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Clarky's Comment - November 2008, Carbon Forestry

  1. Pre-1990 landowners have only a short window of opportunity to apply for exemptions under the 50ha rule or the tree weed category. According to the Draft Forestry Allocation Plan applications for exemptions must be lodged after the Final Allocation Plan is published some time in April 2009, but no later than 30th June 2009. The deadline to apply for "partial compensation" units is to be (tentatively) 31st July. ALL pre-1990 forest owners should be applying for either an exemption or for units on EVERY hectare of pre-1990 forest land they own, as the default position is no exemption and no units. There is only one chance to apply for exemptions and allocations. PF Olsen will work with existing clients for whom we have stand records to make sure everyone gets the maximum advantage from this exemption. Any other people who wish PF Olsen to make these applications on their behalf should contact us as soon as possible.
  2. Both major political parties have, in recent weeks, suggested that the phase-out of free allocations to the agricultural sector is a matter for future negotiation. This comes on top a late change to the Bill that extended the commencement of the phase-out to 2018. While this is perfectly reasonable from an economic perspective, it does have the consequence that high pastoral land values get locked in, supported only by the expectation that pastoral farming emissions will continue to be subsidised by the taxpayer. High land values and land availability are the biggest constraints to large-scale new tree planting in New Zealand.
  3. National and forest owner gains from carbon forestry will be maximised by using treestocks that exhibit high growth and high density. Control pollinated radiata pine seed that exhibit these traits will be in limited supply until at least 2013. Some forestry investors will need to take second-best genetics and some may have to go on a waiting list to get any treestocks at all. Whilst propagation using cuttings is possible, it takes several years to build up volume. If people are thinking about restocking or new planting in the next few years, we strongly suggest they contact PF Olsen early in the planning process to secure their treestocks.
  4. PF Olsen has spent considerable time and effort investigating whether there is an opportunity to sell pre-CP1 post-1989 forest carbon credits into the voluntary market. To date we have been unsuccessful. We are aware of some such units being offered for sale, but have come to the conclusion that without carrying a certificate of compliance with an internationally recognised voluntary carbon standard, that the vendors of these units could be subjecting themselves to commercial risk. It has not been possible to certify pre-CP1 NZ forestry credits to any such standard because it is impossible to pass the additionality test. We are now investigating the opportunity use these pre-CP1 units to "green" Russian/Ukranian "hot air" units so that they become acceptable under the NZ ETS. This has the potential to unlock significant additional value for pre-1990 forest owners, although it is still at a formative stage at present.

On log markets

NZ forest owners face a golden opportunity to get increased prices for export logs. The two key supply chain costs drivers (bulk shipping and exchange rate) have finally tipped seriously in favour of more profitable trade. This opportunity must be tempered with reduced demand for logs from Asia, credit concerns related to some buyers and the deferral of the big increase in Russian log export tax.

Given that demand and credit generates sufficient orders from Asia, what are the barriers to most of the gain coming back to the forest owner and what needs done to remove these over time?

  1. Some export traders or agents have taken long-term positions on bulk freight rates. Until these work through such contracts must be honoured, meaning less revenue for forest owners linked to such contracts. Forest owners not locked in to such arrangements have the option to shop around for better prices offered by others not locked into higher freight rates.
  2. A depressed market for pruned and structural grades, limiting total return to stump even with improved export grade returns. This is a more deep seated problem.
    • Structural Logs. There is considerable upside potential demand for structural timber in both NZ and Australia. There is now a large imbalance in the supply and demand for housing stock in Australia, with the major constraint being housing affordability. With interest rates and land values dropping, activity should pick up in 2009/2010. Meanwhile the NZ Wood campaign in NZ and a similar campaign about to get under way in Australia, combined with climate change policies in both countries should see increased use of timber to displace concrete and steel in commercial structures up to 4 stories high.
    • Pruned Logs. Our current market for long clear mouldings and wide clear boards in US and NZ/Australia is quite limited and mature. With the potential expansion of our national cut from 20 million m3 to 30 million m3 over the next decade, and much of this having pruned logs, this problem will not solve itself. The biggest single opportunity that I see is to displace (or meet increasing demand) for long/wide clears and face veneer currently being served by tropical hardwoods. The biggest potential new markets will be in India and China, but many other SE Asian nations also face reduced access to tropical logs.

Sending pruned logs overseas that arrive sap-stained will not work. Exploring and commencing trade for pruned timber will take a multi-firm effort, often with local partners. I find it interesting that the NZ tourism industry is seeking a further $30 million to add to the $73 million they already spend of taxpayer funding on generic marketing, while an equally fragmented and similar sized forest industry receives $2 -3 million support for the same purpose (mainly NZ Wood promotion - that is new). I am not suggesting there is not a good business case for the additional $30 million for tourism, but it would not be too hard to make a more compelling case for our forest industry I would have thought (in terms of national cost/benefit) - where is MAF and NZTE funding support for this critical market development work?