MASTER THESIS ANALYSES OF THE COMPETITIVENESS OF FOREST INDUSTRY IN THE REPUBLIC OF MACEDONIA

Transcription

1 International Master's Program in Forest Policy and Economics FOREST FACULTY - SKOPJE MASTER THESIS Savić Nenad ANALYSES OF THE COMPETITIVENESS OF FOREST INDUSTRY IN THE REPUBLIC OF MACEDONIA

2 MASTER THESIS Author: Savić Nenad ANALYSES OF THE COMPETITIVENESS OF FOREST INDUSTRY IN THE REPUBLIC OF MACEDONIA.Belgrade 2009.

3 Acknowledgements This study is focused on the forestry and forest industry in the Republic of Macedonia. By deciding to describe such a specific component of the Macedonian forest complex, I was confronted with a lot of difficulties including inconsistencies in data and lack of statistical information. I hope that this work will provide a valuable input for the future policy makers who will use it as guidelines for the development of forest policy in this sector. This is the reason, why I want to thank all the people that helped me to accomplish the task that seemed to be very difficult at the beginning. First, I would like to express my deepest thanks and gratitude to my mentor, Mrs. Anne Toppinen, who provided me with constructive and helpful suggestions regarding theoretical framework, methods and scientific expressions. Special thanks to Mr. Stjepan Posavec, my regional mentor, for all the time and energy he spent providing me with materials and valuable suggestions, and Mrs. Makedonka Stojanoska, my local mentor and tutor, with whom I had an excellent cooperation in the operative part of the project. Finally, I want to thank all members of the coordination body of FOPER project, especially to Mr. Tomi Toumasjukka, Ms Mari Pitkanen, Mr Mersudin Avdibegović, and Mr. Nenad Petrović who had very important role in overcoming difficulties of administrative procedures regarding studies and thesis.

4 ABSTRACT This study gives a thorough picture of the competitiveness characteristics of the Macedonian forest based industry for the period 1993 to 2006, from its independence to present times. The core question is Whether Macedonian forest industry is competitive or not? The study is based on theoretical tool of the diamond model of the national competitiveness introduced by Harvard professor Michael Porter in his book The Competitive Advantage of Nations. The forestry and forest industry in Macedonia has a long tradition but the transition to the market economy and privatisation has left mark. The research showed that the basic strengths are due the existence of favorable factor conditions, as a cheap labor and energy cost-compared with region, good geographic location and relatively decent transport infrastructure, and weaknesses come from the lack of infrastructural investments (lack of capital) inappropriate management strategies, outdated machinery, low productivity and production consists mainly of products with low value added. The largest opportunities for developing forest industry in Macedonia lays in export orientation of high value added final products, and penetration to the specific international niche markets. For this purpose forest industry should be organised in better way and further investments in modern technologies and in human resources are necessary. KEY WORDS: forestry, forest industry, competitiveness, competitive advantage, Porter s diamond model

5 Table of contents 1. INTRODUCTION 1 2. PURPOSE AND OBJECTIVES OF RESEARCH 2 3. DATA SOURCES, METHODOLOGY AND THEORETICAL BACKGROUND Methodology Research design Research object Data collection Data analyses Theoretical background 7 4. RESULTS Geographic location and socio-economic situation in Macedonia Forest resources Wood harvesting Production and consumption of wood products Sawn wood wood based panels wood pulp paper and paperboard Employment Trade with forest products Market and firm structure Legal regulations, institutions and organization in forestry and forest industry DISCUSSION (factors who affected competitiveness of forest industry) factor conditions demand conditions firms strategy and structure related and supporting industries influence of Government CONCLUSIONS RECOMMENDATIONS REFERENCES 53 Appendix I production and consumption of forest wood ( ) 55 Appendix II trade with forest wood products ( ) 57 Appendix III trade with forest wood products in US dollars 58 Appendix IV: Classification and definitions of forest products 60 Appendix V. Organization of the Macedonian Forestry Sector 67 Appendix VI Questionnaire 68

6 Figure 1: Porter s Diamond model 8 Figure 2: Population in Macedonia ( ) 11 Figure 3: Gross Domestic Products per capita in selected countries 11 Figure 4: Production and consumption of round wood 17 Figure 5: Roundwood removals by species and category 18 Figure 6: Production and consumption of Industrial roundwood 18 Figure 7: Production of wood products by sector in 1995 and Figure 8: Production, consumption and trade with wood pulp 22 Figure 9: Production, consumption and trade with paper and paperboard 23 Figure 10: Annual average wages in forest industry in selected countries 25 Figure 11: Net import of wood based panels by category 28 Figure 12: Prices of electrical energy in Euro per kwh in Figure 14: Average hourly labour costs in selected European countries in Figure 13: Structure of consumption of forest products in Table 1: Gross domestic products growth 11 Table 2: Forest resources: area, growing stock annual growth in Table 3: Assortment structure of planned production in Table 4: Wooded land by main group of species and owners in Table 5: Production of industrial roundwood by categories 19 Table 6: Production and consumption of sawn wood by species 20 Table 7: Production and consumption of wood based panels 22 Table 8: Employment in forest sector in Macedonia 24 Table 9: Gross salary in forest sector in 24 Table 10: Share of export and import of forest based industry 26 Table 11: Trade with roundwood 26 Table 12: Trade with sawnwood 27 Table 13: Trade with paper and paperboard 29 Table 14: Forest products net trade 29 Table 15: Structure of enterprises in Republic of Macedonia in Table 16: The largest companies in Macedonia 31 Table 17: Consumption of forest products by country per 1000 persons in

7 1. INTRODUCTION The competitiveness issue is a crucial element of interest for all governments, industries and economies that work under the principles of market economy. To be competitive and to stay at that position requires constant adjustments to market conditions, following the competitors and trends, but first of all, there is a need for restructuring the main production characteristics as quality, standard and prices according to the demand of the domestic and the international market. This study is one of the first attempts in Macedonia to present accumulated statistical material and analyze them with modern methods and approaches used in leading countries for assessing economic and industrial development. The competitiveness of the forest industry and forest sector in general originates from the period when Republic of Macedonia was a part of the Yugoslavian Federation. The market size dropped from 22 million to 2 million people. It caused big problems in the utilization of the production capacities, organization of market toward new measures and establishes relations with the export market had to be renewed. Historically the forest industry in Macedonia has a long tradition. The long experience with forests and wood oriented products has created a strong base for industry as well as skilled and productive workforce. In the beginnings were several steam sawmills, but in 1950 s started significant development of wood processing facilities. Big wood corporations (Kombinats) were established during this period, with production oriented toward the big and protected Yugoslav s market. In the Republic of Macedonia according to the data from the Economic Chamber of Macedonia, existed around 590 companies from the primary processing sawmills, and 566 companies for final wood processing 1. Today forest industry in Macedonia faces lot of challenges as a transition from central planed toward open market economy, globalization of markets and technologies, environmental sensitivity, competition from other industries for raw materials (for energy sector), etc. Intensified competition has been a major driving force behind technology innovation and structural change in the wood industry. The gradual removal of trade barriers (CEFTA, bilateral 1 Economic Chamber in Macedonia, 2006, 1

