Economic growth in Europe has slowed dramatically in Europe this year and the downturn is likely to persist. European hardwood production has fallen under pressure from both declining volume and quality of log supply and with weak consumption in the European construction and furniture sectors. European wood panels production and consumption is also down compared to the period during and immediately following the COVID lockdowns. However, in this sector, performance is still up compared to the pre-COVID period, having received a boost from green policy measures in the region. Longer term, the future direction of supply and demand in the European region is likely to be strongly influenced by introduction of the EU Deforestation Regulation (EUDR), due to be enforced from start of 2025.
These are key messages contained in the advanced draft of the Market Statement due to be considered at the joint session UN ECE Committee on Forests and the Forest Industry and the FAO European Forestry Commission to be held in San Marino between 20th and 23rd November 2023.
According to the Statement, “economic growth in Europe decelerated markedly in 2022 as the post-pandemic recovery ran out of steam” and “the pace of economic expansion in the ECE region is expected to decelerate further in 2023”. It is noted that “some factors that depressed economic performance earlier started to ease in mid-2023. The fall of headline inflation, driven by declining energy prices, easing supply bottlenecks and the reopening of China define a more auspicious outlook”.
However, the Statement goes on to suggest that “the pickup is likely to be rather modest, with growth rates in 2024 remaining well below average pre-pandemic levels. Also, that “the impact of monetary policy tightening will be more strongly felt, dampening the growth of demand”. In addition to undermining consumer confidence, “higher financing costs are increasing the burden of servicing government debt”. This in turn is “adding to the pressures for fiscal consolidation, after the increase in expenditures resulting from the COVID-19 pandemic and the support provided to offset the impact of high energy prices”.
The Statement notes that European sawn hardwood production and consumption decreased respectively by 8.8% and 8.9% to 13.4 and 12.9 million m3 in 2022. All large producing countries such as France, Germany, Romania and Türkiye reported significant declines in production. Oak processors in Europe were facing stiff competition for raw material, notably from buyers in China, resulting in high prices for sawlogs. Sawmills specializing in beech sawnwood production faced competition for raw material with the fuelwood producers for a short period at the end of 2022. Beech sawlogs in Europe are further reported to have quality issues that are likely caused by the droughts in the past five years.
European wood-based panels production is reported to have decreased by 5.1% to 77.4 million m3 in 2022 due to the energy crunch in Europe and its consequences on consumer confidence and the general economic situation. Ninety per cent of the drop in output took place in the second half of 2022 and reflected the decline in furniture output and construction production. However, European wood panels production in 2022 was still 5% higher than in 2019, before COVID. The long-term outlook in this sector also “remains favourable thanks to political support for programmes in the European subregion such as the European Green Deal, the European Renovation Wave and the New European Bauhaus”.
On EUDR, the Statement notes that the regulation “will require significant resources and cooperation among all stakeholders at all levels of commodities’ trade inside and outside the EU. Reactions to this legislation from non-EU countries included a letter from the Ambassador of Canada to the EU raising concerns related to the geolocation coordinates requirements in the regulation, the definitions used for deforestation-free and degradation, and the potential risk of negatively impacting bilateral trade on commodities addressed under the EUDR”.
The UN ECE/FAO draft Market Statement can be downloaded at: https://unece.org/sites/default/files/2023-09/ECE_TIM_2023_4-FAO_EFC_2023_4.pdf
EU increases restrictions on exposure to formaldehyde in wood products
On 14th July, the EU introduced a new maximum emission limit of 0.062 mg/m3 of formaldehyde into indoor air for the “largest contributors” to formaldehyde emissions, identified in the new Regulation (2023/1464) as wood-based articles and furniture, alongside products used for the interiors of road vehicles. A limit of 0.08 mg/m3 will apply to all other articles such as textile, leather, plastic, construction materials or electronic products.
Producers of articles where formaldehyde is used have 36-months – until July 2026 – to comply with the new rules. This, according to the European Commission, will provide “sufficient time for stakeholders to implement the restriction requirements, develop relevant analytical methods to test formaldehyde emissions and deploy formaldehyde-free or low emitting formaldehyde products”.
The European Commission also notes that the European Chemicals Agency – with the support of industry and experts – will develop guidance facilitating harmonised implementation of the test conditions for the measurement of the formaldehyde emissions.
