STOP PRESS!
The challenging aspect of "real-time" communication for an electronic newsletter such as Wood Matters is that no sooner than you have material to distribute, then the world changes.
Such has just happened regarding the Emissions Trading Scheme (ETS). It is now apparent that National's announced review of the ETS is likely to result in:
- Delay in implementation until 2010 at the earliest; and/or
- Significant changes in approach including the possibility of a carbon tax or a hybrid system.
PF Olsen is in discussion with MAF regarding exactly what that means regarding the current legislation and obligations (e.g. the deforestation liability). We have a meeting scheduled with MAF tomorrow morning to seek clarification.
Rather than rewrite this edition of Wood Matters, we are retaining the material as written but include the following caveats regarding Carbon Forestry and the ETS:
- We are expecting subsequent government announcements regarding the obligations and requirements of the newly passed Climate Change Responses Act 2008 and the Climate Change (Forestry Sector) Regulations 2008. These announcements may materially change the advice and interpretations presented in this edition of Wood Matters.
- We have postponed our Carbon Forestry seminar planned to be held in Taupo next week due to the uncertainty surrounding theses issues.
Whilst PF Olsen believe it is highly likely that some sort of scheme will be implemented that will encourage new planting (carbon forestry is still one of the lowest-cost ways of reducing CO2), it is very difficult to plan projects when the rules are constantly changing. Until the uncertainty is removed, there is a high risk that projects will not meet intended expectations.
Please note that the Afforestation Grant Scheme (AGS) and the Permanent Forest Sink Initiative (PFSI) are still intact and may suit some people. If you would like to discuss the suitability of these schemes, please contact us on our FREE phone 0805 PFOLSEN (0508 736 5736) or e-mail us on info@pfolsen.com.
We will continue to monitor the situation closely and keep you updated in subsequent editions of Wood Matters.
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Clarky's Comment
On carbon forestry
 Pre-1990 landowners have only a short window of opportunity to apply for exemptions under the 50ha rule or the tree weed category. According to the Draft Forestry Allocation Plan applications for exemptions must be lodged after the Final Allocation Plan is published some time in April 2009, but no later than 30th June 2009. The deadline to apply for "partial compensation" units is to be (tentatively) 31st July. ALL pre-1990 forest owners should be applying for either an exemption or for units on EVERY hectare of pre-1990 forest land they own, as the default position is no exemption and no units. There is only one chance to apply for exemptions and allocations. PF Olsen will work with existing clients for whom we have stand records to make sure everyone gets the maximum advantage from this exemption. Any other people who wish PF Olsen to make these applications on their behalf should contact us as soon as possible.- Both major political parties have, in recent weeks, suggested that the phase-out of free allocations to the agricultural sector is a matter for future negotiation. This comes on top a late change to the Bill that extended the commencement of the phase-out to 2018. While this is perfectly reasonable from an economic perspective, it does have the consequence that high pastoral land values get locked in, supported only by the expectation that pastoral farming emissions will continue to be subsidised by the taxpayer. High land values and land availability are the biggest constraints to large-scale new tree planting in New Zealand.
- National and forest owner gains from carbon forestry will be maximised by using treestocks that exhibit high growth and high density. Control pollinated radiata pine seed that exhibit these traits will be in limited supply until at least 2013. Some forestry investors will need to take second-best genetics and some may have to go on a waiting list to get any treestocks at all. Whilst propagation using cuttings is possible, it takes several years to build up volume. If people are thinking about restocking or new planting in the next few years, we strongly suggest they contact PF Olsen early in the planning process to secure their treestocks.