8 agreements between ex-yu countries) has exposed the industry to further competition from neighbors and EU manufacturers of wood and substitute products and materials. Many companies ceased or decreased scale of operation and their annual turnover is rather small. Demand and markets have changed, and require new strategies, operation and industrial policy. In recent decades the state as an owner of the large wood processing enterprises have postponed capital investments and maintenance that would have help raise productivity. There were systematic extractions of wealth from these firms and the enterprises went down into bankruptcy. The wood processing sector faces many other systemic challenges, such as outdated technology, inadequate marketing, poor workforce development services (training and education for new technologies), lack of credit facilities, etc. It is important to know what are the main characteristics that can hold the sectors to be competitive, and what are the problematic areas that have to be taken into consideration to keep the sectors competitive position. All of these questions are included and observed by this analysis, through the application of specifically chosen qualitative and quantitative methods, and application of Michael Porter s diamond method, explained in his book The Competitive Advantage of Nations, as a theoretical background, which explains the competitiveness by different characteristics and investigate effects of various competitive factors. 2

9 2. PURPOSE AND OBJECTIVES OF RESEARCH PURPOSE (aim): The main purpose of this study is to analyze competitiveness of Macedonian forest industry and the factors that influences the creation and development of competitive advantages using Porter s Theory of Competitive Advantage of Nations. To meet this aim, several objectives and research questions are answered: Objectives: analyze forest product market and current status of forest industry in Macedonia, achieve a deeper understanding of competitive position and appraise level of competitiveness of Macedonian forest industry, gather information s and point recommendations to improve the present situation. Research questions: 1) What factors affect the competitiveness of forest sector in Republic of Macedonia? 2) What are main competitive advantages and disadvantages of Macedonian forest industry? 3) What recommendations could be given to Macedonian policy makers or managers of companies to enhance forest industry competitiveness? 3

10 3. DATA SOURCES, METHODOLOGY AND THEORETICAL BACKGROUND This research is basically holistic and descriptive and uses both a quantitative and qualitative data in the process of determining the competitiveness of forest based industry in the Republic of Macedonia. The descriptive character of the work is centered in the purpose to describe the present situation and reality in forest sector in Macedonia. 2 As sources of evidence in this case study have been used secondary data sources: documents, interviews (open-ended and focused) and observation. An attempt has been made to collect long time series, analyses starts with the collapse of socialist economy and countries independence in 1993, with special emphasis of the last few years. Chapter 1 is giving some basic data about forest sector in Macedonia, in chapters 2 and 3 are presented objectives, methodology and theoretical background, results and discussion related to factors which affected competitiveness of forest industry are in chapters 4 and 5, chapter 6 contains conclusions and some recommendations are derived in chapter Methodology Research design The work relies on careful analyses of secondary data and triangulation of data from various sources, according to the methodology explained in Robert K. Yin s book: Case study research: Design and methods. The work is based on descriptive character because the quality and length of time series on Macedonian forest sector in economic transition do not facilitate a more formal econometric approach yet. The method used is case study, with purpose to analyze the case, not to apply the case to testing some theories and hypotheses. A case study is a research on realistic situation, which can be examined from many perspectives. The case studies can generate answers to the questions Why, What, How. The collection of data can include interviews, observations 2 There are two types of data: primary data and secondary data. Primary data is a kind of data that is collected for the first time, and secondary already exist. Secondary data includes: documentary, multiple sources and survey (W. Lawrence Neuman Social research Methods - Qualitative and quantitative approach university of Wisconsin at Whitewater, 1991) 4

11 and documentary analysis. Case study research enables researcher to investigate important topics not easily covered by other methods. Researcher Robert K. Yin defines the case study research method as an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used (Yin, 1984, p. 23). Thus, the study can be characterized as a qualitative case study analyses driven by discovery motive and in that way techniques for analyzing the data is directed. The case study research consist five steps that should be used 3 : Determine and define the research questions Select the cases and determine data gathering and analysis techniques Collect data Evaluate and analyze the data Prepare the report Research object (sample) Research object is forest industry in Macedonia, which is, according to diamond model, connected to various factors for competitive advantages: factor conditions, demand conditions, related supporting industries, structure and strategy of forest firms and the role of Government (chance is not analyzed in this study) Data collection This study investigate research object using variety of data gathering and provides answers and evidence that leads to understanding research questions. Data were gathered through documentation, archival records, academic literature, publications, journals and websites. Information s for this study has been gathered from a wide range of sources: Macedonian State Statistical Office, National statistical yearbooks and other national reports FAOSTAT and UNECE/FAO Timber Section, Economic and Trade Chamber of Macedonia, EUROSTAT, 3 Robert K. Yin : Case study methods

12 Public Enterprise Macedonian forests, National Bank of Macedonia, Industrial database of UNIDO and others. Some key persons of the forest sector (owners, and persons involved in daily operations in forest industry: sawmills, furniture producers, personal employed in Public Enterprise, National Park Galicica, MAFW, etc.) is interviewed in order to help in determination the sector competitiveness. Work was focused on following categories: economic situations in the country, Gross Domestic Product (GDP) growth, forest resources, production capacities, removals/roundwood production (fuelwood and industrial roundwood), production and consumption for the main product groups (sawnwood, wood-based panels, pulp wood, paper and paperboard), structure employment and wages in forest based industry, trade (imports and exports of main product groups), and share of export and import of forest sector to the total trade in country Data analysis Analyses of collected data was carried out in the framework of the Michael Porters diamond model of competitiveness, the five determinants was listed and collected data were categorized in each determinant under positive and negative factors, in 5 categories of competitive factors, in order to analyze the competitiveness of forest industry. At the end, recommendations about improving situations in forest industry in Macedonia were derived. 6

13 3.2. Theoretical background In the study as a basic approach to the analysis is used diamond model of the national competitiveness introduced by Harvard professor Michael Porter in his book The Competitive Advantage of Nations 4, published in In this book the author describe how companies find sources of competitive advantages in the specific combinations of skills in their industries and around it in specific regions and countries. He also studied the competitiveness of nations in terms of their ability to offer companies an environment that provides unique advantages. The study explored case studies of regions known for their ability to provide the world with companies able to outperform others such as Silicon Valley, northwest and central Italy, Detroit, etc. National competitiveness has become one of the central preoccupations of governments and industries in every nation. According Michael Porter opinion, national prosperity is created, not inherited. It does not grow out of a country s natural endowments, its labor pool, its interest rates, or its currency s value, as classical economics insists. Nations gains factor-based comparative advantage in industries that make intensive use of the factors they possess in abundance. According to prevailing thinking, labor costs, interest rates, exchange rates, and economies of scale are the most potent determinants of competitiveness. Managers are pressing for more government support for particular industries. Classical theory, however, has been overshadowed in advanced industries and economies by the globalization of competition and the power of technology. A nation s competitiveness depends on the capacity of its industry to innovate and upgrade. In a world of increasingly global competition, nations have become more, not less, important. As the basis of competition has shifted more and more to the creation and assimilation of knowledge, the role of the nation has grown. Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success. They approach innovation in its broadest sense, including both new technologies and new ways of doing things. Innovation can be manifested in a new product design, a new production process, a new marketing approach, or 4 Michael Porter: The Competitive advantages of Nations Haundmills, London,

