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In March 2020, the Peruvian government imposed a strict lockdown in response to the COVID-19 pandemic, allowing only businesses involved in the production of essential goods to stay open.
For the Peruvian timber industry, this meant that only manufacturing of wood pallets could continue, due to their essential role in the loading and transport of goods across the entire economy.
By the end of May, the timber industry began to gradually restart operations. The after-effects of the closure, however, continue to be dramatic and potentially long-term. Put simply, the industry is facing a crisis.
Reducing timber logging might sound good for forest conservation, however, forest management and oversight activities from the Agency for the Supervision of Forest Resources and Wildlife (Spanish acronym, OSINFOR) were also dramatically affected as forest rangers and auditors curtailed their field visits. The lack of regular supervision and enforcement activities has increased the risk of illegal logging and timber trafficking in Peru’s remote forest areas.[1]
In August 2020, Forest Trends, together with the Peru Export and Tourism Promotion Agency (PromPeru) and the Exporters Association (ADEX), conducted a survey of 12 Peruvian timber companies on the impacts of COVID-19 and the national lockdown.
These companies together were responsible for more than 35% of Peru’s total timber product exports in 2019, and over 40% in the first quarter of 2020, mainly in the form of flooring, moulding, and strips (50%), sawn wood (17%), doors and frames (17%), joinery products (8%), and furniture (8%).
When comparing the Peruvian timber exports from January to August 2019 with those from the same period in 2020, can be noticed a drop of almost 32%.[2] This trend will affect and change the supply chain.
The results of our survey shed light on the nature of the crisis the timber industry is currently facing, not only in Peru but all over the world, and points to potential pathways that could minimize the negative impacts on business, as well as the valuable forest of Peru.
Impacts on businesses
To some extent, the full impact of COVID-19 on the Peru’s timber industry will only become clear at the end of 2020, when the harvesting and milling seasons end. However, the results of our survey provide some early clues.
Cash flow: All of the companies surveyed reported that the economic crisis that followed the lockdown affected their cash flow. Most reported a significant decrease (42%), mainly due to cancelled orders. Twenty-five percent reported that over half of their sales orders had been cancelled.
Supply chains: In the first quarter of 2020, logging operations in forest concessions were 80% to 100% lower than the previous year. As a result, 75% of respondents reported a dramatic and worsening shortage of the raw materials needed to keep their mills at full capacity.
In addition, 17% of respondents had reported challenges in getting the necessary documents to prove legality, due to the closed government offices, and 8% had reported struggles due to cost fluctuations relating to these operations.
Production levels: All surveyed companies had resumed operations by August and reported meeting every COVID-19 safety operational requirement imposed by the government.
Half the companies reported the need to restart operations due to financial pressures and the need to fulfil pending sales orders. Others cited the need to access their timber harvest operations (33%) and utilize the support that had been provided by the government (17%).
However, the Peruvian timber industry is still struggling. None of the companies surveyed were working at full capacity by August 2020. Forty-one percent reported operating at around half of their production capacity, while 42% predicted that it would be six months to a year before they could reach full capacity again.
Employment: Half of respondents reported having to reduce their labor force, with only 22% being able to provide social or economic compensation to its laid-off workers. Some employees have been granted temporary leave without pay but have retained accumulated vacation time or future bonuses. Others have kept their jobs but are working more for the same pay (e.g., by working weekends and holidays).
Government support: The Peruvian government has introduced a financial stimulus package (“Reactiva” 1 and 2) to support the private sector during the COVID-19 crisis. It enables companies to access commercial credit with the government acting as guarantor.
More than half of the companies surveyed (58%) reported benefiting from this stimulus package. However, they are requesting additional support which would enable them to (i) freeze financial debts, (ii) access soft loans and other financial mechanisms, (iii) streamline and optimize the government’s forestry authority processes, and (iv) extend or alter the timeframe outlined in harvesting and timber transport permits.
THE FUTURE: Government support
Peruvian civil society and the media have voiced major criticism of the government’s relief package, pointing out its lack of environmental safeguards. They are calling for government programs to reward companies with good corporate and social practices by providing preferential support over those with poor compliance records.
For example, one company, currently under investigation by the Peruvian authorities for timber trafficking, has received more than US$ 350,000 through the economic stimulus package. This same company had, in 2017, all of its imports to the US blocked, with continued sanctions announced in October 2020.[3] Such a company, they say, should not have been able to receive any stimulus payments.
