Absence of plantation cover combined with a tight market makes the South African timber products industry extremely vulnerable to disruption by fire.
While the forest fires which destroyed commercial timber plantations in Kwa Zulu Natal in June this year highlighted weaknesses in the local timber products supply chain, Greg Wattam, Executive Leader, Alexander Forbes believes these can be insured.
Wattam says, "Given already huge local demand, an imminent increase in local production capacity and a seemingly insatiable Asian appetite for timber products it now makes sense to insure timber product production where possible."
Wattam adds that, "Given demand, even without the threat of fire, you have an extremely product-scarce market."
Furthermore, "Most of the industry is not insured as, to date, plantation cover has traditionally been priced ay 100% premium - beyond the means of even global players."
Explains Wattam, "The production schedules, on-sale deals, shipping and delivery contracts and prices are negotiated and established well in advance. When a timber plantation burns it's more than just the fibre value of the trees that is lost. The whole production, supply and sales chain is disrupted."
When thousands of hectares go up in smoke, 25-year-old fibre, and all the deals dependent on its production, can't simply be replaced.
Without cover, the bulk of producers will have to come up with unbudgeted funds to import fibre from elsewhere if they are to meet their delivery obligations with long standing customers.
With the fire season only ending in October, the threat is by no means over for this year.
In response, Alexander Forbes has developed a more affordable product where the plantation owner assumes a pre-agreed percentage of the risk, only purchasing cover for loss that generally cant be salvaged.
Wattam knows that, A lot of the smaller operators have shied away from timber plantation insurance because of cost.
Given that 100% cover is beyond the scope of even large timber producers, Wattam identified a need for plantation owners to buy insurance economically.
Non-salvageable loss usually includes; fire-fighting costs (including aerial fire fighting and ground forces), and removal of fire damaged debris from land.
Often, however, "Cool fires, which run quickly through a plantation, do not significantly damage the fibre. This can still be be salvaged and used in particle boards, saw milling and unbleached pulp. In fact, there are many instances where significant portions of a plantation can still be used after a fire."
The trick is to ensure only those areas critical to honouring delivery obligations and keeping the business cycles going.
The fibre, paper, pulp and timber industry in South Africa is under extreme pressure for product from abroad. Global demand for wood fibre products has outstripped local production with the bulk being chipped and sent to the East where prices are higher.
Even in the face of increasing global demand, New capacity was also being expanded locally. Processing plants are under construction in Richard Bay (NTC), Umkomaas (Saiccor), the Eastern Cape (PG Bison), and White River (Sonae Industries).
Given ever-increasing delivery pressures it makes sense for the timber products industry in South Africa to begin considering insurance.
Wattam concludes that, While a client would certainly not be covered for 100% of his loss, major costs associated with fire damage and land rehabilitation would be covered. This would free the client up to meet his immediate delivery obligations and begin planting again, ensuring the survival of the business.
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