14 a new way of conducting training. It always involves investments in skill and knowledge, as well as in physical assets and brand reputations. A nation s standard of living depends on the capacity of its companies to achieve high levels of productivity. Productivity depends on both the quality and features of products (which determine the prices) and the efficiency with which they are produced. International trade and foreign investment can both improve a nation s productivity as well as threaten it. The ideal is to deploy the limited pool of human and other resources into the most productive uses. Competitiveness also does not mean jobs. It s the type of jobs, not just the ability to employ citizens at low wages. According to Porter, as a rule, competitive advantage of nations is the outcome of 4 interlinked advanced factors and activities in and between companies. These can be influenced in a proactive way by government. Namely, the diamond model is a mutually reinforcing system in which the role of any determinant cannot be isolated and the effect of one determinant is closely dependent with the others. Advantage in every determinant is not prerequisite for competitive advantage, but the interplay of advantage in many determinants reinforces benefits that are extremely hard for rivals to nullify or replicate. Figure 1: The Porter s Diamond system (Porter, 1998, pg 127) 8

15 Factor conditions. This category includes production factors such as natural resources and geographical location, as well as created factors inherited from preceding stages. The first group, named basic physical factors, can include abundance of natural resources, demographic conditions, human capital, geographical location, etc. The second group (advanced or specialized factors) usually includes infrastructure, available capital, knowledge resources and R&D potential. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate. This creates a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable. Demand conditions. The demand is formed by two constituents: local (domestic) market, as a starting source, and export to the international markets, and shows the nature of demand for the industry s product or service. It is the composition of home demand, (structure, the size and pattern of growth of home demand, number of buyers) and the internationalization of domestic demand in foreign markets. So, nations gain competitive advantage in industries or in industry segments where the home demand gives local firms a clearer or earlier picture of buyer needs than foreign rivals can have. If the customers in an economy are very demanding, the pressure facing firms to constantly improve their competitiveness via innovative products, through high quality, etc, will be greater. The Strategy, structure and rivalry of firms. The industry structure is important determinant for gaining competitive advantage. Direct competition impels firms to work for increases in productivity and innovation, and motivate leading companies to invest in the product, management and marketing. The competitive pressure also motivates higher organizational efficiency and training. Firms have a variety of structures and strategies to use, and that some will be more effective than others. As most important national differences in management practices and approaches can be mentioned: the training, background and the orientation of leaders, hierarchical style, decision making, the relationship between labour and management, relationship with the consumers. These differences create advantage and disadvantages in competing in different types of industries. 9

16 Related and supporting industries. Spatial proximity of upstream or downstream industries facilitates the exchange of information and promotes a continuous exchange of ideas and innovations. A developed system of subcontractors and suppliers in a given region or country can offer more complex products and service systems. The supplier industries gives potentials for comparative advantage by producing inputs, offering new methodologies and opportunities to apply new technology, transmission of information, innovations, etc. M. Porter offer two additional areas from which companies can draw competitive advantages: chance which reflect rapid changes on world financial markets, unexpected growth in local or international growth, wars etc; and influence of Government through its policies as a catalyst and challenger; it s role is to encourage - or even push - companies to raise their aspirations and move to higher levels of competitive performance. In the modern economy, government has several roles: a) to achieve macroeconomic and political stability; b) to improve the quality of general inputs and institutions, such as roads, schools and telecommunications; c) to incentives and rules of the game that stimulate productivity innovation; d) to foster and reinforce the cluster formation process; and e) to establish a positive, distinctive and challenging long-term economic vision and action program which mobilizes government, business and citizens. There are many policies that can influence each of the determinants in different ways, but on the other hand, some policies implemented without consideration of their outcome and impact can have opposite and undermining effects on the national advantage. 10

17 4. RESULTS The results are combination of the qualitative and the quantitative findings that contribute to explaining the conditions prevailing in the forest sector in Macedonia Geographic location and socio-economic situation in Macedonia The Republic of Macedonia is situated in the central part of the Balkan Peninsula 5. It occupies an area of km 2 and has a population of The territory of the Republic of Macedonia is hilly and mountainous, cut by river valleys. The climate is modified sub- Mediterranean, continental, and mountainous. Figure 2. Population in Macedonia ( ) Source of data: Macedonian State Statistical Office Macedonia is independent country from 1991, and has experienced turmoil period with severe politic and economic crises. The transition to the market economy and privatization has left mark on the country s economy and society affecting Gross Domestic Products in negative sense (Table 1). In the 1990s, as a result of the transition to a market allocation of resources, an associated decline in industrial production, wealth and purchasing power of the population, the domestic market for forest products decreased. 5 See the map on the cover page 11

18 Gross Domestic Products in the period had negative trend, but from 1997 has small increment (3, 5-4%). In 1996 it was million US dollars. Table 1. Gross domestic products growth for the period year Gross Domestic Product in millions $ GDP Growth rate -7,5-1,8-1,1 1,2 1,4 3,4 4,3 4,5-4,5 0,9 2,8 4,1 4,1 3,7 Source of data: Macedonian State Statistical Office Compared with other countries in the region (figure 3), Macedonia has the lowest GDP per capita (2393 $ US in 2006). Figure 3. Gross Domestic Products per capita in selected countries in the Balkan region in US $ Source of data: Eurostat and National Central Banks Forestry in Macedonia is an economy branch with minor participation in national Gross Domestic Product with %, but if the multifunctional uses are valorized, the contribution will be much bigger. The contribution of the forest industry (primary and secondary wood processing, furniture, paper and celluloses...) in GDP is 2.5-3%, 6 and the share in total labor is 0.8% 7. 6 Ministry of agriculture, forestry and Water economy: Strategy for sustainable Development of forestry in Republic of Macedonia 7 World bank statistical review,

