Funded by:

Supply Chain Mapping

of Malaysian Timber and
Wood-based Industries

This report has been produced by NEPCon, on behalf of WWF-Malaysia. Field research was conducted in
collaboration with the Malaysian Wood Industries Association (MWIA).

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 Supply Chain Mapping
of Malaysian Timber and
Wood-based Industries

This publication has been produced with the assistance of the European Union.
The contents of this publication are the sole responsibility of the partners and can
no way be taken to reflect the views of the European Union.

The Project is funded by the European Union, represented by the European

Commission.

Published on 18 January 2016

NEPCon Tel: +45 8618 0866

Sren Frichs Vej 38K, Fax: +45 8618 1012
1. Sal, Email: info@nepcon.net
8230 byhj, http://www.nepcon.net/
Denmark

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Contents
1. List of Abbreviations..................................................................................................................... 5
2. Introduction ................................................................................................................................... 6
2.1 Background ............................................................................................................................. 6
2.2 Forest governance in Malaysia ............................................................................................... 7
2.3 Legality and sustainability risk in timber supply chains ......................................................... 8
3. Objective and Research Questions ............................................................................................ 11
3.1 Objective ............................................................................................................................... 11
3.2 Research questions ................................................................................................................ 11
4. Limitations of the Study ............................................................................................................. 12
4.1 Challenge to engage the timber industry............................................................................... 12
4.2 Limited on-site time .............................................................................................................. 12
4.3 Barriers between regions ....................................................................................................... 12
4.4 Poor national trade data (by volume) .................................................................................... 12
5. Methodology ................................................................................................................................ 13
5.1 Research methods ................................................................................................................. 14
5.1.1 Literature review ........................................................................................................... 14
5.1.2 Questionnaire ................................................................................................................ 14
5.1.3 Semi-structured interview (SSI) and supply chain mapping ......................................... 15
5.2 Methodological framework ................................................................................................... 15
6. Results and Discussion ................................................................................................................ 16
6.1 Domestic production, import and export in Malaysian timber and wood-based industries .. 16
6.1.1 Domestic production ..................................................................................................... 17
6.1.2 Imports .......................................................................................................................... 19
6.1.3 Exports .......................................................................................................................... 21
6.2 Timber species used in Malaysian timber and wood-based industries ................................. 28
6.2.1 Threatened species ........................................................................................................ 28
6.2.2 Protected/ prohibited species ........................................................................................ 29
6.2.3 Convention on the International Trade in Endangered Species of Wild Fauna and Flora
(CITES)-listed species ........................................................................................................... 29
6.3 Sustainability and legality certification in the Malaysian timber and wood-products
industries ....................................................................................................................................... 32
6.3.1 Programme for the Endorsement of Forest Certification (PEFC) ................................. 33
6.3.2 Forest Stewardship Council (FSC) ............................................................................... 34
6.3.3 Malaysian Timber Legality Assurance Systems ........................................................... 34
6.3.4 Voluntary legality verification schemes........................................................................ 35
6.4 Structure of timber and wood product supply chains in Malaysia ........................................ 37
6.5 Legality and sustainability risk in Malaysian supply chains ................................................. 42

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 6.5.1 Risks and mitigation measures for domestic products .................................................. 42
6.5.2 Risks and mitigation measures for imported products .................................................. 48
6.5.3 Legality and sustainability risk matrix .......................................................................... 50
7. Future Trends .............................................................................................................................. 57
7.1 Domestic production and trade ............................................................................................. 57
7.2 Imports and exports............................................................................................................... 57
7.3 Certification .......................................................................................................................... 58
8. Recommendations ....................................................................................................................... 59
8.1 Capacity building .................................................................................................................. 59
8.2 Collaboration within and across supply chains ..................................................................... 59
8.3 Support SFM in Sarawak ...................................................................................................... 60
8.4 Certification .......................................................................................................................... 60
8.5 Building reference databases for species and origin testing ................................................. 61
8.6 Further research into the furniture and paper industry .......................................................... 61
8.7 Standardised reporting of trade data ..................................................................................... 61
8.8 Certification of Rubber Wood............................................................................................... 62
8.9 Due diligence regulations...................................................................................................... 62
8.10 Environmental sustainability criteria for financial institutions ............................................. 62
8.11 Tackling corruption ............................................................................................................... 63
9. Conclusion.................................................................................................................................... 64
10. Bibliography ................................................................................................................................ 65
11. Appendices ................................................................................................................................... 71
Appendix 1 Company Overview ..................................................................................................... 71
Appendix 2 Sample of Supply Chain Questionnaire .................................................................... 74
Appendix 3 Semi-Structured Interview Questions ....................................................................... 75
Appendix 4 Protected/ Prohibited Tree/ Plant Species in Malaysia ............................................ 76
Appendix 5 Legality Verification/ Certification Schemes ............................................................ 78
Appendix 6 List of HS Codes Used for Trade Analysis ................................................................ 79

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1. List of Abbreviations

AILPA Australian Illegal Logging Prohibition Act

BJC Builders' Joinery and Carpentry
CITES Convention on International Trade in Endangered Species of Wild Fauna and Flora
CPI Corruption Perceptions Index
DDS Due Diligence System
EIA Environmental Impact Assessment
EUTR European Union Timber Regulation
FDPM Forestry Department Peninsular Malaysia
FDS Forest Department Sarawak
FELCRA Federal Land Consolidation and Rehabilitation Authority
FELDA Federal Land Development Authority
FLEGT Forest Law Enforcement, Governance and Trade
FM/CoC Forest Management/ Chain of Custody
FRIM Forest Research Institute Malaysia
FSC Forest Stewardship Council
GFR Global Forest Registry
GTA Global Trade Atlas
HCVF High Conservation Value Forest
IUCN International Union for Conservation of Nature
LVL Laminated veneer lumber
MACC Malaysian Anti-Corruption Commission
MPIC Ministry of Plantation Industries and Commodities
MPPMA Malaysian Pulp & Paper Manufacturers Association
MTCC Malaysian Timber Certification Council
MTCS Malaysian Timber Certification Scheme
MTC Malaysian Timber Council
MTH Mixed Tropical Hardwoods
MTIB Malaysian Timber Industry Board
MWIA Malaysian Wood Industries Association
MYTLAS Malaysian Timber Legality Assurance System
NCR Native Customary Rights
NGO Non-Governmental Organisation
OLB Origine et Lgalit des Bois
PEFC Programme for the Endorsement of Forest Certification
PRF Permanent Reserved Forest
RISDA Rubber Industry Smallholders Development Authority
SFC Sarawak Forestry Corporation
SFD Sabah Forestry Department
SFM Sustainable Forest Management
SSI Semi-Structured Interview
STIDC Sarawak Timber Industry and Development Corporation
TLAS Timber Legality Assurance System
TLTV Timber Legality and Traceability Verification
VLC Verification of Legal Compliance
VLO Verification of Legal Origin
VPA Voluntary Partnership Agreement
WWF World Wildlife Fund

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2. Introduction

2.1 Background

Malaysia is a major contributor to global timber trade flows and consumption. Timber and wood-based products
also serve as important contributors to Malaysias economy, and utilisation of natural resources has become an
integral part of meeting the countrys goal of becoming a self-sufficient industrialised nation by the year 2020
known as Vision 2020. Indeed, in 2011 the timber and wood-based industries contributed the equivalent of 2%
of Malaysias gross domestic product and employed more than 210,000 people (Hoare, 2015). Malaysia is one
of the worlds largest exporters of tropical timber and is the worlds third largest producer of rubber and second
largest producer of oil palm (ANZ, 2015; MPIC, 2009). Together with cocoa, tobacco and pepper these
commodities dominate the growth of the natural resources sector.

As Malaysias utilisation of domestic and imported natural resources has increased, so too has scrutiny over the
legality and sustainability of this trade. Concern over deforestation and degradation is particularly acute in a
country where forest covers more than 50% of the land area, or more than 18 million hectares (Transparency
International, 2015). This vast expanse of forest harbours a wealth of biodiversity and is home to a number of
Indigenous communities1 and can be threatened by unsustainable natural resource extraction. Clearance of forest
land for oil palm and rubber can be a major threat to natural forest ecosystems, as can degradation of forests
through unsustainable timber extraction, which acts as a stepping stone to deforestation. These threats are not
unique to Malaysia but occur around the world wherever fierce economic growth competes with the presence of
valuable natural resources.

As such, commercial companies operating in the timber and wood products sector face a number of stakeholders
concerned about sustainability and legality risk. These stakeholders include, inter alia; governments, non-
governmental organisations (NGOs), local communities, concerned buyers and financial investors. Each of these
stakeholders can variously impact upon organisations operating in the timber sector.

To address these concerns, and to ensure the continued commercial viability of the timber sector, the Malaysian
Government introduced the National Timber Industry Policy (20092020). This policy was aimed at ensuring
the long-term sustainability in terms of environmental resources, human capital and technology development.
The Malaysian Government has also supported the uptake of forest certification, especially in Peninsular
Malaysia where eight states have achieved Malaysian Timber Certification Scheme (MTCS) certification a
national certification scheme recognised under the Programme for the Endorsement of Forest Certification
(PEFC) (PEFC, 2015b).

On the demand side, governments around the world have sought to tackle deforestation by introducing illegal
logging legislation and responsible public procurement policies. Legislation has been introduced in the EU,
USA and Australia to halt the sale of illegally harvested timber products. This places extra obligations on
Malaysian companies to provide supply chain information downstream to buyers who are legally obliged under
the regulations to demonstrate that their purchases are at low-risk of having been illegally harvested. Public
procurement policies in key markets such as the Netherlands and the UK have also served to promote
responsible forest management and sustainability certification. The Dutch parliament is currently discussing
recognition of the MTCS system under the national timber procurement policy, which is designed to ensure
utilisation of responsibly sourced timber by the Dutch public authorities (MTCC, 2014).

NGOs have also played a key role, by raising the profile of alleged unsustainable environmental practices, poor
working conditions and abuse of traditional and civil rights. Global Witness investigations have proved integral
in highlighting illegal harvesting in Sarawak timber concessions (Global Witness, 2012, 2013), whilst research

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Malaysia has 3.5 million Indigenous people, many of whom still rely on forests for their livelihoods (Yong et al. 2014).

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by Friends of the Earth Malaysia has reported potential customary land rights violations (FOE, 2013). Local
communities also engage in the debate by direct action; disrupting commercial activities (sometimes violently)
to protest for their right to free, prior and informed consent and customary land rights (Borneo Post, 2011a,
2011b; Survival International, 2009). As well as the direct revenue losses from inability to harvest, such
community conflicts also generate unwanted media attention and negatively impact the public image of timber
companies, causing pressure for the industry to move towards legal and sustainable practices.

Forest certification has played a key role globally, with end-users and large retailers increasingly choosing to
source wood products certified to internationally recognised sustainability schemes. For example, the Forest
Stewardship Council (FSC) certification logo was reported in 2015 to be recognised by 50% of individuals
sampled in the UK, 20% in Australia and 17% in Sweden (FSC, 2013, 2014) whilst large retailers such as Marks
& Spencer and IKEA seek FSC certified wood in preference to other sources and both have the long-term aim to
source 100% of their products from sustainably certified forests (IKEA, 2015; M&S, 2015).

Pressures for proof of legal and sustainable practices also come from financial institutions. These stakeholders
have moved towards imposing stricter rules as a prerequisite to companies obtaining funding over the past 20
years. For example, HSBC has implemented a Forestry Policy aimed at avoiding investment in illegal logging.
This includes avoiding funding companies that are directly involved in illegal practices but also avoiding
companies involved in the purchase of illegally harvested products (HSBC, 2014b). Indeed, there are now a
number of initiatives and tools available to the financial sector aimed at raising awareness of ethical investment
in the timber industry. In 2010, Pricewaterhouse Coopers released their Sustainable Forest Finance Toolkit
aimed at financial institutions (PwC, 2010) and in 2012 WWF released their Guide to Responsible Investment in
Agricultural, Forest, and Seafood Commodities (Levin et al., 2012). In addition, a plethora of NGOs promote
integration of Environmental, Social and Governance practices in financial decision-making (Brotto & Cupit,
2014; Global Witness, 2012; Stampe et al., 2015).

These various groups of stakeholders require robust and transparent data on supply chains on which to assess
companies performance data which are often not easily available or collated in a way which can be utilised by
stakeholders for meaningful assessment.

2.2 Forest governance in Malaysia

Malaysia has an estimated 18.06 million hectares of forested land (MPIC, 2014a). The largest portion of this
(7.8 million ha, 43%) is located in Sarawak. Another 5.83 million hectares (32%) are located in Peninsular
Malaysia and 4.43 million hectares (25%) in Sabah. Many of the wood and paper products consumed and
exported by Malaysia derive from the countrys own domestic and often natural forest areas.

It is thought that up to 80% of the forest in Sarawak and Sabah has been heavily impacted by commercial
harvesting operations; with the annual deforestation rate between 2000 and 2012 standing at 1.6% (Hoare,
2015). The main drivers of degradation and deforestation are expansion of agricultural plantations for oil palm
and rubber as well as timber harvesting and commercial tree plantation for timber and pulp production (Hoare,
2015). The Ministry of Plantation Industries and Commodities (MPIC) estimated that by 2014, 5.4 million ha of
land in Malaysia would be planted with oil palm and over 1 million ha with rubber (MPIC, 2014c).

Malaysia operates a federal governance system, whereby implementation of forest policy and management falls
under the jurisdiction of each of the 13 states (11 in Peninsular Malaysia, plus Sabah and Sarawak on Borneo).
However, the federal government is responsible for providing overall policy direction for the forestry sector,
towards which the states must work. The National Forestry Policy of 1978 was developed to harmonise forest
management in Malaysia and led to the National Forestry Act (1984), which was replaced by the National
Forestry (Amendment) Act (1993). These policies and acts are aimed at protecting forests from illegal logging,
unauthorised settlement and other unpermitted activities. Forestry policy is governed by two bodies at the
federal level: the Ministry of Natural Resources and Environment and the MPIC. Technical assistance is also
provided to the states by the federal body, the National Land Council (previously the National Forestry Council

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or NFC). This body was tasked with harmonising approaches to Sustainable Forest Management (SFM) within
Malaysia.

Forest land in Malaysia is divided into four main categories:

(1) Permanent Reserved Forest (PRF)
(2) State land & alienated land
(3) National Parks/ Wildlife & Bird Sanctuaries (collectively known as protected areas)
(4) Plantations forests

Permanent Reserved Forest (PRF) is forested land managed by state governments for either commercial
production or as protection forest. Around 78% of the total PRF area is utilised commercially according to SFM
practices, whilst the remaining area is designated as protected. Such protected forest includes: non-harvestable
forest (areas above certain altitudes and slopes), virgin jungle reserves, recreational forest, catchment forest and
reservoirs and forest for federal purposes (MTC, 2010). State land and alienated land can be either publicly or
privately owned and can be used for timber harvesting in the process of conversion to other land-uses. National
Parks/ Wildlife & Bird Sanctuaries are managed by state governments and are totally protected. Plantation
forests may be publicly or privately owned and are allocated for the production of commercial tree plantations.

In Peninsular Malaysia, there is common legislation and regulation for forest management, whilst regulations in
Sabah and Sarawak differ somewhat. In Sabah, the State Forest Policy of 1954 and the Forest Enactment policy
of 1968 are the most important laws governing the forestry sector. In Sarawak, the Statement of Forest Policy of
1954 (currently undergoing revision) and the Forest Bill of 2015 govern the forestry sector.

The Forestry Department of Peninsular Malaysia (FDPM) and the State Forestry Departments in Peninsular
Malaysia are responsible for the management of its forests. The Sabah Forestry Department (SFD) is
responsible for the management of forests in Sabah, control of harvesting operations and the requirement for
payments of royalties in line with the Forest Enactment 1968. The Forest Department Sarawak (FDS) and the
Sarawak Forestry Corporation (SFC) are responsible for the management of forests in Sarawak. The FDS is
responsible for forest management whilst operational aspects are the responsibility of the SFC.

Under Malaysian law, all forest management areas in Malaysia require an SFM plan for each concession or
harvest area in order to ensure sustainability of operations. In addition, all logging operations in areas larger than
500 ha and pulp and paper mills producing more than 50 tonnes per day, require an Environmental Impact
Assessment (EIA) to operate2. To extract wood from the PRF an operator must have a valid harvesting license,
which is issued by the relevant authority in each state. Each lorry load of felled logs is inspected by relevant
authorities for payment of royalties and issued with a Removal Pass before the logs can be transported to the
sawmill. Mills are required to maintain Removal Passes and a log book of volumes purchased and processed.
Import and export licenses (where applicable) are issued for timber products by the relevant authority e.g.
Malaysian Timber Industry Board (MTIB), SFD or Sarawak Timber Industry and Development Corporation
(STIDC).

A non-exhaustive list of documentation to demonstrate compliance with applicable legislation can be seen in
Figure 1.

2.3 Legality and sustainability risk in timber supply chains

A risk-based approach is increasingly being used by companies in the timber sector to assess legality and
sustainability risk. This approach is the same as that which is adopted by timber regulations, such as the
European Union Timber Regulation (EUTR) and Australian Illegal Logging Prohibition Act (AILPA) and

2 In Sarawak, logging operations require an EIA for: (i) Extraction or felling of timber from any area exceeding 500
hectares which have previously been logged or in coupes have previously been declared to have been closed by the
Director of Forests, and/or (ii) Extraction or felling of any timber within any area declared to be a water catchment area.

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involves companies conducting Due Diligence on timber supply chains. However, more and more companies
are also applying the same risk-based approach to sustainability issues. Such an approach allows organisations
to allocate their time and resources to those areas where risks are perceived to be highest.

The process of collecting information on supply chains and assessing this information to identify where risk
may be present is called due diligence. The due diligence process follows a stepwise approach, as depicted in
Figure 2. First, relevant information on timber supply chains is collected from direct and indirect suppliers (e.g.
species, origin, volumes, certification status), public sources (e.g. news reports, NGO research, lists of
endangered species) and any other sources that may provide relevant information. This information is then
assessed to determine the level of risk present in the specific supply chain. Finally, if any risks are identified
these should be mitigated to a level where they can be considered negligible.

The Due Diligence Process

Figure 1. The due diligence process

This due diligence approach is increasingly being employed by commercial organisations whether or not they
are subject to mandatory requirements under national laws. It is an approach that is also used by large retailers
and financial institutions to avoid reputational risk as well as being used by NGOs to contextualise risk and by
governments as part of responsible public procurement schemes.

When assessing legality and sustainability risk in timber supply chains, buyers and investors should take into
account any risks identified at the macro-level, related to country of harvest, documented illegal/unsustainable
harvesting of species, etc. They should then specify whether any of the risks are applicable and present in the
particular sub-national region or forest concession from which their suppliers/fund-recipients source their
products. If risks are present they should be mitigated or avoided, to ensure only legal and/or sustainable timber
is sourced. Often it is possible to implement mitigation actions and then reassess the risk. In the process, either
risks are effectively mitigated or they continue, in which case further specification and mitigation should occur,
until risks are reduced to negligible levels. Thus risk assessment is an iterative process.

Risks in the forestry sector are many and diverse, and can be broadly split into two forms: legality risk and
sustainability risk (see Figure 3).

Definitions
Where risk is identified in timber supply chains this may take two forms:

Legality risk Risk that timber and wood products were not harvested in compliance with applicable
laws in the country of harvest

Sustainability risk Risk that timber and wood products were harvested in a way that depletes or
diminishes the capacity of natural ecosystems to regenerate and support life.

Figure 2. Definitions

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Compliance with government legislation is a minimum requirement for all companies. Yet many companies aim
to exceed legal requirements and implement sustainable practices that go above and beyond national laws.
Companies must avoid legality risk, both due to the legal penalties that may be incurred due to infringements,
but also due to the possible brand damage resulting from association with illegal practices. Whilst many
sustainability requirements are voluntary, non-conformance with these requirements may also risk brand
damage.

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3. Objective and Research Questions
This research aims to provide an overview of the Malaysian timber trade and offer an insight into specific
supply chain issues in the timber sector. This is done to aid evaluation of legality and sustainability issues
relevant to a variety of stakeholders; and specifically to support stakeholders in the Malaysian timber sector
itself in moving towards ensuring timber legality (at a minimum) and sustainability (as standard practice). This
will allow industry stakeholders to focus on addressing the most pertinent issues and communicate their legality
and sustainability achievements, to obtain ethical investment and trade.

To meet these aims, an overall objective and a number of research questions have been formulated.

3.1 Objective

The overall objective of this research study is to provide a detailed understanding of the Malaysian timber
industry, through characterisation of (i) the key Malaysian timber and wood-based industry supply chains, (ii)
identification of legality and sustainability risks within these supply chains and (iii) perspectives on potential
future trends in the Malaysian wood industry and trade.

3.2 Research questions

To meet this objective, a number of research questions have been formulated in three broad groupings:

Supply Chain Mapping

What are the key timber and wood-based products produced and traded in Malaysia?
Who are the key companies in Malaysian timber and wood-based industry supply chains?
What are the current production and trade volumes of certified and non-certified products?
What is the typical structure of timber and wood-based industry supply chains?

Legality and Sustainability Assessment

What information can be obtained to assess risk in supply chains and what are the key gaps in supply
chain information?
What are the main legality and sustainability risks in supply chains?
What are the potential mitigation options to address these legality and sustainability risks?
What policy options may be employed to increase legality and sustainability of Malaysian timber and
wood-based product supply chains?

Future Trends

What are the expected future trends relating to the points above?

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4. Limitations of the Study

There were a number of limitations encountered during this research study. The main challenges are outlined
below.

