BURMESE TIMBER EXPORTS DECLINING

C O N F I D E N T I A L SECTION 01 OF 04 RANGOON 000374 SIPDIS STATE FOR EAP/MLS, INR/EAP, EEB/TFS, OES BANGKOK FOR REO OFFICE PACOM FOR FPA TREASURY FOR OASIA, OFAC E.O. 12958: DECL: 06/19/2019 TAGS: ECON SENV PREL PGOV ETRD PINR BM SUBJECT: BURMESE TIMBER EXPORTS DECLINING REF: A. 08 RANGOON 706 ¶B. 08 RANGOON 721 ¶C. RANGOON 357 RANGOON 00000374 001.8 OF 004 Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4 (b and d). Summary -------------- ¶1. (SBU) The value and quantity of legal Burmese timber exports dropped in 2008 by eight percent and 21 percent respectively over the previous year. EU sanctions appear to impact Burma's timber trade, as the value of direct exports to Europe has dropped by 65 percent since 2007. Timber industry experts predict that exports in 2009 will also decline, due to decreased world demand and lower quality of Burmese timber. According to Burmese private consultant Business Investment Group, India remains Burma's largest legal market for teak and other hardwoods, followed by Thailand, China, Vietnam, and Singapore. However, timber industry contacts estimate that between USD 50-100 million in timber is sent to China annually via illegal and unofficial border trade. End Summary. Drop in Timber Exports -------------- ¶2. (C) Following a record year for Burmese timber exports in 2007 (Ref A),the total value of legal timber exports in 2008 fell by eight percent, from USD 562 million to USD 516 million. (Note: The GOB maintains export data in kyat, rather than USD. Currency conversions reflect the average USD/kyat rate in a given year.) The overall quantity of legally exported timber decreased by 21 percent, from 2.4 million metric tons in 2007 to 1.9 million metric tons in ¶2008. Teak exports decreased from 317,000 metric tons to 225,884 metric tons; sales of ironwood, rosewood, and pine accounted for the remaining 2008 exports. Despite the drop, timber remains one of Burma's top export industries, according to Burmese economic consultants Business Investment Group (BIG). In 2008, MTE exported USD 499 million in timber; private companies exported the remaining USD 17 million. -------------- -------------- Burmese Timber Exports 2006-2009* Value in Millions USD Quantity in Metric Tons -------------- -------------- Year Qty Teak Qty Other Total Total Teak Value Other Value Qty Value -------------- -------------- 2006 384803 318.7 1530357 211.8 1915160 530.5 2007 317507 302.9 2092643 258.9 2410150 561.7 2008 225884 253.2 1714311 169.1 1940195 516.4 2009* 33025 41.3 349531 46.9 382586 88.2 -------------- -------------- Source: Business Investment Group, August 2008 *Through June 2009 ¶3. (C) Retired timber exporter Captain Maung Aye told us that the timber business is not as profitable as in the past, due to lower world prices of teak and declining quality of RANGOON 00000374 002.6 OF 004 Burmese timber. State-owned Myanmar Timber Enterprise (MTE), which is responsible for the extraction and marketing of timber, exceeds annually the Ministry of Forestry's annual allowable cut of 250,000 metric tons of teak and 1.5 million metric tons of other hardwoods to meet its revenue quota of USD 300 million, environmentalist U Uga told us. For example, according to internal MTE documents MTE and select crony companies cut more than 500,000 metric tons of teak in 2008 -- double the allowed limit. Nevertheless, according to U Uga, declining world prices of teak throughout the year forced MTE and many crony companies, including Dagon Timber, Htoo Timber, and IGE Co. Ltd., to hold on to their teak stocks until world prices rise, accounting for the difference between amount cut in 2008 (500,000 metric tons) and the amount exported (225,884 metric tons). The majority of MTE's revenue was earned from exports of other hardwoods, for which both world price and demand is still relatively high. Impact of Sanctions? -------------- ¶4. (C) According to U Win Aung, owner of United International, one of Burma's larger private timber companies, decreasing world demand and lower quality of timber were only a few of the reasons behind the drop in 2008 exports. He surmised that EU timber sanctions, instituted in November 2007, also played a role, as many furniture and ship building companies supplying European markets have stopped ordering Burmese timber (Ref B). BIG export data shows that 2008 Burmese timber exports to the EU totaled USD 