19 4.2. Forest resources Forest area 8 : Macedonia has land area of km 2. Total wooded land is ha or 39%; forest area in Macedonia is ha or 36% of total area and other wooded land is around ha. According the forms of management: high forest are ha or 29%, coppice or 71%. The most abundant species are oak (Quercus spp.) and beech (Fagus spp.). Forest distribution by purpose is: Economic forests are ha (92%), Protective ha (2%), and National Parks ha (6%). Growing stock is 74, 3 million m 3 or 70 m 3 /ha (in 2006). Table 2: Forest resources: area, growing stock and annual growth in 2006 Forest area Volume of growing stock Total annual growth Annual growth ha m 3 m 3 m 3 /ha Coppice High forests Total Source: Statistical review, State Statistical Office of the Republic of Macedonia Table 2 and Table 3 shows that the forestry reserves in the Republic of Macedonia are on an unsatisfactory level and lag considerably behind other countries, especially those of Central and Northern Europe. The high percent of low quality coppice forests (mainly beech and oak), many of which are highly degraded, together with the small quantity of conifers, results in relatively small timber reserves and low annual growth per unit of land. 8 Source: Statistical review: Agriculture, Forestry, , State Statistical Office of the Republic of Macedonia 13

20 Table 3: Assortment structure of planned production in 2005 (m 3 ) Sort of wood Assortment structure Total Timber Fuel wood Beech Oak Fir White pine Black pine Other Waste Total Source: Public Enterprise Macedonia forests Forest ownership Forests in the Republic of Macedonia are either state or private property. The ownership is regulated by the Constitution and other legislation acts which guarantees equal rights to each owner and provides equal responsibilities, immunity of the rights of ownership and independence of the economic activity. According to the official statistics, state owned forests make a 88% and are mostly managed by Public Enterprise Macedonian forests and national parks. Macedonian forests is public enterprise founded by the state to manage state owned forests, to develop silviculture, maintain and regenerate forests, manage plantations, reconstruct and reclaim forests and brushland, produce forest seeds and nursery stock and establish new forests and forest plantations, etc 9. The remaining 12% of forest area is owned and managed by private owners. Privately owned forests are scattered, fragmented and small in size There are approximate plots of an average size of 0, 4 ha owned by approximate households Statute of PE Macedonian forests 10 Ministry of agriculture, forestry and Water economy: Strategy for sustainable Development of forestry in Republic of Macedonia 14

21 Table 4: Wooded land 11 by main group of species and owner in 2004 (ha) Main group of species Public Private Total Pure tree stands of 473, , ,000 broadleaf Pure stands of conifers 70,000 10,000 80,000 Stands of mixed broadleaf 250,000 25, ,000 Stands of mixed conifer 5,000-5,000 Stands of mixed broadleaf and conifers 55,000-55,000 Total 853, , ,000 Source: Ministry of agriculture, forestry and water economy: National forestry strategy for sustainable development 2006 All activities conducted in privately owned forests are done under the supervision of public enterprise Macedonia forests. Forest management Traditionally forestry has primarily been seen as an economic activity and most forests have been managed or established to supply wood and timber. Role of forestry as a provider of a wide range of other goods and services has not yet become more pronounced. The limited land mass and finite area of forest cover demand careful planning, reforestation and harvesting procedures. There is great un-balances in age classes with either large excesses in inventory on some forests, to large deficits in some age classes. Clear cutting is allowed, mainly in coppice forests. The certification of the forests does not yet exist in Macedonia. Some forest have been over utilized and some have been neglected which lead to inconsistent quality, inefficiencies, and unacceptable price variation. The forest sector s operations are inefficient and timber supply to local industry is inconsistent and uncertain especially to the small and medium size sawmills who are dependent of continuous supply with timber, and cannot afford delays in production Cumulative forests area and other wooded land 12 According owners interviewed in this study, this is the most inhibited factor which hampers their production plans 15

22 Illegal logging is big problem; the approximate 8630 m 3 in or 10% of total harvesting in the country is from illegal activities, but some sources (PE Macedonian Forests, Forest faculty) states that this percentage reaches 20-25%. There has been a steady decline in legal cut and wood processing and this has left the forests in less than optimal condition. According the opinion of some forest experts in the PEMF and Forest faculty, if this trend of unsustainable management practices continues, forests will be depleted over time, the revenues from timber will be negatively affected and the wood industry will ultimately fail Wood harvesting (Production and consumption of round wood) The basic forest product in Macedonia has been roundwood. It comprises all wood obtained from removals, i.e. the quantities removed from forests and from trees outside the forest, including wood recovered from natural, felling and logging losses during the period - calendar year or forest year, and can be for industrial utilization and for heating (fuelwood). (Appendix I). The use of determined volume is incomplete due to a number of reasons: inaccessibility of forests owing to poor quality and few roads to the forests; insufficient mechanization of operations; unfavorable orographic conditions; low interest in certain kinds of timber, etc. As a reason of steep terrain harvesting practice basically is not changed since 1960s. Chainsaws are still widely used and motor-manual wood harvesting is giving way only slowly to mechanize wood harvesting. Mechanization appears in skidding, involving adapted agricultural tractors. Nevertheless, it is unlikely that harvesting companies will introduce new technology in near future. Quality of timber suffers because of low-yielding species, poor forest stands, and poor harvesting practices with limited access to the stands. Quality and quantity and sale are driven neither by standardized specifications and volumes from the demand side, nor from planned and sustainable yields from the supply side. A major influence on demand relates to the non-industrial demands on forests, particularly for fuelwood. It is common practice to use first class industrial logs as a fuelwood. Demand for energy for both commercial and household purposes will undoubtedly increase with population 13 Source: Estimation by Forests police-ministry of agriculture, forestry and water economy 16

23 and economic development, and the limitations (high costs) on alternative energy sources will continue to place heavy pressure on forests. Production and consumption of roundwood during the period are very balanced, and are more and less same (Figure 4). Trade with this commodity is very low and insignificant. Figure 4: Production and consumption of round wood in m 3 ( ) Source of data: UNECE Trade and Timber Division: timber bulletins Production is dominated by non-conifer species which exceeded conifers by large (conifer removals are around 10% and non-conifer 90% respectfully). As a result of this condition of the forests, non-conifer logs are used mainly as a fuel-wood (Figure 5). Fuelwood accounts for approximately 82-85% of produced roundwood, and industrial roundwood accounted for remaining 15-18% respectively (the biggest percentage has been sawn and veneer logs with smaller quantities of pulpwood and for other industrial uses). In the country there still is not exist developed market for another types of wood products (as a pellets, wood chips and wood residues) to produce electrical and heating energy. There is a big demand for a woodfuel in the country, because other energy sources are scarce and expensive (electricity, natural gas, oil ) and majority of households rely on firewood for heating. Wood fuel consumption is around m 3 annually, and mainly are covered by the domestic production and very small quantities are imported. 17

24 Figure 5: Roundwood removals by species and category in 1000m 3 ( ) Source of data: Food and agriculture organization of the United nations-faostat and UNECE Trade and Timber Division: timber bulletins Consumption and production of industrial roundwood are balanced and generally, production exceeded consumption by only small amounts, except in 1999 and Figure 6: Production and consumption of Industrial roundwood by species in 1000 m 3 ( ) Source of data: UNECE Trade and Timber Division: timber bulletins 18

