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A summary of “The competitive Climate for Wood Products and Paper Packaging: the Factors Causing Substitution with Emphasis on Environmental Promotions”

Since the early seventies the Minimum Efficient Scale (MES) of the forest industries, i.e. the average annual production capacity needed to produce at lowest long run per unit costs, has increased considerably. Especially the MES of wood-based panels and pulp industries showed large increases. Driving forces of these increases are the (new) environmental requirements which the production processes have to comply with, the increasing use of small diameter roundwood, wood residues, waste paper, and waste wood. The lower the quality of used raw materials, more complex production processes need to be employed which to be profitable require large scale production. So, ironically the cheaper the raw materials used, the bigger the mill, and the higher the investments needed to build the mill that is able to use these raw materials as furnish. Larger capital outlays, especially in projects with large hard to recover investments in installations, are associated with greater aversion to risk. The ongoing concentration within the forest industries resulting in an increased influence of 'outside' shareholders and banks, combined with an on average low profitability of forest industries, have also an intensifying effect on risk aversion in the decision to invest. For the forest industries an important risk factor is (un)certainty of supply of raw materials of the quality and quantity the mill was designed for. In spite of increasing demand for wood products in all industrialised countries, a decline of production capacity is taking place in countries in which the availability of raw materials is declining or becoming more and more uncertain due to the harvesting behaviour of forest owners. Increases of production capacities are occurring either in countries with a 'certain' supply, or for other types of raw materials (wood residues, waste paper, waste wood). This results in an enormous "over-supply" of small diameter roundwood in regions/countries which are not 'preferred production sites' of the forest industries. Forest owners in those over-supply areas, can make their region more attractive as place of business for forest industries if they remove the uncertainty of raw material supply by changing their harvesting behaviour.