4.1 Challenge to A large number of companies were contacted regarding participation in this
engage the research study and many decided not to engage for reasons relating to
timber confidentiality and fear of being accused of illegality. Those companies that did
industry engage may therefore represent the most aware players in the industry, wishing to
participate to gain feedback on their current sourcing strategies.

The furniture industry in Malaysia is a particularly closed section of the market.

None of the largest companies approached wished to participate and obtaining
access to data on this sector was difficult.

It is similarly difficult to obtain data on the pulp and paper sector. Statistics are
compiled by the Malaysian Pulp & Paper Manufacturers Association (MPPMA),
but these are based on estimates from members self-reporting rather than officially
reported production figures verified by government. Data are also not published
(freely available) by the MPPMA and the latest available data are from 2013.

Additionally, many companies were wary to engage in a study on legality funded

by WWF-Malaysia, for fear of being highlighted in a publicly available report. As
such, the researchers were constrained somewhat by the need to assure companies
that specific supply chain information would not be divulged without prior consent.

4.2 Limited on- All companies visited as part of this study are thanked for their participation.
site time However, due to the voluntary nature of the study, the minimal perceived benefit,
and commercial pressures, many companies were not able to afford a great deal of
time to researchers and wished only to provide very high-level information on
supply chains. This made detailed risk analysis extremely difficult for researchers.

4.3 Barriers Barriers were found to be incredibly high between the different regions of Malaysia
between (Peninsular, Sabah and Sarawak) with each having its own forestry authorities and
regions timber industry associations. As a result, reporting from each region is different and
the level of available data varies widely. Trade associations and companies in each
region are protective of their own interests and in some cases the research partner
MWIA (which is also a trade association in Peninsular Malaysia) did not participate
in either of the visits made to companies in Sabah due to these sensitivities.

4.4 Poor national Good trade data (imports and exports, measured by value) are available for
trade data (by different wood products at the national level. However, there are gaps in the
volume) available data measured by volume. For some product groups (e.g. logs, plywood,
veneer, etc) data is reported in cubic metres. Whilst other products (e.g. wooden
frames and BJC) are recorded by weight (kilograms). Furniture typically is reported
based on number of units/pieces, making comparison between product groups
extremely difficult. This is unfortunate, as comparison of volumes and values of
exports is useful to identify low value/high volume exports as well as high
value/low volume exports.

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5. Methodology

To answer the research questions and reach the overall objective, a number of methods were employed,
combining qualitative and quantitative data. The research was comprised of two distinct components: a desk-
based research component followed by on-site research in Malaysia.

Component 1: Desk-based research

The initial component focussed on collection and review of publicly available information, such as trade data,
scientific literature, NGO and government reports as well as interview of key informants with knowledge of the
Malaysian timber sector. As part of this component, leading commercial producers and exporters in the
Malaysian timber and wood-based products industry were identified and contacted.

Component 2: On-site research

The second research component focussed on engaging ten (10) key commercial companies that provided in-
depth information on supply chains 11 companies were finally engaged (see Table 1). These companies were
selected based on their export value/volume, and strategic influence/profile in the timber and wood-based
products sector. Methods used as part of Component 2 included: review of publicly available literature on each
company and their supply chains; completion of a supply chain questionnaire by each participating company;
and semi-structured interview (SSI) and supply chain mapping session with each participating company.

Eleven Companies Engaged for On-Site Component of Research

No. Company Name Main Export Location of Estimated Value
Main Site of 2014 Exports
(million USD)
1 Dongwha Fibreboard Sdn Bhd Fibreboard Peninsular 60
2 Sabah Forest Industries Sdn Bhd Paper Sabah 53
3 Carl Ronnow Sdn Bhd Sawn timber Sabah 36
4 Heveaboard Bhd Particleboard Peninsular 24
5 Robin Resources Sdn Bhd Fibreboard Peninsular 19
6 Marcoco Furniture Industries Sdn Bhd Furniture Peninsular 14
7 Finesse Moulding Sdn Bhd Wooden frames Peninsular 14
8 Costraco Sdn Bhd Sawn timber Peninsular 14
9 Maran Road Sawmill Sdn Bhd Sawn timber Peninsular 10
10 Jin Sheng Furniture Industry Sdn Bhd Furniture Peninsular 2
11 United Woodwork and Construction (M) Furniture Peninsular 2
Sdn Bhd
Total 248
Table 1. Companies engaged for on-site component of research (MTIB, 2015; SFD, 2015; own elaboration)

13
Details of each participating company can be found in Appendix 1; with an overview of some of the relevant
features of the companies provided in the Case Study View (Figure 4). .

Case Study View: Companies in Numbers

The 11 companies visited as part of this study have a combined annual sales turnover of >USD 399
million and employ >4800 people.
Four companies are classed as primary manufacturers, five secondary manufacturers and two
traders.
Nine companies are primarily located in Peninsular Malaysia, one in Sabah and one in both Sabah
and Peninsular.
Companies were selling: sawn timber (four companies), mouldings (3), furniture (3), plywood (2),
fibreboard (2), particleboard (1), logs (1), BJC (1), pulp and paper (2) and veneer (1).
Six companies held valid FSC Chain of Custody certification, five held PEFC certification, one
VLC verification, one NEPCon LegalSource and one SGS Generic Chain of Custody certification.
Nine companies declared awareness of the EUTR, US Lacey Act and the AILPA.
Five companies declared that they operated a Due Diligence System (DDS) for their wood products
(however, see discussion in Legality and Sustainability Risk Section) and two companies declared
using external expertise to support their due diligence.

Figure 4. Case study view: companies in numbers

5.1 Research methods

The research methods used in both components of the research can be grouped into three categories:

5.1.1 Literature review

A variety of sources and types of data were drawn upon for literature review. At the macro-level, trade flow data
in the form of import and export statistics from a number of trade and government sources were compared
(GTA, 2015; MPIC, 2014b; MTIB, 2015a, 2015b). In addition, NGO and government reports as well as peer-
reviewed scientific literature were reviewed to gather information on national and sub-national trends and
identified risks.

Trade associations in Peninsular Malaysia (MWIA), Sabah (Sabah Timber Industries Association) and Sarawak
(Sarawak Timber Association) provided information on the key exporting companies in each region, with this
information used as the basis to contact companies regarding their participation in the study. Companies were
approached primarily based on the value of their exports; however due to the sensitive nature of the study and
information required, a high proportion of companies approached did not wish to participate due to fears over
commercial confidentiality and reputational risks. As such, whilst best efforts were made to engage the largest
companies in each region, this was reliant on company willingness to participate.

Once companies were engaged, web searches were conducted to gather background information on each. From
here, company websites were reviewed, as well as information entered into certification portals (e.g.
www.info.fsc.org) and any NGO or government sources relating to the participant company.

5.1.2 Questionnaire

A supply chain questionnaire was emailed to each of the 11 companies engaged for the on-site research. This
was completed and returned via email by each company prior to the researchers visiting the companies offices.

14
The questionnaire gathered information about the participating company (primary activity, annual turnover,
location of offices, etc.), its environmental and social governance (certified status, responsible sourcing strategy,
due diligence procedures, etc.) and basic information on supply chains (types of products purchased/sold, sales
markets, species and names of suppliers). The questionnaires provided valuable information to the researchers,
and this information was further explored during the company visits.

A copy of the questionnaire template can be found in Appendix 2.

5.1.3 Semi-structured interview (SSI) and supply chain mapping

Each participating company was visited, following the return of the completed questionnaire. During these
company visits, SSIs with key informants were conducted alongside supply chain mapping for timber products.

SSIs were used to clarify information presented in the returned questionnaires as well as to discuss, in more
detail, supply chains and risk. SSIs are a flexible form of interview where new questions are formed during the
course of the conversation, and only guiding questions are prepared in advance.

Supply chain mapping was conducted during interviews, with company staff providing information on the
structure of supply chains, companies involved, harvest origins and also information gaps. This allowed
researchers to record information on supply chains and verify this with respondents during interview.

A list of SSI questions can be found in Appendix 3.

5.2 Methodological framework

The three methods employed as part of this research were used to collect information regarding all research
questions. Through this multi-method approach, data were triangulated and layered to build a picture of current
and future trends in wood industry supply chains. The methodological framework is depicted in pictorial form
below (Figure 5).

Figure 5. Methodological framework

15
6. Results and Discussion

6.1 Domestic production, import and export in Malaysian timber and wood-based
industries3

Key findings:
Malaysia imports USD 2.8 billion and exports USD 7.1 billion worth of wood products
Sixty per cent of timber from natural forest is harvested in Sarawak, 28% in Peninsular and 12% in Sabah
Pulp and paper are the most important import products 73% total imports, by value
Wooden furniture and plywood are the most important export products 26% and 22% of exports by value,
respectively
Asia is the main export market Japan consumes 20% of total wood exports and 50% of plywood exports

Malaysia is both an importer from and exporter to global markets for timber and wood products. The total value
of timber and wood-based product exports4 in 2014 was USD 7.1 billion. This figure has increased since 2001
but trade was hit by the global financial crisis, with exports heavily affected in 2009 after years of steady
growth. Exports recovered steadily from 2009 and reached a high in 2011 of USD 7.6 billion (see Figure 6). In
2014, export values were down compared to 2011 mainly due to continuing volatility of global economic
markets (MTC, 2015a). The value of timber imports has grown slowly and steadily over the same time and a

Figure 6. Import/ export value of wood-based products between 2000 and 2014 (GTA, 2015)
3
Data used in this section originate from a number of sources, including the Global Trade Atlas (GTA) (GTA, 2015) (based on data
reported by national statistics departments), MTIB website (MTIB, 2015a, 2015b), Malaysian Timber Council website (MTC, 2015a),
MPIC website (MPIC, 2014b) and annual reports from and direct requests to Forest Departments of Peninsular Malaysia, Sabah and
Sarawak (FDPM, 2013; FDS, 2012; SFD, 2013). Due to the variety of different entities creating and amalgamating data, figures often
vary slightly. For the purposes of transparency, these discrepancies are described where applicable.
Where possible, GTA data have been used preferentially as this is based on actual import/ export figures from national statistics
departments. GTA figures tend to be higher than figures reported from other sources. This may be due a variety of causes; in some cases
statistics from different regions omit values for certain product types. For example, no export values for fibreboard were reported from
Sabah in MTIB statistics for 2014. This leads to under-reporting of exports. Most figures for timber and wood products also omit pulp
and paper values (e.g. MTIB data), whilst these are incorporated in the GTA figures shown.
Whilst data on the value of products imported/ exported are readily available from a number of sources, information on the volume of
exports is harder to obtain. MTIB maintains a limited set of data on volume of products traded; however this does not include volume
figures for furniture or pulp and paper products. Where volumes are recorded, the unit of measurement used for different product types
makes comparison difficult. For example, Builders Joinery and Carpentry (BJC) products and Wooden Frames are recorded in
kilograms, whilst other products are recorded in cubic metres. However, the data available are provided in Table 5 (for imported
volumes) and Table 7 (for exported volumes) for informational purposes.
A full list of commodity codes used to capture product types (especially grouped figures e.g. Other products) is provided in Appendix 6,
to aid transparency and scrutiny of the figures presented.
4
This figure includes wooden furniture and pulp and paper.

16
drop in imports was also seen in 2009. After this point imports recovered to reach USD 2.8 billion in 2014.

6.1.1 Domestic production

The availability and quality of data on domestic production and consumption varies widely between the
different regions of Malaysia. The total production of logs in 2013, was 4.1 million m3 in Peninsular Malaysia
(FDPM, 2013), 3.38 million m3 in Sabah (SFD, 2013) and 8.2 million m3 in Sarawak (FDS, 2015).

Peninsular Malaysia

In Peninsular Malaysia most log production is from natural forest, State land and clearance of rubber
plantations. The total production of logs in 2013 was 4.1 million m3, whilst sawn timber production stood at 2.5
million (FDPM, 2013). Between 2011 and 2015, average annual log production from natural forests accounted
for just over half of the total production, one-third derived from rubber plantations and the rest came from
timber plantations (Hoare, 2015). At the country level in 2012, 28% of all production from natural forests
derived from Peninsular Malaysia (Hoare, 2015).

The production of logs, sawn timber, plywood and mouldings all decreased from 2012 to 2013. Production of
mouldings decreased 69%, from 244,000 m3 to 77,000 m3. According to the FDPM, 2013 saw a huge increase in
the production of veneer: up 49%, from 62,000 m3 to 92,000 m3 (FDPM, 2013). However, this jump is not
reflected in whole-of-Malaysia production figures reported for the same time period by the International
Tropical Timber Organisation (ITTO, 2015), which show steady veneer production. It is therefore unclear what
caused this increase or indeed whether the figures show real increased production or a change in product
classification or calculation by the FDPM.

Sabah

In Sabah, the total production of logs in 2013, from both natural and plantation forest, was 3.38 million m3. This
dropped slightly to 3.33 million m3 in 2014. Of this total, 2.1 million m3 derived from natural forest harvesting,
whilst 1.3 million m3 derived from timber plantations (SFD, 2013). In 2013 the top three producers of plantation
logs were Sabah Forest Industries Sdn Bhd, Hijauan Bengkoka Plantation Sdn Bhd and Sabah Softwoods Bhd
(SFD, 2013). A list of companies producing the largest quantities of plantation logs in Sabah is presented in
Table 2.

2013 Production of Plantation Logs in Sabah In 2012, 12% of all

Company Total (m3) natural forest production
Sabah Forest Industries Sdn Bhd 759,211 in Malaysia occurred in
Hijauan Bengkoka Plantation Sdn Bhd 283,156 Sabah (Hoare, 2015).
Sabah Softwoods Bhd 98,823 Whilst Sabah still relies
Benta Wawasan Sdn Bhd 60,075 heavily upon production
Other Private Tree Planters (Smallholders) 46,191 from natural forests, by
2013 over one-third of
Lega Kekal 7,470
logs came from
Lembaga Industri Getah Sabah (LIGS)/ Other Rubber 7,159
plantations (Hoare,
Smallholders
2015). Plantation logs
H & L Enterprise 6,897
are generally used as an
Excella Construction 6,351
input for pulp
Rinibina Construction 743
production.
Global Test 656
Kekal Jaya Enterprise 313
Total 1,277,045
Table 2. 2013 production of plantation logs in Sabah (SFD, 2013)

17
Sarawak

Nearly all timber production in Sarawak is from natural forests and, in 2012, 60% of all natural forest
production in Malaysia occurred in Sarawak (Hoare, 2015).

The total production of logs in 2012, from both Estimated Concession Areas in Sarawak, by Company
natural and plantation forest, was 9.8 million Company Concession Area (ha)
m3. Only 127,000 m3 was derived from timber Samling Group 1,288,389
plantations, with the remainder being harvested RH Group 1,001,877
from natural forest (FDS, 2012). Shin Yang Group 500,904
Ta Ann Group 433,003
Timber production in Sarawak is dominated by WTK Group 357,017
six big companies that collectively hold KTS Group 144,485
concession licenses for around 3.7 million
Table 3. Concession areas in Sarawak by company (Tawie, 2015)
hectares of land. These companies and the
amount of land for which they hold concession licenses is shown in Table 3. The area of land licensed to these
companies equates to around 70% of the forest used for timber production in Sarawak. The Big Six companies
are typically vertically integrated, conducting forest management and harvesting activities, sawmilling,
secondary processing and export. As a result these companies are expected to be the largest log producers as
well as exporters of forest products from Sarawak.

18
6.1.2 Imports

In 2014, Malaysias imports of wood products reached USD 2.8 billion up from USD 1.5 billion in 2000. In
2014, the top import by value was pulp and paper (73%), followed by plywood (5%), wooden furniture (5%),
sawn timber (5%) and veneer (3%) (see Figure 7). These products composed 91% of Malaysias total imports by
value (GTA, 2015).

Figure 7. Value of wood imports by Malaysia by product type in 2014 (GTA 2015)

In total, 92% of Malaysias pulp and paper

imports (by value) are composed of paper and
paperboard (e.g. newsprint, toilet paper,
wallpaper, envelopes, notebooks, etc.) (HS
code 48); whilst the remaining 8% is made up
of wood pulp and recovered paper and
paperboard (HS code 47).

Malaysias 2014 paper and paperboard imports

(HS48) totalled USD 1.9 billion (excluding
pulp [HS47]). China provided 19% of these
imports, whilst another 16% was from
Indonesia, with Singapore, South Korea, Japan
and Taiwan contributing 7% each (see Figure
8). In the same period, pulp imports totalled
USD 163 million; 43% of this was imported
from the USA, followed by New Zealand
(13%), Brazil (6%) and Singapore (5%).
Figure 8. Malaysias 2014 imports for paper & paperboard
(HS48) (by value) (GTA, 2015)

19
A full list of product types imported in 2014 is shown in Table 4 (by value) and Table 5 (by volume).

Import Value of Timber and Wood-based Import Volumes of Timber and Wood-based
Products in 2014 Products in 2014
Product Type Value (USD) Product Type Unit Quantity
Pulp and paper 2,015,066,128 BJC kg 12,314,974
Plywood 148,826,093 Wooden frames kg 1,145,919
Wooden furniture 145,911,342 Chipboard/ particleboard m3 440,415
Sawn timber 144,334,994 Plywood m3 427,193
Veneer 83,671,977 Sawn Timber m3 252,944
Particleboard 73,412,213 Veneer m3 196,596
Fibreboard 39,594,875 Fibreboard m3 125,621
Mouldings 34,243,227 Mouldings m3 78,452
Logs 21,033,963 Logs m3 50,206
BJC 15,046,256 Wooden furniture
Other products 50,306,647 Pulp and paper Data deficient
Other products
Table 4. Import value of timber and wood-based products Table 5. Import volumes of timber and wood-based
in 2014 (GTA, 2015) products in 2014 (MTIB, 2015a)

In the first three months of 2015, 65% of Malaysias total timber imports (excluding pulp and paper products),
derived from Asia, 16% from the Americas, 8% from Europe, 10% from Oceania and 1% from Africa (MTIB,
2015c). Within Asia, China is the major import origin, contributing 27% of all products by value. The major
import is wooden furniture, but also significant supplies of plywood, veneer, and mouldings. In total, 14% of
imports come from Indonesia, with these imports predominantly of plywood. Another 12% of imports derive
from Thailand; (chipboard/particleboard being the major product type imported from this country); whilst 6% of
total imports derive from Vietnam mainly plywood and some furniture. Of the total international imports, 12%
derive from the USA, 2% from Brazil and 2% from Canada. Imports from these countries are mainly of sawn
timber, veneer and mouldings. In Oceania, New Zealand contributes 5% of imports and Australia 5%, with
veneer and sawn timber being the major imports. The dominant source of imports from Europe is Germany (2%
of total imports), most of which is sawn timber. It is also worth noting that an estimated 11% of Malaysias
sawn timber is imported from Myanmar, where illegal logging is rife. Illegal practices include systemic
corruption, weak legal framework, poor law enforcement, lack of oversight, and ongoing conflict (see Section
6.5.2 for further discussion) (MTIB, 2015c; NEPCon, 2015b).

There is also trade of timber and wood products amongst states. Most important to mention in the context of this
report (because of the higher-risk status of timber harvested from Sarawak) is the trade of products from
Sarawak to both Sabah and Peninsular Malaysia. In 2014, Sabah Forest Department recorded almost 65,000 m3
of imports from Sarawak, including 41,000 m3 of veneer, 16,500 m3 of sawn timber and 7,000 m3 of log
imports. This equates to 58% of Sabahs total imports of veneer, sawn timber and round log imports in 2014. In
addition, Sabah imported 20,500 m3 of veneer, sawn timber and round logs from Papua New Guinea (18% of
total imports) and 10,000 m3 from Indonesia (9%) (SFD, 2015).

20
6.1.3 Exports

In 2014, Malaysias top five exports (by value) were wooden furniture (26%), plywood (22%), pulp and paper
(13%), sawn timber (11%) and logs (9%) (see Figure 9, below). These products composed 81% of Malaysias
total wood exports by value (GTA, 2015). From 2000 to 2015, the value of wood exports increased from USD
5.0 billion to USD 7.1 billion (GTA, 2015). However, the volume of exports over the same period decreased
to around 22 million m3 (roundwood equivalent) (Hoare, 2015). This has been due to a move away from export
of logs and sawn timber and towards higher-priced value-added goods such as furniture and mouldings. In
addition, exports of paper have continued to increase since 2000 (Hoare, 2015).

Figure 3. Value of wood exports by product type in 2014 (GTA, 2015)

Malaysias wooden furniture exports grew steadily from 2001 to 2008, increasing from USD 894 million to
USD 1.8 billion, and overtaking plywood to become Malaysias leading wood export. Despite the value of
exports being hit heavily in 2009 by the global financial crisis (down to USD 1.6 billion), exports recovered to a
record high of USD 2 billion in 2012. By 2014 exports had dropped again to USD 1.8 billion. However, from
2008 to 2014 furniture has been Malaysias largest-value wood export. Estimates indicate that in 2014, 31% of
Malaysian furniture exports went to the USA, followed by Japan (9%), Australia (7%), Singapore (6%) and the
UK (5%) (MTIB, 2015b).

