Olam's entry into the timber business was in the teak trade flow from Ghana to India in 1994 and has since posted an impressive growth rate over the past 13 years. In this period, we have grown to being one of the largest suppliers of teak round logs in the world. This strong growth is the result of our strength in the three key dimensions of the business - sourcing, depth of product species and marketing presence.
We supply hardwoods, primarily tropical round logs and tropical sawn lumber. World trade in this category is about 18 million cubic meters with a value of about US$ 4 billion. The rationale for choice of this segment is the opportunity it offers us to leverage our core strengths in origin management and our physical presence in producing countries. The ability to transfer understanding and experience of the timber business across origins, species and markets through intensive training and good management processes has been the key to the rapid growth we achieved. The major producing countries of timber in this category are Gabon , Democratic Republic of Congo (DRC, formerly Zaire ), Congo-Brazzaville (formerly Congo ), Ivory Coast , Ghana and Brazil while smaller producers are Tanzania , Nigeria and Mozambique . We are currently present in all these producing countries, albeit in a limited extent in DRC where our operations are still primary exploratory. ( Read more about our timber business in DRC ).
We place a significant emphasis on quality control and this is reflected in our quality management systems and procedures. Log selection is undertaken on the basis of physical inspection by graders at the site and after all the species are graded, the quality determined and their measurements taken, the logs are then individually marked. The logistics team up-country, which procures logs from the loggers, oversees the handling and movement of the logs to the log park where the quality, the number of pieces and the measurement is rechecked. Our robust risk control systems have given us a strong platform to grow the business without compromising on risk management.
We are involved in the entire value chain from contract logging of teak plantations, through to logistics handling, processing, shipping and redistribution. We are involved in the sawn timber business in Ghana and Nigeria and in downstream processing in Congo-Brazzaville and Gabon .
On the marketing front, we offer a basket of origins and or species to all our customers in key destination markets like India , Continental Europe and the Far East . We have our own marketing offices in these countries to provide individualised service to customers. These offices also help in collecting information on the latest trend in species preferences enabling us to cater to the changing demands of our customers. We also leverage our strong origin presence and product knowledge to suggest alternate species thereby offering better value to customers.
Our expansion plans include entry into more tropical origins, increasing our product range to customers and focus on developing new markets in North America and Middle East . Our objective is to enhance value through providing superior service to our customers whilst contributing to the economies and people who benefit from managed forest cultivation.
In 2006 we have made a promising entry into the flooring business. We currently sell flooring components to some of the largest names in flooring business in Western Europe . We are building up a configuration of sourcing and processing facilities for flooring components in China and Indonesia in Asia and in Europe .
Importance of Forestry sector in Africa
The forestry sector represents significant part of GDP in several countries, creating numerous jobs and contributes in developing public services such as roads, dispensaries and schools in isolated locations far away from infrastructure and populated areas. Given the predominance of the forestry sector to such countries, Olam believes in engaging indigenous suppliers and providing them with resources and training, so that they could better benefit from their national resources and become a integral part of the supply chain. Olam has therefore pursued a sourcing model engaging indigenous suppliers providing resources such as; micro finance, forestry equipments, capacity development, quality training and logistics support to help them conduct their activities in an effective manner, notwithstanding the limitations they may face as compared to large enterprises. Olam believes that significant benefits will directly accrue to a larger segment of local people, if we develop a sustainable forestry management and supply chain model through indigenous suppliers (and not abandon the sector for its' present limitations). We therefore believe that such operations can form an integral part of the forestry sector and co exist alongside direct forestry operations by large international companies.
Improving supply chain systems
Olam reaffirms its commitment to sustainable forestry including third party sourcing from indigenous suppliers. Olam recognises that it requires long term commitment to improve forestry practices (of suppliers) and to make it more compliant with international standards thereby "averaging up" existing practices. Towards this commitment, Olam is establishing an independent system of Timber Legality and Traceability Verification for its third party suppliers. This is a significant step that will enhance acceptability of third party sourced wood products while assisting local people to conduct their business in a sustainable manner, to the benefit of all stakeholders including the national governments.
Towards Sustainable Forestry Management
Olam considers preservation of forests as a part of its social responsibility that goes hand-in-hand with its long term business objectives. Olam's objective is to trade in wood products that come from sustainable and well managed forests.
Environmental focus is therefore a high priority for us. This becomes an even more important area of focus for us as there is a rising consumer interest in traceability and certified wood products.
To guide us towards achieving a sustainable timber business, Olam has a formal written Corporate Social Responsibility (CSR) policy and a policy on Sustainable Forestry Management (SFM) that clearly defines the principles, procedures and actions to be taken in all our timber activities from sourcing, logging, processing and distribution.
As outlined in Olam's CSR policy, we will ensure that its forest management plan addresses the following:
- Preparation of a logging plan that includes cyclic harvesting of forest resources and re-plantation of the harvested area;
- Protection and conservation of biological diversity (flora and fauna) and of endangered species;
- Protection of both surface water and ground water from logging activities;
- Minimisation of impact of road construction on water bodies and forest incursion;
- Consent of the local community; and
- Mitigation of risk of human settlement incursion.