The public sector has a key role to play in supporting the timber industry while maintaining long-term sustainability and environmental goals. International and multilateral financial organizations, led by UN agencies, and impact investment mentors are promoting innovative ways to support green recovery efforts in developing countries.
These efforts include granting a higher degree of concessionality to small and medium-sized businesses (small sawmills, for example) while also attracting private investment. The success of these endeavours, however, rests on businesses establishing and/or demonstrating rigorous due diligence processes. In the absence of such processes, it will be difficult to ensure that funds are used for green recovery efforts and to meet the risk-reduction requirements of future financial partners.
The public sector will need to help business establish such due diligence and transparent supply chain processes. Ultimately, these will help businesses carry forward with greater resilience and agility they will need not only for post-pandemic recovery, but also to shift towards the more innovative, cost-effective, and transparent practices increasingly required in global supply chains.
THE FUTURE: business practice
Companies with forest concessions are concerned about the threat of concession-invasion by illegal loggers, in the event of any additional government-mandated lockdowns. They voiced a preference for partial lockdowns, under which they could continue harvesting, transport, and milling operations, at least in areas less affected by COVID-19. Presumably, this would also include maintenance of forest oversight and auditing operations as well.
The future is not, however, completely bleak for ethical timber trade. In fact, those timber industries which implement rigorous due diligence and document verification are also facilitating streamlined supply chain management further down the line – and are considered more likely to stay afloat. Providing proper documentation for products which verifies compliance with national and international regulations, is one way for companies to increase market share.
Nevertheless, companies will always need to adapt to unexpected fluctuations in the market. In this case, they need to plan ahead for potential future lockdowns and anticipate their market vulnerability. Close monitoring of the entire supply chain would enable companies to identify potential bottlenecks and search out improvements in supply and services, helping to ward off severe and sudden financial impacts. The smaller the geographical distance between the stages of the supply chain, the easier this becomes. Businesses might, therefore, be advised to relocate or target a new market niche.
Creating long-term business partnerships can also boost efficiency and cut costs. Trade associations and industry bodies can play a key role in this, creating sustainable supply chains within the domestic market and facilitating responsible public procurement policies.
THE FUTURE: additional support
Additional actions that could help the industry weather the storm of COVID-19 and future economic downturn, as well as adapt to the constantly evolving global timber market, include:
Increased training for businesses: Online training programs offering specialized advisory services tailored to specific groups and problems can, and should, be created by relevant authorities to support businesses in this period of massive change.
Up-to-date information: Newsletters explaining new regulations, online tools, market trends, and more are equally useful tools.
Boosting efficiency of government services: Government authorities can use this time to evaluate and improve their processes. These efforts should focus on: boosting the efficiency of existing services (waiting times, for example), increasing the number of people using services, and conserving forest cover.
Adoption of digital tools: The implementation of digital tracking tools, or systems enabling source verification, would strengthen Peru’s timber legality assurance systems, boosting trade reputation, and thus creating opportunities in a wider range of markets. It would also contribute to a responsible public timber procurement policy.
Recognition and support of indigenous and independent oversight initiatives: In the meantime, and in the absence of a national timber legality assurance systems, self-managed forest oversight initiatives promoted by indigenous communities or independent forest management certification schemes are useful tools to foster a responsible market, as well as to encourage forest conservation.
CONCLUSION
The COVID-19 pandemic, and Peru’s national lockdown this spring, pushed the country’s timber industry into crisis and has left wide swathes of forestlands open to illegal logging without forest range and auditing oversight. The response of the government, competent authorities, and businesses to this crisis will determine their legacy. With more focused support, improved technology, and more responsive business practices, a more competitive and ethical industry can emerge, contributing to Peru’s green recovery efforts and the conservation of the country’s valuable tropical forests.
[1] For additional information, refer to: https://www.forest-trends.org/publications/peeling-back-the-bark-timber-tracking-and-regulations-controlling-the-peruvian-forest-supply-chain/
[2] ADEX (2020): Boletin Informativo de la Gerencia de Servicios e Industria Extractivas. October 2020.
[3] https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/october/ustr-announces-enforcement-action-block-illegal-timber-imports-peru
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