Overall, 66% of Malaysias wood exports (excluding pulp and paper) go to Asia, 15% to the Americas, 11% to
Europe, 5% to Oceania, 3% to Africa. Of sales to Asia, Japan consumes 20% of Malaysias timber and wood
exports mainly plywood, most of which is sourced from Sarawak. Indeed, Japan consumes just over 50% of
Malaysias total plywood exports, showing heavy reliance on this market. India (9%), Taiwan (5%), South
Korea (5%), Singapore (4%) and China (4%) are major export markets for logs, sawn timber and plywood
(Hoare, 2015; MTIB, 2015b). In Oceania, Australia is the major market, consuming 4% of Malaysian timber
exports. The USA makes up 12% of the overall sales to the Americas and exports are mainly of furniture and
plywood products. The EU also dominates the export markets for furniture, sawn timber and plywood (Hoare,

21
2015). The UK (4% of total exports) is the single largest EU destination for exports (MTIB, 2015b) whilst the
Netherlands is also a key EU market. Both US and EU exports predominantly derive from Peninsular Malaysia
(Hoare, 2015).

A full list of product types exported in 2014 is shown in Table 6 (by value) and Table 7 (by volume).

Export Values of Timber and Wood-based Export Volumes of Timber and Wood-
Products in 2014 based Products in 2014
Product Type Value (USD) Product Type Unit Quantity
Wooden furniture 1,823,392,388 BJC kg 198,157,385
Plywood 1,588,428,424 Wooden frames kg 9,764,979
Pulp & paper 948,251,399 3
Logs m 3,218,515
Sawn timber 812,222,204 Plywood m3 3,099,371
Logs 635,317,538 Sawn timber m 3
1,893,949
Fibreboard 323,399,313 Fibreboard m3 952,975
BJC 308,188,066 Chipboard/ m 3
570,282
Mouldings 220,795,543 Particleboard
Particleboard 104,493,608 Mouldings m3 256,961
Fuel wood 97,008,511 Veneer m 3
216,926
Veneer 93,462,001 Wooden furniture
Wood packaging 72,008,864 Pulp & paper Data deficient
Wooden frames 37,916,181 Other products
Wood charcoal 20,489,149
Table 7. Export volumes of timber and wood-based
Other products 35,800,553 products in 2014 (MTIB 2015)
Table 6. Export values of timber and wood-based
products in 2014 (GTA, 2015)

Peninsular

The top three exports from Peninsular Malaysia in 2014 were wooden furniture (55% of total), sawn timber
(14%) and BJC products (8%), closely followed by fibreboard at 7% of exports (MTIB, 2015b)5 (see Figure 10).

A total of 2,749 wood-based processing mills was licensed in Peninsular Malaysia in 2013. A large proportion
of these (1,829) were classed as Furniture/ Wood Working/ Carpentry & Joinery Mills (FDPM, 2013). This
reflects the dominance of furniture production in Peninsular Malaysia, which contributes USD 1.5 billion in
exports from Peninsular Malaysia (MTIB, 2015b).

Table 8 shows the leading exporters of wood products (by value) in Peninsular Malaysia. Company names and
rankings are based primarily on information provided by the MTIB. Seven of these companies were visited as
part of this study (Dongwha Fibreboard Sdn Bhd, Carl Ronnow Sdn Bhd, Heveaboard Bhd, Robin Resources
Sdn Bhd, Finesse Moulding Sdn Bhd, Costraco Sdn Bhd and Maran Road Sawmill Sdn Bhd (see Table 1).

5
MTIB export statistics do not include figures for pulp and paper exports.

22
Top 20 Exporters from Peninsular Malaysia (excluding pulp, paper and furniture)
No. Company Name Main Export Estimated Value of 2014
Exports (million USD)
1 Dongwha Fibreboard Sdn Bhd Fibreboard 60
2 Evergreen Fibreboard Bhd Fibreboard 48
3 Carl Ronnow Sdn Bhd Sawn timber 36
4 Asia Plywood Co Sdn Bhd Plywood 24
5 Heveaboard Bhd Particleboard 24
6 Mentakab Veneer & Plywood Sdn Bhd Plywood 24
7 Mieco Manufacturing Sdn Bhd Chipboard 19
8 Robin Resources Sdn Bhd Fibreboard 19
9 MK Pro Trade Sawn timber 19
10 Evergreen Fibreboard (Nilai) Sdn Bhd Fibreboard 19
11 Finesse Moulding Sdn Bhd Wooden frames 14
12 Pan Resources Sdn Bhd Sawn timber 14
13 Costraco Sdn Bhd Sawn timber 14
14 Segamat Panel Boards Sdn Bhd Fibreboard 12
15 EC Moulding Sdn Bhd Wooden frames 12
16 GRV Logistic (M) Sdn Bhd Sawn timber 10
17 Great Bonanza Timber Sdn Bhd Sawn timber 10
18 Mediarex Sdn Bhd Mouldings 10
19 Provencal Cord Sdn Bhd Sawn timber 10
20 Maran Road Sawmill Sdn Bhd Sawn timber 10
Total 408
Table 8. Top 20 exporters from Peninsular Malaysia (excluding pulp, paper and furniture) (MTIB, 2015 MWIA, 2015)

Sabah

Sabah produces around 20% of Malaysias total plywood and around 10% of Malaysias sawn timber (Hoare,
2015). It is therefore natural that these products also dominate the export markets. Plywood (49% of total), sawn
timber (21%) and logs (8%) were the top three exports from Sabah in 2014 (MTIB, 2015b) (see Figure 10).

Table 9 (below) shows the leading exporters of wood products (by value) in Sabah. Company names and
rankings are based on information provided by SFD. The companies visited in the state of Sabah were, Sabah
Forest Industries Sdn Bhd and Carl Ronnow Sdn Bhd. While most Carl Ronnow exports are shipped from
Peninsular Malaysia, the company operates both in Peninsular Malaysia and Sabah (where the head office is
located).

Sarawak

In 2014, 54% of Sarawaks exports (by value) were plywood, followed by logs (26%) and sawn timber (8%)
(MTIB, 2015b)6 (see Figure 10, below). This is unsurprising, considering that 70% of all Malaysian plywood is
produced in Sarawak (Hoare 2015).

6
MTIB export statistics do not include figures for pulp and paper exports.

23
Top Ten Exporters from Sabah (excluding furniture)
No. Company Name Main Export Estimated Value of 2014
Exports (million USD)
1 Sabah Forest Industries Sdn Bhd Paper 53
2 Focus Lumber Bhd Plywood 31
3 Ikut Maju Sdn Bhd Plywood/ veneer 28
4 Sabah Berjaya Sdn Bhd Logs 21
5 Sinora Sdn Bhd Plywood 21
6 Arus Borneo Sdn Bhd Various (broker/trader) 21
7 Sabajuta Industries Sdn Bhd Plywood 19
8 Fu Yee Corporation Sdn Bhd Plywood 17
9 Perusahaan Khosinar Sdn Bhd Veneer/ plywood 16
10 Khaspermata Sdn Bhd Veneer/ plywood 16
Total 243
Table 9. Top ten exporters from Sabah (excluding furniture) (SFD, 2015)

In 2012, 34% of Sarawaks wood exports went to Japan, whilst 16% were destined for India, 10% for Taiwan,
9% to unspecified Middle East nations and 8% to South Korea (STIDC, 2012)7. However, product types
imported by these countries differ markedly. Japan consumes the vast bulk of the plywood exported from
Sarawak 50% of the 2.6 million m3 exported in 2012. India imported 63% of Sarawaks 3.3 million m3 of log
exports. (Meranti makes up the largest proportion of Sarawaks log exports, along with other tropical
hardwoods.) For sawn timber, Thailand is the major export destination, receiving fully 29% of the 817,000 m3
of sawn timber exports in 2012 (STIDC, 2012).

It was not possible to obtain accurate figures for export values for the Big Six companies in Sarawak.
However, the approximate concession areas held by each company are presented in Table 3 (above).

No companies from Sarawak agreed to take part in the questionnaire and supply chain mapping section of the
study to provide information on their timber supply chains. Many of the companies have been the subject of
criticism by NGOs over the past 20 years for alleged illegal practices and at the time of conducting this study
the Malaysian Anti-Corruption Commission (MACC) was undertaking an investigation into illegal logging
that saw 375 bank accounts frozen and logs confiscated from a range of companies in Sarawak (Ling, 2015).
Due to the negative focus on the Sarawak timber sector at the time of writing it is perhaps unsurprising that none
of the Big Six companies listed in Table 3 decided to participate.

Furniture8

Researchers approached the Malaysian Furniture Promotion Council and Malaysian Furniture Council for
figures on the leading furniture exporters. These bodies were not willing to provide export figures or rankings
for companies in the furniture sector. The companies in Table 10, however, were highlighted as the leading
exporters in Malaysia. Peninsular Malaysia is the main hub for furniture manufacturers. The furniture
manufacturers listed below were approached to take part in the questionnaire and supply chain mapping stage of
the study, however none wished to participate. With a recognition of the importance of representing the
furniture sector in the study (due to the product type being one of Malaysias dominant exports by value), the
researchers engaged three furniture companies not in the list below who were willing to participate: Marcoco
Furniture Industries Sdn Bhd, Jin Sheng Furniture Industry Sdn Bhd and United Woodwork and Construction
(M) Sdn Bhd (see Table 1).

7
STIDC export statistics do not include figures for all furniture or pulp & paper exports.
8
Data for the furniture and pulp & paper sectors are not held by MTIB, MWIA or forest departments. As such, data for these sectors vary
in quality and format and is presented separately.

24
Leading Furniture Exporters from Malaysia (Unranked)
Company Name Main Export Estimated Value of 2014
Exports (million USD)
Yeo Aik Wood Sdn Bhd Furniture No data available
Li Hen Furniture Sdn Bhd Furniture No data available
LB Furniture Sdn Bhd Furniture No data available
Sern Kou Furniture Industries Sdn Bhd Furniture No data available
SHH Furniture Sdn Bhd Furniture No data available
Green River Wood & Lumber Manufacturing Sdn Bhd Furniture No data available
Latitude Tree Sdn Bhd Furniture No data available
Table 10. Leading Malaysian furniture exporters (unranked) (MWIA, 2015 MFC, 2015 and MFPC, 2015)

Pulp and Paper

The figures in Table 11 were provided by the MPPMA and show the major paper manufacturers in 2013 (the
latest available figures). Sabah Forest Industry Sdn Bhd was visited as part of this study, as one of Malaysias
leading paper manufacturers (see Table 1).

Leading Paper Manufacturers from Malaysia in 2013

No. Company Name Main Export Total Production / annum
(mt)
1 Muda Paper Mills Sdn Bhd Paper 325,000
2 GS Paper & Packaging Sdn Bhd Paper 280,000
3 Malaysian Newsprint Industries Sdn Bhd Paper 250,000
4 Sabah Forest Industry Sdn Bhd Paper 165,000
5 Nibong Tebal Paper Mill Sdn Bhd Paper 156,000
6 Pascorp Paper Industries Sdn Bhd Paper 150,000
7 United Paper Board (M) Sdn Bhd Paper 75,000
8 Kimberly Clark Paper 35,000
9 Cita Peuchoon Paper Mills Sdn Bhd Paper 24,000
10 Harta Packaging Industries Sdn Bhd Paper 23,000
11 Theen Seng Paper Manufacturing Sdn Bhd Paper 11,500
12 Johmewah Maju Paper Mill Sdn Bhd Paper 8,000
13 Yeong Chaur Shing Paper Mill Sdn Bhd Paper 3,600
14 Pembuatan Kertas (Perak) Sdn Bhd Paper 3,000
15 Taiping Paper Mills Sdn Bhd Paper 2,400
Total 1,511,500
Table 11. Leading Malaysian paper manufacturers in 2013 (MPPMA 2015)

25
Figure 10 shows the different trends in wood exports from each of the regions of Malaysia in terms of the
dominant product types exported (excluding pulp and paper exports). This shows the variation in manufacturing
and processing within the country. Whereas Peninsular Malaysia focusses on exports of wooden furniture and
sawn timber, Sarawak and Sabah both focus on plywood. In Sarawak the export of logs is the second largest
earner, whereas in Sabah it is sawn timber. In all regions, exports of the primary product type comprise around
half of total exports.

Percentage of Timber & Wood-based Product Exports (by value) by region (excluding pulp
and paper)

Figure 4. Percentage of timber and wood-based product exports (by value) by region (MTIB, 2015b)

Due to the lack of pulp and paper industry data held by MTIB, it was not possible to accurately identify regional
differences in this sector. However, exports are likely to be minimal for this sector due to its predominant use in
domestic markets.

Figure 11 (below) provides a breakdown of the companies visited as part of this study, showing the relative
emphasis of their export trade and main markets. Overall, these case studies reflected the more general industry
trend, with export trade predominantly focussing on Asia. In many cases companies selling to Europe either
sold small volumes or focused a large proportion of their exports on these markets an all or nothing
approach.

It should also be noted that Middle Eastern markets acted as substantial export markets for some of these
companies. These markets were noted as typically having low or no sustainability requirements and buyers do
not typically request evidence of legal compliance for forest products.

26
 Case Study View: Export Destinations

Of the 11 companies visited as part of this study, all were selling to countries in Asia; with sales to these
countries varying between <1% of overall sales (by volume) to around 95%. Three of the companies
visited were selling >90% by volume to the Asian market. Six of the ten companies were selling to the
Malaysian market and these domestic sales typically composed between 30% and 80% of each companys
total sales. Other key Asian sales markets were China, India, South Korea, Japan and the Philippines.

Five companies made sales to the European market in 2014. Three of these were selling >80% of their
wood products to Europe. The Netherlands was the biggest market within Europe with two companies
selling 6070% of their total sales volume into this market. Belgium was another key market, with one
company selling almost 80% of total export volume to this market. The UK and Germany were the next
biggest markets for companies selling to Europe.

Five companies were exporting to countries in the Middle East. For three of these companies the Middle
East constituted major sales markets (30%, 45% and 61% of total sales, respectively). Three companies
were selling to North America (USA and Canada) comprising 4%, 13% and 30% of total sales,
respectively. Four companies were exporting to countries in Africa and these sales comprised between 2%
and 12% of the organisations total sales. African export destinations included South Africa, Mauritius,
Ghana and Nigeria.

No sales to South America were reported by any company.

Figure 5. Case study view: Export destinations

27
6.2 Timber species used in Malaysian timber and wood-based industries

Key findings:
Common domestic hardwoods are: Red Meranti, Yellow Meranti and Keruing
Common domestic plantation species: Rubber Wood (Hevea brasiliensis), Acacia and Eucalyptus
Common imported species: Sapelli (Entandrophragma spp.)
Malaysia has 673 vulnerable, endangered or critically endangered and two Convention on International
Trade in Endangered Species of Wild Fauna and Flora (CITES)-listed tree species.
Protections/ prohibitions over harvesting: 32 species in Peninsular Malaysia, >45 in Sarawak and 20 in
Sabah.

The Malaysian timber sector utilises a huge range of native and non-native species. The species utilised varies
depending on the product type, often due to the intrinsic properties of the species (e.g. tensile strength, density,
workability) or market demand. For example, Rubber Wood (Hevea brasiliensis) is used widely in the
Malaysian furniture sector as it dries and machines relatively easily, as well as being widely available.

Twenty of the most commonly utilised species in Malaysia are listed below (MTC, 2015b):

Balau (Shorea spp.) Merbau (Intsia spp.)

Bintangor (Calophyllum spp.) Nyatoh (Palaquium spp.)
Chengal (Neobalanocarpus heimii) Kembang Semangkok (Scaphium spp.)
Dark Red Meranti (Shorea spp.) Kempas (Koompassia malaccensis)
Gerutu (Parashorea spp.) Red Balau (Shorea spp.)
Kasai (Pometia spp.) Yellow Meranti (Shorea spp.)
Kelat (Syzygium spp.) Sepetir (Sindora spp.)
Keledang (Artocarpus spp.) Mersawa (Anisoptera spp.)
Keruing (Dipterocarpus spp.) Merpauh (Swintonia spp.)
Mengkulang (Heritiera spp.) Rubber Wood (Hevea brasiliensis)

6.2.1 Threatened species

Whilst many of the species utilised by the timber trade are not endangered, there are many closely related
species that are threatened or endangered in Malaysia. In 2015, the International Union for Conservation of
Nature (IUCN) Red List of threatened species catalogued 673 Malaysian tree species as vulnerable (385),
endangered (101) or critically endangered (187) (IUCN, 2015). Of those species listed as critically endangered,
73 are of the genus Shorea, 24 are of the genus Dipterocarpus, four of the genus Anisoptera and four of the
genus Parashorea. This illustrates the need for timber and paper companies to know which species of tree are
included in their products. Most companies visited as part of this study knew the trade or common name of tree
species and some knew the scientific name to genus level (e.g. Dipterocarpus spp.). Few, however, could
identify the precise species (e.g. Dipterocarpus obloglofolius). Knowledge of the full scientific name (including
the specific epithet or species name) is required to distinguish between threatened and non-threatened species
within the same genus. This would allow companies to demonstrate that the wood contained within products is
not derived from endangered species but from closely related but abundant commercial species. Such
information is available in forest management documents (e.g. forest management plans) and, for some species,
can be deduced by laboratory analysis (e.g. anatomical or DNA analysis).

The IUCN Red List can provide an overview of the sustainability risks of tree species and it is often used as an
initial identifier of legality risk by companies conducting due diligence for compliance against the EUTR or
AILPA. This is often due to the correlation between scarcity and value of timber species (and hence risk of
illegal logging). However, it should be noted that listing on the IUCN Red List does not necessarily imply
prohibition of trade under national law. A species may be listed in the IUCN Red List and still be legally

28
harvested under national law unless specific legislation prohibits harvesting. For sustainability purposes,
however, the IUCN Red List is a clear indicator of risk as sustainable harvesting of critically endangered species
is rarely possible in situ.

6.2.2 Protected/ prohibited species

The forest departments in each region of Malaysia do maintain lists of prohibited/ protected species of plants,
for which harvesting is banned or restricted in Permanent Reserved Forest. In Peninsular Malaysia there are
more than 32 such species and these are conserved for their medicinal value, importance in faunal food chains
and for their traditional use by Indigenous communities. In Sarawak more than 45 plant species are protected
under Section 31 of the Wildlife Protection Ordinance 1998 and in Sabah, any tree marked for retention by the
Director of Forestry is protected, along with a list of more than 20 species (GoA & GoM, 2014a, 2014b, 2014c).
Extraction of such species requires a license from the relevant forest department (protected species) or may not
be licensed for extraction (totally protected species).

In addition, it should be noted that these prohibitions apply only in PRF and do not apply to species harvested
from State land or alienated land and forest plantations outside PRF. Thus, where these species are present on
the market it is necessary to demonstrate from which type of forest land they originated.

For a full list of protected/ prohibited species see Appendix 4.

6.2.3 Convention on the International Trade in Endangered Species of Wild Fauna and Flora
(CITES)-listed species

CITES is an international agreement adhered to by many governments which aims to avoid the trade in
endangered species. At the time of writing, 181 countries have enforced the CITES Convention under national
law (CITES, 2015b). CITES works by the regulation of listed species that may be traded only through an
authorised licensing system. Species are listed in one of three appendices, according to the degree of protection
required. Appendix I includes species threatened with extinction and trade in these is permitted only in
extraordinary circumstances. Appendix II includes species that may be traded, but the trade is regulated to avoid
progression towards extinction. Appendix III includes species that are protected in at least one nation, with that
nation asking other CITES countries for assistance to regulate the trade. Malaysia ratified the CITES
Convention in 1977 (Keong, 2004).

The following tree species are found in natural forest in Malaysia and covered by CITES (Appendix II):

Agarwood (Aquilaria spp.)

Ramin (Gonystylus spp.).

Both have export quotas and trade is prohibited without a valid CITES export permit. For Peninsular Malaysia
and Sabah, MTIB is the Management Authority responsible for the issuance of CITES export permits for the
export of any CITES species of wood. For Sarawak the Management Authority for CITES is Sarawak Forestry
Corporation (NEPCon, 2015b).

Ramin was listed on CITES (Appendix II) in 2004, following concern over cross-border illegal trade from
Indonesia. This illegal trade was thought to be promoted by Indonesia placing restrictions on the harvest of
Ramin by listing Gonystylus species in CITES (Appendix III) in 2001 (Cooney, Meibom, & Keong, 2012).
Despite the CITES listing of Ramin, there were concerns that the harvest/ export volumes put in place by
Malaysia were not stringent enough. In 2007 this continued concern led to the EU suspending all Ramin imports
(IHB, 2007). As the EU was a major export market for Ramin, this move placed huge pressure on Malaysia to
reduce its harvest quotas and improve management of Ramin. In less than a year the Malaysian CITES
authorities revised and justified the harvest quotas and the suspension was lifted in Peninsular Malaysia and
Sabah (and in 2009 in Sarawak).

29
The largest importers of Ramin from around the world are the EU and USA. The Netherlands was, by far, the
largest importer of Ramin in the EU between 2002 and 2011 (Ferriss, 2014). In Malaysia, Gonystylus bancanus
is the most prominent commercial species. Export prices for Ramin in 2011 were stated to average $995 per
cubic metre (Ferriss, 2014). Malaysia has set export quotas for the entire Gonystylus genus in Peninsular
Malaysia and Sabah and for the species G. bancanus in Sarawak. The quotas in Peninsular Malaysia and Sabah
decreased from 23,000 m3 in 2006 to 10,000 m3 in 2015 for the former; and for the latter from 22,000 m3 in
2006 to 3,178 m3 in 2015 (CITES, 2015a; Ferriss, 2014).

In recent years a number of initiatives have commenced, to support CITES enforcement and improve
sustainable trade in Malaysia. The first is a project to build a genetic database, to support DNA testing of Ramin
species with a view to aiding law enforcement, both in terms of specification of the species and origin of timber.
The second is a focus on research to propagate Ramin species for plantation growth to reduce the pressure on
wild populations from illegal harvesting and unsustainable quotas (ITTO-CITES, 2013).