Our Timber Business in the Democratic Republic of Congo (DRC)
Olam started a small timber operation in DRC after South Africa 's brokered peace accord was reached in 2003. Post the peace accord, apart from United Nations' peace-keeping forces in DRC, various donor institutions and international organisations have established their presence in the country, bringing about a semblance of political stability amid a transitory nature of government. Besides financial aid, there is active cooperation between the government and international organisations in policy formulation and capacity building. Some basic business infrastructure services began to emerge and grow sufficiently for the private sector to start-up businesses in the country.
The addressable market for soft commodities in the DRC is sizeable. During the 1980s, the DRC was a net exporter of a multitude of commodities, including rice, coffee, cocoa, cotton, sugar and timber. DRC is potentially an attractive market for Olam as we would be able to leverage our strengths in setting up a farm gate buying model for multiple commodities, establishing a network of small supplier agents, developing meaningful partnerships with farming communities, investing in processing facilities in the origins, thereby adding value to the local industries, and exporting them to end-markets globally.
Timber has been our first product and is only product we source and export in DRC today. The Congo Basin is estimated to have a forest cover of about 90 to 100 million hectares, the second largest after the Amazon Basin in Brazil . It is estimated that the sustainable volume of extraction of about 5 million cubic metres is achievable in the country (Source: International Tropical Timber Organization). Olam believes that its timber business, backed by sustainable forestry practices, will have a high positive impact on DRC's national development and the livelihood of small suppliers.
However, Olam's timber operations in DRC have been small and primarily exploratory and will remain so until long term national policy is determined and legal transparency and a clear, legitimate regulatory framework is in place. For the financial year ended 30 June 2007, Olam sourced approximately 10,000 cubic meters of logs from DRC valued at about US$5 million. This represents about 3% (log equivalent) of the total estimated wood harvested in the country. Timber from DRC accounts for 0.13% of Olam's turnover or 3.4% of total timber revenue.
Timber Procurement in DRC
Olam has sourced approximately 10,000 cubic metres of logs from DRC, valued at about US$5 Million for the financial year ended 30 June 2007. This represents around 3% of the total estimated (log equivalent) wood harvested in the country . In DRC, Olam has applied its procurement model that it adopts in other commodities to log buying by providing microfinancing, asset financing, quality training, price discovery and market information. Micro financing supports the livelihood of small suppliers in countries with low small and medium enterprise (SME) financing, contributing to their economic and social development.
Olam's business model in DRC of procuring from small indigenous suppliers and supporting them should be rightly seen in the context of its overall business model, the proven benefits it has offered to local communities and the challenges one may face in institutionalizing a zerotolerance traceability system in a difficult operating environment. While the system provides good visibility of the suppliers' operations, the difficult forestry terrain and the inadequate infrastructure make it sometimes difficult to have a full control of all their activities.
Olam's procurement policy for wood products include requirements for valid legal permits and internal documentation to link logs procured to permit numbers. Olam has initiated the process of putting in place independent third party verification for traceability and legality for the logs it procures? to further protect the integrity of its supply chain. Olam is also evaluating a suspension of its timber procurement in DRC for a 3 to 6 months period starting from the earliest practicable date given the pending contracts that need to be honoured. This period will serve to complete an internal review of suppliers and their compliance to procurement procedures. We would like to reiterate that we have operated with as much caution and diligence as we could under the circumstances and the terrain we operate.
Olam's operations in DRC have been small and primarily exploratory and will remain so, until long term national policy is determined with full legal transparency and a clear legitimate regulatory framework is in place to ensure forestry operations are conducted within an internationally recognized sustainable forestry management system.
We believe that our business model and our farm gate presence in some of the most difficult terrains in the world, has made significant contributions to local capacity building, rural employment generation and has had a beneficial impact on several thousand families in developing countries around the world. Our pioneering activities in the areas of farm productivity improvement, local capacity building, infrastructure development, free trade and community development have earned the support of several international developmental agencies.
Olam's role in DRC timber needs to be seen in the right context, considering the nature of its participation, scale of operations and its intentions of developing indigenous suppliers.
Exports and Taxes
All Olam's exports from DRC have been fully declared and taxes paid. The DRC government and its customs department hold records of such payments. Over the last two financial years, Olam has paid advolerm taxes, customs duties, OCC (Office Congolaise de Control) charges and MOE taxes in excess of US$450,000 in total to the concerned government departments.
Our Commitment to Sustainable Forestry in DRC
Olam is committed to sustainable forestry practices in the DRC and to supporting efforts underway to ensure forestry makes a positive contribution to national development. Olam considers the sustainable management of forests as a part of its social responsibility that goes hand-in-hand with long term business objectives.
The Democratic Republic of Congo (DRC) government has so far allocated forest concessions totaling 22 Million hectares in two phases, about 7 million hectares prior to the World Bank moratorium and about 15 million hectares thereafter. Of this, Olam was allocated 130,300 Ha of concessions by the Ministry of Environment in order to facilitate the setting up of a processing facility that enhances product value and generates local employment. Olam proposed further support for community based social services through a plan that included? construction of a school, a health centre, repair of local administrative office, providing farm equipment for crop cultivation and supply of essential food articles. It is pertinent to note here that Olam's concession allotment was less than 0.6% of all concession granted . Olam did not operate its two concessions in DRC pending the outcome of the national legal review, even though it had paid applicable landuse taxes to the Government. Olam's management, on the recommendation of its Board, returned the concessions to signal its intention to play a longterm role as a responsible private sector player in the forestry sector. It is important to note that Olam has been the only company to return concessions to the Government. Olam has played no role so far in the concession logging sector of DRC.
