had hoped to realise a commercial benefit - and there are meaningful financial benefits to be had from certification, but we went into it for the social/environmental objectives so a commercial benefit would be a pleasant surprise," he said. "If plywood buyers are serious about helping Indonesia to preserve the tropical forest, they should buy certified products like ours and must recognise that this does involve higher costs for us and they must be willing to compensate the concession holders in terms of price. So far the Netherlands and Germany are prepared to pay more, but the reception in the UK is somewhat lagging behind these two countries, for example." Another project instigated in 2006 concerns the resin supply for the company. "We are in an advanced stage of transition to cut our glue costs, but I can't discuss this in detail at present," said Mr Lee when interviewed in December; negotiations were ongoing at that time. "but to summarise, we have had three strategic cost reduction exercises in progress in 2006: the coal-fired power station at the MDF factory; lowering the feed-stock costs for MDF; and lowering the glue costs. "With these lower costs and our high quality products we are certainly capable of being one of the highest quality producers in South East Asia, if not all of Asia."