Aquilaria species were listed on CITES (Appendix II) in 2004. Malaysia is home to seven species of the genus
Aquilaria (Teck Wyn, 2010). In 2015 the quotas in Peninsular Malaysia and Sabah were 200,000 kg and in
Sarawak, 5,000 kg (CITES, 2015a). Aquilaria malaccensis is the most commonly traded species of the genus.
Also known as Agarwoods, these species are commonly utilised for their medicinal values or role as perfumes
and in religious practices. This is due to the presence of a dark aromatic resin produced by the heartwood in
response to fungal infection.

The species has always been utilised for domestic use and, from the 1970s, international demand grew rapidly.
The wood is in high demand from Middle East (especially Saudi Arabia and UAE) and north-east Asian markets
(China and Japan). In Peninsular Malaysia, harvesting by foreign nationals entering from Thailand was cited as
a cause of unsustainable extraction from the 1990s onwards. Similar over-exploitation by small-scale harvesters
also reduced populations in Sabah and Sarawak (CITES, 2003). The CITES listing of these species followed a
similar scenario as described for Ramin (see above), with reduced international trade and improved enforcement
of CITES-listed species occurring after 2007. Illegal harvesting persists, however, and the Malaysian
Government has acknowledged that domestic trade has not received enough focus (Teng, 2015). Much of the
continuing small-scale trade in Agarwood feeds the tourist souvenir trade. This is particularly problematic in
Peninsular Malaysia in the states of Penang, Perak, Pahang and Johor as well as Selangor (Teng, 2015).

Efforts to improve management and detect illegal Agarwood trade have been developed in Malaysia in recent
years. Such efforts include the construction of a genetic database, to support DNA testing of Agarwood species
with a view to aiding law enforcement (ITTO-CITES, 2013). In addition, the area of planted Aquilaria species
now stands at around 2,368ha (Teng, 2015), with private investment increasing: recently Asia Plantation Capital
Sdn Bhd announced a joint venture with the Islamic University in Gombak to cultivate Aquilaria sinesis in
Malaysian plantations (PRNewswire, 2015).

Management of both CITES-listed species had significantly improved since 2004 when grave concerns were
raised (Cooney et al., 2012); however some problems persist in the trade of Ramin and Agarwood. These risks
are discussed further in Section 6.5.

30
Case Study View: Species
The 11 companies visited as part of this study utilised a wide variety of timber species. The number and
variety of species differed markedly depending on the product type in question (see Table 12 below).
Sawn timber was the product type utilising the highest variety of different species (mostly domestic
hardwoods). Similarly a variety of hardwoods was utilised to manufacture mouldings, wooden frames and
veneer. Few companies were aware of the full scientific name of species that they purchased only the
genus e.g. Shorea spp.

One company reported that the top-selling species (by volume) in 2014 were: Red Meranti, Yellow
Meranti (Shorea spp.), Keruing (Dipterocarpus spp.), Nemesu (Shorea spp.), and Seraya (Shorea spp.).
Rubber Wood (Hevea brasiliensis) was by far the most heavily utilised species for furniture production as
well as being a major input for board manufacture (particleboard, fibreboard, plywood). Other plantation
species (mainly Eucalyptus and Acacia) were heavily utilised for pulp and paper and board manufacture.

Sapelli (Entandophragma cylindricum) was the most commonly cited imported species, in all cases
originating from West Africa. This was sold as sawn timber as well as being used as veneer in the
manufacture of frames and boards. Temperate species (including Oak, Beech, Cherry, Ash and Maple)
were also typically used as veneers.

No companies reported trade in CITES-listed species. One company mentioned previous trade in CITES
species which had ceased when CITES-listing came into effect.

Imported Species
Species obtained from within Malaysia
Product (Inputs obtained from outside
(including inputs of indigenous species)
Malaysia)
Meranti (Shorea spp.), Keruing (Dipterocarpus spp.),
Merbau (Instia spp.), Mersawa (Anisoptera spp.),
Mengkulang (Heritiera spp.), Mempening (Lithocarpus
spp.), Pelawan (Tristaniopsis merquensis), Kempas
(Koompassia malaccensis), Selangan Batu (Shorea
inappendiculata), Keranji (Dialium indum), Mangilan
(Agathis borneensis), Medang (Lauraceae), Binuang
Sapelli (Entandrophragma (Octomeles sutatrana), Kembang (Heritiera simplicifolia),
cylindricum) Melapi (Shorea spp.), Red Seraya (Shorea ovata), Red
Sawn timber
Sapelli (Entandrophragma Seraya (Shorea platyclados), Geronggang (Cratoxylum
candollei) arborescens), Simpoh (Dillenia borneensis), Terentang
(Campnosperma spp.), White Seraya (Parashorea
malaanonan), Yellow Seraya (Shorea faguetoides), Mersawa
(Anisoptera spp.), Nyatoh (Palaquium spp.), Kapur
(Dryobalanops spp.), Gagil (Hopea sangal), Magas
(Duabanga moluccana), Laran (Neolamarckia cadamba),
Obah (Eugenia spp.), Pisang-pisang (Polythia lateriflora),
Acacia (Acacia spp.)
Rubber Wood (Hevea
Rubber Wood (Hevea brasiliensis)
Furniture brasiliensis)
Nyatoh (Palaquium spp.)
Hemlock (Tsuga spp.)
Pulp and N/A Acacia (Acacia spp.)
paper Eucalyptus species (Eucalyptus spp.)
Sapelli (Entandrophragma
cylindricum), Oak (Quercus
spp.), Cherry (Prunus spp.),
Eucalyptus species (Eucalyptus spp.)
Veneer Ash (Fraxinus spp.), Zebrano
Various Tropical Hardwoods
(Microberlinia spp.), Maple
(Acer spp.), Okoume
(Aucoumea spp.),
Oak (Quercus spp.)
Dark Red Meranti (Shorea spp.), Penarahan (Myristica spp.),
Mouldings/ Beech (Fagus spp.)
Jelutong (Dyera costulata), Mempisang (Alphonsea spp.),
Frames Sapelli (Entandrophragma
Merpauh (Swintonia spp.), Durian (Durio spp.)
cylindricum)
Particleboar/ Rubber Wood (Hevea brasiliensis), Durian (Durio spp.),
Fibreboard/ N/A Acacia (Acacia mangium), Eucalyptus species (Eucalyptus
Plywood spp.), Mixed Tropical Hardwoods (MTH)
Table 12. Species traded by case study companies by product type

31
6.3 Sustainability and legality certification in the Malaysian timber and wood-products
industries

Key findings:
About 26% of Malysias forest is certified to PEFC (MTCS) or FSC standards.
About 168,094 m3 of MTCS/ PEFC-certified wood products were exported from Malaysia in 2014.
Companies visited during this project declared sales of >80,000 m3 of wood products with certification
claims (n=9).
Companies visited during this project sold 99% of all pulp and paper without any form of certification
claim (n=9).

Certification is the dominant voluntary tool used to demonstrate sustainable forestry. By 2013 the proportion of
global roundwood supply from certified forests was estimated at 28% (501 million m) (FAO, 2014). Forest
certification schemes all adhere to the same basic structure: each forest management unit must be certified to
demonstrate that it meets the requirements of the certification standard. In addition each subsequent organisation
in the supply chain requires certification to demonstrate that the chain of custody of certified products from the
forest to the end-consumer remains unbroken.

There are two dominant forest certification

schemes: the Forest Stewardship Council
Percentage of Forest Area under Certification Schemes
(FSC) and Programme for the Endorsement in Malaysia
of Forest Certification (PEFC). Together
these two schemes have certified
444,223,317 ha of the worlds forests. Both PEFC
operate globally and, as of 2014, national (MTCS)
FSC certification standards had been Uncertified 22.8%
73.9% total forest
elaborated in 39 countries around the world,
total forest
and 32 national standards had been endorsed area FSC
by PEFC (FAO, 2014). Globally 263 million FM/CoC
ha of forest are certified under PEFC 3.3 %
endorsed schemes (PEFC, 2015c), whilst 181
million ha are certified under FSC
certification (FSC, 2015).
Figure 6. Percentage of forest area under certification schemes in
Malaysia (NEPCon, 2015)
Both schemes are used in Malaysia and total
certified area here amounts to 5,335,150 ha. This constitutes roughly 26% of total forest area in Malaysia
(NEPCon, 2015b). Almost 23% of this is PEFC certified under the recognised national scheme (MTCS) and
only 3% is FSC certified (see Figure 12).

FSC and PEFC certification are key tools for demonstrating sustainable management of forests and provide
assurance to buyers that forest products derive from well-managed forests that have been independently audited
by a third-party certification body. Certification can also be taken into account when assessing legality risk. The
FSC system has its Controlled Wood scheme which ensures that any non-certified materials entering FSC
supply chains are subjected to a minimum level of legality assurance. In addition, the PEFC scheme now
requires that all certificate holders conduct due diligence on PEFC-certified materials to ensure that legality
requirements are met.

There are a number of reasons why companies may become sustainability- or legality-certified. One is the
potential for a per unit price premium on certified products. A study conducted in Sabah in 2005 found that the
value of certified logs in Malaysia was 577% higher than for non-certified logs, depending on the species
(Kollert & Lagan, 2007). In addition, the Director of SFD stated that FSC certification adds a 100% price
premium per cubic metre of timber sold from certified Deramakot forest management units (NEPCon, 2015c).

32
Additionally, selling products certified against robust certification standards can reduce the legality risk of
products a key benefit when selling to buyers who conduct due diligence on timber supply chains.

However the major driver for obtaining certification is

access to markets where certification is a key demand. It is difficult to get a higher price for MTCS/
PEFC product, but it enables us to continue
Thus even where there is no price premium for products,
accessing markets. Everything we send to EU
many companies use certification to gain access to key at the moment is PEFC-certified and we use
markets or buyers. One company interviewed as part of the fact that it is certified to demonstrate to
this study (Carl Ronnow Sdn Bhd) stated that increased our buyers that there is a minimal chance of
market access is the driver of certification for their illegality at forest level because the forest is
business (see Figure 13). certified

Dick Anning (Environmental Manager),

Another reason cited for the use of sustainability and Carl Ronnow Sdn Bhd
legality certification schemes was to access financial
investment. Sabah Forest Industries Sdn Bhd mentioned
Figure 7. Case study quotation
this as a prerequisite for financial investors seeking to
fund investments in the timber sector.

6.3.1 Programme for the Endorsement of Forest Certification (PEFC)

As of August 2015, there were 4,661,816 ha of PEFC-certified forest in Malaysia. This area is certified under 12
individual forest management certificates (MTCC, 2015; PEFC, 2015c). Eight of these PEFC Forest
Management Units are located in Peninsular Malaysia. These certificates are held by State forestry departments
and apply to the forest estate managed by the forest departments. As such most of the commercial forest estate
in Peninsular Malaysia is PEFC-certified. In addition there are three PEFC-certified Forest Management Units
in Sarawak and one in Sabah (PEFC, 2015a).

Malaysias PEFC-certified area constitutes 1.8% of the global area of PEFC-certified forest but 88% of Asias
PEFC-certified forest. The country has the largest PEFC-certified forest area in Asia, followed by Indonesia,
which has 610,798 ha (PEFC, 2015c).

Table 13 shows a list of all PEFC-certified forest management and FM/CoC certificate holders in Malaysia.

Company Name Region Area (ha) Certificate Code

Johor State Forestry Department Peninsular 351,302 SGS-MTCS/FM-0102
Kedah State Forestry Department Peninsular 307,046 FMC 003
Kelantan State Forestry Department Peninsular 424,497 FMC 005
Negeri Sembilan State Forestry Department Peninsular 154,676 FMC 002
Pahang State Forestry Department Peninsular 1,524,827 SGS-MTCS/FM-0104
Perak State Forestry Department Peninsular 991,436 FMC 004
Selangor State Forestry Department Peninsular 238,747 SGS-MTCS/FM-0105
Terengganu State Forestry Department Peninsular 516,697 SGS-MTCS/FM-0103
KTS Plantations Sdn Bhd Sabah 57,247 FMC 001
Zedtee Plywood Sdn Bhd Sarawak 83,535 FMC 0006
Shin Yang Plywood Sdn Bhd Sarawak 1,007 FPMC 0001
Syarikat Samling Timber Sdn Bhd Sarawak 10,800 FPMC 0002
Table 13. PEFC-certified forest management and FM/CoC certificate holders in Malaysia (MTCC, 2015; PEFC, 2015a)

The Malaysian timber industry also has 338 PEFC Chain of Custody certificates the most of any country in
Asia (PEFC, 2015c). This likely reflects the volume of PEFC-certified materials from domestic sources
available on the Malaysian market.

33
The Malaysian Timber Certification Council (MTCC) reported exports in 2014 of 168,094 m3 of MTCS/ PEFC-
certified wood products from Malaysia. These exports comprised sawn timber (65%), plywood (26%) and
mouldings (8%), with <1% composed of paper, laminated scantlings and blocks and finger-jointed products
(Pers. Comm. Mustapha., 2015).

The Netherlands and the UK were the major export markets for MTCS-certified materials receiving 27% and
18% of Malaysias total MTCS exports, respectively. These markets were followed by Germany (8%), Saudi
Arabia (7%), Australia (7%), Belgium (5%) and UAE (5%).

It is worth noting that the FDS stated in 2015 that the Big Six companies operating in Sarawak (see Table 3)
as well as STIDC must achieve certification for at least one of their forest license areas by 2017 or face
licenses being terminated (MTC, 2015c). This is being sought as part of the Sarawak Governments strategy to
reduce illegal harvesting practices and rebuild the States image.

6.3.2 Forest Stewardship Council (FSC)

As of July 2015, there were 673,334 ha of FSC-certified forest in Malaysia. This certified area is under 12
individual Forest Management or joint Forest Management and Chain of Custody (FM/CoC) certificates. Ten of
these certificates are for forest in Sabah and two in Peninsular Malaysia. There is no FSC-certified forest in
Sarawak. Malaysias FSC-certified area constitutes only 0.37% of the global area of FSC certified forest and 8%
of Asias FSC-certified forest. The country has the fifth largest FSC-certified forest area in Asia, behind Turkey,
Indonesia, China and India (FSC, 2015).

Table 14 shows a list of all FSC-certified Forest Management and FM/CoC certificate holders in Malaysia.

Company Name Region Area (ha) Certificate Code

Kumpulan Pengurusan Kayu Kayan Terengganu Sdn Peninsular 106,697 SCS-FM/COC-00108N
Bhd
Pesama Timber Corporation Sdn Bhd Peninsular 20,243 SCS-FM/COC-004167
Boonrich Sdn Bhd Sabah 628 RA-FM-007006
Hijauan Bengkoka Plantations Sdn Bhd Sabah 20,665 SCS-FM/COC-00142P
Sabah Forestry Department Sabah 55,139 SGS-FM/COC-000065
Sabah Forestry Department North Gunung Rara Sabah 61,330 SCS-FM/COC-005059
Sabah Forestry Department Pin Supu Sabah 4,696 SCS-FM/COC-005060
Sabah Forestry Department Timimbang-Botitian Sabah 13,610 SCS-FM/COC-005061
Sabah Forestry Department Trusmadi & Sg Kiluyu Sabah 75,804 SCS-FM/COC-005062
Sabah Forestry Department FMU 17A Sabah 50,070 SCS-FM/COC-00136N
Sabah Forestry Department USM FMU Sabah 241,198 SCS-FM/COC-00141N
Sabah Softwoods Berhad Sabah 23,254 SCS-FM/COC-00101P
Table 14. FSC-certified forest management and FM/CoC certificate holders in Malaysia (FSC, 2015e)

The Malaysian timber industry also has relatively few FSC Chain of Custody certificates only 173 (at July
2015). This likely reflects the dominant supply of wood materials from domestic sources, most of which is not
FSC-certified.

6.3.3 Malaysian Timber Legality Assurance Systems

Malaysia now operates Timber Legality Assurance Systems (TLAS) in Peninsular Malaysia and Sabah (and a
Sarawak TLAS is currently under development). Many timber-producing countries now have similar systems in
place. Most have arisen out of negotiations with the EU as part of its Forest Law Enforcement, Governance and
Trade (FLEGT) initiative. This initiative seeks to form Voluntary Partnership Agreements (VPAs) with
producer countries allowing, with minimal regulation, for the free trade of timber and wood products to the EU.
To implement a VPA and achieve this goal, the producer country must implement a TLAS to demonstrate the

34
legality of timber product exports, through a third-party annual auditing and licensing scheme. Once a
producers TLAS has been reviewed by the EU and found to be robust enough to eliminate illegal products from
supply chains, it will be approved, after which point FLEGT licenses may be issued to cover export of timber
products to the EU under the VPA.

Six countries have signed a VPA with the EU and are working towards implementing a functioning TLAS
system for approval under the VPA process. These include Cameroon, Central African Republic, Ghana,
Indonesia, Liberia and the Republic of Congo. In addition, nine more countries (including Malaysia) are in
negotiations with the EU to become part of the VPA process (EFI, 2015b).

Malaysia operates a TLAS in Peninsular Malaysia (known as MYTLAS) and Sabah (known as the Sabah
TLAS). Malaysias MYTLAS was created originally as part of its ambition to participate in the VPA process
and be able to deliver FLEGT-licensed timber. Although negotiations as part of the VPA process started in 2007
(EFI, 2015a), these stalled, not least due to the rejection of the VPA process by Sarawak (FERN, 2015). NGOs
have also criticised Malaysias VPA process for insufficiently recognising Indigenous peoples rights. These
criticisms include the use of an inadequate legality definition that does not fully recognise Native Customary
Rights (NCRs); and insufficient recognition of judicial rulings on NCRs (FERN, 2015; FOE, 2013;
JOANGOHutan & JOAS, 2009; JOANGOHutan, 2010). Discussions to include only Peninsular Malaysia and
Sabah in the VPA process were mooted by Malaysia and discussions are ongoing as to whether a VPA would be
signed between the EU and these two regions, pending time-bound commitments for Sarawak to develop a
TLAS (EFI, 2014). As such the Malaysian TLAS schemes have developed in-line with EU requirements but
outside the VPA negotiations. The MYTLAS scheme, which is operated by MTIB, is in place and issuance of a
TLAS license is subject to inspection of the timber consignment by MTIB. MYTLAS certificates are therefore
being issued for exports on a voluntary basis. The Sabah TLAS is also operating and being implemented by the
SFD. However neither the MYTLAS nor the Sabah TLAS is yet approved under the FLEGT VPA process.

6.3.4 Voluntary legality verification schemes

In addition, there is a growing number of voluntary legality verification schemes being used by Malaysian
companies. The growth of this type of certification has been driven by the demand for a minimum legality
verification, in and of itself, but also as a stepping stone towards sustainability certification. With the
implementation of timber legality legislation in the USA, EU and Australia, demand for such types of
verification is increasing. Such schemes (being implemented in various parts of the world) include, inter alia,
NEPCons LegalSource certification, Rainforest Alliances Verification of Legal Compliance (VLC), Bureau
Veritas Origine et Lgalit des Bois (OLB), SGS Timber Legality and Traceability Verification (TLTV), and
CertiSource Legality Assessment for Verified Legal Timber. Whilst a detailed comparison of the many different
voluntary legality schemes will not be provided here, it is important to state that the focus of schemes varies as
do the specific requirements included in the legality standard used 9. Therefore it is important for any stakeholder
considering risk in supply chains to assess not only the presence of legality certification schemes but the
content.

Almost all companies visited as part of this study had some experience with these different types of certification
and verification schemes. Use of certification schemes, however, was more prevalent for companies focussing
on exports, especially those selling to Europe and the USA. Adherence to voluntary certification systems also
differs according to the product type being sold. Notably, none of the furniture companies visited adhered to any
form of sustainability certification or legality verification schemes. Neither were these companies as aware of
sustainability principles as other companies visited. This contrasts with other product sectors. All other
companies visited, from timber traders to frame manufacturers, adhered to some form of certification or
verification scheme.

9
An overview of those schemes used by participants of this study is included in Appendix 5.

35
Case Study View: Forest Certification

Of the 11 companies visited as part of this study, nine held some form of certification: six held a valid
FSC Chain of Custody certificate and six held a valid PEFC Chain of Custody certificate. Some of the
companies visited are the market leaders in certified exports. One company, Carl Ronnow Sdn Bhd,
stated that their company was responsible for 46% of the PEFC sawn timber exported [from Malaysia]
under the MTCS scheme during 2014; and 100% of Maran Road Sawmills sales were certified (either
to PEFC, FSC or TLTV) in 2014 according to this latter company. The companies visited as part of this
study sold upwards of 80,000 m3 of timber and wood products. However, 99% of pulp and paper sold
was uncertified, with only <1,500 metric tonnes of pulp and paper products sold as certified (n=9).

Certificate holders were found to trade a wide range of different species, with organisations higher up
the supply chain (closer to the forest) found to have the highest number of certified species. The most
common certified species from Malaysian forests were reported to be: Dark Red Meranti (Shorea spp.),
Yellow Meranti (Shorea spp.), White Seraya (Parashorea spp.), Merbau (Intsia spp.), Kapur
(Dryobalanops spp.), Mengkulang (Heritiera spp.), Keruing (Dipterocarpus spp.), Nyatoh (Palaquium
spp.), Acacia (Acacia spp.) and Eucalyptus (Eucalyptus spp.).

Sapelli (Entandrophragma cylindricum) from Cameroon, Republic of Congo and Gabon was cited by a
number of companies as a commonly used, non-native certified species. In addition, certified Pinus
radiata from New Zealand was used by one company and Hemlock (Tsuga spp.) from Canada by
another.

