In This Issue

• Clarky's Comment
• PF Olsen Australia - Sponsor and Speaker at Victorian Association of Forest Industries
• Log Markets
• PF Olsen Awarded Timberlands West Coast Management
• Update on WQI - Wood Quality Initiative
• PF Olsen's IT Expansion and Contraction

Clarky's Comment

This is our last edition of Wood Matters for this year. The staff at PF Olsen would like to take this opportunity to thank all our clients, suppliers, contractors and other folk that we have been involved with during the year - and wish you all a very MERRY CHRISTMAS and PROSPEROUS NEW YEAR.

It has clearly been a challenging year, not just in forestry, but across almost all sectors in New Zealand and across the globe.

Some holiday season reflection may give us a chance to ponder some of the upsides that are inevitably ahead of us:

• Rapid gains in housing affordability driven by rapid falls in interest rates and lowering house prices.
• Lowering interest rates lowering the cost of business.
• Fundamental under-supply of housing in NZ and Australia.
• Lowering fuel costs and other costs of production.
• A falling exchange rate increasing our export competitiveness.
• Revisiting the increase in the Russian export log tariff (after the 9-12 month deferral announced a few weeks ago).

Let us hope that some of these considerable upsides are significant enough to more than offset any as-yet-unforeseen future set backs.

The Emissions Trading Scheme - Where to From Here?

Since the announcement of the deferral of the Emissions Trading Scheme, there has been a mixture of sighs of relief (e.g. from many emitters) and howls of anguish from those that had businesses and projects partially initiated or poised for action. It is probably safe to speculate that no matter your view on this subject, there would be a general consensus of opinion that the lack of certainty in this area has been damaging to individuals, firms, the NZ economy and NZ's international reputation.

It now seems likely that the order that will go before Parliament will be one of full suspension of the ETS. That leaves the question of deforestation of pre-1990 forest land. Some commentators are speculating that the economics of dairy farming are now such that there would be relatively little forest-to-dairy conversion - this would appear to make the offset scheme proposed by the Flexible Land Use Alliance (FLUA) much more tenable to the government. Either way, some strong signal will have to be given regarding deforestation of pre-1990 forests.

Although the Select Committee's terms of reference for the review of the ETS is wide-ranging, and includes a consideration of a carbon tax, most commentators are expecting some form of ETS will still prevail. And since forestry represents one of the lowest-cost and environmentally positive ways of mitigating greenhouse gas emissions, it is likely that the ETS will be positive for forestry.

If you are considering new forest investment, you should take a look at the Permanent Forest Sink Initiative or the Afforestation Grant Scheme to see if they could fit your needs (see below). Otherwise, unless you have a clear vision and personal conviction about how things might shape up, new forest investment projects predicated on carbon values may have to sit tight and wait for more clarity and certainty.

Afforestation Grant Scheme and Permanent Forest Sink Initiative

Depending on your circumstances, the Afforestation Grant Scheme (AGS) or the Permanent Forest Sink Initiative (PFSI) may suit your circumstances. These programmes are expected to remain in place. The AGS provides a significant subsidy for planting that meets specific criteria - see link Wood Matters Issue 3. The PFSI provides the ability to generate Assigned Amount Units (AAUs) which are tradable on the international market but there is a 99 year harvesting covenant. PF Olsen can help you evaluate these schemes further - call you local PF Olsen representation of call FREEPHONE 0508 PF Olsen (0508 736 5736) or email us at info@pfolsen.com.

PF Olsen's Role in Carbon Forestry

Many of these newly emerged businesses are focussed on sales and brokering of carbon credits. They are interested in attracting large numbers of forest owners with the primary motivation of selling their (the forest owners) carbon credits and "clipping the ticket". Whilst sales and brokering are important end points of a carbon forestry project, it's important that the brokering "tail" does not wag the project "dog".

So what is PF Olsen's current and future role in this area? We anticipate a busy future in carbon forestry and look forward to getting projects off the ground as soon there is more certainty:

1. Continued representations to Government Ministers and officials to get the best long-term outcome for forest owners (e.g. active support and involvement via the Kyoto Forestry Association, the NZ Forest Owners Association, the Flexible Land Use Alliance and the Climate Change Leadership Forum);
2. Contribution to processes that shape legislation and regulations (such as the Measurement Working Group);
3. Evaluation of opportunities for owners and would-be forest owners;
4. Evaluation of opportunities for emitters who wish to hedge their emission exposure with forestry-based projects;
5. Research and consulting into optimum site, species and regime choice;
6. Optimisation and management of carbon measurement;
7. Stand records and carbon accounting. Filing obligations and carbon returns on behalf of forest owners;
8. Projecting timber, carbon and cash flows;
9. Project implementation and management;
10. Developing a fund which will have the effect of a carbon "pool" and provide a broad range of efficient carbon trading opportunities and carbon instruments, including price hedging and forward sales opportunities. This will benefit both new and existing post-1989 forest owners.