The new limit is exactly half the value indicated in 1989 by the World Health Organization (0.124 mg/m3) and which is the maximum level established in the existing European Standard EN 13986 for E1 classification. In addition to significantly reducing the allowed level of emissions, unlike the existing E1 requirement which is mandatory in only a few EU states, the new requirement will be a legal requirement for all regulated products placed on the EU market, whether produced inside or outside the region.
The European Panels Federation (EPF) has welcomed the new regulation, stating that European wood-based panel manufacturers can easily cope with the lower limit. In fact, the EPF has actively lobbied for introduction of a “½ EI class of product” with formaldehyde levels at 50% of the current ≤0.124 mg/m3 limit and for making E1 compulsory for all panel products circulating in the EU.
The text of the new EU regulation on formaldehyde is available at: https://eur-lex.europa.eu/eli/reg/2023/1464/oj
New EPDs for tropical timber products from the Congo Basin
ATIBT has produced 3 Environmental and Health Declaration Sheets (“French EPDs”) for decking, cladding and tiles made from Congo Basin wood from sustainably managed forests. The French EPD is a standardized document that presents the results of a product’s Life Cycle Assessment, together with health-related information, with a view to calculating the environmental and health performance of a building’s eco-design.
The French EPDs are prepared in line with the EN 15804+A1, the standard for Environmental Product Declarations (EPDs) for construction products in the EU, together with its French supplement NF EN 15804/CN. They take into account the product’s entire life cycle, from extraction of raw materials to end-of-life, also including transport, implementation and use of the product itself (cradle to grave).
The French EPDs are designed to provide building professionals (builders, architects, design offices, etc.) with reliable, verified environmental information to help them develop projects that comply with France’s 2020 Environmental Regulation (RE 2020). RE2020 is a national regulation for all new buildings in France which came into effect on 1st January 2022.
Available free of charge from https://www.base-inies.fr/iniesV4/dist/consultation.html, the three EPDs are as follows:
- EPD: Congo Basin wood decking, all tropical species, all configurations (v.1.1)
- EPD: Congo Basin wood strip siding, all tropical species, all configurations
- EPD: Glued-laminated timber beams from the Congo Basin, all tropical species, all configurations (excluding installation accessories) (v.1.1)
The 3 EPDs are the result of the DRYADES project (Life Cycle Analysis of Wood Products from the Congo Basin) led by ATIBT and supported by COMIFAC’s PPECF program, Fair&Precious and the French trade association LCB. The aim of the Dryades project is twofold:
- To produce Life Cycle Impact Assessments (LCIA) up to the port of shipment that can be reused in all markets requiring EPDs. In this way, professional organizations, NGOs or any other person or institution can integrate the LCIA data produced by the DRYADES project into their own life-cycle analyses.
- To Produce EPDs (FDES – Fiches de Déclaration Environnementale et Sanitaire) to enable companies to remain competitive on the carbon aspect for the French market, and translate them into English so that they become generic EPDs.
The three EPDs for decking, cladding and joinery squares were verified by an independent third party as part of the INIES program, a government-recognized program for RE2020-compliant calculations. Additional data were collected from August 2022 to December 2023, with verification certificates to be received in July 2023.
The results of the EPD’s will be presented at an ATIBT event on “Lifecycle analyses of certified woods and updated rules for contracts and uses”, to be held on October 5 from 10am to 12:30pm in Nogent-sur-Marne, France, and by video conference.
Increasing media coverage of EUDR as policy dialogue heats up
Following passage of the EU Deforestation Regulation into law on 31 May, and with enforcement now due to start in no more than 15 months, policy makers both inside and outside the EU have been taking a hard look at potential impacts. The world’s media is also waking up to the wider political fallout and implications of the law for global forest products and agricultural supply chains.
Perhaps the most prominent concern about the law expressed by politicians and trade analysts outside the EU is the stipulation that producers and traders must provide precise geographical coordinates for all plots of land (defined as a “land within a single real-estate property”) from which products are sourced with every individual consignment placed on the market. This is expected to be particularly challenging for commodities sourced from smallholders and which account for a large share of supply of the regulated products. The European Commission, for its’ part, insists that there are sufficient safeguards in place to avoid arbitrary or unjustifiable discrimination or trade restrictions.