Of the companies participating in the study, only the three furniture companies did not hold any form of
certification. One of these reported purchasing PEFC- and Verification of Legal Origin (VLO)-verified
inputs to their furniture manufacture (although none of the PEFC certificates matched those listed on the
PEFC database and the VLO certificate was found to have expired). This may be due to the organisation
not being certified and not knowing how to check the validity of PEFC and VLO certification online
underlining the importance of full Chain of Custody certification to ensure sustainability and legality
claims.

In addition to FSC and PEFC, two companies were certified against legality standards. The first, Sabah
Forest Industries, was certified against the Rainforest Alliance VLC and NEPCon LegalSource schemes
(NEPCon, 2015d; Rainforest Alliance, 2015). The second, Maran Road Sawnmill, reported generic
Chain of Custody verification for the transmission of claims under SGS TLTV scheme.

Figure 8. Case study view: Forest certification

36
6.4 Structure of timber and wood product supply chains in Malaysia

Key findings:
Traceability back to forest of harvest difficult for Rubber Wood but region of harvest may be deduced.
Supply chains for composite products are opaque and may change frequently depending on availability.
Even consignments of solid wood may originate in some cases from up to 15 forest concessions.
Variable levels of information on supply chains certification improves access to information.

The Malaysian timber industry is characterised by both upstream and downstream activities. Upstream activities
include logging, sawmilling and other primary manufacturing, whilst downstream activities include value-
adding through secondary manufacturing for the production of, for example, furniture, flooring, panels, doors,
etc. An overview of the structure of the Malaysian wood industry is provided in Figure 15. This shows the inter-
linkages between many of the sub-sectors but masks considerable complexity and changes over time.

In the year 2000, 70% of Malaysias export earnings were generated from the sale of primary processed
products and 30% from secondary processed products. This trend has shifted a little up to 2014, with 66% of
export earnings deriving from primary products and 33% from secondary products. The 4% shift towards the
secondary processing industry has been largely due to the increasing role of the furniture sector (GTA, 2015). In
2013 there were 1,829 Furniture/ Wood Working/ Carpentry & Joinery Mills registered with FDPM in
Peninsular Malaysia, 671 sawmills and 167 moulding mills (FDPM, 2013); whilst in Sabah in 2013, 142
sawmills and 118 moulding mills were licensed.

Figure 9. Overview of the Malaysian wood industry structure (adapted from MPIC, 2009)

The structure and complexity of supply chains is a key consideration when assessing risk, as it often has
ramifications for the availability of information, transparency and stasis of supply chains. Long supply chains
and those where suppliers are fluid and ever-changing increases risk associated with sustainability and legality.

37
As part of this study, the structure of supply chains for the 11 participating companies was assessed to gain an
overview of complexity, length and fluidity. The following supply chain maps have been created based on
combined data from similar companies to provide the reader with a typical structure for the product type in
question.

Figure 16 gives just one example of a supply chain for sawn timber. Visits to a number of companies selling
sawn timber, however, showed that information on the supply chain structure and access to documentation to
verify supply chain structures was generally good. This is thought to be a symptom of two factors: The first is
the length of the supply chain upstream from the company in question. Companies selling sawn timber from
Malaysian forests were typically two tiers (or fewer) away from the forest management company. For imported
timber, or instances where timber is sourced through a trader/ agent, the supply chain is typically longer (at least
by one tier) and less transparent with traders generally wishing to retain confidentiality of suppliers. The
second reason for good information in timber supply chains is the prevalence of certification. Timber deriving
from Peninsular Malaysia, where MTCS certification is widespread (see Section 6.3 on certification), was often
seen to be PEFC-certified. In addition, high-value imported species such as Sapelli from Africa were commonly
cited as being sourced as certified. Certified supply chains almost always provide greater access to information
as this is maintained as a key requirement of the certification scheme.

Case Study View: Sawn Timber

This example demonstrates a typical supply chain structure for Keruing (Dipterocarpus spp.) sawn timber
harvested from Permanent Reserved Forest in Peninsular Malaysia and certified under the MTCS. The
sawn timber was exported to the Netherlands for use by a manufacturer as well as installation of various
products within the commercial sector. Thus the Tier 1 company is the final organisation in the supply
chain fitting the products for end-use. The supply chain is therefore composed of four tiers. The
Malaysian company purchases from two to four suppliers, which tend to be sawmills located close to the
Forest Management Units (FMU). In this example, three FMUs were identified as the origin of products
(under the MTCS, FMUs in Peninsular Malaysia cover the whole PRF in a State). Within one of the
FMUs studied by the researcher, inputs derived from four licenses (licenses for other FMUs were not
investigated by researchers). One company remarked that for large customer orders it is not unusual for
materials to derive from up to 15 concessions.

Figure 10. Supply chain diagram: Sawn timber

38
A similar trend was observed with supply chains for mouldings (i.e. architraves, skirtings and doors). The
supply chain example below (Figure 17) shows a certified supply chain for African hardwoods. Despite the
forest of origin being located outside of Malaysia, the FSC certification allowed the tiers in the supply chain to
be verified, back to the particular concession of harvest for two of the three suppliers.

Case Study View: Mouldings

This example demonstrates a supply chain structure for mouldings made from imported tropical timber,
declared to be harvested from Cameroon and the Republic of Congo. The supply chain is composed of at
least four tiers. The Malaysian company buys from three companies (Tier 3). The supply chain was
declared to carry full FSC certification and the researcher was able to verify the validity and scope of the
FSC certification for the Tier 2 company and all three (Tier 3) suppliers as well as for the Forest
Management Units in Congo. The mouldings were exported to an undisclosed market and it is not known
how many more tiers exist in the supply chain before the products reach the end user.

Figure 11. Supply chain diagram: Mouldings

The supply chain structures for single component products are typically much simpler than for composite
products such as MDF, particleboard, plywood and pulp and paper, and this was found to be the case for the
composite product supply chain analysed as part of this study. It was typically harder to allocate a particular
batch of inputs to a particular supplier due to the much higher volumes of inputs, the higher number of suppliers
of the same product/ species, and the nature of the manufacturing process.

Unlike solid wood products, suppliers of composite products had less understanding of the upstream supply
chain structure. Whilst they typically had an idea of who supplied their suppliers, it was not possible to clearly
identify companies involved in particular supply chains. It was also observed that there is a greater range of
sourcing strategies for inputs to composite products (as shown by Figure 18). This is usually due to the need to
maintain a constant supply of inputs to almost continuous manufacturing processes. As such, supply chains are
much more fluid for composite products.

Rubber Wood is extracted from a species (Hevea brasiliensis) that is widely used, not only in the manufacture
of board products, but also as a dominant input to the furniture industry in Malaysia. It is thought that Rubber
Wood contributes 80% of the total export value of Malaysian wooden furniture exports (Ratnasingam, Iora, &
Wenming, 2011). All three board manufacturers and all three furniture companies visited as part of this study
used Rubber Wood as the major input to their products. Figure 18 shows a supply chain for production of
Rubber Wood board products of one company visited as part of this study.

39
Case Study View: Board Products
This example demonstrates a typical supply chain structure for particleboard/ fibreboard products, declared
to be harvested from Malaysia. The major input to these products was found to be Rubber Wood. However
this was often mixed with MTH predominantly waste wood left from commercial logging operations. For
the supply chain shown below it was stated that Rubber Wood constitutes 7580% of input volume, with the
remainder being MTH. The supply chain is composed of at least five tiers and is uncertified.

Multiple
MTH

Unknown section of supply chain (~10) sawmills

Multiple Multiple
sawmills (813) traders
Rubber Wood

Private or Manufacturer
FELDA Multiple Secondary Undisclosed
sawmills Manufacturer
plantations manufacturer buyers
Manufacturer

Tier 5 Tier 4 Tier 3 Tier 2 Tier 1

Figure 12. Supply chain diagram: Board products

The origin of harvest for all inputs was declared to be within 5060 km of the Tier 2 company (respondent).
This is due to the prevalence of Rubber Wood from many local sources and because the MTH and Rubber
Wood utilised is typically waste and offcuts sourced from local sawmills. For both MTH and Rubber Wood
supply chains there was little traceability by batch, due to the huge volumes used as inputs.

Mixed Tropical Hardwoods (MTH)

The company sourced from around ten sawmills for MTH inputs. All sawmills were located within the same
State and/or within close proximity and supplied offcuts and branches too small for sawn timber processing.
Not all species were not known but the company declared that the sawmill could provide this information. It
was presumed by the company that Meranti (Shorea spp.) was the dominant MTH used. The supply chain
upstream from the sawmills was opaque but the company expected it to be easily mapped due to the local
nature of sourcing.

Rubber Wood

For Rubber Wood there were three different routes for sourcing utilised by the company. In around 5% of
cases the company itself would take a mobile chipper to a Rubber Wood plantation site and chip materials
on site. In 95% of cases the company would buy from traders or from three large manufacturing companies
within the same State or purchase from around ten local wood traders. These traders would either buy from
independent mills or have their own mills from which materials were sourced. In all cases the materials
utilised are offcuts and waste wood from sawmilling processes (typically trunks too small to be milled for
sawn timber). All Rubber Wood was declared to originate from private plantations or FELDA plantations
(government-backed smallholder programme).

Due to the number of different suppliers utilised, lack of segregation of inputs from different suppliers, lack
of Chain of Custody system and almost continuous processing, supply chain traceability is likely to be a
challenge.

40
The dominant role of Rubber Wood in the Asian timber industry means that focus should be given to the
sustainability and legality of this species. Almost 70% of the worlds Rubber Wood plantations are located in
Malaysia, Indonesia and Thailand (Ratnasingam et al., 2011). The huge supply of Rubber Wood derives from
plantations established primarily for latex tapping which, after 2530 years, decline in productivity and are
harvested for timber. Typically rubber plantations are then re-established on the same land for further latex and
timber production. This trend, along with the fact that Rubber Wood is effectively a by-product of the latex
production process and is now utilised instead of being disposed of, means that many now see Rubber Wood as
an eco-friendly timber product. From a sustainability perspective, this argument is valid so long as the original
establishment of the rubber plantation occurs on already degraded land and not on forested (or other areas of
high biodiversity) land.

In Malaysia, rubber plantations are predominantly found on private estates and smallholdings. There are
currently over 250,000 smallholdings in Malaysia with an average size of 1.5 ha (MFPC, 2015). Most
smallholder plantation areas have been established under one of the government-backed schemes, namely the
Rubber Industry Smallholders Development Authority (RISDA), Federal Land Development Authority
(FELDA) or Federal Land Consolidation and Rehabilitation Authority (FELCRA) schemes.

Ratnasingam et al. (2011) indicate that the area under cultivation for Rubber Wood is actually decreasing due to
smallholders favouring more profitable agricultural crops such as oil palm. This claim is supported by
companies visited as part of this study, who stated that ten years ago it was possible to purchase large diameter
trunks of Rubber Wood but increasingly now companies are purchasing small diameter branches and offcuts
from sawmills to maintain the level of inputs required for production processes due to the reduced availability of
Rubber Wood stocks. One company visited had also resorted to importing Rubber Wood from Thailand to
secure its production - a trend also observed in the wider sector (Puasa, Rahman, Ahmad, Fui, & Roda, 2010).

Traceability in Rubber Wood supply chains is typically more challenging than for other species, due to the use
of traders who typically tour a State buying up any waste wood from sawmills and aggregating this into a single
load which is sold to a single or multiple customers. Despite challenges in identifying specific supply chains, the
low value of Rubber Wood inputs used in furniture and board manufacture typically mean that materials are not
transported long distances as it becomes an uneconomical practice. One respondent stated that each large-scale
board manufacturer dominates the local sourcing of Rubber Wood surrounding their manufacturing facility and
will typically source from the same subset of sawmills which will source from the same local plantations. It can
therefore be assumed that most Rubber Wood originates within 6080 km of the area of manufacture. Thus,
even where supply chains are opaque, buyers may derive an indicative area of origin based on their
manufacturers location. For imports of Rubber Wood the situation is less clear and the one respondent
importing stocks from Thailand was unaware of the supply chain structure upstream from the exporter. Further
research is recommended to characterise imported Rubber Wood supply chains.

The only paper and pulp producer visited as part of this study was Sabah Forest Industries. This company is one
of the largest paper producers in the country and is vertically integrated, leasing concessions and operating its
own pulp and paper mill (as well as integrated timber complex) near to the forest of harvest. Timber from its
leased concessions is used predominantly, with some inputs also being sourced from local sawmills and farms.
As such the supply chains for domestic materials used by this company were very short and the company is able
to provide a high level of information about its harvest areas. However, not all pulp and paper manufacturers
source from their own concessions. As discussed in the sections above, imports of pulp and paper (HS codes 47
and 48) exceed USD 2 billion in value. This indicates a huge volume of imports for which the supply chains are
expected to be significantly more complex. Further research is recommended to characterise imported pulp and
paper supply chains.

41
6.5 Legality and sustainability risk in Malaysian supply chains

The analysis of timber supply chains presented in the previous sections has characterised the main trends in the
Malaysian timber and wood-product sector. In this section the opportunities and risks will be highlighted and
discussed in further depth. Information on risk is derived not only from visits to companies but is also based on
information in the public domain relating to country-level risk and to documented cases of illegality/
unsustainability in the timber sector.

At the end of this section, a Risk Matrix (Table 16) summarises identified risks, the supply chains to which they
are most relevant, and the potential mitigations actions that may be used to address each.

6.5.1 Risks and mitigation measures for domestic products

i) Corruption

Malaysia scored 52 out of 100 on the Corruption Perceptions Index (CPI) scale in 2014 (Transparency
International, 2014). This scale indicates the overall level of corruption within a country. It is commonly used as
an indicator of risk in the timber sector due to the recognised correlation between overall level of corruption
within a country and the level of suspicious log supply within a country (Marmon, 2006). A score of 52
indicates medium risk level. This reflects a general level of corruption and lack of transparency which is also
documented specifically in regards to the timber sector, especially in Sarawak.

In addition, the Global Forest Registry (GFR), a database rating risk in the forestry sector in different countries,
identifies legality risks at the national level (FSC & NEPCon, 2015). These risks relate to a number of issues
highlighted by NEPCon (NEPCon, 2015b):

Documented corruption in the award of timber concessions and logging licenses including preferential
non-competitive allocation (Transparency International, 2011);
Corruption related to forest zoning changes, establishment and excision of Permanent Reserved Forest and
unlawful clearance of natural forest for establishment of plantations. Notably, Wyn (2013) reviewed 52
cases of alleged illegal forest clearance for plantations, of which 38 included allegations of corruption
(Sam Lawson, 2014; Transparency International, 2011; Wyn, 2013);
Corruption in the control of harvesting and restrictions on re-entry logging in Permanent Reserved Forest
areas (Transparency International, 2011, 2012).

Many of Malayias legality issues result from forest management operations in Sarawak. Whilst responsible
forest management is generally perceived as fair in Peninsular Malaysia and Sabah, corruption and illegality is
still reported to be systemic in Sarawak. These problems have been highlighted by many commentators over the
last ten years. Long-serving Chief Minister Abdul Taib Mahmud was implicated in the widespread corruption
plaguing the Sarawak timber sector (Global Witness, 2012, 2013; Straumann, 2015). New Chief Minister Sri
Adenan Satem has also recognised the problem of engrained corruption and nepotism in the Sarawak timber
sector (see Figure 19) and in 2014 vowed to tackle it head-on. The historic problems with corruption have been
a major barrier for Malaysia moving forwards in the FLEGT VPA process (FERN, 2014, 2015) and have led to
Sarawak being characterised as a hub for illegal and
unsustainable logging (FOE, 2013; Global Witness, 2012, Some, of course not all, pretend they dont
2013; Lawson, 2011; Ling, 2015; Straumann, 2014). know. The reason is very simple; either they
are stupid, cowards or corrupt
Companies located in any countries subject to timber
legality legislation would find it difficult to argue that any Sri Adenan Satem (Sarawak Chief Minister)
timber from Sarawak can be concluded to be at low-risk
Figure 13. Quote from Sarawak's Chief Minister on
of illegality without implementing stringent risk mitigation corruption in the Sarawak forest authorities

42
actions. As such, many companies within Europe, US and Australia avoid imports from Sarawak altogether.
This is partly why both the EU and USA favour imports from Peninsular Malaysia. It is also likely the reason
why no companies from Sarawak wished to participate as part of this study.

The legality and sustainability risks posed by Sarawak are troubling, not only because Sarawak is home to 43%
(or 7.8 million hectares) of Malaysias forested area but also because of the sustained trade the State has with
Japan. This trade drives the unsustainable utilisation of Sarawaks forests, predominantly for production of
tropical plywood for the Japanese construction industry (Global Witness, 2013).

For companies wishing to purchase from or invest in the Malaysian timber industry, Sarawak is currently
considered a high-risk area for which robust mitigation options are required. Independent third-party verification
of legality and sustainability criteria is recommended throughout the supply chain to minimise the risks at the
forest level. Even when employing such mitigation action, organisations should be mindful of the underlying
risk of corruption and bribery and employ a number of mitigation actions concurrently. This may include
verifying the validity of documentation, ensuring the objectiveness of third parties, employing robust legality/
sustainability certification standards and using multiple independent sources of evidence.

ii) Lack of traceability

It was found through company visits and requests for information from companies that the level of detail on
timber supply chains varied widely depending on the type of operation, species utilised, position in the supply
chain and certification status of the company. This is a typical situation in all countries and does not necessarily
indicate illegality or unsustainability but it does inhibit robust assessment of supply chain risk.

Confidentiality was a key concern of almost all companies visited as part of the study and is the reason why
many organisations declined to participate. Even where organisations did have good access to information on
supply chains they stated reluctance to provide this to buyers for fear of identifying their suppliers and
subsequently being cut out of supply chains. A number of companies also mentioned that accessing information
on the supply chains was significantly more difficult when the supplier was a trader/broker. This is to be
expected as these companies may be more likely to be cut out of supply chains.

Confidentiality is a common concern that also inhibits the free flow of information. It may be mitigated through
the use of independent, third-party assessment of supply chains against legality requirements or by sourcing
certified products (under a scheme where each entity is independently audited). However, where legal liability
rests on a particular organisation, e.g. a company deemed as an Operator under the EUTR, supply chain
confidentiality may not be realistic if risk assessment is to be robust.

Organisations that were closer to the source of materials had a much greater level of understanding of supply
chains. In addition, companies certified to forest certification or legality verification schemes were found to
have a much greater level of information available on supply chains. And even when certified companies did
not have complete supply chain traceability, certification standards were found to include requirements that
made this information available upon request so traceability is likely to be much easier for certified supply
chains. Companies in the furniture sector were found to have less detail as to supply chains and/ or be reticent to
provide this information to researchers due to confidentiality concerns.

iii) Lack of awareness

Staff awareness of sustainability and legality issues varied widely. One company visited was operating a robust
DDS, independently audited and certified by a third party. This company had a strong ethical and sustainability
focus throughout the company, driven by management. However, even within this company the DDS was
limited in scope and did not cover most of the volume of inputs processed by the company. Other companies
had a good level of awareness of due diligence issues but were not actively implementing robust due diligence
checks. Many companies relied solely on certification as proof of legality, without considering the need to

43
mitigate the risk of corruption. Many companies also relied solely on the Removal Pass to indicate legality and
were reluctant to conduct further due diligence due to increased work load.

At the extreme of the awareness spectrum, staff at one large company visited were almost completely unaware
of PEFC/ FSC certification or due diligence (despite sister companies within the same group holding FSC
certification). Another non-certified company visited as part of this study claimed to purchase PEFC-certified
and VLO-verified products from its suppliers. However, when the validity of the certificates was checked on
the PEFC database and Rainforest Alliance website, these certificates were found to be invalid (although it
appears valid PEFC certificates do exist for other related subsidiaries of the supposedly certified supplier). This
issue demonstrates the risk of relying on supply chains with broken Chain of Custody (where not all companies
in the supply chain are certified) and highlights the need for capacity building in sectors where certification is
not the norm, to help companies understand the utility of Chain of Custody certification.

iv) Harvesting of threatened species

It has been highlighted that, at the national level, requirements for endangered/ rare and threatened species are
not always observed by some forest management enterprises, with issues compounded by poor levels of
accessibility and field monitoring by authorities due to remote locations (NEPCon, 2015b).

The one forest management enterprise visited as part of this study (Sabah Forest Industries) was found to have
detailed information on species harvested, being able to specify scientific names to the species level. However,
the majority of companies visited (further down the supply chain) could not identify the scientific name to the
species level (e.g. Shorea macrophylla) but only to the genus level (i.e. in this case Shorea spp.).

This is a particular problem when considering tropical hardwoods from natural forest, as many species in PRF
are prohibited from felling or are threatened. Of those species listed on the protected/ prohibited lists maintained
by the forest departments, a number of species belong to the same genus as commonly harvested species. These
include Shorea spp., Calopyllum spp., Artocarpus spp., Dipterocarpus spp. and Koompassia spp. Due to the
presence of harvesting prohibitions it may be necessary for organisations to know the taxa producing the wood
materials they are purchasing down to the species level. This way companies can reduce legality risk by
ensuring that, for example, whilst they source Sterculia species from the PRF in Peninsular Malaysia, they can
confirm that the particular species utilised is neither the protected Sterculia parvifolia nor S. foetida. Similarly,
because of the regional protection lists, different species may be protected in different regions. For example,
Koompassia malaccensis is protected in Sarawak and Sabah but not in Peninsular Malaysia.

Information on species was a particular problem for manufacturers of composite products. For these sectors it is
common to utilise a small amount of MTH for which individual species were not known. This is a particular risk
when considering that seven of the top 15 exports from Peninsular Malaysia are board manufacturers likely to
be utilising large amounts of unknown MTH species.