PF Olsen will continue to communicate via our carbon seminars (currently in abeyance due to the recent uncertainty) and Wood Matters. For those of you who are full PF Olsen management clients (which means we have your forest on our FIPS data base) we will continue to monitor the situation and communicate directly with you when we see either an obligation falling due or an opportunity emerges.

PF Olsen Australia - Sponsor and Speaker at Victorian Association of Forest Industries

PF Olsen would like to thank the Victorian Association of Forest Industries for the opportunity to sponsor and speak at the Annual Dinner recently.

Pat Groenhout, PF Olsen's Australian General Manager (see photo left) spoke at the event.

Pat delivered a typically passionate plea for the industry to set aside politics, agendas and personalities and work collectively to advocate that the Victorian Government address fundamental flaws in its forestry right legislation. This legislation, attends Pat, prevents the effective trade of such rights and is likely to place Victorian forestry in a difficult position with respect to participating in an emissions trading scheme. Pat also noted the changing face of forest ownership. More than 90% of new forest establishment in Australia in the last ten years (comprising more than 50% of the entire planted forest estate) has occurred through private investment. This substantial increase in ownership puts ever greater demands on legal instruments such as forestry rights to confer ownership of trees (timber/carbon/other values) independent of ownership of the land. The major anomaly Pat sees in the Victoria Government Forestry Right Act of 1996 is that it excludes the ability to transfer a specific forestry right between parties and explicitly excludes the forestry right being an interest in the land on which it sits.

Well done for highlighting this issue Pat. Lets hope it can be resolved to make the forestry industry stronger and a greater contributor to the Victorian economy in particular and the Australian economy generally.

Log Markets

Export Log Market - at Point of Inflexion?

This market is very much at a possible point of inflexion. November saw some export at-wharf-gate (NZ port) prices rise considerably as high C&F US$-based prices (at Asian ports) coincided with rapidly declining shipping costs and a declining NZ$/US$ exchange rate. The effect was not across the board as some traders were still working off longer-term shipping fixtures and foreign exchange positions.

Agrifax report - "Over the past 14 years, we have never seen such wharf-gate price variances from exporters as we are seeing now, with a standard Korean short log ranging in price from $65 to $105 per metre."

To give a perspective of how much shipping rates have dropped, earlier this year it cost over US$80/JAS m3 to ship logs from NZ to Asian ports. Last week we were told of a $25/JAS m3 fixture (a 68% drop). The NZ$/US$ exchange rate has dropped from a high of 0.82 earlier this year to 0.52 today (a 37% drop).

However, concurrent with these positive changes has been a significant drop in demand and price as a result of the financial crisis and the deferral of the Russian log tariff (final step increase). Our market intelligence is that NZ A-grade prices in China have fallen from C&F US$130/JAS m3 to less than US$100/JAS m3. Despite the price drop, the biggest issue is sluggish demand and building inventory.

The message from the main export traders is clear and consistent. The market is fragile and needs to clear stocks prior to showing any signs of recovery, possibly after Chinese New Year in late January.

Domestic Log Market

Log producers are benefiting from the more favourable exchange rate for their export sales but sluggish demand is capping their ability to fully exploit this advantage. Domestic sales are also weak on the back of the slowing property market and falling residential construction activity, with a small offset from increases in non-residential and infrastructure construction.

In some instances sawmillers are cutting back production, as forest owners are not prepared to reduce prices further, especially with the high export prices on offer.

Overall Log Index and Summary

The following is how Agrifax summarises the situation and outlook. "The NZX Agrifax Log Price Index, which measures returns from the whole forest, rose by $5 per tonne. This is the biggest ever one month rise recorded, and is due to the higher export returns, particularly evident in the North Island. However the whole forestry export scene is going to be very volatile and probably will soften for the next three months, until after the Chinese New Year".

PF Olsen Awarded Timberlands West Coast Management

Late last month PF Olsen was successful in being awarded management of 27,000 hectares of plantation forest currently trading as Timberlands West Coast Ltd (a State-Owned Enterprise).

"We are very pleased with this outcome", said Peter Clark, PF Olsen's CEO. "We currently manage forests for Crown Forestry in Northland and the East Coast and are pleased that they had the confidence to extend our responsibilities to the west coast forest estate".

Management of the forest will transition from an in-house management team to contract management with PF Olsen on the first of January 2009. "This is a very short start up window but we are confident we can meet the deadline", says Peter Keach, PF Olsen's Operations Manager. "We have considerable experience in management transitions over short time frames, so we can draw on that experience. We will do everything necessary to meet Crown Forestry's requirements including maintaining Forestry Stewardship Council certification for the estate and will ensure that harvesting operations get underway promptly in the New Year to meet log supply commitments to existing Timberland's customers".

The PF Olsen is expected to employ most of the current Timberland's West Coast management staff.

Selection of the forest manager followed a rigorous competitive tendering process involving the submission of a management proposal and an interview. Crown Forestry General Manager Charles Schell said that PF Olsen had been selected for the task of managing the day-to-day operations on the forest estate based on the depth of their operational experience nationwide, the strength of their proposal for managing these forests and their backup capacity.

