The challenges of expanding wood processing in New Zealand

Most agree that more domestic processing of our forest produce in New Zealand would be a good thing. It is also essential if we are to achieve the Woodco mission to achieve export revenue of $22 billion by 2022. What is less clear, and where there are many divergent opinions, is how to go about it. Following are some observations about the role of log exports, and key findings from the February 2013 Woodscape study which is now available on the Woodco web site:

  1. Log exports have been the harbinger for foreign direct investment in wood processing in NZ. Imagine how risky it would be to invest in wood processing in NZ if there had been no prior exports of NZ logs to the rest of the world. How would you assess processing performance and costs or product and market acceptance if there was no direct experience in processing the logs? Offshore companies that have invested in greenfields processing in NZ (e.g. Rayonier, Juken, Ernslaw) developed a prior understanding of Radiata pine by either trading it as export logs, or purchasing NZ Radiata pine logs overseas and processing them.
  2. Log exports keep the industry going and provide employment, keep it internationally competitive and provides sufficient returns to forest owners to (mostly) reinvest by replanting after harvesting (although not sufficiently high enough to stimulate new planting).
  3. Any investment in new processing has to be internationally competitive as the NZ market is already pretty well saturated with domestically supplied wood products. Growth of the domestic market will be very small in relation to the 8 million m³ of additional wood supply expected in the next 10 or so years.
  4. Industrial plywood, oriented strand board (OSB), optimised engineered lumber (OEL) and cross-laminated timber (CLT) are considered the most viable processing/product options for expansion of processing in New Zealand. Importantly, they can utilise the rougher, larger knot A and K grades.
  5. Many potentially attractive secondary processing options (such as kraft and dissolving pulp, biofuels and chemical production) require large scale and economic access to residues produced from primary processing (such as sawmilling or plywood manufacture). The primary and secondary processing plants have to be clustered together and the forest resource has to be relatively close by. There are few opportunities in New Zealand for such industry concentration.
  6. To be internationally competitive, most primary processing options require large scale and new technology and the concentration of industries as mentioned above. However, this does not match the current sawmilling industry structure in NZ which suggests the industry will need to consolidate and rationalise. Is this happening? Not really, other than some rationalisation by CHH Wood Products a few years ago. And if you look at the current ownership of NZ wood processors, it is unlikely to occur any time soon. You would also have to question why incumbent NZ wood processors would support studies or lobbying for more processing if the end-game was rationalisation which will produce more losers than winners.
  7. Existing sawmills in NZ have latent capacity. This was estimated at 1.0 million m³ in the central north island in 2012. From a capacity utilisation viewpoint, it is preferable to use up latent capacity prior to investing in new capacity (in this case the incumbent wood processors should become more profitable especially if using processing machinery with low debt/book value). However, what happens if global competitiveness demands that viable new production has scale and concentration – something not necessarily achievable by the incumbent processors? This is a highly disruptive scenario which would elicit plenty of negative media publicity. What investor would want to bear the brunt of that?
  8. The relatively low stiffness of Radiata pine means its lumber struggles to be internationally competitive. It survives primarily on the New Zealand domestic market and Australian sales but is vulnerable to imports from Europe and the Americas, especially when the NZ$ and AU$ are high.

Expansion of wood processing in New Zealand is a widely shared vision but the path to get there is not straight forward.

So what does all this mean?

Firstly that it is not surprising that there has been a lack of coordination of effort related to investigating and facilitating development of new log processing in New Zealand. Most incumbent processors would likely be disadvantaged by any establishment of new internationally competitive wood processing. Secondly, log exports have an important role in keeping forestry viable and getting NZ Radiata pine accepted in international markets. Without them forested area in New Zealand would likely decline rapidly unless domestic processing could step up and pay equivalent prices for the logs.

Whilst we would all like to see more viable domestic wood processing, the pre-requisites of scale and concentration limit opportunities to a handful of areas in NZ; perhaps only the Central North Island. And wherever in New Zealand new processing is viable, there is the dilemma of whether it is better to increase utilisation of existing capacity (a short-term strategy), or accept the highly disruptive and publicly unpopular process of concentration and rationalisation. Any new processing investment will likely be driven by companies with an international wood products business. These are likely to be foreign companies. It is not surprising that when they look at the opportunities and situation as presented above, they are somewhat reticent to part with their $100s of millions of dollars.