Supply chain documentation at forest level, e.g. harvest plans and Environmental Impact Assessments, may be
used to verify that certain species were present/ absent at the forest origin. However, the full scientific name of
species is not commonly used on other documentation e.g. the Removal Pass. As such, relevant mitigation
actions may include collection of information on species from forest management documentation, combined
with assessment of prevalence of harvesting of threatened, prohibited or CITES-listed species at the sub-national
level (e.g. State level) for example, media reports of illegalities or consultation with State forest departments.

For CITES-listed species there are a number of risks that should be taken into account. For Ramin species,
major discrepancies exist between the volume of exports declared by Malaysia and the volume of imports
declared by importing countries. This is expected to be due to under-reporting of CITES-listed exports by
Malaysia (Ferriss, 2014). In addition, documented illegalities should be taken into account; these can be found
in reports on seized CITES-listed products (e.g. Ferriss 2014). For example, in 2007, 281,355 dowels from
Malaysia were seized in the Netherlands en-route to Belgium as they included the CITES-listed species Ramin

44
but were not accompanied by CITES documentation (Ferriss, 2014). Organisations can avoid unsustainable and
illegal trade in CITES species by ensuring that only products with the correct permits and CITES export license
issued by MTIB are exported.

Whilst large-scale over-harvesting of Aquilaria species has been effectively tackled since 2007, ongoing
problems persist with domestic use and small-scale traders illegally exporting product. This has been recently
highlighted in Peninsular Malaysia, where the Forestry Department recognised illegal logging in Penang, Perak,
Johor, Pahang and Selangor (Teng, 2015). This trade is thought to be largely driven by the tourist souvenir trade
and due to foreign nationals entering across the Thai border due to exhaustion of stocks of Agarwood in
neighbouring countries. This risk requires a robust response from government to stem the trade in illegal
Aquilaria harvesting.

Timber companies can mitigate the risks of purchasing illegally harvested Aquilaria species by ensuring that all
stocks are accompanied by a valid license issued by MTIB. The correct CITES export license should be
available for all products exported from Malaysia. In addition, companies sourcing from States where there are
documented concerns over the legality of CITES-listed species (e.g. Pahang for Aquilaria) should ensure full
supply chain mapping and verify the legitimacy of licenses with MTIB.

Companies trading in CITES species or closely related species may also utilise species and origin identification
using genetic methods. Specialists at the Forest Research Institute Malaysia (FRIM) sequenced microsatellite
markers for Aquilaria malaccensis in 2012 which can be used to distinguish between this and other species
(Tnah et al., 2012). Since this time FRIM has developed DNA markers for seven more Aquilaria species10 for
the purposes of species identification. In addition, a genetic reference map is being built for A. malaccensis
(based on 17 populations across Malaysia) that will allow for specification of origin of harvest and timber
tracking. In addition, reference data for the CITES species Gonystylus bancanus is also available for the
purposes of timber tracking11 (Pers. Comm. Mustapha., 2015). Genetic testing may provide additional
information to support the risk assessment alongside documentation to validate claims of species and origin.

General mitigation actions for all threatened species include sourcing from supply chains certified to a credible
sustainability/ legality standard. This will ensure information is independently verified at the forest management
level and that this information is made available to customers down the supply chain. Where sufficient reference
data are available, laboratory testing using microscopic or genetic methods may be employed to identify species
included within products.

v) Origin identification

In most cases in Malaysia it is necessary to be able identify the origin of products. Most companies stated that
they were aware of the origin of products but only a handful were conducting sufficient due diligence to verify
this. It is necessary to specify the origin as corruption and illegality vary among the regions of Malaysia. For
example, it may be necessary to prove the previous land-use of plantations (see Plantations and Forest
Conversion below) and because protected/ prohibited species and threats vary geographically. For example, as
part of this study, one organisation cited the use of Durian wood a species that is protected/ prohibited in
Permanent Reserved Forest (PRF) in Peninsular Malaysia and Sabah. The company stated that the species was
not harvested from PRF and as such the harvesting prohibition did not apply. For due diligence purposes it
would be necessary to demonstrate the tenure of the harvest origin to verify such claims.

Without traceability back to the forest of harvest it may be difficult to mitigate risk. Suitable mitigation actions
may be for organisations to work with their suppliers to map the supplied products back to the forest of origin
and monitor supply chains. Sourcing from supply chains certified to a credible sustainability/ legality standard

10
Aquilaria malaccensis, A. microcarpa, A. hirta, A. sinensis, A. beccariana, A. crassna and A. subintegra.
11
Genetic reference data for timber tracking is also available for Neobalanocarpus heimii, Shorea platyclados and Koompassia
malaccensis.

45
may ensure origin information is independently verified and that this information is made available to customers
down the supply chain.

vi) Risk of mixing

It has been mentioned above that supply chain traceability is an issue in many supply chains. Below, risks
associated with imported materials are discussed. Where timber sources change frequently or inputs are
aggregated from different origins, then a risk exists that high-risk timber may be mixed with low-risk timber.

This is not just a problem when considering timber imported from high-risk countries. Domestic trade is also
relevant. In 2014, 65,000 m3 of wood products were traded from Sarawak to Sabah and (as discussed above)
Sarawak is a high-risk origin. One company visited as part of this study stated use of small volumes of materials
sourced from Sarawak. This is identified as a high risk, as potentially illegal materials from Sarawak may be
mixed with low-risk materials from Sabah and sold onwards.

vii) Non-compliance with harvesting regulations

Although not detected with any of the companies visited as part of this study, non-compliance with harvesting
regulations is a recognised risk for domestic produce which is another reason why full supply chain
information is vital. Non-compliance with harvesting regulations is a concern in relation to riparian zones, High
Conservation Value Forest (HCVFs), and slopes. In the case of Sarawak there is often a failure to prepare and
submit Environmental Impact Assessments. Logging outside concession boundaries and non-compliance with
harvesting regulations, including logging on excluded land classes (such as steep land), logging of protected
species and under-sized logs, clear cutting along roads and cutting in stream buffers, have been documented. In
2013, Global Witness reported on illegalities by Samling Global and Shin Yang Group in regards to logging in a
proposed national park and area of high biodiversity; and logging outside licensed concession areas (Global
Witness, 2013). In the neighbouring state of Sabah, according to SFD, the government lost approximately USD
10.4 million in revenue due to illegal logging in 2014 (NEPCon, 2015e).

viii) Tenure rights abuses

Although not detected with any of the companies visited as part of this study, there are many documented cases
of tenure rights disputes and violations of customary rights (Sam Lawson, 2014; Wyn, 2013; Yong, 2010). This
includes more than 300 NCR cases pending hearing in Sarawak courts in 2014 (Bian, 2014). In 2013, Global
Witness also reported on illegalities by Samling Global and Shin Yang Group in regards to customary land
rights abuses (Global Witness, 2013)12.

Companies should ensure that they are not sourcing from any area currently disputed in the Malaysian courts by
Indigenous groups. Another mitigation option is to source certified materials. Certification against credible
sustainability standards, such as FSC, ensures verification of customary tenure rights during auditing and may
serve as an adequate mitigation action. However, when using certification as a mitigation action, companies
should be aware of the scope and coverage of the certification standard itself, to ensure mitigation is effective.
For example, the MTCS Forest Management Standard (endorsed under the PEFC scheme) has recently been
criticised by NGOs, including Friend of the Earth Malaysia, Greenpeace Netherlands, Netherlands Centre for
Indigenous Peoples and WWF Netherlands for a number of reasons (FOE, 2013; Greenpeace Netherlands,
Netherlands Centre for Indigenous Peoples (NCIV), & WWF Netherlands, 2013).These include criticism that
free, prior and informed consent in regards to forest management is only afforded to Indigenous peoples who
have legal ownership of land. In many cases Indigenous peoples may have usufruct rights but not legal

12
All companies alleged to have committed illegal or unsustainable practices by other stakeholders should be mindful of the fact that such
information will be taken into account by any buyer conducting rigorous due diligence. It is therefore recommended that companies
effectively communicate improvements to their practices and work actively with all stakeholders (including those who raise allegations)
to highlight progress. Participation in studies such as this allows companies to reply to allegations and communicate improvements
achieved since allegations were made. Companies in Sarawak, especially, are recommended to engage with the NGO sector to benchmark
progress as the State authorities attempt to improve the image of the Sarawak timber sector.

46
ownership of land and may thus be excluded from the management of MTCS-certified forest. Such criticisms
are relevant to consider in the risk assessment process when choosing how to mitigate identified risks.

ix) Illegal employment

Although not detected with any of the companies visited as part of this study, a significant share of the
workforce in Malaysia is comprised of illegal foreign workers from Indonesia, Bangladesh and the Philippines
(Wyn, 2013). Therefore, Malaysian timber companies may need to provide evidence of legal employment of
staff to mitigate this risk.

x) Plantations and forest conversion

Rubber Wood is touted as an eco-friendly source of timber that derives its environmental credentials from the
fact that it is a cyclically replanted plantation species. This is likely to be true in many cases, however a number
of caveats should be borne in mind by investors and buyers of products containing this species:

The first relates to legality risk and poor access to information on Rubber Wood supply chains. Rubber
Wood is generally grown on smallholder and estate plantations in Malaysia. It is generally accepted that
plantation-grown species are at lower risk of illegality than species harvested from natural forests, partly
due to the reduced ecosystem complexity allowing for simpler planning and monitoring. This reduced risk
is often offset by the informal nature of smallholder management, with reduced or poor record-keeping. In
addition, as Rubber Wood is typically a lower value species (compared to domestic tropical hardwoods),
there is less risk of illegal trade as the benefits do not outweigh the risks. It was also noted as part of this
study that many board manufacturers utilise by-products (offcuts and branches) left behind at felling sites or
generated during sawmilling (for the furniture sector). Such sourcing typically aggregates volumes from a
number of sources and, as a result, supply chains become extremely complex, hampering full traceability.

The second issue relating to Rubber Wood surrounds sustainability. Whilst a rubber plantation may be
legally established and managed in compliance with all applicable laws, there may be questions regarding
the sustainability of rubber plantations if they are established on land cleared of natural forest for the
purpose of plantation establishment. Under the National Forestry Act 1984 (GoM, 1984) State authorities
may excise a section of the permanent forest estate where the reason for its reservation no longer applies or
where it is required for an economic use that is higher than that offered by the existing forest. Under this
process of excision, Permanent Reserved Forest may be degazetted and its tenure changed to State land
(Transparency International, 2011). It can then be developed for agriculture (including rubber and oil palm
plantations), property or industrial purposes. Indeed, between 2001 and 2005, 40,000 ha of forest reserve
was excised in Peninsular Malaysia alone (MNS, 2012) although it should be noted that this was by no
means all for use as rubber plantation. Therefore, whilst establishment of rubber plantations may be
perfectly legal under Malaysian law, investors and buyers wishing to consider sustainability issues (above
and beyond legal compliance) should be able to identify the previous land-use and demonstrate that their
products do not derive from an area of previously natural forest. This is an approach increasingly taken by
concerned companies. For example, the UK retailer John Lewis currently considers the sustainability risks
associated with forest conversion for rubber plantations as part of its Sustainable Sourcing Policy (John
Lewis, 2015); as does the bank and investor in forest and agricultural commodities, HSBC (HSBC, 2014a).
This consideration is also particularly relevant for Malaysia due to the fact that Rubber Wood is the major
input to the furniture sector and this sector composes 26% of Malaysias wood exports by value.

Buyers, financial institutions and investors can mitigate these risks by gaining access to information on supply
chains and assessing this in detail. For legality purposes, organisations should assess the level of information
available on Rubber Wood supply chains, but not be discouraged if information is lacking from smallholders.
Supply chains should be identified as domestic or imported. For domestic supply chains the companies involved
in the supply chain should be identified at least back to the manufacturer. As Rubber Wood is typically not
transported more than 6080 km, an approximate area of harvest may be inferred. Further risk assessment may

47
be made on this basis for both legality and sustainability purposes. Narrowing the area of harvest allows the
general level of compliance at the State level to be checked and for documented cases of illegal harvesting to be
detected. For sustainability purposes, the levels of excision from State forest reserves can be identified to
determine the risk that plantations have been established at the expense of high biodiversity forest.

xi) Over-reliance on certification

Certification of supply chains can offer an increased level of confidence that legality and sustainability
requirements are conformed to. However, certification should not be used blindly. The particular standard used
by each scheme should be evaluated to assess if it contains requirements covering issues highlighted as part of
the risk assessment. A number of certification/ verification schemes were used by companies visited as part of
this study; with these including PEFC, FSC, VLC, LegalSource and TLTV. Each scheme has a different set of
requirements and if any are to be used as part of risk assessment, it is important for companies to assess the
relevant certification standard.

xii) Non-compliance with health and safety regulations

Although not detected with any of the companies visited as part of this study, lack of awareness and non-
compliance with health and safety requirements is recognised. This is especially a risk for forest management
operations relating to workers wearing Personal Protective Equipment as this is where occupational hazards are
greatest. Certification against occupational health and safety standards or sustainability standards such as FSC
and PEFC, which include requirements covering health and safety regulations, may be a possible mitigation
action to minimise this risk.

6.5.2 Risks and mitigation measures for imported Major Importing Countries CPI Score
products
China 36
Indonesia 34
Review of import statistics and meetings with companies
Thailand 38
identified a number of key importing countries for wood
USA 74
products. When aiming to assess legality of forest products for
Vietnam 31
imported materials it is necessary to consider the legislation Myanmar 21
relating to the country of harvest for all imports. The following Australia 80
section provides a discussion of risks and potential mitigation Import Countries cited by CPI Score
measures that may be used for non-domestic sources. It should Companies
be noted, however, that the country from which products have Cameroon 27
been imported is not always the country of harvest and, Republic of Congo 23
particularly for processed products, there may be long supply Gabon 37
chains with inputs originating from a variety of countries. In Canada 81
this case it is necessary to assess a wider range of national Table 15. CPI score of major import countries
(Transparency International, 2014)
contexts and legality and sustainability issues.
From national import statistics, it can be seen that Malaysian timber products are mainly imported from China,
Indonesia, Thailand, USA and Vietnam (MTIB, 2015). In addition, Myanmar and Australia supply notable
amounts. On top of these significant import countries, companies participating in this study also declared
imports from Cameroon, Republic of Congo, Gabon and Canada (see Table 15).

i) Lack of traceability

Access to information for some imported supply chains was an issue. In a number of cases companies were
using a wide variety of imported veneers of which the origin of only a few was known. Although veneer may be
a minor component of products by weight, the species utilised may often be high value and, as in this case, be
imported. One company mentioned imported Oak from China but was unsure of the country of harvest, having
never enquired (several cases have shown that illegally harvested Russian Oak is often declared and sold as Oak

48
from China (EIA, 2013)). Extra information should be sought to identify the origin or products before moving to
assessing such supply chains.

Another company importing FSC-certified mouldings from West Africa was found to have incomplete
information on the supply chain and relied on the fact that certification was in place. In countries where
corruption is high, extra measures should be taken to check even certified supply chains; for example, through
supply chain mapping, volume reconciliation, laboratory species testing, etc.

There is very little publicly available data on the pulp and paper sector in Malaysia. One pulp and paper
manufacturer was engaged as part of this study and this was helpful in characterising the domestic production of
these commodities. Pulp and paper constitutes 73% of total imports by value; yet it was not possible to obtain
accurate information on the origin of these imports, as the sector is not included within figures maintained by
the trade associations and government departments concerned with other timber and wood products (MTIB,
MTC, MPIC and Forest Departments).

ii) Imports from high risk countries

China, Thailand, Vietnam, Myanmar, Cameroon, Republic of Congo and Gabon all have CPI scores below 50
(the common threshold used to filter low- and high-risk countries) (see Table 15). Malaysia receives 10% of its
sawn timber imports from Myanmar. Illegal logging is a systemic problem in Myanmar, with high levels of
corruption, a weak legal framework, poor law enforcement, large-scale overharvesting, lack of oversight and
ongoing social and political conflict (MTIB, 2015c; NEPCon, 2015b). A log export ban enacted in 2014 has
done little to stem the illegal flow of timber; and a minister even stated that the government is powerless to stop
the vast illegal timber trade (Chatham House, 2014). Even with much illegal trade escaping detection due to
corruption, the levels of illegal logging are so high that large amounts are still captured. In 2014, Myanmars
authorities seized more than 15,000 tonnes of illegally harvested timber in just two months (The Nation, 2014).
In September 2015, the NGO Environmental Investigation Agency reported on huge volumes of trade across the
MyanmarChina border (EIA, 2015). As such, legality risks associated with timber imported from Myanmar are
extremely high and sourcing low-risk timber from this country is almost impossible at the current time.

China is a major manufacturing hub that imports enormous amounts of timber products from countries around
the world. As such, many products imported to Malaysia from China are unlikely to originate from Chinese
forests. Malaysian stakeholders should be aware of the possibility that imports from China may themselves
derive from high-risk countries and should mitigate these risks. For example, China imports high volumes of
timber from countries with known problems of illegal logging, such as Myanmar (see discussion above) and
Russia. The Russian Far-East is known to have huge problems with illegal harvesting. Trade data discrepancies
and trade flow analysis continue to indicate that trade with high-risk countries makes up a significant portion of
Chinese imports. In 2014, Chatham House reported that imports of high-risk products have declined since 2000
but still comprise 17% of total imports by volume (Wellesley, 2014).

Even if Chinese suppliers declare that products derive from lower-risk countries, there is also a risk of illegal
products being mixed with low-risk products in supply chains passing through China. This risk of mixing has
been highlighted, especially for composite products. In 2015, the UK National Measurement Office conducted a
supply chain study on plywood from China. This study showed that in many cases the lists of species declared
to be included in plywood products were incorrect or incomplete. This is a key risk, as robust due diligence
cannot be conducted if the full variety of species included within a product is not known (Pillet & Sawyer,
2015). Risks associated with Oak species have also been demonstrated in China. In 2013 the Environmental
Investigation Agency highlighted the problem of known, illegally harvested Russian Oak (Quercus mongolica)
being transported over the border to China and being mixed in supply chains (EIA, 2013).

Cameroon also suffers from a high level of corruption and well-documented illegality in the forest sector.
Whilst timber originating from the larger FMUs in Cameroon may be considered lower-risk, risks are still
significant (NEPCon, 2015a). As much as 4061% of timber production in Indonesia is thought to be illegal, as
well as 70% in Gabon (WWF, 2015). In 2014, 10,000 m3 of imports from Indonesia entered Sabah and although

49
illegal smuggling of timber from Indonesia to Sabah and Sarawak has decreased, it is still a risk (Dave Currey,
Doherty, Lawson, Newman, & Ruwindrijarto, 2001; Seneca Creek, 2004; Siahaan, 2011). Thailand, Vietnam,
Republic of Congo and Gabon also all suffer from similar risks in the forest sector. A precautionary approach
should be taken when sourcing from any of these countries.

Mitigation actions should be robust when sourcing from countries where corruption is high and illegality in the
forest sector is well-documented. Actions may include sourcing FSC-certified products, conducting on-site field
verification using an independent third-party auditor at all steps in the supply chain, rigorous checks of volumes
throughout the supply chain and/ or conducting laboratory testing to periodically verify species and origin of
products. Implementing a number of these in unison may be the only effective way to mitigate risk in some
cases. The organisations visited as part of this study, sourcing from West Africa, were all using certified
products, which is a key risk mitigation strategy.

iii) Pulp and paper

There is very little publicly available data on the pulp and paper sector in Malaysia despite pulp and paper
constituting 73% of total imports by value. One pulp and paper manufacturer was engaged as part of this study
and this was helpful in characterising the domestic production of these commodities. Trade statistics show that
Malaysia imports significant volumes of paper from abroad. China is the largest importer (19% of imports by
value). As mentioned in the previous section, China is known to have problems with mixing of legal and illegal
materials to legalise materials during manufacturing. The complexity of paper supply chains and the
continuous nature of the paper manufacturing process makes traceability extremely difficult in this industry.
Similarly, Malaysias second biggest import partner is Indonesia (16% by value), where the pulp and paper
industry has been implicated in illegal logging and deforestation for over a decade, including the harvesting of
highly endangered species such as CITES-listed Ramin (Greenpeace, 2014; Greenpeace, 2015). More
information is required on this sector in particular, due to the huge value of Malaysias imports and the high-risk
countries from which these materials derive/ are traded through.

6.5.3 Legality and sustainability risk matrix

The risks discussed in this section are amalgamated in a consolidated Risk Matrix (Table 16) overleaf, which
summarises the risks, the supply chains to which they are most relevant, and the potential mitigation actions that
may be used to address each.