An article was published in Euronews on 20 September under the heading “Why the Global South is against the EU’s anti-deforestation law”. (https://www.euronews.com/my-europe/2023/09/20/why-the-global-south-is-against-the-eus-anti-deforestation-law). The article reports on a letter sent to EU Commission and Parliament officials earlier this month by the Ambassadors of 17 countries describing EUDR as an “inherently discriminatory and punitive unilateral benchmarking system that is potentially inconsistent with WTO obligations”.
The signatories — from Argentina, Brazil, Bolivia, Colombia, Dominican Republic, Ecuador, Ghana, Guatemala, Honduras, Indonesia, Ivory Coast, Malaysia, Mexico, Nigeria, Paraguay, Peru, and Thailand — called for a change to the legislation and “open dialogue” about possible mitigation measures, in particular to help small and medium-sized companies.
Euronews quotes Pedro Miguel da Costa e Silva Brazil’s ambassador to the EU as stating that “The legislation is unilateral, as it was created without an effective dialogue with producer countries and without being supported by any agreement negotiated at international level”.
Commenting on the letter, Adalbert Jahnz, a spokesperson for Virginijus Sinkevičius, the European Commissioner for Environment, Maritime Affairs and Fisheries, rejected the accusation that the law is discriminatory on grounds that “it will also be applied to domestic producers…Therefore, it will be implemented in an even-handed manner that does not constitute arbitrary or unjustifiable discrimination for third-country producers, or a disguised restriction to trade. It was designed to be fully compatible with World Trade Organization rules”.
In a Financial Times article published on 20th August, the Head of the International Trade Centre (ITC) is reported as suggesting that the EUDR may have a “catastrophic” impact on global trade if the bloc does not help small producers and developing nations to adapt. (https://www.ft.com/content/9119d448-ff1c-434d-b07f-27b1bf11c041).
Pamela Coke-Hamilton, executive director of the ITC, a joint agency of the UN and World Trade Organization, told the Financial Times that a ban on goods linked to deforestation from entering the EU favoured big companies that can trace where their produce had been grown and risked “cutting off” smaller suppliers.
“What the biggest producers may do is, not being able to do the traceability for these small farmers, simply cut them off”, Coke Hamilton is reported to have said to the FT. Depending on how well the EU addressed its outreach to developing countries the impact of the law on global trade could be “catastrophic or it could be OK”, she added.
If small producers could not meet the requirements for exporting goods covered by the law this risked “a vicious cycle”, Coke-Hamilton said in another comment to the FT. “Once you have loss of market share, you have loss of income, then you will have lots of increased poverty, then increased deforestation because at the root of deforestation is poverty. We [risk] falling into the trap of reinforcing something that we’re trying to change”, she added.
Coke-Hamilton also said to the FT that information requirements and the obligation to use geolocation technology presented too much of a burden. “Many [smallholders] are trying to just keep up with post-Covid, the cost-of-living crisis, climate change. They’re just caught in this maelstrom of survival”, she is quoted as saying in the FT.
In response, a spokesperson for the European Commission told the FT that the EUDR “applies to commodities, not countries, and is neither punitive nor protectionist, but creates a level playing field. It will be implemented in an even-handed manner that does not constitute arbitrary or unjustifiable discrimination for third-country producers, or a disguised restriction to trade.”
Similar concerns about the potential impact of EUDR on smallholders are raised in an article published on 20 September on Mongabay, the environmental website, drawing on interviews with independent trade analysts (https://news.mongabay.com/2023/09/eu-deforestation-free-rule-highly-challenging-for-se-asia-smallholders-experts-say/).
The Mongabay article suggests that “while the regulation is a step toward transparency and international deforestation-free supply chain management, observers say it places millions of smallholders who depend on access to the EU market in a vulnerable position. Many small-scale farmers lack the technical capacity and financial capital to meet the hefty due diligence requirements of the new rules”.
Quoting Phuc Xuan To, a policy adviser to the Forest Trends thinktank, Mongabay notes that smallholders produce 95% of Vietnam’s coffee, 42% of Indonesia’s palm oil, and 95% of Thailand’s rubber. In Vietnam alone, more than 2 million smallholders operating across roughly 6 million plots of land are engaged in the country’s three major forest-related commodities that enter EU markets and are directly affected by the new rule. Vietnam’s timber, rubber and coffee generate combined revenue from the EU in excess of $2.5 billion annually.