25 The biggest percentage of industrial roundwood is used for sawnwood and veneer logs (more then 90%), and smaller quantities of pulpwood and for other industrial uses (table 5). Table 5: Production of industrial roundwood by categories in 1000 m 3 ( ) year industrial roundwood saw logs pulp wood Other industrial roundwood Source of data: Food and agriculture organization of the United nations-faostat and: UNECE Trade and Timber Division: timber bulletins From this statistics is obvious that the country is relatively small in harvesting of forests. The use of forests and wood for industrial purposes in Macedonia is at a fairly modest level. Most of the industrial wood is used in sawmilling, and small amounts are used in wood-based panels manufacturing and pulp and paper production. In accordance to the existing raw material base, most sawmills produce sawn hardwood. Production and consumption of hardwood species exceeded coniferous (approximately 60%-40% - Table 6). This is as a consequence of structure and quality of forest resources in Macedonia, comprised mainly by broadleaves coppices and low quality forests, and scarcity of coniferous forests with high technical value Production and consumption of wood products in Macedonia The basis raw material unprocessed round wood is supplied from domestic production i.e. from PE Macedonian forests (PEMF). Non-conifer (mostly beech) sawn wood is the main category produced; the conifer sawnwood is imported. The production of plywood and veneer is symbolic, and production of chip-board and fibreboard does not exist at all, so that the furniture industry imports them (Appendix I). Besides the furniture producers, the materials for reproduction such as ironwork, furniture cloth, varnish and paints are imported. So the ironwork is imported from Turkey, Italy and Greece and the varnish and paints mostly from Germany. 19

26 Figure 7: Production of wood products by sector in 1995 and 2006 (1 000m 3 ) Source of data: Food and agriculture organization of the United nations-faostat Production of sawnwood, wood based panels and paper and paperboard declined significantly from 1995 to 2006, and only fuelwood increased to m 3. This situation is a consequence of difficulties that wood industry faced in transition process in Macedonia. Structure of the production according to individual sectors is discussed in more details next: Sawnwood Table 6: Production and consumption of sawn wood by species in 1000 m 3 ( ) Year production agg ,5 26,7 36, ,8 27, conifer , ,5 5,5 5,6 5 7, non-conifer ,5 27, ,6 15, ,6 12,9 13 Consumption agg , , conifer , non-conifer 1,2 4, ,4 9,6 10, ,5 7 8 Source of data: Food and agriculture organization of the United nations-faostat and UNECE Trade and Timber Division: timber bulletins 20

27 Consumption of sawnwood has exceeded production by large. The gap between production and consumption is balanced by a net trade. In accordance to existing raw materials base (softwood species form a small component of the forest fund), most sawmills produce sawn hardwood mostly beech. It is very interesting to recognize that production of non-conifer, exceeded conifer sawnwood by two thirds, but in consumption conifer sawnwood exceeded non-conifer by very large amount Wood - based panels The wood based panels comprising the following commodities: veneer sheets, plywood, particle board (including oriented standard board) and fibreboard. In category of fibreboard are included compressed (medium density fibreboard - MDF, and hardboard) and non compressed fibreboard (named also as insulating boards). 14 One of the most important differences between the various wood panels is the types of wood raw materials that can be used to manufacture each product. Fibreboard and particleboard are reconstituted panels, and are manufactured from wood chips that can come from a variety of sources. Plywood and veneer sheets are manufactured from industrial roundwood and are usually made from larger sizes of roundwood (i.e. sawlogs and veneer logs). 15 Macedonia is not internationally a significant producer of wood panels. The production is almost stopped after collapse and bankrupt of only producer in Kavadarci in 2003, and consumption is satisfying from import, mainly from Greece, Turkey, Czech Republic and Slovenia. In 2006 net import reached amount of m 3, mainly by increased imports of particleboard and fibreboard. Consumption of wood-based panels followed and slightly exceeded production, but after 2001, it significantly decreased - 72 % to the level of around m 3. After 2003 the market has recovered and in 2007 consumption raised to the m 3 (Table 7). 14 Product definition is taken from FAO site; figures are given in solid volume 15 European Forest Sector Outlook study: main report 21

28 Table 7: Production and consumption of wood based panels by category in 1000 m 3 ( ) Year Production of wood based panels agg ,2 0,1 0, particleboard plywood ,1 0,1 0,5 0,1 0,6 0,2 0,1 0, veneer sheets 0,6 0,4 0,2 0,2 0, Consumption of wood based panels agg , , ,5 86 particleboards plywood 0,3 0,5 1,7 2,4 6 1,7 2, ,7 2 2 veneer sheets , , fibreboards 1 3, , hardboard 0, , , ,6 10,5 11 MDF 0 1,1 0 1, ,2 7,5 8 11,8 12 insulating board 0,2 0 1,3 0, ,5 1,2 5,4 6 3,5 4 Source of data: Food and agriculture organization of the United nations-faostat and: UNECE Trade and Timber Division: timber bulletins Wood pulp This category includes wood pulp, fibre pulp from non-wood origin and recovered paper. Wood pulp (a mixture of ground up and moistened wood cells or fibers ) is the main source for paper and many other fiber products. Production and consumption of wood pulp in Macedonia has been on very modest level and domestic production is not sufficient to satisfy domestic needs for paper, so consumption is entirely dependent on import. Figure 8: Production, consumption and trade with wood pulp in metric tons ( ) Source of data: UNECE Trade and Timber Division: timber bulletins 22

29 Paper and paperboard Figure 9: Production, consumption and trade with paper and paperboard in metric tons ( ) Source of data: Food and agriculture organization of the United nations-faostat and: UNECE Trade and Timber Division: timber bulletins Figure above shows that production of paper and paperboard over this period ( ) has been relatively stable, with little oscillations Macedonia is producing mainly paper for packaging. The production is used mostly on domestic markets and 90% of them are carried out in small and medium sized private companies Employment The main characteristic of the Macedonian labour market is high percentage of unemployment and comparing to the European labour market relatively cheap labour force. Forestry and forest industry plays an important role in the national economy and provides employments in rural areas. According to statistics about people are directly employed by the forestry and forest industry sector (Table 8). Indirectly the sector provides job opportunities (part-time jobs) to additional people through multiplier effects (this is 4-6% of total employed work force in Macedonia of ). Tens of thousands of people rely on the 16 Source: Statistical Office of Macedonia 23

