Introducing Wood Matters
Dear Reader
 Welcome to the brand new PF Olsen E-zine - Wood Matters! As part of a review of our communication with you and in response to many enquiries and suggestions from you we have launched this new way to keep you updated on news and views related to forestry.
This initiative is utilising modern technology to better communicate to our valued clients. We hope you benefit from more timely information and interesting features which affect your forestry investment.
Each month we will be e-mailing you a new edition of this e-mail publication and because the distribution is instantaneous, we hope to be able to keep you abreast of all new relevant developments that affect forestry as well as our regular articles and features.
Please feel free to forward this E-zine to a friend (there's a link right at the bottom you can click on) and they can register themselves to receive subsequent issues.
If you have any comments or suggestions on what you would like to see included in this E-zine, please send us your ideas. E-mail Wood Matters Editor
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Peter Clark
CEO
PF Olsen Limited
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Harvest-Ready Message More Important Than Ever
Conditions in the forestry sector are now such that forest owners with near-mature timber need, more than ever, to be Harvest-Ready. We know that the log market is volatile (see log price chart elsewhere in this Newsletter). We know that harvest levels have decreased (down 11% year on year) and logging contractors have left the industry. We know that mature timber standing inventory is building up.
 What we also know is that when the market improves there will be a run on logging contractors and those that aren't Harvest-Ready will have to go on a waiting list. It could well be that by the time a logging contractor is available, the market has turned.
So what is being Harvest-Ready all about:
- Having a harvest plan with access and consent issues resolved.
- Main roads and landings constructed.
- A timber inventory so you know what you have to sell and how much it should be worth.
- An idea of sales method.
- A harvesting and marketing management agreement in place. This will allow us to schedule the harvesting and marketing of the woodlot.
"If forest owners want to get the best returns, they have to understand the value of being able to programme their volume into the best market channels", says Peter Weblin, PF Olsen's Marketing Manager. "For example, the containerised shipping initiative is only possible if sufficient volume can be committed to enable the log exporter to make the investment in infrastructure to store and stow and logs and establish sales channels - this all takes time and money."
"Having volume scheduled doesn't mean a forest owner has to accept any old price", adds Weblin. "They are still in control of the final decision to harvest. If the market falls over, the sensible option may be to suspend harvesting (or not commence as the case may be)."
Many forest owners focus on trying to predict the market (something beyond their sphere of influence), and neglect attending to the most valuable thing they can influence and which can significantly improve harvesting returns - getting Harvest-Ready.
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Carbon Update and Carbon Forestry Seminars
Over the past three months PF Olsen has hosted three carbon forestry seminars, in Gore, Dunedin and Blenheim. The seminars were very well supported with 247 people attending in total. Attendees included forest owners, farmers, lawyers, accountants, land valuers, real estate agents and would-be forest growers. "We appreciated the broad-based support we received from the communities for the seminars", says seminar presenter, Peter Weblin, "It demonstrated a strong and widespread interest in carbon and the emissions trading scheme. It was only unfortunate that the political process meant that there was still plenty of uncertainty about what people should do next".
In light of these uncertainties, PF Olsen has temporarily suspended additional seminars although we have accepted an invitation to join Horizons on a four seminar series in the southern north island in August.
For most people's circumstances, we are not in a position to recommend the commitment of capital to projects with this degree of uncertainty. We are aware of some projects being initiated now and they may do very well with an early mover advantage. But this is a risk that most people would prefer not to take on at this stage.
Despite the uncertainties, PF Olsen believes that an Emissions Trading Scheme is likely to be passed either this year or in the first half of next year. However, unless orders for additional tree stocks are placed soon, there will be insufficient tree stocks for much increased planting in 2009. It may not be until 2010 (half way through commitment period one) that planting levels increase significantly. "This is a real loss in opportunity", says Peter Clark, PF Olsen's CEO. "Planting trees on appropriate land is one of lowest cost ways for New Zealand to reduce green house gas emissions and meet its Kyoto Protocol obligations."