“There are a lot of concerns and worries about [the EUDR],” Phuc told Mongabay. “[E]ntire sectors, like the Vietnam coffee industry, are unsettled; many don’t know where to start and it’s particularly challenging for smallholders.”
Phuc told Mongabay that the process of verifying land use rights and plantation registration certification, let alone gathering geolocation data, is protracted, complex and slow in many parts of Southeast Asia. Phuc said that the monitoring systems and databases simply don’t exist and that EUDR compliance will be “highly challenging if not impossible” over the short term.
Phuc also highlighted to Mongabay the challenges of dealing with the complex supply chains that are typical of South East Asia: “If we look at how Vietnam imports timber from Laos, rubber from Cambodia, coffee from Laos … once it enters the country it is mixed with locally sourced supplies and then exported to Europe. How can those imports be traced? We’re not talking about small-scale imports here, there’s more than $1 billion worth of rubber imported from Cambodia each year, it’s on a massive scale.”
Similar concerns are expressed by Nathalie Faure, a senior program officer at RECOFTC, a Thailand-based community forestry nonprofit, when speaking to Mongabay. Faure does highlight that benefits may flow from the EUDR, given sufficient support for reform processes. “The purpose of the regulation is really to create the sustainability of products, so there’s potential for having better access to information, better rules around sustainability, greening local economies,” Faure told Mongabay. “And it might create legal reforms in relation to certain aspects, such as land tenure, sustainability and trustability.”
But Faure added in her comments to Mongabay, that there’s a risk of traders cutting ties with smallholders deemed “high risk” under the new EU rule and switching to larger, less scrupulous and less ethical suppliers, but with larger capital to comply. This, ultimately, would undermine the EU’s intention, she told Mongabay.
Tran Quynh Chi, a regional director at IDH – the Sustainable Trade Initiative, a social enterprise headquartered in the Netherlands, told Mongabay the new rules serve as an opportunity for forest commodity sectors to develop more responsible approaches to business. “This is really an opportunity to make the markets and the sector transformed toward more transparency and sustainability,” Tran told Mongabay.
Tran said 10-15% of smallholders engaged in the coffee sector in Vietnam live in poor rural regions close to forest edges. If mechanisms aren’t put in place to help such producer groups maintain access to supply chains, “there’s a very big risk that they’ll be excluded from the EU market, and that will drive up poverty levels,” she said. Furthermore, Tran told Mongabay that smallholders living close to natural forests who are unable to comply with the new regulations “might be forced to go further into the forest to eke out a living” if excluded from EU supply chains.
Early insights into potential trade impacts of EUDR
The comments of policy makers and trade analysts in recent media articles imply that there will be winners and losers from the EUDR when enforcement begins on 1st January 2025. A revealing insight into where the balance of advantage, and disadvantage, might lie in trade terms is provided by a presentation by Matthew Spencer, of the IDH Sustainable Trade Initiative, delivered to a meeting of the Amsterdam Declarations Partnership (ADP) held in London in May this year.
The slides for Spencer’s presentation on “EUDR key opportunities and risks” can be downloaded at: https://www.idhsustainabletrade.com/uploaded/2023/05/EU-Deforestation-Regulation-Opportunities-and-Risks.pdf
Spencer’s central message is that there may be “wider wins from EUDR” including stronger enforcement of national forest laws, acceleration of land titling programmes, and widespread implementation of “new accessible and cheap traceability solutions”. However, these “wins” will only materialise if “production countries feel respected and supported to be partners in implementation”. Without adequate dialogue and support, negative outcomes are possible, particularly resulting from market exclusion of smallholders, according to Spencer.
Spencer argued that in practice, whether the balance of EUDR trade impact is negative or positive will vary between supply countries and sectors and will depend to a large extent on where producers stand in relation to two key factors:
- The share of volume exported to the EU; and
- The share of smallholder farmers compared to large scale farmers and plantations.
Spencer observed that the “biggest opportunities” for “wins” from the legislation will occur in those sectors where small farmers dominate supply and the EU is the biggest buyer. This situation prevails, for example in the cocoa and coffee sectors in Africa. In these circumstances, large intermediary companies should have a strong incentive to stay engaged even with the smallest producers and to invest in longer term efforts to build farm mapping and traceability mechanisms.