30 forest industry for a living. As 40 percent of the population lives in rural areas and since a high proportion of these people are unemployed, forestry is likely to be of particular importance in raising living standards in rural areas. The forest industry employs workers with a broad range of skills. Workers in the forest industry include chemists, engineers, foresters, heavy equipment operators, loggers, mill operators, truck drivers, and paper and wood scientists. Table 8: Employment in forest sector in Macedonia ( ) number of workers forestry Wood industry Pulp and paper industry Total Source of data: Statistical Office of Macedonia There is increase in employment in the recent 3 years, mainly in wood processing industry. Although wood industry historically had a skilled and competitive workforce, the best and brightest are leaving the industry and country to earn higher wages. Its managers, however, with solid technical skills and from respected technical institutions, require more practical business management training (e.g., marketing, accounting, information and communications technology, manufacturing resource planning, design proficiency, finance). Table 9: Gross salary in forest sector in ( ) forestry 284, ,7 320,9 342,6 wood industry 191,3 198, ,2 223,4 pulp and paper 289,2 298,3 320,8 319,7 348,4 Source of data: Statistical Office of Macedonia Wages have also slightly increased (above), during the past few years, but the level is still much lower than EU countries and neighboring countries (figure 9). Especially gap in salaries in wood industry is evident and large compared with west European and Scandinavian countries. This low 24

31 cost of labor can be comparative advantage of Macedonian wood industry, and provides high motivation for foreign investments in it. Figure 10: Annual average wages in forest industry in selected European countries in (US dollars) Source: UNIDO Industrial Database 2005 The responsibility for the educational and training activities for the people involved in the Forestry sectors belong to the forest secondary school in Kavadarci, and forest faculty in Skopje. Both of these institutions have a great impact for acquirement of appropriate knowledge and generating high skill labour force. However, the expert s opinion is that the sector lacks specialists and managers that are able to deal with the prevailing production and market conditions

32 4.6. Trade with forest products According to statistics Macedonia is mainly import oriented with huge and growing trade deficit and relies on import of high value added wood products. Export of wood products dramatically dropped since 1997 to lowest amount of $ US (2005), and share of export in total export of Macedonian industry continuously have been decreased (to lowest 0, 23% of the total export in 2005), and share of import increased (83, 8 million US dollars). The external trade balance in the exchange of wood products is negative. The import value is several times bigger than the value of realized export. Table 10: Share of export and import of forest based industry) in total trade in Macedonia year EXPORT in US$ Export total export FBI % 1,90 2,21 2,11 2,22 2,60 0,80 0,75 0,63 0,59 0,58 0,55 0,29 0,23 0,43 IMPORT in US$ Import total import FBI % 1,82 2,12 2,16 2,29 3,64 2,79 4,07 2,61 2,62 2,80 2,81 1,88 1,72 2,23 Source of data: Macedonian State Statistical Office Trade with roundwood comprises small quantities and import exceeds export. Under the present conditions, only a total of approximately m 3 industrial timber (logs) which is 5% of the total production or 1, 02% of total timber production, were placed on the foreign markets (mainly precious species as walnut which is exported in Greece and Italy). Table 11: Trade with roundwood in 1000 m 3 ( ) years import 3,6 1,2 1 0,7 1 3, , ,2 export 5 1,2 1,6 1,6 4,5 3 0,8 1,2 9 7, ,5 - Source of data: Food and agriculture organization of the United nations-faostat and UNECE Trade and Timber Division: timber bulletins 26

33 Demand for the fuelwood is satisfied mainly from domestic sources. Industrial timber is mainly absorbed by the domestic wood-processing industry. The annual consumption of the wood industry and annual cutting volume of timber indicate that the industry s need for non-conifer trees can be completely satisfied from domestic production and that conifer are deficient. For the reason that domestic production cannot satisfy demand quantities, Macedonia is forced to import sawnwood, mainly of conifer species and this import have an increasing trend (see table below). Very small quantities are exported mainly in Greece, Italy and Serbia. The conifer sawnwood is main import product; its worth in 2004 was $ 11,302,000 (Appendix III) or 30% from the entire realized import of wood products. Main markets for import of conifer sawn wood are Serbia, Bulgaria and Ukraine. 18 Table 12: Trade with sawnwood in 1000m 3 ( ) years import conifer 31,5 27, , import nonconifer ,8 3,8 2,5 6 4,5 4,5 3,4 1,2 1 2,5 3 export conifer 8,6 0,2 0,4 0,4 0,2 0,1 4 4,6 1,5 0,2 0,2 0,5 0,5 0,7 1 export nonconifer ,5 9,6 8,6 1, Source of data: UNECE Trade and Timber Division: timber bulletins Regarding wood based panels, Macedonia is small producer, and therefore domestic consumption is satisfied with import. The figure 11 shows net trade with wood-based panels: mainly is imported particleboards and fibreboard (hardboard and MDF) and import gradually has been increased. In 2006 net trade has been m 3 or 25 million US dollars (Appendix III). Import is mainly from Greece, Slovenia, Austria and Bulgaria. Small quantities are exported in Serbia and Germany EU questionnaire, industry 19 EU questionnaire, industry 27

34 Figure 11: Net import 20 of wood based panels by category in m 3 ( ) Source of data: UNECE Trade and Timber Division: timber bulletins Paper and paperboards: Macedonia has been net importer of all categories of paper and paperboard products, because there is no significant production of pulp and paper in the country. Very limited quantities of packaging cardboard are exported mainly in Serbia and other ex Yugoslav countries. Import gradually has been increased during the period , than in next two years dropped to the level of around m.t. (or 22,5 millions $US), and again start to rise in 2006 (56800 m.t. or 46 million $US). Regarding category, larger share in the import have packaging & wrapping paper and printing & writing paper (table below) mainly from Slovenia, Germany, Serbia, Bulgaria, Sweden, Greece. The main markets for export are Serbia, Bosnia and Herzegovina, Albania and Italy. Small quantities of pulp are imported from Bulgaria, Slovenia and Serbia Net import= import -export 21 EU questionnaire, industry 28

35 Table 13: Trade with paper and paperboard in 1000 m. t. ( ) years import of paper &paperboard 15,7 23, ,6 33, , ,8 45,9 28,4 27,3 56,8 newsprint 2 3 3,2 3,2 3,5 4,5 5,5 7 7,7 5,8 6 7,4 6,6 6,7 printing &writing paper 6 11, ,3 13, ,5 8,4 8,6 11,5 12,6 1 1,2 14,5 sanitary paper 0 0 1, ,2 3,9 4 4,2 3,8 3,7 Packaging & wrapping paper 7,5 7 13, ,4 12,6 18,4 16,5 17, , other paper 0 0 0,1 0,2 0 1,3 1,5 2,1 2,1 2 1,6 1,5 2 1,1 export of paper &paperboard 0 0,2 13,5 10,5 7,8 7 7,5 6,9 7,2 9 7,5 6 7,1 8,3 newsprint ,1 0 0, ,2 printing &writing paper - 0,2 3 2,4 1,8 1,3 0,7 1,8 1 0,4 0, Packaging & wrapping paper ,2 2 4,3 5,8 8, ,8 8 other paper ,4 4,8 0,7 0, ,1 0,2 0 Source of data: Food and agriculture organization of the United nations-faostat and UNECE Trade and Timber Division: timber bulletins If entire trade with all categories of wood products is being observed (see table 14), it is clear that net trade deficit has an increasing trend. From -1, 6 million US dollars in 1993 in 2006 reached -72, 9 millions US dollars. The biggest trade deficit is from paper and paperboard, sawnwood and wood based panels. Only exports of round wood as industrial raw material exceed import. The reasons for this negative balance in trade are many (are low quality and lack of standards for international markets, un-competitive prices, lack of business contacts, etc.). Table 14: Forest products net trade (export - import) in Macedonia in 1000 US $( ) years in $ 1000 ROUNDWOOD Agg fuelwood , Ind roundwood SAWNWOOD PANELS WOOD PULP PAPER AND PAPERBOARD TOTAL Source of data: Food and agriculture organization of the United nations-faostat and UNECE Trade and Timber Division: timber bulletins 29

