Whenever tree clearing is suggested, the mind conjures up images of bulldozers forcing their way through virgin rainforest or chainsaws felling ancient woodlands. But not all tree felling and clearing is as savage and damaging to the forests and environment as many assume. There are times when such actions are both necessary and desirable.
Sandy Fletcher, chief financial officer of Sustainable Forest Holdings, speaks to FinanceAsia and explains why.
Please outline the business of Sustainable Forest.
In general we have operations in Brazil, Russia and China and we specialise in investing in natural forests. Our base for our hardwood products is in the Amazon in Brazil because it’s the largest economy in South America, and also because Brazil accounts for 65% of the total Amazon forest landmass. Our softwood forest investments are in Siberia because it’s the biggest landmass of forest in the world. We chose this particular location because Russia is still the number one exporter of timber products globally, and because of its proximity to the China and Japan markets.
As our company name suggests, we sustainably manage our forests as it is the only way to move forward when investing in natural forests. Sustainable forest management can have different implications in different countries, but in general the definition is cutting below growth rate so that you are consuming less timber than what the forest would be generating. We call the Amazon an old growth forest because everything is quite mature; therefore it has a growth rate of between 2% to 5%. This is a rather low figure when compared to younger forests and plantations which could have growth rates in double digits.
Can you describe your role at the company and explain how your treasury operations are coordinated?
As the CFO I look after all the accounting and finance functions of the company, I am additionally responsible for public and investor relations. Our office in Hong Kong only deals with financial management since we maintain our listing here and I have a financial controller who reports to me, but our real operations are where the forests are. So we have a big finance and accounting team in Brazil where my finance director and his financial controller are based. We have exactly the same set up in Russia and China. However, China is less complex as we only conduct sales and we do not have any forest assets located there.
Our treasury is centralised and I communicate with the finance teams in each region on a daily basis. We have an enterprise resource planning system (ERP) for managing financial and operational information. Besides financial data, the ERP system is very important to us because it is the key to our sustainable management. The way we monitor our inventory is to actually go inside our forests. With the ERP system, the GPS position of each tree, its species and its size is visible to us. We are able to track each tree from the forest all the way through the processing chain, and we know the exact day to go into the forest to cut a specific tree at the precise GPS location.
Environmental protection and conservation is a major issue. How do you educate your clients and the public about the sustainability of your business?
Our business sector is not very well known, certainly not in Hong Kong as there are only a few similar companies listed here. Quite often I find myself spending more time in the public and investor relations side of my work educating the general investors, analysts and funds about this sector and how it is different from the paper and pulp companies. In terms of education, it is always ongoing as people just assume that if you are cutting trees you are harming the environment, but the way trees have been destroyed in the past has given rise to very serious environmental problems now. The law in Brazil does not permit clear cutting of forest and, when constructing hydropower plants, the forest was simply flooded. Now it has been proven that after being submersed in water for a long period of time, the trees rot and decay releasing carbon back into the atmosphere and releasing dangerous toxins into the water affecting marine life.
The problem has been studied for a while now, but awareness of this problem has only been recently magnified. There are private companies that now try to go underwater in the forests to cut and remove the dead trees, but this is extremely dangerous and very costly as there is no way to tell how much wood would be usable after cutting. I have met people who are very stubborn, and it is impossible to win everyone over but if I talk to 10 people and two are convinced, then I consider that a success.
What are your key product markets and what is your strategy to tap them?
China is our key product market and 90% of our revenue is generated there but ideally we want to reduce that 50% or 60%. Selling our products in China is not a problem because historically it has been very difficult for the larger Chinese buyers to get enough volume of product since we get better pricing in Europe, the US and Japan. Many of our customers have offered to buy 100% of our production because it is very difficult to get a stable supply of timber and they are afraid to commit to their own customers if they are unsure if they can get the timber supply.
We also want to tie our supplies from Russia with Japan. Historically too, there has not been a lot of trade between the two markets. We are already selling our hardwood products in Japan so it’s just a matter of leveraging on the same network for our softwood products from Russia. It is also logical to obtain supplies from a closer source as many Japanese companies import from South America or New Zealand.
Looking ahead, what can we expect from Sustainable Forest?
We are currently involved with two large hydropower plant projects in Brazil. We have actually been mandated to provide a forest clearing service to make space for the hydropower plants, and all timber resources belong to us once the clearing projects are finished. These two particular projects took nine years to approve but we are looking to pursue similar projects looking forward. We are very selective in choosing where we commit ourselves because we believe in sustainably managing forests. We are committed to obtaining Forest Stewardship Council (FSC) certification for all of our current and future forests. These two projects are the first of their kind in the history of Brazil, so we can safely claim that we are the only company with such experience there and this will be a different business line from our sustainable forest line.
Additionally we are looking into making use of the waste products, residues and other non-timber resources we collect from clearing and processing. These products can be converted into environmentally friendly charcoal with Brazilian portable technology to supply the local steel industry, and can also be used in biomass power plants to produce carbon neutral electricity for the locals.