In contrast, the “biggest risks” from the legislation occur where smallholders dominate but the EU is not a large buyer, a situation typical of most agricultural commodity supply chains in South-east Asia. Here, segregation of supply chains becomes more likely, with smallholders diverting supply away from the EU, while buyers in the EU focus their attention on supplies that can be derived from the big state and industrial plantations. Significant investment to build capacity for traceability in the smallholder sector will only occur if plantation supplies prove inadequate and this investment will focus only on the simplest, and lowest risk supply chains.
In sectors and supply chains where larger plantations or forest operations already predominate, the regulation will likely have less significant impact, either positive or negative. While still creating technical challenges and tending to marginalise those smallholders that have been supplying the EU market in the past, compliance with the geolocation and traceability and other requirements is more straightforward for the bulk of the industry. Examples include the Brazilian soy and coffee sectors.
Spencer’s presentation focused on agricultural commodities and makes no mention of forest products. But it is easy to identify where various forest products lie in relation to the Spencer’s two key factors and, therefore, which are most likely to be winners and losers. For example, tropical logs, lumber, and veneer from Africa, for which supplies into the EU mainly derive from large concessions, many of which are already FSC certified, will face few obstacles in meeting the legislation.
However, wood furniture and other composite products manufactured in Southeast Asia, where a significant proportion of wood derives from smallholders or is imported from other countries, will face more significant challenges in delivering the geolocation data. Without significant intervention to develop the necessary tracking procedures, imports of these products into the EU – which only accounts for a relatively small proportion of total exports from Southeast Asia – may decline with more product diverted to other markets in Asia and in North America.
In these circumstances, continuing far-reaching support by the EU and other donors to help develop the land registration and tracking systems required for EUDR conformance – either through the existing FLEGT VPAs or the new “Forest Partnerships” which are mandated through the EUDR – will be necessary to avoid negative outcomes, particularly for smallholders.
EUDR encourages development of comprehensive wood tracking framework inside the EU
One forest products sector characterised by both heavy reliance on smallholders, and where a very large proportion of products is destined for the EU market, is Europe’s domestic wood manufacturing sector. Recent developments in this sector tend to confirm Spencer’s analysis (see above) that the combination of these two factors will encourage greater investment in traceability and verification capacity.
The SINTETIC research project launched in June this year aims to deliver a “comprehensive data management scheme” for the EU forest value chain. The project has received €9 million funding from Horizon Europe, the EU’s key funding programme for research and innovation. The basis of the SINTETIC project is that every European log is stamped with a digital code during harvesting. When the project concludes in four years’ time, the project aims to be able to trace along the full length of the forest value chain – from forest through logs and processing into products – using several different but integrated tracking systems:
- Radio Frequency Identification to allow standing trees as well as logs to be tagged;
- A punching code impressed directly onto the wood with a hammer;
- CT log scanning at all sawmills; and
- A bar/QR code to enable product identification through the retail process.
The last step is seen as crucial as it will enable operators and customers to trace the wood element in the finished product back to a specific forest and an individual tree.
Aside from promoting a widespread uptake of shared digital technologies, the project researchers hope this will increase the number of EU forested areas under active management, which will, in turn, improve the health and productivity of forest stands.
To cope with the diversity of the European forest sector, the platform will be designed to accommodate two ‘extreme’ forest sector scenarios – and consequently everything in between – namely:
- The mature forest sector, as found in the north and central EU and represents high-value forests with good data availability, fully mechanized harvest systems, and a well-structured supply chain including modern sawmills equipped with sensors for quality assessment.
- The forest sector, as found in the Mediterranean and eastern EU, represents a high fragmentation of forest’s ownership non-harmonized inventories, small and micro sawmills, and low levels of investment and innovation.
Effective and efficient rollout of this system will be critical to successful implementation of the EUDR for European manufacturers, particularly as the regulation requires that geolocation data to the individual “real estate properties” where harvesting occurred must be provided with all consignments exported from the EU market in the same way as imported products.
In the absence of such a system, the challenges to EU manufacturers of composite products such as wood furniture, panels, joinery products, and paper, many of which depend on smallholders, in meeting the new export requirements will be significant.