50
Legality and Sustainability Risk Matrix

Risk Headline Risk Detail Relevant Supply Chains Example Mitigation Actions
Lack of Low level of supply chain traceability in All supply chains Supply chain mapping
traceability some cases, inhibiting robust risk Volume reconciliation
assessment. But most relevant for the following Laboratory species testing (microscopic/
supply chains/companies: genetic)
Non-certified supply chains Use of independent third-party assessment of
Long supply chains supply chains against legality requirements or
Supply chains including traders and by sourcing certified products (under a scheme
unwilling suppliers where each entity is independently audited).
Imported material supply chains (in
some cases)
Furniture supply chains
Pulp and paper sector
Rubber Wood supply chains
Lack of Low level of awareness regarding legality All supply chains Capacity building on Due Diligence and
Awareness requirement and sustainability risks in some legality requirements in EU, USA and
cases. But most relevant for the following Australia
Lack of awareness on how to implement supply chains/companies: Capacity building in sectors where certification
robust due diligence. Sectors where certification and is not the norm to help companies understand
Lack of awareness on how to check supply chain traceability are not the the utility of Chain of Custody certification.
certification claims. norm (furniture, paper, board,
plywood)
Companies not selling to EU, US
or Australia
Sarawak

51
Risk Headline Risk Detail Relevant Supply Chains Example Mitigation Actions
No or low Non-engagement with process of due All supply chains Capacity building on Due Diligence as part of
quality risk diligence. responsible sourcing (as well as meeting
assessment Lack of awareness on how to implement buyers/ investors requirements).
robust due diligence. Information sharing with buyers and suppliers
to map supply chains and implement cost-
efficient due diligence.
Adherence to legality certification scheme (e.g.
LegalSource) to demonstrate compliance.
Corruption CPI score of 52 All supply chains Ensure full traceability of supply chains back
GFR specified risk rating; to forest of origin.
Systemic corruption at political and But most relevant for the following Certification to a credible third-party scheme.
administrative levels of government, supply chains/companies: Consultation with authorities and to verify
including forest departments All supply chains originating from validity of issued documentation in line with
Corruption in the award of timber or passing through Sarawak. regulations.
concessions and logging licenses Consultation with non-government
Corruption related to forest zoning changes, stakeholders.
establishment and excision of PRF and Forest-level legality verification audits by an
conversion of natural forest to plantation independent third party.
forest.
Corruption in the control of harvesting and
restrictions on re-entry logging in PRF
Non-compliance Non-compliance with harvesting regulations, All supply chains Certification to a credible third party
with harvesting e.g. harvesting in riparian zones, HCVF and sustainability scheme.
regulations on slopes. But most relevant for; Forest-level legality verification audits by an
Failure to prepare and submit Environmental All supply chains originating from independent third party (where applicable).
Impact Assessments (in Sarawak) Sarawak
Logging outside concession boundaries Supply chains for high value
Logging of protected species and under- tropical hardwoods.
sized logs and overharvesting of approved
species.
Clear cutting along roads

52
Risk Headline Risk Detail Relevant Supply Chains Example Mitigation Actions
Tenure rights Tenure rights disputes and violations of Supply chains originating from areas Mapping of supply chains back to forest origin,
abuses customary rights where Indigenous/ customary rights to assess whether Indigenous/ customary rights
claims are made claims exist.
Consultation with experts, NGOs, forest
department and relevant communities to verify
relevance of claims to forest of origin.
Cease sourcing from any areas subject to
ongoing court cases over rights.
If claims exist and are valid, consultation with
communities required to mediate process.
Certification to a credible third-party
sustainability scheme.
Forest-level legality verification audits by an
independent third party (where applicable).
Non-compliance Non-compliance with health and safety Most relevant to forest management Second- or third-party auditing of companies to
with health & requirements companies but also to any manufacturing verify use of personal protective equipment and
safety company in supply chain. compliance with other H&S laws.
regulations
Illegal Use of illegal foreign workers Relevant to all companies in the supply Checking presence and validity of work
employment chain. permits for foreign workers.

But most relevant for:

Forest management companies.

53
Risk Headline Risk Detail Relevant Supply Chains Example Mitigation Actions
Harvesting of Insufficient recognition regarding Relevant to all companies in the supply Supply chain mapping to establish forest
endangered/ requirements for endangered/ rare and chain. origin.
protected species threatened species and protected sites/ Assessment of prevalence of harvesting of
habitats. But most relevant for: threatened, prohibited or CITES-listed species
Inability to identify full scientific name of Forest management companies, to at the sub-national level.
species beyond genus level may lead to avoid harvesting such species. Check harvest plans and EIA to verify
substitution in the supply chain of non- All other companies in the supply threatened/ prohibited species were present/
prohibited species with prohibited species. chain, to be able to verify that no absent at the forest origin.
Documented cases of illegal harvesting of threatened/ prohibited species are Certification at the forest management level to
CITES-listed species. included in materials sourced. legality and/ or sustainability standards (and
Companies using MTH where few chain of custody certification throughout
checks are conducted on species. supply chain).
Companies trading CITES-listed Increase volume of certified products from
species or closely related species. already certified companies.
Laboratory testing (genetic) to verify/identify
species.
Origin Origin risk varies based on, inter alia; Relevant to all supply chains. Supply chain mapping to establish forest
Corruption level in the region/ State, origin.
Threatened/ protected status of species in Sourcing from supply chains certified to a
the region credible sustainability/ legality standard.
Previous land-use (for plantations) Laboratory testing (isotopic) to verify origin.

54
Risk Headline Risk Detail Relevant Supply Chains Example Mitigation Actions
Mixing Risk of mixing and legalisation of illegal Relevant to all supply chains, including Require increased level of documentation for
materials from Sarawak and imports from those certified under the MYTLAS Sabah supply chains to verify absence of
high-risk countries. scheme. illegally imported timber.
Supply chain mapping to establish forest
But most relevant for: origin.
Supply chains using inputs from
Sarawak.
Supply chains in Sabah and
Sarawak where illegal smuggling
from Indonesia is a problem.
Any supply chain using imported
inputs that have not been rigorously
risk assessed.
Conversion of Sustainability risk that natural forest land All supply chains including plantation Supply chain mapping to establish forest
natural forest for was cleared for plantation establishment. materials origin.
plantations Identification of the levels of excision from
Legality risk of corruption in establishment But most relevant for: PRF at the State level.
and excision of PRF and conversion of Furniture supply chains Consultation with forest authorities to establish
natural forest to plantation forest. Pulp and paper supply chains previous land-use of plantation.
Source from FSC-certified plantations (where
forest conversion is covered under stringent
FSC requirements).
Over-reliance on Lack of assessment of requirements All supply chains where certification is Conduct assessment of the certification scheme
certification included under various legality and used as part of risk assessment to be used in risk assessment or review existing
schemes sustainability standards to ensure they offer including for the following commonly assessments of certification schemes in the
robust legality/ sustainability assurance. used certification schemes: public domain.
MTCS Identify gaps in certification scheme (against
PEFC legality/ sustainability requirements) and
MYTLAS further mitigate risks.
FSC
NEPCon LegalSource

55
Risk Headline Risk Detail Relevant Supply Chains Example Mitigation Actions
High risk Importation of significant amounts of timber All imports from countries with CPI <50 Avoid sourcing any products from Myanmar.
imports and wood products from high-risk countries and countries where illegal/
(at the national level). unsustainable practices are well For other import countries:
documented. Supply chain mapping to establish forest
origin, species and structure.
But most relevant for imports from: Sourcing from FSC-certified supply chains
Myanmar Laboratory testing to verify origin (isotopic)
Indonesia and species (microscopic/ genetic).
China Conducting on-site field verification using an
Thailand independent third-party auditor
Vietnam Rigorous checks of volumes throughout the
especially when wood derives from supply chain.
natural forests (rather than plantations) in
these countries.
Table 16. Legality and sustainability risk matrix

56
7. Future Trends

7.1 Domestic production and trade

Malaysias domestic production of timber is set to decline over the coming years. In 2006, the average annual
log production was estimated at 19.4 million m3 and this was predicted to fall to 14 million m3 by 2010. Log
production from forest plantations is predicted to rise to 16.7 million m3 by 2020 (MPIC, 2009). In recognition
of this, the Malaysian Government implemented the National Timber Industry Policy in 2009, to guide the
Malaysian timber trade towards production of value-added products. Since the start of the century, most growth
in secondary processed products has been driven by the furniture sector. Exports, however, have suffered since
the start of the global financial crisis and due to strong competition from countries such as Vietnam and China.
Therefore the move towards a timber sector based on secondary processed products is likely to continue but at a
reduced pace.

Growth may also be expected in the pulp and paper sector. In 2012 there were 700,000 ha of land under timber
plantation for pulp production. This is predicted to double by 2020 (Hoare, 2015).

Annual production of logs from Rubber Wood plantations is also expected to decline to 1.8 million m3 by 2020
(from 2.1 million m3 in 2006). Respondents visited as part of this study have already commented on the
declining availability of quality Rubber Wood. If the furniture sector continues to grow, it is expected that
higher volumes of Rubber Wood will be used in this sector, further reducing available inputs to the manufacture
of board products.

Despite years of strong trade between Sarawak and Japan, which has bolstered illegality in the State, recent
events may indicate a turning point for Sarawak. The appointment of Chief Minister Sri Adenan Satem in 2014,
saw a new, stronger approach to the illegal logging in Sarawak. The Chief Minister has vowed to rout out
corruption from the government as well as illegality in the timber sector (ENS, 2014). This process has already
begun, with the MACC freezing 375 bank accounts and seizing suspected illegal logs in June 2015 (Ling, 2015).
In addition, Sarawak companies operating within the Heart of Borneo13 were told to achieve certification in their
concessions by 2017 or risk losing their licenses (MTC, 2015c).

As promising as these early indications are they do not change the current situation or level of risk in Sarawak.
For companies wishing to purchase from or invest in the Sarawak timber industry, the recommendations in
Section 6.5.1 (i) should be followed.

7.2 Imports and exports

Along with the recent indicators of change in Sarawak, Japan has also made recent overtures in regards to
timber legality. In July 2015 it was reported that Japans Government is moving to propose legislation
preventing the sale of illegal timber without prior checks being conducted by companies (Yusuke, 2015) a law
it is thought will closely follow the format of the EUTR. This is likely a response to mounting international
pressure regarding Japans imports from Sarawak, the fact that it currently has no such legislation requiring
private companies to conduct due diligence on timber purchases, and the increased PR threats this poses with
the 2020 Tokyo Olympics approaching. Indeed NGOs are already pressuring the Japanese government to
expedite these plans to stamp out illegal logging once and for all (Global Witness et al., 2015).

Whilst China is set to continue to dominate the worlds manufacture of timber products, there will be major
reductions in the amount of Chinese domestic timber on markets from 2016 onwards. With increasing
recognition of the current unsustainable utilisation of domestic forests, China has moved to phase out
commercial logging in natural forest by 2017. A trial phase in April 2014 saw commercial logging banned in the

13
The Heart of Borneo is a vast inland area on the island of Borneo that straddles the borders of Brunei, Malaysia and Indonesia and is home
to undisturbed and highly biodiverse rainforest and the Indigenous forest-dwelling Dayaks.

57
natural forests in states in the north-east of the country (IHB, 2014). This will be followed by a total ban on all
commercial logging in natural forest on State-owned forest farms and areas from 2016. This ban will be
extended in 2017 to harvesting of natural forest by collectively owned and private forest farms. This will affect
198 million ha of Chinas natural forest and drastically reduce Chinas 50 million m3 annual production from
natural forests (China Daily, 2015).

These changes will undoubtedly impact upon Malaysias imports from China, which currently stand at 27% of
the total. It is uncertain to what extent, however, as it is unclear what proportion of these wood imports originate
from China and how many are imported products which are simply processed in or traded through China.

7.3 Certification

PEFC (MTCS) certification has recently been approved (provisionally) under the Netherlands public
procurement programme. When this is approved unconditionally it is expected that the demand for PEFC-
certified products will grow and thus the number of Chain of Custody certificates and export volumes will also
increase. In 2014, 8% of Malaysias total sawn timber exports and 21% of mouldings exports were destined for
the Netherlands (MTIB, 2015b). So this recognition will boost trade further.

In addition, the MTCC in conjunction with trade associations such as MWIA are currently conducting a
scheme to train timber companies for PEFC certification. Companies with strategic influence in supply chains,
such as Carl Ronnow Sdn Bhd, were also noted to be working with their own suppliers to build capacity for
certification. Such initiatives are likely to see PEFC continue to dominate in Malaysia.

Whilst FSC is making movements towards developing a national standard for forest management in Malaysia,
this process is not so advanced. In addition, difficulty will be encountered for Forest Management Units in
achieving FSC certification in many parts of Malaysia. Where there is minimal productive natural forest area
available, companies commonly allocate more than a 'limited portion' to industrial tree plantations in attempts to
present a viable business plan a move that conflicts with FSC requirements against conversion of natural
forest.

There is mixed evidence as to whether timber legality legislation has supported uptake of certification in
Malaysia. Two companies explicitly stated that buyers had increasingly started to request certified materials due
to the onset of the EUTR. One of the largest companies stated that their customers do not currently request any
form of certification and, if they did, these requests would be referred to a certified sister company based in
Oceania. The drive towards certification is likely to depend on the particular sector and how much produce is
sold to markets with timber legality laws in place.

However, one company did remark that the larger buyers in the Middle East have also started to request
information on timber supply chains for due diligence purposes. These are buyers located in countries where
legislation is not in place requiring companies to conduct due diligence. It is therefore likely that reputational
risk for large companies will continue to grow as consumers in all markets become increasingly aware of the
impacts of their purchasing choices.

58
8. Recommendations

8.1 Capacity building The provision of training and awareness-raising within all parts of the timber
industry is essential. Most companies were found to be aware of the concept of
due diligence but few were implementing robust risk assessment of their supply
chains.

Capacity building for industry should focus on:

Understanding the risk assessment process being conducted by buyers in
EU, Australia and USA and why supply chain information is requested;
Collaboration between buyers in EU, Australia and USA and suppliers in
Malaysia to avoid duplication of efforts and avoid increased costs (see
Recommendation 8.2, below);
Development of a DDS and related support by timber trade associations that
may be offered to members;
Awareness-raising in sections of the market currently unaffected by calls for
risk assessment: furniture trade, paper trade, non-EU/ Australia/ US trade.
Awareness-raising of the available tools that can be utilised by EU, US and
Australian importers for legality purposes. Tools such as NEPCon forestry
risk profiles (http://www.nepcon.net/forestry-risk-profiles) that identify
relevant supply chain documentation that can be used in risk assessments
are particularly useful.
Training to financial institutions (banks, building societies, pension funds,
etc.) on legality and sustainability issues in the Malaysian forestry sector
(see Recommendation 8.10 below).

8.2 Collaboration When making requests for information, companies located in markets subject to
within and across illegal timber regulations should be aware of the challenges faced by Malaysian
supply chains suppliers. Malaysian companies have buyers requesting varying types and levels
of information. Companies in buyer markets should be sensitive to the increased
time-cost of providing supply chain information and work closely with suppliers
to build capacity, avoid duplication of effort, and reduce costs.

Malaysian suppliers may consider working concurrently with all buyers in

markets subject to illegal timber regulations to coordinate and agree a common
approach to the risk assessment process and information provided in relation to
Malaysian supply chains. This could benefit both suppliers and buyers by
allowing for costs to be split among a number of parties, covering the following:

Document collection for the purposes of risk assessment by Malaysian

suppliers;
Translation of supply chain documentation by independent third parties;
Annual legality and/ or sustainability certification audits of Malaysian
suppliers and upstream suppliers;
Periodic microscopic, genetic or isotopic testing to verify species/ origin of
products;
Changes to supply chains and replacement of upstream suppliers.

Some or all of these activities may already be being conducted by numerous

different companies in supply chains. Within the EU, importers are slowly

59
 starting to see the benefits of collaborating with suppliers and competitors (who
use the same suppliers), to reduce the costs of due diligence.

8.3 Support SFM in The recent changes in the Sarawak administration have signalled a renewed
Sarawak commitment to ending corruption and illegality in the timber trade. This is,
however, a nascent process that should be supported by all stakeholders.

NGOs and government should highlight the expected move towards

implementation of illegal timber legislation in Japan because if such legislation
were to be implemented this would effectively exclude much of the import trade
from Sarawak due to very high risk of illegality.

Support should be provided to both industry and government in Sarawak to

ensure that the State may make meaningful steps towards the FLEGT VPA
process, which will likely remain stalled without such commitment. This may
include the development of a robust TLAS and audit checklist for Sarawak.

8.4 Certification Increased use of supply chains certified to a credible and internationally
recognised standard will greatly help to reduce the risk in Malaysian supply
chains and for imported materials. Currently the most widely recognised schemes
are PEFC and FSC. Focus should be on two main areas:

Increasing the number of certified companies: Initiatives being run by

MTCC and MWIA have sought to increase the uptake of certification by
supporting and training companies. Such initiatives should be supported also
from the NGO sector and by government.
Increasing the volume of certified sales: Whilst many companies visited as
part of this study were certified to either PEFC or FSC, the sales volume of
certified products was usually low when compared to non-certified sales.

Focus should be placed on the role of certification in the risk assessment process
and how supplying certified materials reduces many forms of legality and
sustainability risk. However, focus should also be placed on improving
certification systems:

MTCS has received much focus due to concerns over recognition of Indigenous
rights. This was highlighted during a process whereby the MTCS scheme was
assessed against the Dutch public procurement guidelines and the concerns
addressed in order to achieve recognition as a robust sustainability scheme.
Continued scrutiny and improvement of the MTCS standards is required in order
to ensure it delivers legal compliance, because it is by far the most dominant
certification scheme in Malaysia.

Independent third-party evaluation should also be applied to a range of different

certification schemes (FSC, VLC, LegalSource) in order to assess their alignment
with national legality requirements in order to support businesses in identifying
non-compliances with national laws and to help standard-setting bodies close
gaps in certification standards.

FSC is now revising its approach towards forest conversion, which currently
prevents certification of plantation forest established by conversion of natural or

60
 semi-natural forest after November 1994. This effectively precludes FSC from
the Malaysian market and is a major reason for the small area of FSC-certified
forest. A more measured approach is required to encourage sustainable forest
certification in markets such as Malaysia whilst still retaining rigorous standards.

All standard-setting bodies should be aware that, stakeholders conducting due

diligence will increasingly focus on evaluating the rigour of the certification
scheme and documented incidences of failure of the systems. Therefore
addressing concerns in the public domain is paramount if standard-setting bodies
wish to maintain integrity and be able to reduce supply chain risk.

8.5 Building Laboratory testing is becoming an increasingly important tool in the due
reference diligence process, used to verify supplier claims on species and origin of
databases for materials. Both genetic and isotopic methods, carried out by independent
species and origin laboratories, can be used to verify such claims. Genetic analysis can often
testing identify the full scientific identity of timber species allowing stakeholders to
distinguish between species within a genus. Genetic and isotopic analyses may
be used to verify or identify the origin of materials, sometimes to the level of the
forest concession.

A necessary prerequisite for utilising such technologies, however, is the

availability of reference data for the comparison of test samples. It is therefore
recommended that steps be taken in collaboration with government,
certification schemes, industry and laboratories to create a publicly available
reference database of timber samples from Malaysia that may be utilised by labs
around the world. In addition, expanding skills in these techniques to Malaysian
labs will be useful for conducting analyses in-country.

FRIM has a laboratory with technicians able to conduct microscopic and genetic
analysis of timber samples. This may be utilised for cases where species require
verification/ identification. Laboratories able to conduct microscopic analysis to
verify taxa (to the genus level) are now prevalent around the world and may be
utilised by importers in EU, USA and Australia, e.g. Kew Gardens in the UK and
Von Thunen Institute in Germany. In addition, labs such as the Von Thunen
Institute and Agroisolab specialise in DNA and stable isotope testing,
respectively.

8.6 Further research Further research is required both into the furniture industry and the paper
into the furniture industry, due to the dominance of these two product types in Malaysias exports
and paper and imports, respectively.
industry
For both of these sectors there is a dearth of publicly available information.
Companies in this sector are also reticent to provide information to independent
stakeholders. There is, therefore, a need for more research on paper supply chains
originating from outside Malaysia. Engagement of, and research on, furniture
companies is also required to provide more detailed risk assessment of this
sector.

8.7 Standardised Inter-agency co-operation would greatly help improve the quality and coverage
reporting of trade of timber trade data. Currently forestry departments in each of the regions
data (Peninsular, Sabah and Sarawak) produce production and trade statistics at
varying intervals and in different formats (mainly through their annual reports).

61
 Definition of a common set of reporting parameters would greatly facilitate
comparison between regions. In addition, collaboration on reporting trade
volumes among the regions could help highlight and reduce discrepancies in
reported trade. The frequency of such reporting should be (at least) annually.

Currently, MTIB produces import and export figures for a range of products
throughout each year. These data provide a wealth of information and are well
presented. However, the data could be improved through the addition of:

Figures for products from the pulp and paper industry;

Improved data on the furniture trade to measure volumes traded;
Clarification of which products are included within each category using an
unambiguous classification scheme (such as HS codes).

Forest Departments, MTIB, MPIC, MTC and any other government agencies/
quasi-autonomous government agencies that are producing statistics on wood
industries should collaborate to reduce redundancy and to create a single
dedicated portal for information. Currently, Forest Departments, MTIB, MPIC
and MTC all have various trade figures and analyses on their websites.
Efficiency and effectiveness could be greatly improved by centralising this data
collection, storage and reporting.

8.8 Certification of Due to the fact that Rubber Wood is a dominant input to furniture and board
Rubber Wood manufacturing processes, development of Rubber Wood certification would be a
key tool for providing legality and sustainability assurance. A current project
under the PEFC system is seeking to explore the opportunities associated with
smallholder group certification (PEFC, 2015d). Such initiatives should be
supported by all stakeholders to provide the most robust verification under
whichever certification system is used.

8.9 Due diligence The implementation of illegal timber regulations in various consumer markets
regulations has shown the effectiveness of such laws in curtailing trade of illegal timber.
However, it is likely that a large portion of risky trade has simply been shifted to
markets without due diligence regulations. Thus there is a need for a greater
number of markets to implement laws that mirror the EUTR and AILPA. Placing
legally binding requirements on the timber sector to conduct due diligence would
serve as a powerful tool in the international fight against illegal logging and help
boost Malaysian sales by reducing legality risk for buyers in regulated markets.
Putting regulations in place in Malaysia would also support the timber sector to
meet the requirements of key markets already subject to illegal logging
legislation (EU, USA and Australia).

