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Clarky's Comment - February 2012

The forest industry is sometimes accused of not adding value by not processing more logs in New Zealand – so let's examine this issue a bit more closely.

  1. The "Forest Industry" really comprises a biological business of investing in and growing a crop over a 25 – 30 year timeframe; plus a manufacturing industry of turning a raw material (logs) into something that is useful to people and can be sold at a profit. That may involve one or more specific manufacturing plant treatments.
  2. It is the job of the forest owner to produce logs that are firstly of a consistent quality as all manufacturing is most efficient if the raw material input is consistent. Secondly the logs must have shape characteristics and internal wood properties that enable the manufacturer to efficiently produce a high proportion of wood products that can compete in high value/high volume uses. For example structural and appearance solid wood clearly wins over wood pellets in this regard.
  3. The forest growing subsector adds value by turning a 40 cent seedling into a $200 series of logs up a single tree, provided it can do this and still generate an acceptable margin over the weighted average cost of capital of the investor. New Zealand forest owners have in the last couple of years been achieving this, and contributing more per annum to New Zealand economy per hectare occupied than drystock farming with which it competes for productive land. See the chart below that relates to the primary produce only (not processing contributions):
  4. The fact that we do not process more of our logs within New Zealand relates to the small size of our domestic markets and international competitiveness of NZ-based wood processing. Exchange rate volatility makes investing in new wood processing a risky business when most of the additional volume needs to be exported. Nevertheless there are factors starting to come into play that will help mitigate this risk over time:
    • China is expected to import more sawn timber, veneer and panels, and fewer logs as already high energy costs rise further, and the Chinese government regulates to direct scarce energy to higher-value manufacturing processes.
    • The US housing market is expected to start recovering over the next couple of years. Once it does, expect demand for processed wood to rise.
    • There is pent-up demand for housing in Australia and now also in Auckland, as well as the Christchurch re-build. NZ/Australia house construction has historically been a mainstay of the profitability of NZ sawmilling.
  5. The single biggest contribution the Forest Industry collectively can make to New Zealand's economic growth is to process more logs within New Zealand. We cannot expect much in the way of new investment in processing logs within New Zealand until the profitability of NZ sawmilling improves. Any such investment will need to be large scale to be internationally competitive. To support large scale processing we need forest owners to focus on producing a consistent and high quality log that can be used primarily for structural and appearance grade timber and panels, at lowest possible cost. That must be the message to our young foresters, training organisations and the main focus of our Research and Development effort.