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Clarky's Comment - October 2013, What is holding our Forest Industry back?

What is holding our Forest Industry back?

The government has set a Business Growth Agenda goal of lifting the ratio of exports to gross domestic product from 30% to 40% by 2025. This is a massive lift in the value of exports. It is widely acknowledged that our primary sectors must be the key drivers of this growth in exports, but also that such a target cannot possibly be met by simply exporting more dried milk powder or logs.

In the forestry space all forest owners (at least those I've talked to) are also keen to see growth in the profitable domestic processing of logs. Over-reliance on log exports (now around 50% of all roundwood removals), and in particular over-reliance on one single market (China) is quite a risky strategy from a variety of perspectives. So what is holding back investment in wood processing in New Zealand, and what is needed from industry and government?

    1. More Investment in Forests
      1. New planting in the right areas would signal to those interested in investing in wood processing that the log supply was sustainable over the 50-year plus life of the processing investment. Current deforestation trends are not helpful. GDP contribution per hectare of land occupied is materially higher for plantation forests than for dry stock farming.
      2. Land values inflated by farmer tolerance for very low cash yields and expectation of windfall gains on land capital value at sale need not apply to Maori land. There are significant tracts of Maori land that are underutilised and suitable for commercial forestry. Fragmented multiple ownership is inhibiting development of those lands.
      3. A credible price on greenhouse gas emissions across all sectors would be a good start. But in the absence of that the application of the polluter pays principle (as opposed to taxpayer pays) to all negative environmental impacts would better align private and public good when rural land use decisions are made.

 

    1. Reduced Impediments to Productivity
      1. Research has the potential to deploy rapid technology advances to harvesting steep land, forest mensuration, reduced transport and logistics costs and measurement of wood characteristics for optimal processing decisions. Maintenance of the high ratio of government to private sector funding for forestry sector research can be justified on the basis of the public benefits that private sector investment in forests and wood processing provides such as:
        • Erosion control;
        • Resilience to adverse climatic event (droughts, flooding, snow and hailstorms, etc.);
        • Fresh water quality restoration;
        • Wildlife corridors;
        • Public recreation facilities;
        • Greenhouse gas emissions reduction;
        • Fossil fuel reduction.
      2. The government has key roles to play in:
        1. Reducing the exchange rate volatility risk. Continue to investigate central bank options for reducing currency volatility by reducing the level of speculative activity in the currency and minimising the rate differentials that promotes the carry trade.
        2. Transport infrastructure, including ports, and how rural roads are funded. The High Productivity Motor Vehicle initiative is a great example of government action that just needs the extension of permitted road networks to have a material cost and truck movement reduction.
        3. Urgent update of building standards to facilitate engineered wood use in commercial structures.
        4. Accelerated depreciation rates for wood processing plant and machinery.
        5. Giving processed wood products priority for tariff and non-tariff barrier removal in FTA negotiations.
        6. Funding skills training as a career path steps, whether linked to a full qualification or not.
        7. A National Environmental Standard for plantation forests would reduce investment risk and the cost of submitting on plan updates and addressing different operational standards across 14 Regional Councils.

 

  1. More Utilisation of Wood
    1. With a very small domestic market, and exchange rate volatility, processors face considerable risk developing new engineered solid wood products and wooden building systems. The domestic market size issue could be in part addressed by promoting wood use through a government procurement policy for all new commercial structures.
    2. Introduction of a bio-energy policy with the objective of reducing reliance on fossil fuels over time would improve options for the considerable volumes of wood left to rot around logging skids.