8.10 Environmental Whilst international financial institutions have begun to consider environmental
sustainability sustainability in decision-making, uptake by domestic financial institutions has
criteria for been much more limited in Malaysia. To motivate responsible companies in the
financial wood industry, sustainability criteria should be explicitly considered when
institutions deciding on loans and investment to companies in the forestry sector.

To reach this point, a number of initiatives should be pursued:

Domestic financial institutions should be provided with training on risk

identification in the forestry sector so that key decision-makers are given the
skills to conduct legality and sustainability assessments for forest-sector

62
 investments;
Support to create best-in-class and/ or negative screening procedures/
guidelines that may be used internally by decision-makers in domestic
financial institutions;
Assistance to financial institutions on reporting of legality and sustainability
decision-making for forest-sector investments in a way that is clearly
understandable to concerned investors;
Support to companies within the wood industry on reporting of legality and
sustainability achievements to meet financial institutions screening criteria
and enhance inward investment;
Pressure on, and assistance to, policy-makers to integrate sustainable
development issues into capital market policy-making.

8.11 Tackling A necessary step underpinning all other moves towards improving legality and
corruption sustainability, is the need to reduce corruption within the public sector. This is
especially pertinent in the case of Sarawak. Independent oversight should be
encouraged wherever possible and the MACC strengthened to reduce corruption.

63
9. Conclusion

Malaysia plays a key role in the international timber trade, supplying domestic and imported products to a range
of countries around the world. Furniture, pulp and paper, plywood and sawn timber are the key exports. Many of
these products, especially furniture and sawn timber, are sold into markets such as the EU and USA, where
timber legality legislation is in place and governments adhere to strict public procurement policies; whilst other
major markets such as Japan are predicted to implement similar legislation over the next few years. Ensuring
that timber supply chains are legal and sustainable is therefore integral to ensuring continued growth in the
timber sector. Forest management certification in Peninsular Malaysia and Sabah along with continued
implementation of TLAS schemes are key steps towards demonstrating low risk in supply chains. However,
corruption, environmental infringements and abuse of NCRs are continuing concerns, especially in Sarawak. As
a result, it is necessary to gather a high level of information on timber supply chains (even where certification is
in place) to conduct robust risk assessment. It may be necessary to provide this information to buyers
downstream or to ethical investors concerned about legality and sustainability.

Currently, companies have a mixed awareness of how to conduct due diligence; with some conducting in-depth
risk assessment and mitigation of risks and others completely unaware of the due diligence concept. Awareness
was found to be higher in companies exporting to the EU, USA and Australia, and also in companies seeking
financial investment. Whilst most companies had information on supply chains, there was a reluctance to
divulge this information or to implement a DDS due to the perceived confidentiality risks and increased
workload, respectively. Some key opportunities exist in the utilisation of Rubber Wood and other plantation
species; however conversion of natural forest to plantations is a sustainability risk that should be addressed.
Utilisations of hardwoods from natural forest is common in Malaysia, and at present few companies can provide
supply chain information to prove threatened/ protected species are excluded from supply chains. Traceability
was typically lower for imported goods and this risk is compounded when imports derive from high-risk
countries.

Capacity building is required to actively engage the timber sector. Buyers are encouraged to support Malaysian
suppliers in accessing information and be aware of the increased burden upon companies. Along with support to
Malaysian companies international buyers should also include legally-binding commitments in contracts with
Malaysian companies to provide accurate supply chain information. Suppliers are encouraged to engage fully
with the process to facilitate the free flow of information through supply chains; whilst priorities for government
are to continue tackling corruption and support the uptake of sustainability certification. NGOs have a key role
to play in training the private sector, highlighting illegality and providing scrutiny of certification schemes.

64
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11. Appendices

Appendix 1 Company Overview

Information presented here is taken from publicly available sources and for confidentiality reasons does not
include all details provided by companies as part of this study.

Company Name: Carl Ronnow Sdn Bhd

Primary Activity: Timber Trader
Locations: Kota Kinabalu, Port Klang
Website: www.carlronnow.com
Input products: Logs, Sawn timber, Plywood
Output Products: Logs, Sawn timber, Plywood
Species used: Meranti, Kapur, Keruing, Selangan
batu, Acacia, Teak, Merbau,
Nyatoh, etc.
FSC certification: RA-CoC-000864
PEFC certification: SGS-MTCS/COC-0036

Company Name: Costraco Sdn Bhd

Primary Activity: Timber Trader
Locations: Selangor
Website: http://www.costraco.com/
Input products: Sawn timber, Mouldings
Output Products: Sawn timber, Mouldings
Species used: Gerutu, Durian, Meranti, Seraya,
Selangan-batu, Merbaur, Merpauh,
Majau, Keruing, Kapur, etc.
FSC certification: SCS-COC-000564
PEFC certification: SGS-MTCS/COC-0010

Company Name: Dongwha Fiberboard Sdn Bhd

Primary Activity: Fibreboard Manufacturer
Locations: Nilai, Kulim, Merbok
Website: http://www.dongwha.com.my/
Input products: Logs
Output Products: Fibreboard, Paper
Species used: Rubber Wood, etc.
FSC certification: CU-COC-838151
PEFC certification: N/A

71
Company Name: Finesse Moulding Sdn Bhd (subsidiary of
Classic Scenic)
Primary Activity: Picture Frame Manufacturer
Locations: Rawang
Website: http://www.classicscenic.com/
Input products: Sawn timber, Veneer, Wooden Dowels
Output Products: Wooden Frames
Species used: Pinus radiata; Pinus taeda, etc.
FSC certification: SGS-COC-005702
PEFC certification: N/A

Company Name: Heveaboard Bhd

Primary Activity: Particleboard Manufacturer
Locations: Gemas
Website: http://www.heveaboard.com.my/
Input products: Logs
Output Products: Particleboard
Species used: Rubber Wood, etc.
FSC certification: N/A
PEFC certification: SIRIM-COC 0068

Company Name: Jin Sheng Furniture Industry

Sdn Bhd
Primary Activity: Furniture Manufacturer
Locations: Kedah
Website: www.jinsheng-furniture.com
Input products: Sawn timber, Laminated Board
Output Products: Furniture
Species used: Rubber Wood, etc.
FSC certification: N/A
PEFC certification: N/A

Company Name: Maran Road Sawmill Sdn Bhd

Primary Activity: Sawmill
Locations: Kuala Lumpur, Kuala Berang,
Temerloh
Website: http://www.maran.com.my/
Input products: Logs, Sawn timber
Output Products: Sawn timber, BJC, Mouldings
Species used: Meranti, Merbau, Keruing,
Mersawa and Kempas, Sapelli,
etc.
FSC certification: SGS-COC-002827
PEFC certification: SGS-MTCS/COC-0019
72
Company Name: Marcoco Furniture Industries Sdn
Bhd
Primary Activity: Furniture trader
Locations: Penang
Website: http://www.marcoco.com.my/
Input products: Wooden Furniture
Output Products: Wooden Furniture
Species used: Rubber Wood, etc.
FSC certification: N/A
PEFC certification: N/A

Company Name: Sabah Forest Industries Sdn Bhd

(subsidiary of Avantha Group)
Primary Activity: Sawmill & Pulp/Paper Mill
Locations: Sipitang
Website: http://www.avanthagroup.com/
Input products: Logs
Output Products: Pulp & Paper, Sawn timber, Plywood,
Veneer
Species used: Meranti, Merbau, Keruing, Mersawa,
Kempas, Acacia, Eucalyptus, etc.
FSC certification: SW-COC-005412, SCS-COC-004438,
SCS-COC-004890,
PEFC certification: SCS-PEFC/COC-004890
LegalSource Cert: NC-LS-021672
VLC Certification: RA-VLC-005726

Company Name: United Woodwork & Construction

(M) Sdn Bhd

Primary Activity: Furniture Manufacturer

Locations: Penang
Website: http://www.united-woodwork.net/
Input products: Sawn timber, Plywood
Output Products: Wooden Furniture
Species used: Rubber Wood, Nyatoh
FSC certification: N/A
PEFC certification: N/A

73
Appendix 2 Sample of Supply Chain Questionnaire

74
Appendix 3 Semi-Structured Interview Questions

Supply Chain (upstream)

How many direct (tier 1) suppliers do you have?
Where are they located?
What products does each supplier supply?
How often are suppliers changed?
How long have the current supplier been supplying products to your company?
Do you know who/where your tier 1 suppliers get their products from?

Supply Chain (downstream)

How many buyers did you have in 2014?
What type of companies are your buyers (traders, retailers, manufacturers)?

Origin
Do you know the origin of timber included in products supplied to you, to the level of;
i) Country
ii) Sub-national region
iii) Forest Concession
Do you know how many steps there are in the supply chain back to the forest?
Do suppliers always use the same forest origin to supply these products to you?
What evidence do you have of the origin of products supplied to you?
What percentage of your purchases come from different countries (please specify)?

Species
Do you know the species of timber included in the products supplied to you?
What evidence do you have of the species of products supplied to you?
Do suppliers always provide products with the same species of timber to you?

Certification
Is your company certified to any sustainability or legality standard?
Do you buy any products as certified/ verified? (whether or not your company is certified)
What percentage of your annual purchase volumes are certified? (please specify if multiple standards
are used)
If so, what percentage of your annual sales volumes are certified? (please specify if multiple standards
are used)
Do you foresee you certified purchases/sales increasing or decreasing in the next 5 years?

Supply Changes
Have the type of products you sell or supply chains you use changed in the last 5 years?
Do you expect the type of products or supply chains you use to change in the next 5 years?
Has your company been affected by timber legislations coming into effect in consumer markets?
If so, which markets?
If so, which have been the hardest to deal with?

Due Diligence
Have you heard of EUTR, Lacey Act, AILPA?
What has been you experience dealing with these legislations?
What are the major obstacles in dealing with these legislations?
Where are your major information gaps in regards to your supply chains?

75
Appendix 4 Protected/ Prohibited Tree/ Plant Species in Malaysia

Peninsular Malaysia Sarawak Sabah

Scientific Name Local Name Scientific Name Local Name Scientific Name Local Name
Archidendron Kerdas Rafflesia spp. Bunga pakma Shorea All Tengkawang/
bubalirum macrophylla, Kawang species
Shorea
gysbertinana,
Shorea pinangah
Archidendron Jering Dipterocarpus Ensurai Mangifera spp. All Asam family -
jiringa obloglofolius Mangga or Macang
Hutan
Durio zibethinus Durian Shorea macrophylla Engkabang jantong Durio spp. Durian
Mangifera indica Mangga Shorea splendida Engkabang bintang Triomma spp., All Kedondong
Daryodes spp. and species
Santiria spp.,
except Canarium
spp.
Baccaurea Tampoi Shorea helmsleyana Engkabang gading Drancontomelon Langsat
maingayi spp.
Baccaurea Tampoi Shorea simins Engkabang Bacaurea spp. Tampoi,Rambai
sumatrana terendak and Belimbing
Hutan
Artocarpus Temponek Shorea palembanica Engkabang asu Artocarpus spp. Terap, Buruni,
rigidus Pulutan/Cempedak
Dysoxylum spp. Mersindok Shorea stenoptera Engkabang rusa Nephelium spp. Meritam and
Rambutan
Nephelium Rambutan Shorea pinanga Engkabang langai Paranephelium Mata Kuching
lappaceum Hutan bukit spp.
Garcinia Asam Shorea ochracea Raru Aquilaria spp. Gaharu
artoviridis Gelugor
Boucea Kundang Ficus spp. Pokok Ara Koompassia spp. Mengaris/Tualang
macrophyla Hutan
Barringtonia spp. Putat Sonneratia alba Perepat Eusideroxyln Belian
zwageri
Sandoricum Sentul Sonneratia Pedada Protoxylon Belian Malagangai
koetjape caseolaris malagangai
Ardisia spp. Mata Avicennia alba Api-api hitam Intsia palembanica All Merbau species
Pelanduk and including Merbau
Sympetalandra Lalat
borneensis
Artocarpus Nangka Avicennia lanata Api-api N/A All mangrove
heterophyllus species
Aglaia spp. Bekak Avicennia marina Api-api merah N/A Any trees marked
by the Director for
retention
Koompassia Tualang Avicennia officinalis Api-api sudu N/A Any trees from the
excelsa general stipulated
in Schedule I -
Forest Rules 1969,
if the diameter is
less than the
specified limit
except if marked
by the Director for
felling.
Ficus spp. Ara Lumnizera littorea Teretum merah
Mangifera Machang Koompassia excelsa Tapang / Tualang

76
longipetiolata
Parkia spp. Petai Koompassia Menggris / Kempas
malaccensis
Podocarpus spp. Podo Actoxylon Kayu gahru
sympetalum
Dialium spp. Keranji Aquilaria beccariana Kayu gahru,
engkaras (I)
Sterculia foetida Kelumpang Aquilaria Kayu gahru
Jari malaccensis
Lithocarpus Mempening Aquilaria Kayu gahru
cyclophorus Gajah microcarpa
Knema spp. Basong Didesmandra aspera Rhu Laut
Myristica spp. Basong Casuarina Rhu Laut
equisetifolia
Sterculia Kelumpang Rhododendron spp. Rhu Laut
parvifolia
Santiria laevigata Kedondong Nepenthes spp. Periok Kera
Gergaji /Pitcher plants
Daun
Licin
Castanopsis spp. Berangan Orchidaceae spp.
Irvingia malayana Pauh Salacca magnifica
Artocarpus Cempedak Johannesteysmannia Ekor buaya
integer altifrons
Eugenas spp. Kelat Jambu Areca triadra Pinang
Laut
Areca jugahpunya Pinang
Pinanga mirabilis Pinang
Areca subcaulis Pinang
Licuala orbicularis Biris
Eurycoma longifolia Tongkat cili,
sengkayap
Goniothalamus Kayu hujan panas
velutinus
Monophyllaea spp.
Antiaris toxicaria Ipoh
All peat swamp Ketau
species of Madhuca
Calophyllum Bintangor
lanigerum
Calophyllum Bintangor
teysmanii
Cycas rumphii Paku gajah, paku
laut
All epiphytic Ekor tupai
Lycopodium species
Begonia spp. Riang, telinga gajah
Aeschynanthus spp.
Cyrtandra spp. and Melebab
Didymorcarpus spp.
N/A All species of listed
in CITES
appendices I & II

77
Appendix 5 Legality Verification/ Certification Schemes

LegalSource LegalSource certification is a scheme created by NEPCon which provides third-

Certification party endorsement of the ability of an organisation to exercise due diligence
through a well-functioning DDS.

LegalSource auditing is carried out against the NEPCon LegalSource Standard,

which is aligned with the EUTR, the US Lacey Act and the AILPA. The
standard sets out requirements that companies seeking LegalSource certification
need to comply with. It includes criteria for a quality system covering forest
product sourcing and/or production as well as requirements for supply chain
evaluation, risk evaluation and risk mitigation. Appendixes specify
requirements related to chain of custody, group certification, and supply chain
and forest level legality audits.

The LegalSource standard can be applied to any organisation in the supply

chain.

Website: http://www.nepcon.net/certify-your-due-diligence

Verification of Legal Rainforest Alliances Verification of Legal Origin (VLO) scheme verifies that
Origin (VLO) timber comes from a source that the harvester has a documented legal right to
harvest, pursuant to the laws and regulations of the government of the
and jurisdiction. Suppliers of VLO timber must follow and maintain a documented
generic chain-of-custody system to pass on VLO claims. The Rainforest
Verification of Legal Alliance has begun to phase out VLO certification and will eventually
Compliance (VLC) discontinue it altogether, although active VLO certificates will be maintained
for those companies that applied prior to 1 July 2012.

VLC ensures that the administrative requirements of permitting, planning, taxes

or fees, and harvesting, as well as a broad range of applicable and relevant laws
and regulations related to forestry, have been met.

Whilst legal origin verification signifies that a company has met the
administrative requirements of permitting, planning, taxes or fees, and
harvesting in defined areas only, legal compliance encompasses a broad range
of laws on environmental protection, wildlife, water and soil conservation,
harvesting codes and practices, worker health and safety, and fairness to
communities.

Website: http://www.rainforest-alliance.org/forestry/verification/legal

Timber Legality and SGS TLTV scheme is aimed at verifying forestry companies compliance
Traceability Verification against the TLTV Legality of Production Standard. The legal timber trail to the
(TLTV) markets is then controlled through chain of custody audits of the processing or
trading companies. The TLTV legality of production and chain of custody
statements issued by SGS provide independent assurance to customers,
stakeholders, and investors on the legality of the company, its operations,
activities and products

Website: http://www.sgs.com/

78
Appendix 6 List of HS Codes Used for Trade Analysis

The following tables outline the product groups and corresponding HS codes that were used for data analysis of
GTA data contained within the body of this report. Where the source GTA is referenced in the body of the
text, the following groups have been used. Where data in the body of the text references Other products, this
refers to any product groups listed below not elsewhere specified or indicated in the text:

HS 44 Wood and Articles of Wood HS 47 & 48 Pulp & Paper

Plywood, Veneered Panels & Similar Chemical Woodpulp, Soda Or Sulfate, Not
4412 Laminated Wood (PLYWOOD) 4703 Dissoly Gr
Wood Sawn Or Chipped Length, Sliced 4707 Waste And Scrap Of Paper Or Paperboard
4407 Etc, Ov6Mm Th (SAWN TIMBER) Pulps Of Fibers From Recovered Ppr, Oth
Wood In The Rough, Stripped Or Not Of 4706 Cell Mat'L
4403 Sapwood Etc (LOGS) Woodpulp From Mechanical/Chemical Pulp
Fiberboard Of Wood Or Other Ligneous 4705 Processes
4411 Materials (FIBREBOARD) Chemical Woodpulp, Sulfite, Not Dissolving
Builders' Joinery And Carpentry Of Wood 4704 Grades
4418 (BJC) 4701 Mechanical Woodpulp
Wood, Continuously Shaped (Tongued, 4702 Chemical Woodpulp, Dissolving Grades
4409 Grooved Etc.) (MOULDINGS) Paper & Paperboard, Coated With Kaolin
Particle Board & Similar Board Of Wood 4810 Etc, Rl Etc
4410 Etc. (PARTICLEBOARD) Paper, Uncoat, For Writing Etc, Rolls;
Fuel Wood In Logs Etc; Wood In Chips, 4802 Hndmd Paper
4401 Etc. (FUEL WOOD) Paper, Paperboard, Wad Etc, Coat Etc
Veneer Sheets Etc, Not Over 6 Mm Thick 4811 Nesoi, Rl Etc
4408 (VENEER) Kraft Paper & Paperboard, Uncoat Nesoi,
Packings Etc, Wood; Pallets, Collars Etc, 4804 Rolls Etc
4415 Of Wood (WOOD PACKAGING) Paper & Paperboard, Uncoat, Nesoi, Rolls
Wooden Frames Paintings, Photographs, 4805 Or Sheets
4414 Mirrors, Etc (WOODEN FRAMES) Paper, Paperboard, Cellul Wad To Size &
Wood Charcoal, Whether Or Not 4823 Arts Nesoi
4402 Agglomerated (WOOD CHARCOAL) Cartons Etc Paper; Office Box Files Etc,
4421 Articles Of Wood, Nesoi14 4819 Paper Etc
Railway Or Tramway Sleepers (Cross- 4801 Newsprint, In Rolls Or Sheets
4406 Ties) Of Wood Labels Of Paper Or Paperboard, Printed Or
Hoopwood; Split Poles; Pickets And 4821 Not
4404 Stakes Etc Toilet Etc Hshld/Santry Stock Paper Roll Or
Densified Wd Blocks/Plates/Strips/Profile 4803 Sheets
4413 Shapes Toilet Paper, Towels, Sim Hh/Hospital Art
Wood Marquetry Etc; Jewel Case Etc & 4818 Of Paper
4420 Wd Furn Nesoi Veg Parchment, Greaseproof Papers Etc,
4806 Rolls Etc
4419 Tableware And Kitchenware, Of Wood
4809 Paper, Carbon, Self-Copy Etc, Rolls Etc
Casks, Barrels, Vats, Etc. And Parts, Of
4813 Cigarette Paper, Cut To Size Etc Or Not
4416 Wood
Registers, Notebooks, Binders, Bus Forms
Tools/Tool & Broom Bodies Etc Shoe
4820 Etc, Papr
4417 Last/Trees Wood
Paper And Paperboard, Corrugated Etc,
4405 Wood Wool (Excelsior); Wood Flour
4808 Rolls Etc

14
NESOI: Not Elsewhere Specified or Indicated

79
HS 47 & 48 Pulp & Paper (Continued)
Wallpaper Etc.; Window Transparencies Of
4814 Paper
Bobbins, Spools Etc. Of Pap Pulp, Paper &
4822 Paperbd
Composite Paper & Paperboard, No Surf
4807 Coat, Rl Etc
Paper, Carbon, Self-Copy Etc Nesoi, Boxed
4816 Or Not
Envelopes, Postcards Etc & Boxes Etc Of
4817 Stationary
Filter Blocks, Slabs And Plates, Of Paper
4812 Pulp
Floor Coverings, Ppr/Pprboard Base, W/N
4815 Cut To Sz

Selected HS 94 codes Wooden Furniture

940360 Wooden Furniture, Nesoi

Seats W Woodn Frames, Not Upholstered,
940169 Nesoi

940350 Wooden Bedroom Furniture, Except Seats

940340 Wooden Kitchen Furniture, Except Seats

940600 Prefabricated Buildings

940330 Wooden Office Furniture, Except Seats

80
Cover and rear image courtesy of Katerina Germanis

NEPCon Tel: +45 8618 0866

Sren Frichs Vej 38K, Fax: +45 8618 1012
1. Sal, Email: info@nepcon.net
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