Rest assured that PF Olsen is closely involved in all aspects related to carbon and how clients can best take advantage of the new opportunities as they arise. We will be in touch with you as, and when, these opportunities unfold.
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"Logs in Boxes" Boosts Returns for Forest Owners
In a down market, it's always welcome to find new opportunities to improve log returns for the forest owner. PF Olsen has been working with log exporting companies to ship logs to Asian ports in containers. Due to New Zealand's trade balance, 70 to 80% of shipping containers are returned empty to offshore destinations.  This is a costly exercise and container operators are welcoming the opportunity to backload logs rather than "fresh-air". Utilising containers to carry logs is particularly competitive at the moment because of the extremely high bulk shipping costs. "With bulk shipping of logs costing around $60-70/JAS m³, containers are proving much more competitive in this environment", says Peter Weblin, PF Olsen's Marketing Manager. "The other big benefit is that small lots of just a few hundred cubic meters can be delivered and we aren't restricted to the main ports. This opens up the market to niche buyers serviced by more ports."
Hub and Spoke System
Container shipping works on a Hub and Spoke system. Large container ships ply the waters between big, designated, servicing ports (the Hubs). Then, depending on the final destination of the consignment, the container may move to a satellite or feeder ship for the final leg of the journey (the Spoke). Whilst a container may travel a greater distance and be handled more often with this method, the total logistics solution is optimised. When coupled with discounted rates for back loading containers, we can see a good lift in forest gate returns.
Most of the log export is done in 20 foot containers with 5.1m and 5.4m log lengths providing the best stowage efficiency. "Depending on the grade and log length, between 14 and 18 JAS m³ can be fitted into each container", says Weblin. "Fumigation, which is required for export to India and China, is either done in the container or by tent-fumigation (under tarpaulins on the port)".
Currently PF Olsen is exporting logs out of Ports of Tauranga, Napier, and Lyttleton with plans to commence supply logs to operations out of Ports of Nelson and Auckland.
Impact on Forest Gate Returns
The impact on forest gate returns can vary depending on which port is utilised. Evaluation at one of the ports PF Olsen use shows improvements of up to $10/JAS m³ compared to break bulk operations. This is a welcome benefit to PF Olsen clients who have been subject to downward pressure on returns this year with a weak timber market in combination with increasing costs driven by high fuel prices.
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Log Markets
After hitting a low in November 2007 last year and drifting sideways for several months, export log returns slowly increased to a "peak" in February 2008 and then drifted downwards. There is strong consensus that April/May at-wharf-gate prices are a low point with expectations of firming prices for the balance of the year and beyond.
The domestic market, which has held up much more consistently for some years, is now showing distinct signs of weakness as the fall out from the credit crisis and slowing growth rates in New Zealand, Australia and the US crimp demand and put pressure on prices. The NZ Timber Industry Federation recently reported significant over capacity in the NZ sawmilling sector and pruned log processors are facing very weak conditions in the key US market.
An outcome of the market volatility can be seen in recent MAF production statistics. Total production-forest harvest volume dropped to 4.17million m³ in Quarter 1 2008 compared to 4.67 million m³ for the same quarter a year earlier; an 11% drop. This drop is in direct response to falling log prices as standing inventory of mature timber rose during the same period. What this means, is that when prices rebound, more and more forest owners will be chasing fewer and fewer harvesting crews (see Harvest-Ready story above).
Outlook
Rather than spend time lamenting the current market situation, it is more useful to look at some of the drivers that are expected to influence the market going forward.
The general consensus amongst market commentators is that export log prices will strengthen through the remainder of this year and early next year. This is due to several fundamental factors working in our favour:
- Russian log tariffs are programmed to increase to 80% of log value (from 25% currently) or a minimum of €50/JASm³. Russian log supply as reported by the Japan Lumber Journal has dropped such that Japan is reported to be having an "absolute shortage of supply" of Russian wood.
