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Clarky's Comment - September 2011

This month marks the 40th anniversary of the commencement of the PF Olsen business. See PF Olsen Celebrates 40 years of Business. I'm reflecting on significant changes in the structure of the forest industry in New Zealand and some future opportunities if we choose to work together to make them happen.

Our industry was of course set up by government and private plantings on underutilised land, much in the Central North Island, or land planted for coastal dune or steep-land erosion protection. Some bold initiatives by the NZ Forest Service, NZ Forest Products, Fletcher Challenge, Carter Holt and Baigents saw us go through a period of developing a few large vertically integrated plants to process pine, and cooperation between those firms to develop the log export trade, initially to Japan.

The state-owned commercial and indigenous forest estates were split in 1987 and the plantations largely sold to private sector interests. For a range of reasons large vertically integrated firms are now gone. A few smaller ones have emerged but we are faced with a forest industry where most of the forests are owned separately from wood processing. In addition forest ownership is now in the hands of many owners with a wide range of size and nationalities and varying objectives for their respective forests.

We can debate whether the changes have been good or bad. There is certainly evidence from Chile that large corporate ownership has led to a much higher degree of domestic log processing than in New Zealand, but, are the forest owners in Chile better or worse off than in New Zealand?

That debate is academic in any case, because we have what we have. We cannot reverse engineer or change the ownership of the industry by committee or legislation, even if a case did exist to do so.

There are some emerging drivers that favour increased processing of logs within New Zealand rather than overseas, including:

  1. Rising costs of energy favour processing closer to the forest to avoid transporting 50% water in logs.
  2. Rising wages and energy costs in China, India and Korea should also improve the economics of processing logs in New Zealand relative to those countries.
  3. Progress on an international agreement to limit greenhouse gas emissions and/or domestic action in China, India and Korea to put a price on carbon. New Zealand's electricity from renewables (mainly hydro and geothermal) means high electricity-consuming industries based in NZ are less exposed to cost imposts on greenhouse gas emissions.
  4. Consumer and investor focus on the environmental sustainability of products and processing. Processing New Zealand pine within New Zealand ticks quite a few energy efficiency and sustainability boxes.
  5. Unpredictable and volatile bulk sea freight rates used for logs versus the more stable container and liner freight costs that apply to processed lumber and panels.
  6. Additional costs associated with port congestion as the log trade increases.
  7. Fumigation and or biosecurity costs and risks associated with bark-on log trade but not for processed lumber.
  8. Good progress on Free Trade Agreements with many Asian countries will reduce barriers to sales of processed wood products over time.

While these mega-trends are useful, without our collective intervention they alone will not result in investment in timber processing, or improve the profitability of the forest growing or processing subsectors.

Forest industry strategy studies carried out at the national level by Woodco (MAF supported) and in the Bay of Plenty (supported by Bay of Connections) are complemented by other work taking place in the transport sector, zoning and servicing of industrial land in various places and in science and innovation. Put together, this represents what I think is a fair "head of steam". There is a lot of sector leader and specialist energy focussed on making some positive changes within our industry. Here are some of the priorities identified that PF Olsen thinks deserve early action:

  1. Changes to the way we raise and administer pan-industry funding, including for science and innovation.
  2. Initiate collective action to promote use of radiata pine, particularly in construction applications with priority focus on Australia, India and China.
  3. Develop greater collective control over distribution channels. Lack of trust and the behaviour of some log and lumber traders must be addressed.
  4. Achieve better measurement of wood quality in logs and therefore stronger price differentiation.
  5. Prepare large sites suitable for wood processing – zoned and serviced. Make it clear to processors that they are welcome.
  6. Maintain domestic wood promotion, especially NZ Wood.
  7. Work with government to minimise regulatory and trade barriers.
  8. Develop and update key industry standards (e.g. the National Environmental Standard, emissions standards for wood processing, the 3603 building standard and the Australian grading rules).
  9. Establish a Woodco industry leadership group to meet regularly with government.
  10. Accelerate bridge upgrades and route permits for larger trucks.
  11. Unblock bottlenecks in log transport, measurement, port storage and fumigation.
  12. Science and innovation focussed on high value, high volume solid wood applications and new products.
  13. Improved productivity in steep country harvesting (both work methods and new technology).
  14. Public education on the non-wood benefits of commercial forestry as a sustainable land use.

Many of these are currently being worked on as are other important areas such as skills development, bioenergy, bio-chemicals and health and safety initiatives.

The recently launched Bay of Plenty Forestry and Wood Processing Strategy addresses many of these issues in its Action Plan, directed at extracting increased value from the region's forest harvest.

It may be a longer journey than we would like, but it is clear that complacency and inaction will take us nowhere. Our competitors are all working hard to win the hearts, minds and wallets of society and consumers so we have to face the challenge with the full determination and energy of a sector that believes in itself and believes in what it can achieve.