- PF Olsen has spent considerable time and effort investigating whether there is an opportunity to sell pre-CP1 post-1989 forest carbon credits into the voluntary market. To date we have been unsuccessful. We are aware of some such units being offered for sale, but have come to the conclusion that without carrying a certificate of compliance with an internationally recognised voluntary carbon standard, that the vendors of these units could be subjecting themselves to commercial risk. It has not been possible to certify pre-CP1 NZ forestry credits to any such standard because it is impossible to pass the additionality test. We are now investigating the opportunity use these pre-CP1 units to "green" Russian/Ukranian "hot air" units so that they become acceptable under the NZ ETS. This has the potential to unlock significant additional value for pre-1990 forest owners, although it is still at a formative stage at present.
On log markets
NZ forest owners face a golden opportunity to get increased prices for export logs. The two key supply chain costs drivers (bulk shipping and exchange rate) have finally tipped seriously in favour of more profitable trade. This opportunity must be tempered with reduced demand for logs from Asia, credit concerns related to some buyers and the deferral of the big increase in Russian log export tax.
Given that demand and credit generates sufficient orders from Asia, what are the barriers to most of the gain coming back to the forest owner and what needs done to remove these over time?
- Some export traders or agents have taken long-term positions on bulk freight rates. Until these work through such contracts must be honoured, meaning less revenue for forest owners linked to such contracts. Forest owners not locked in to such arrangements have the option to shop around for better prices offered by others not locked into higher freight rates.
- A depressed market for pruned and structural grades, limiting total return to stump even with improved export grade returns. This is a more deep seated problem.
- Structural Logs. There is considerable upside potential demand for structural timber in both NZ and Australia. There is now a large imbalance in the supply and demand for housing stock in Australia, with the major constraint being housing affordability. With interest rates and land values dropping, activity should pick up in 2009/2010. Meanwhile the NZ Wood campaign in NZ and a similar campaign about to get under way in Australia, combined with climate change policies in both countries should see increased use of timber to displace concrete and steel in commercial structures up to 4 stories high.
- Pruned Logs. Our current market for long clear mouldings and wide clear boards in US and NZ/Australia is quite limited and mature. With the potential expansion of our national cut from 20 million m3 to 30 million m3 over the next decade, and much of this having pruned logs, this problem will not solve itself. The biggest single opportunity that I see is to displace (or meet increasing demand) for long/wide clears and face veneer currently being served by tropical hardwoods. The biggest potential new markets will be in India and China, but many other SE Asian nations also face reduced access to tropical logs.
Sending pruned logs overseas that arrive sap-stained will not work. Exploring and commencing trade for pruned timber will take a multi-firm effort, often with local partners. I find it interesting that the NZ tourism industry is seeking a further $30 million to add to the $73 million they already spend of taxpayer funding on generic marketing, while an equally fragmented and similar sized forest industry receives $2 -3 million support for the same purpose (mainly NZ Wood promotion - that is new). I am not suggesting there is not a good business case for the additional $30 million for tourism, but it would not be too hard to make a more compelling case for our forest industry I would have thought (in terms of national cost/benefit) - where is MAF and NZTE funding support for this critical market development work?
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Carbon Forestry Seminars
PF Olsen held a successful Carbon forestry seminar in Ohaupo (just North of Te Awamutu) earlier this month. A total of 83 participants, many of whom had travelled from well outside of the district to attend, filled the Windy Ridge Conference Centre. South Waikato turned out a beautiful afternoon for the event, the only "dark-cloud" being that the timing clashed with the Melbourne Cup. (Ross Larcombe did check for clashes but didn't extend his search that widely. And we did appreciate those that gave up viewing the race "live" to attend the seminar.)
The sessions are designed to cover not only some essential background to the topic of carbon trading and the emissions trading scheme, but also focus on what forest-owners and would-be forest owners can to in terms of taking "next-steps". One of the topics covered is the highly favourable cashflow that can be generated from Carbon forestry - this makes Carbon forestry much more attractive than timber-only forestry projects (see Exhibit below)
 Another topic covered was the issue of treestocks. Treestocks for planting in 2009 are already almost completely committed. In addition, low seed stocks and a poor seed strike this year means that NZ seed supply will be lower than usual. It is very likely that treestock availability in 2010 and 2011 will be constrained (see also Clarky's Comment). When this is combined with increased planting intentions related to the Emissions Trading Scheme, a serious shortage of treestocks is looming. "People considering planting programmes in the next few years will need to secure their treestocks as soon as possible to avoid disappointment", pointed out Peter Weblin, PF Olsen's Marketing Manager and seminar presenter.