5.7 million, a drop of 65 percent over 2007 levels. (Note: Although EU sanctions ban all Burmese timber imports, local EU colleagues explain that due to customs implementation problems that extended into 2008, some European companies continued to import timber directly from Burma.) ¶5. (C) Jamie Humphries, owner of reclaimed timber company Burma Chindits, told us Burmese companies are still able to export timber to Europe despite sanctions, as several Singaporean, Thai, and Malaysian companies are willing to import Burmese timber and re-export it to Europe with a fake certificate of origin. So far in 2009 Burma has exported USD 509,000 worth of timber to European countries, including Italy, France, and Germany, through this indirect process. Captain Maung Aye cautioned not to overestimate the impact of European sanctions, noting that the European market for Burmese timber was not especially large before sanctions began. He agreed, however, that EU sanctions deter many companies from doing business with Burma. Exports to Asian Markets -------------- ¶6. (C) According to official trade statistics, almost half of Burma's legally exported hardwoods in 2008 went to India in the form of uncut logs. Former MTE Deputy Managing Director U Khin Zaw reports that Indian saw mills process the wood and Indian manufacturers use it to produce furniture, hardwood flooring, and handicrafts. Captain Maung Aye told us many higher value products are shipped to other parts of Asia, including China and Thailand, or to the Middle East for resale. According to BIG, Thailand is the second largest legal importer of Burmese timber; 2008 imports increased by 61 percent over 2007 levels due to higher demand in Thailand RANGOON 00000374 003.6 OF 004 and among trans-shippers who resell the goods to Asian and European destinations as "Thai" products. -------------- -------------- Official Burmese Timber Exports by Country 2007-2009* In US Dollars -------------- -------------- Country 2007 2008 2009* -------------- -------------- India 270,360,092 228,447,315 41,182,196 Thailand 57,097,548 92,007,208 13,239,904 Vietnam 40,188,315 41,472,415 1,861,119 Singapore 32,812,361 34,249,914 9,039,649 China 41,887,961 41,813,239 3,969,183 Bangladesh 31,119,270 27,098,746 14,582,785 Hong Kong 25,050,808 14,767,208 925,466 Pakistan 10,438,888 7,268,203 145,066 Malaysia 7,956,213 11,476,385 1,370,118 Italy 14,375,179 3,457,882 253,603 Other 30,435,890 14,340,076 1,673,184 -------------- -------------- Total 561,722,525 516,398,591 88,424,237 -------------- -------------- Source: Business Investment Group, June 2009 *Through March 2009 Illegal Exports to China -------------- ¶7. (C) Although official trade figures show otherwise, timber contacts confirm that China is the largest overall market for Burmese timber. According to BIG data, China in 2008 legally imported USD 42 million in Burmese timber products, of which 25 percent was teak. U Khin Zaw and Captain Maung Aye explained that a substantial amount of Burmese teak enters China illegally each year, transported via truck across the border with the acquiescence of corrupt customs and/or police officials. Captain Maung Aye also told us the regime allows select Regional Commanders to sell and export additional timber through unofficial border trade to China and India (Ref B). Although the GOB no longer publishes border trade data, Captain Maung Aye estimated that China illegally and unofficially imported between USD 50 million and USD 100 million in 2008. U Khin Zaw concurred, but stressed that China's overall timber imports from Burma, including illegal imports, are down from 2007 levels (Ref A). Comment -------------- ¶8. (C) Despite the eight percent decline in the value of Burma's legal timber trade, the regime still earns close to USD 500 million annually from this sector. The drop in 2008 timber exports was primarily due to lower worldwide demand and falling quality of Burmese timber rather EU sanctions. The majority of Burma's timber has traditionally been sold to Asian countries, not to Europe. Even before the EU prohibited the import of Burmese timber, Europe accounted for only USD 15 million of annual sales -- less than three percent of Burma's total timber exports. Given current world economic conditions, low demand for timber, and falling timber prices, we expect Burma's timber exports will continue RANGOON 00000374 004.6 OF 004 to drop in 2009. DINGER