36 4.7. Market and firm structure Forest industry is consists of two closely interdependent sectors: 1) the forestry, including stateowned forest enterprise and small private logging companies, which grow trees and harvest timber (logs) and 2) the wood products manufacturing industry, which converts timber into value-added finished and semi-finished wood based goods. These manufacturers tend to be located in rural areas near sources of timber. There are also secondary products that are derived from the forests known as Non-Timber Forest Products (NTFP). Before the privatization process started, there were ten wood processing kombinats. A typical kombinat included a sawmill (band saw) producing some m 3 /annum of sawn wood, kiln-drying facilities and downstream production in the form of furniture, kitchen cabinets, doors and windows. All these units have been privatized, or are in the final stages of being privatized, but have never achieved previous level of production, and many of them bankrupted. Subject who dominated the forestry in the country is Public Enterprise Macedonian forests responsible for planning and executing forest operations, and is the largest supplier of raw material to forest industry. It also operates with own seven sawmills with an annual capacity of m 3. In addition there is a great number of smaller sawmills that operates on and off when saw logs can be acquired at affordable prices (Table 15). Table 15: Structure of enterprises in Republic of Macedonia in 2003 gross Size of enterprise output in Euro number of enterprises sawmills small wood based panels medium small medium paper and paperboard small medium big Source: EU questionnaire, industry 30

37 Their common characteristic is that they are in private property and functionate as a joint stock companies or LTDs. They have positive financial results, but still lack modern technology, marketing, modern design to be competitive on the international markets. The existence of great numbers of sawmills is result of small starting capital needed and fast turnover of invested capital compared to production of other wood products. These companies are privately owned with mainly domestic capital. Table 16: The largest companies in Macedonia Gross Output in euro 31 Number of Employees Ownership SAWMILLS LEDER private MAK DRVO private PLACKOVICA private ELA MAK private TRESKA STRASO PINDZUR public MAKEDONSKI SUMI public ТОТАL private BORDINGS private JELAK STLARIJA private JAVOR private BISTRA DRVO private WOOD BASED PANELS MIMAKO-VUD private PAPER AND PAPERBOARD KOMUNA-AD private FUSTELARKO BOREC private KOSTA ABRAS private MISKOM private HIPS INDUSTRIJA ZA private SUPERIOR private TEHA VLATKO I DRUGI private BIOMENT private NATRONPAK private ILINDEN private FENIKS private LANTANА private Source: EU questionnaire, industry

38 In the interviews managers and owners of some of these companies, stated that the biggest problem in their daily operations is disloyal competition of the unregistered small family firms, which drastically ruin the market, do not fulfill their financial obligation from state and other companies, especially when it comes to contracts with foreign partners, and sale of products at foreign markets. Approximations are that more the 1000 firms existed in this illegal market, but are impossible to establish the real number and assess their production results Legal regulations, institutions and organization in forestry and forest industry The status of forests is basically defined by the Constitution of the Republic of Macedonia as a natural resource of public interest placed under special protection regulated by a law. Institutions and organizations play a pivotal role in the achievement of policy goals and implementation of forestry strategy and programs. The Government of the Republic of Macedonia administers the forests and forestlands of state ownership through the following institutions (organization of forest sector is given in Appendix V): Ministry of Agriculture, Forestry and Water Economy (leading role in forest sector); Ministry of Environment and Physical Planning; Ministry of Finance Ministry of Economy Economic Chamber of Macedonia Public Enterprise Makedonski sumi ("Macedonian Forests"); National Parks Galicica, Mavrovo, Pelister ; Public Enterprise "Jasen". The State Inspectorate of Forestry and Hunting functions as a body within the Ministry of Agriculture, Forestry and Water Economy The Forestry Police as a sector within the Ministry of Agriculture, Forestry and Water Economy 32

39 Ministries carry out tasks of state direction, i.e. apply laws and general regulations and official documents of Parliament and Government, as well as official documents of the President of the Republic. Ministries also carry out administrative monitoring and other administrative tasks defined by law. Ministries independence is determined by the Constitution and by competences defined by law. 33

40 5. DISCUSSION (Analyses with the diamond model) Using Porter s diamond model, the factors affecting competitiveness of forest sector can be categorized as production factors, demand factors, firm strategy and industry structure, related and supporting industries and government related factors. They will be discussed in more details next Factors condition In this category of factors who affected competitiveness are included: a) basic factors- inherited by the nation as a physical (geographic location, abundance, quality and accessibility of forest resources, climate) and human resources (quantity, skills and costs of workforce) and b) advanced factors which are created and contribute to achieve higher level of competitive advantage (knowledge resources, infrastructure, available capital). Competitive advantage from the factors depends on how efficiently and effectively they are deployed. Macedonia has geographic location on the Central part of Balkan Peninsula, relatively close to the transport corridors (rail and roads) and access to big and lucrative markets in neighborhood and Europe. (Italy, Greece, Austria, Germany, Serbia ). This good position which avail forest companies themselves to the low transport costs. State owns almost 90% of entire areas of economic forest, and remaining 10% of private forests are with small and fragmented plots (average size 0, 4 ha). Public Enterprise Macedonian forests manage with state and private forests. Privatization of state-owned public enterprise and big wood processing companies is not complete, and that unregulated position in the market generates problems in continuous supply with raw materials. The country is relatively small in harvesting of forests. The use of forests and wood for industrial processes in Macedonia is at a modest level. The removals does not reach annual growth which in 2006 was around m 3, while harvesting quantities in the same year were m 3. As a consequence there is shortage of industrial timber and producers bear high costs and have low productivity. The high percent of low quality coppice forests, mainly beech and oak, (70% 34