- Softwood export volumes from New Zealand and Australia have dropped by an estimated 18% compared to last year.
- Strong demand and reducing inventories of logs in Asian markets are seeing pressure on US$CFR prices (prices paid by log buyers at the destination port).
- Stable, albeit high, ocean freight rates with some downside commencing.
- Increased containerisation to mitigate high break-bulk ocean freight rates.
- Some (continued) lowering of the NZ$/US$ cross rate.
Just how these factors play out in terms of at-wharf-gate prices is difficult to predict. One of the leading NZ log exporters we supply is forecasting price rises of $15 to $20/JASm³ through the end of this year.
Domestic log market conditions face strong head-winds with continued deterioration in the property market, the threat of stagflation and little room for the Reserve Bank to significantly lower interest rates. To some extent, increasing export log prices may provide a floor for domestic log prices. In addition, major offshore markets for our sawn and processed products face a similar domestic situation. Some relief may come from lowering NZ$/US$. Pulp log pricing should strengthen as high stocks from land conversion projects disappear and lower grade logs are exported.
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Kokako Programme Achieves Milestone
The Kaharoa Kokako Trust is a community-based initiative aimed at restoring populations of this iconic native New Zealand bird. Based in Kaharoa, just north of Rotorua, the Trust has facilitated a concerted possum and rat control programme throughout the Kaharoa Conservation Area. During the last 10 years the Kokako population has built up from 12 to over 60 breeding pairs.  A recent walk-through survey funded by PF Olsen as agent for OTPP showed birds moving out into new areas. "This is a tremendously successful programme and PF Olsen and its client OTPP is proud to be supporting the good work being done", says Kit Richards, PF Olsen's Environment Manager.
The Trust recently put out a press release covering the expansion of the Kokako populations and favourably acknowledged both PF Olsen and OTPP (a neighbour to the Kaharoa Conservation Area).
Associations with these sorts of initiatives can only strengthen OTPP's status regarding FSC certification. See also Kaharoa Kokako Trust website.
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On the job training brings rewards and satisfaction
After 15 years each in forestry, Brett Jobe and Logan Negus have found the forest industry offers them a diverse and satisfying career.
They work in PF Olsen's second most northern office in Kawakawa, Northland - which covers the area from Mangamuka south to Auckland - with two colleagues, Peter Bullen and Grant Rowe.
 Brett says, "The advantage of working in a small four-man team is that there are lots more opportunities to shift between the different roles within the company.
"While I'm currently a Forest Manager involved in all aspects of forest management I have expanded my responsibilities into harvest supervision and inventory work."
That need to be multi-skilled also keeps them on their toes in terms of training, as PF Olsen supports its employees in job related study, as areas of expertise are needed.
"We often find that training in different areas of forestry - like Forest Health - improves our relationships with our clients as we are able to talk to them about forest health issues they may have. This complements the standard forest management services we offer", says Harvest and Marketing Manager, Logan.
"By gaining a National Certificate in Log Making and becoming a trainer and assessor, we are able to confidently offer a training service to some of our harvesting contractors and gain an edge over our competitors", says Brett.
Although it is always a challenge to find the time to train when you are working fulltime, Brett and Logan have between them completed; a Diploma in Forestry, a Bachelor of Science and Technology degree, and six FITEC National Certificates in Forest Establishment, Silviculture, Log Making and Forest Health from Level 3 to Level 5.
Brett and Logan received national certificates at FITEC's regional graduation ceremony in Whangarei in May.
But best of all they get to apply their training and their skills to help clients achieve the best possible results from their forestry investment.
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PF Olsen Expands Business in South Island with Selwyn Plantation Board
PF Olsen welcomes Selwyn Plantation Board (SPB) as one of its new clients. Based in Canterbury and managed from our Christchurch office, SPB now has forestry and harvesting management services, along with FSC certification, provided by PF Olsen.
