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Clarky's Comment - August 2014

This month I draw readers' attention to the published findings of the Commerce Commission in a Preliminary Investigation into Eastland Port Ltd's log storage and wharfage charges. The findings can be accessed here.

The matter was brought to the attention of the Commerce Commission in early 2012 by the main forest owners in the Gisborne region following a large price increase imposed by the port company in November 2011. Despite meetings and correspondence with the port company the parties were unable to form a common view on either the basis for the price increases or the charges themselves.

Given the high costs to transport logs to the next nearest port at either Tauranga or Napier, Eastland Port really holds all the negotiating power in this sort of dispute, leaving the port users nowhere to go other than the Commerce Commission.

Although not yet a full-blown enquiry under the sector-specific provisions of the Commerce Act, the Commission was satisfied on the basis of information presented by both parties and analysed internally that some aspects of the building blocks model that was held up as supporting the price increases resulted in excessive charges. There is a particular focus on the asset valuation and the required WACC.

Whether the East Coast forest owners and Eastland Port Ltd can resolve this dispute commercially or whether a Full Part IV Commerce Commission enquiry takes place next year is now largely in the hands of the port company.

The message for other ports around New Zealand is that as far as log exports are concerned, forest owners do not usually have viable options to use any port other than the closest, and as such that port enjoys a monopoly status for the log trade. As an effective monopoly that is not currently regulated in New Zealand, special care must be taken to justify prices charged and the validity of inputs into any building blocks pricing model.

If we are to see the current trend of net deforestation reversed and confidence in the forestry sector restored, all parts of the supply chain will have to play a part. Although log prices and resulting harvest levels have increased in recent years, investments in new planting and in wood processing are at very low levels. Port efficiency and appropriate port charges, along with transport efficiency and harvesting productivity and safety are all part of that supply chain that can together make a material difference to whether investment will take place or not.

Gisborne Log boat
Gisborne port: An efficient supply chain for forest products is essential to produce sufficient returns to support continued investment in forestry in New Zealand.