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Carbon Forestry Seminar Cancelled
As a consequence of the uncertainty now surrounding the ETS, we have decided to postpone our planned Carbon Forestry seminar in Taupo next Tuesday 25 November. If you are scheduled to come along to this seminar, please note that we are no long holding it as planned. Please pass this postponement notice on to any people you know that might be planning to attend and who may not get this notification.
"Postponement of this meeting was a hard decision to make", points out Peter Weblin, PF Olsen's Marketing Manager and seminar presenter. "However, we are reluctant to have people taking valuable time out of their busy day to sit and listen to what has now become uncertain. Until the rules are clear, for many people taking action regarding carbon forestry now would be far too speculative."
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Log Markets
Some big news last week was the deferral of the planned increase in Russian log export tariff to €50 or 80% from 1st January 2009. Apparently the press release coincided with key negotiations between Russia and the Norwegian timber industry.
There is much speculation regarding the motivation for the deferral. Some commentators suggest that is was never intended to be introduced and it was just "sabre-rattling" by Russia. Others believe that the global financial meltdown and big drops in oil and gas prices mean significantly lower export revenue for Russia. The prospect of a big curtailment of log export revenue in this climate was highly unattractive.
However, since we didn't really know what the impact of this final tariff step would be, we don't really understand the impact of this deferral. Last week a Chinese log buyer, whilst confirming a large export order for the first quarter of next year reported to us: "We have based our orders on the current situation so the deferral of the [Russian] tariff has no impact".
As reported in Clarky's Comment, the current climate is creating larger than usual spread of wharf-gate returns. Forest owners are well-advised to shop around and make sure they understand the basis of the sales arrangements they are making and the price and credit risk associated with it.
PF Olsen has been working with log exporters and has established some highly favourable log sales over the coming months, and well into the summer (early 2009). "We are pleased to have accessed some strong segments of market demand which are enabling the big reductions in bulk shipping and exchange rate to flow through to forest-owner returns", says Peter Weblin, PF Olsen's Marketing Manager. To find out more of these opportunities FREE phone us on 0508 PFOLSEN (0508 736 5736) or phone Peter Weblin on 021 942 820.
Ocean Freight Rates Stabilise
After the Baltic Dry Index fell to less than 80% of what is was a year ago, bulk shipping rates are starting to stabilise - albeit at low levels. "We understand that some log exporters are getting fixtures in the high USD20s/JAS m3 but some are still running out higher rates from prior fixtures", says Weblin, "So long as there is sufficient demand to take NZ volume, at-wharf-gate prices should could still improve going forward".
Bulk Shipping Rates Fall Below Containerised Shipping
The rapid fall in bulk shipping rates has made this mode of shipping more competitive in many ports such as Tauranga. Whilst container rates for log shipments are also expected to reduce (based on lower vessel costs and the back-load factor), we are currently entering a period of higher out-going demand for containers (export of summer produce) and less containers are coming into NZ due to lower consumer demand.
For most forest owners, this switch (between break-bulk and containers) is a moot point as responsive marketing managers will simply move to the mode that yields the best net returns.
Log Prices
The NZX Agrifax Log Price Index, which measures returns from the whole forest, rose by only a little over $1 to $NZ76.80 a tonne in October. This was a function of small increases in export log prices and stable domestic log prices.
PF Olsen expects a similar movement in the index in November.
There is hope that the significant (USD586 billion) stimulus package announced by the Chinese Government on 7 November will shore up Chinese log demand. The largest such plan in China history, it calls for new housing, roads, railways and airport, plus rebuilding areas devastated by the earthquake on 12 May 2008.
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