 SPB saw the writing on the wall several years ago with regard to the implications of the Kyoto Protocol and carbon emissions and proceeded to convert most of their plains forests to pastoral farming prior to the imposition of the Emissions Trading Scheme's carbon liability (what some call a carbon "tax" on land conversion). Acting as responsible land managers SPB sought to deliver highest and best land use for their shareholders (local territorial authorities, Selwyn Investment Holdings Ltd and Christchurch City Holdings Ltd).
With less than 6,000 hectares of hill country forests, SPB concluded that it was not viable to sustain its own in-house management capability, and it sought proposals from various third-party professional forest managers. "Modern forestry involves national environmental certification, carbon sequestration, emissions trading, forest estate modelling and meeting best-practice compliance", says Austen Russell, SPB's chef executive. "Contract management provides for economies of scale and allows the company (SPB) to access the best professional forestry skills that are available."
PF Olsen is pleased to have been chosen by SBP to be its manager. Kerry Ellem, former CEO of SPB (see photo), has this to say about PF Olsen: "When Selwyn Plantation Board decided to out-source its forest management, proposals were evaluated from service providers around New Zealand. PF Olsen was our preferred choice for a number of reasons. Their 36 plus years of broad-based forest management experience gave them credibility and we felt confident that they could deliver. In our dealings with PF Olsen we found them highly professional and credible. They were able to offer a comprehensive management service and clearly kept abreast of innovation and advances in research through their support of, and involvement in, collective research and lobby groups. We liked their investment in management systems and strong disciplines in areas such as GIS, stand record management and forest modeling. We also needed a manager who didn't have conflicts of interest such as log trading or contracting and PF Olsen stacked up very well in terms of its independence."
Since commencing the new contract in May of this year PF Olsen has been busy transferring data into its FIPS system and getting to know the estate, contractors, neighbours stakeholders and log buyers. The log export container initiative (featured above) will be particularly advantageous for SPB and PF Olsen's other Canterbury-based clients. Up until recently, options for log export out of Port Lyttelton were very limited. "Working closely with Tenco Limited, a global forest products export company, we are looking at signficantly increasing the net return on Export A grade logs by an estimated 30-40% says Scott Downs, PF Olsen's Northern South Island Manager and key account manager for SPB, "That's great news for SPB and great news for our other forest owner clients".
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Kit Richard's Contribution Recognised in Forester of the Year Award
PF Olsen's Environment Manager, Kit Richards, was recongnised as the New Zealand Institute of Forestry Inc (NZIF) 2007 Forester of the Year at the Institute's annual conference in Palmerston North in May.
Kit's selection as the Forester of the Year recognises his leadership and excellence in forestry, and his commitment and contribution to the profession.  Kit has made significant contributions in the sustainable management of indigenous forests, development of the Environmental Code of Practice, leading edge work with environmental management systems and national initiatives on FSC in general. His good publication record underpins his qualities as a suitable recipient of the NZIF Forester of the Year Award.
The award is in the form of a carving, to be held by the recipient for a year, which contrasts the mighty native forests of old with the more uniform exotic forests of the present.
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PF Olsen Forestry Client Success Story
Matthew Haigh, a farmer from Putaruru, wanted his 8ha woodlot of 15 year old pines cleared to make way for a dairy conversion and contacted PF Olsen to do the job.
 "A family friend referred PF Olsen to me and I was keen to get them on board. With their local standing and knowledge in the community, I knew I could listen to their advice and they would be able to tell me the best solutions for harvesting my woodlot."
"Actually log prices went up from previous estimates I had received. PF Olsen managed to get a very competent, local contractor on site who completed the work within the time frame. They were then able to sell a significant portion of smaller sawlog for export. What a great achievement!"
"I mainly dealt with Craig Fisher from PF Olsen and I was impressed with his professional approach.
He was honest, reliable and down to earth. Most of all, he was able to deliver what I expected and more. I have no hesitation recommending them to friends and neighbours, the whole job went smoothly from beginning to end".
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