41 of total forest area), many of which are highly degraded, together with the small quantity of conifers (around 10% of total growing stock), results in relatively low timber reserves, low timber mass, and low annual growth per unit of land. Macedonia has only m 3 of annual harvest of industrial round wood. Quality of timber suffers because of low-yielding species, poor forest stands, and poor harvesting practices with limited access to the stands. The forest sector s operations are inefficient and the forests are generally harvested in a discriminatory manner which leads to non-sustainable supply. Timber supply to local industry is inconsistent and uncertain especially to the small and medium size sawmills who are dependent of continuous supply and cannot afford delays in production. Illegal logging which according to official sources is almost 1/5 of legal harvesting is huge problem who affect forestry, forest industry and entire forest sector. Most forest products are transported by roads and railway. The country have relatively decent transport infrastructure, with 1821 km of roads, or 72,84 km/1000km 2, and 530 km of railroads (21,2 km/1000km 2 ); two Trans European corridors (Corridor 10 and Corridor 8) passing through country. The railway connect Macedonian capital city Skopje with harbor in Thessalonici, Greece, which is main terminal for trade, because Macedonia is landlocked country and do not has sea access (Thessalonici is 220 km from Skopje). There are two airports in Skopje and Ohrid, but without significant role in the transport of forest products. This density of transport network (despite low efficiency and out-of-date railway coaches) can deliver goods and products on the large Europeans market inr relatively short time distances, and brings competitiveness for the forest and entire industry in the country. But still, future development of the industry is closely connected with major investments in present transport network. Forest industry in Macedonia for the power mainly uses electrical energy. Total capacity of working machinery, motors and devices in forest firms in 2005 was kw. Consumption in the same year was MWh. This relatively high consumption per product is mainly because of outdated equipment. According to the State Statistical Office in 2006, in the Republic of Macedonia, in the gross national electricity consumption which is MWh, the domestic production share is 79.6% and the import share is 20.4%. 77% is from thermal sources (power plants REK Bitola and Oslomej), and 23% from hydro sources. Regarding prices of electrical 35

42 energy that industry is paying, compared from other countries in the region and EU (figure 12), is obvious that price of 3 Eurocents per kwh is relatively low and still very competitive, but concerning high import dependencies in the future for expensive electrical energy, this situation cannot lasting very long. Figure 12: Prices of electrical energy in Euro per kwh in 2006 Sources: EUROSTAT and Macedonian regulatory commission Most of the equipment in use has been inhered from socialist era and dated from 90 s. Machinery and equipment are outdated and inefficient (equipment in small sawmill companies is consist mainly of 1 or two band or circular saws, debarker, board lumber is dried on open air, very rarely in kiln), productivity is low, and there is lack of production process automation systems. Only a few individual small and private (furniture and sawn mills) companies have introduce some improvements in technology (as an automatic lathe s and laser guided saw), which does little to change the overall situation. As a consequences Forest industry is a faced with disadvantages as a wasteful use of raw materials and energy, high production losses, high specific power and raw material consumption, high specific labour intensity, high pollution. Low investments in aging facilities leads toward low productivity and energy efficiency. All needed equipment and machinery have to be imported, because there aren t domestic producers in the country. The import is burdened with high prices on the international markets and transportation costs. Companies do not have substantial funds for modernization, and financial institutions are not providing them with enough favorable credits and other sources of capital. Foreign direct 36

43 investments in wood industry in 2006 was only $US 22. Without investment in new technologies is impossible to met international standards and produced higher value added products which would be competitive on international markets. According to statistics about people are directly employed by the forestry and forest industry sector and indirectly the sector provides job opportunities to additional people through multiple effects which is 14 % of the total employed work force in the country. Regarding labor costs, wages in forest sector is well below average wages in EU countries and this low cost of labor can bring comparative advantage and high motivation for investments in the sector. If average hourly labour costs in various European countries are compared, in Macedonia is 2, 63 Euro per hour, and only Bulgaria have lower (Figure 13). Figure 13: Average hourly labour costs 23 in selected European countries in 2006 (in per hour) Source: EUROSTAT and Macedonian State Statistical Office Although Macedonian wood industry has had a skilled and competitive workforce, the best and brightest are leaving the industry and the country to earn higher wages, due to the law salary level in companies and low standard in all country. The quality of personnel currently employed does not meet international standards especially in the field of management, marketing, IT knowledge, discipline and work culture and mentality. 22 Central Bank of Macedonia 23 Average hourly labour costs, defined as total labour costs divided by the corresponding number of hours worked 37

44 5.2. Demand factors Demand is formed by two constituents: domestic (local) and international (export) demand. It is the composition of home demand, the size and growth of home demand, and the mechanisms by which a nation s domestic preferences are transmitted to the foreign markets. The demand factors offer a high development potential, to be achieved specifically through the domestic market development. So, nations gain competitive advantage in industries or in industry segments where the home demand gives local firms a clearer or earlier picture of buyer needs than foreign rivals can have. However, a major increase of the domestic market capacity would be impossible in the absence of the general growth of national economy, accompanied by a substantial increase of the per capita GDP. Local customers not only provide firms with a source of income, but they educate firms about customer needs and perceptions, so the local customer has much more influence over how products are designed, supported, and sold. Macedonia with its relatively small population (figure 2), small economy (lowest GDP in South East Europe (table 1 and figure 3) and small domestic market cannot offer possibilities to develop economy of scale. In the 90s, as a result of the transition to a market-based allocation of resources, an associated decline in industrial production, wealth and purchasing power of the population, the domestic demand for forest products decreased. Table 17: Consumption of forest products by country per 1000 persons in 2002 Sawnwood (m 3 ) Plywood (m 3 ) Wood-based panels (m 3 ) Paper and paperboard (tons) USA , Canada , Finland ,8 90,6 393 Sweden ,9 99,1 205 Germany , Italy ,8 65,9 178 Russia 85 4,2 24,7 26 Macedonia 76,5 1,3 31,25 28,5 Source: Research and Design Institute on Economics, Production management and information for forests 38

45 The Gross Domestic Product per capita in 2006 was $US and was well below the other countries in EU and Balkan region (Figure 3). Domestic market with its size does not allow achievements of the economy of scale and big demanding consumers, and purchasing power of domestic population is on very modest level (table 17). A major influence on demand relates to the non-industrial demands on forests, particularly for fuelwood. Non industrial uses of timber, including fuelwood is reached 2/3 of entire consumption in the country. Vast majority of households rely on firewood for heating and utilize first class hardwood timber for fuel (Figure 12). Demand for energy for both commercial and household purposes will undoubtedly increase with population and economic development. Figure 12: Structure of consumption of forest products in 2006 Source of data: Food and agriculture organization of the United nations-faostat and UNECE Trade and Timber Division: timber bulletins Regarding industrial wood, beech sawn wood is mostly been produced. Because of the little production of conifer logs, the conifer sawnwood is being imported. The production of plywood and veneer is only symbolic, and production of particle-board and fibre-board does not exist at all, so the industry imports them. (Appendix I). The key customers and driving force for demand for wooden boards and plywood are the furniture and construction industries. From tables 13 and 14 is obvious that Macedonia has been net importer of all categories of paper and paperboard products. The portion of exports in the total country s export has rather small (0, 23 %). 39