Thanks for the vote of confidence Crown Forestry. We look forward to getting involved in this new resource and working with new people. This greater presence in the Canterbury/West Coast regions will also benefit existing and future PF Olsen clients by providing economies of scale, improved log cartage opportunities and more scope for market development.

The photo below shows PF Olsen staff getting to know local logging contractors currently working the Timberlands West Coast resource.

Update on WQI - Wood Quality Initiative

WQI is a forestry industry based research company with the objective of developing tools and techniques to better assess wood quality to drive better allocation decisions along the supply chain (e.g. the right logs or timber going into the right process or end-use) and improving processing methods and technology (e.g. how do we minimise the damaging effect of checking and cell collapse during timber drying).

WQI's shareholders are forest industry participants (mainly based in NZ and Australia). As a WQI shareholder, PF Olsen gets direct and immediate access to share-holder privileged research findings which we can then apply to the management of our client's forest and harvesting management.

One exclusive benefit that came out of WQI this year was the development of algorithms that enabled us to estimate wood density and sonic velocity (wood stiffness) for individual log sorts. We could also model the changes going forward as a function of forest growth. This allows us to accurately determine the year at which production of high value structural logs optimised the total net return from harvesting. This ultimately means more money for the forest owner. The chart (below) shows such a projection for a stand in the Bay of Plenty.

Two of the great advantages of WQI is its funding leverage and collective effort.

For each dollar invested by the shareholder, the Government contributes a dollar. This funding leverage gives a real boost the research programme and acts as an incentive for shareholders to get stuck in and provide good funding support.

Most of the research programmes would be out of the reach of individual shareholders. Collectively, however, the research funding is significant and allows WQI to manage programmes of real substance with significant value-added potential.

A current exciting area of research with a big near-term potential win is the development of tools for predicting resinous defects at the forest and stand level. The particular relevance of this research relates to the critical role exported Radiata pine appearance products will play in utilising the large volumes of pruned logs coming on stream over the next 10 years.

The photos (right) show resin bleed; the top photo through paint (this is from a barge board - the green section being exposed and the white section was underneath the roof flashing) and the bottom photo after machining. The section that has bleed is clearly different from the section of wood it is finger-jointed to. WQI is working on developing an automated system to allow processors to reject these pieces before manufactured into final product. This will confer huge cost savings by reducing the incidence of non-conforming product.

PF Olsen's IT Expansion and Contraction

Sometimes less is more. In the Information Technology realm this is becoming more so.

PF Olsen is reducing the number of servers it runs in order to:

• increase utilisation
• reduce mangement costs
• reduce power consumption
• improve reliabiilty, and
• improve system resilience.

More computer hardware means more potential points of failure, and greater management costs. Too few servers makes a business vulnerable to single failures. Striking the right balance, and having the right strategies to prepare for failure without incurring undue expense could mean the difference between delivering leading-edge competitive management services to our clients and inefficiency and unrelaible service.

With the recent announcement that PF Olsen has been awarded the management of the Crown's West Coast resource, we brought forward a project to expand our data storage by creating a Storage Area Netwrok (SAN) and to virtualise our data servers. This project will be undertaken by our service provider, Gen-i Limited, during the Christmas/New Year period to minimise disruption to users.

So What's A SAN?

Servers are often configured with local or locally attached storage in much the same way as a home PC has its own local hard drive. This configuration limits the ability to share that disk space with other computers, or to expand storage available to that computer by adding disks. The frustration for IT Managers is to see one server running out of disk space while another server has plenty of available storage. A SAN comprises of an array of disks connected to by multiple servers. Each server can have differing amounts of drive space allocated to it. Space allocation can be changed dynamically, and when there is a need for more storage on the SAN additional drives can be added to the array and the total disk space increased without the need to shuffle data round.

In a SAN the file system appears to the user as if it is on the server, however the data is physically stored elsewhere on the network.

Because the storage is "outside the box" and connected to over a network, it is possible to have greater reliability. When the disk drive is inside the server, there is usually a single controller, which can be subject to failure. When a SAN is set up, two fibre channel connectors are installed into the server, which are then connected to the SAN via two separate switches. In order for data to be made unavailable to the users there has to be two simultaneous failures.

What is Server Virtualisation?

Until recently when an organisation wanted to add a new business system, to avoid conflicts with other systems or to enable separation, it would have bought and configured a new server. This lead to many single use servers existing in organisations. Quite often these servers were under-utilised. The tragedy of this is that regardless of how many users were connecting to the system, and how much demand there was for the memory, processor and other system resources, these machines sat in the server room drawing the same amount of power as one that was working at 90% load. And all those servers take up space in the server room.

In the last five years or so, server virtualisation has become a reality. Server virtualisation involves using one very powerful server to host multiple servers (virtual machines). Depending on load, a single server host can be configured to do the work that used to be done by five or ten physical servers. When several host servers are set up in an IT environment, the virtual machines can be configured to run on one or more of the physical hosts, thereby enabling the IT staff to move operations from one server to another for maintenance.

PF Olsen has been using server virtualisation for the last two years, and we have now reached the point where we can virtualise the last of our dedicated physical servers. Four servers will be shut down and started as virtual machines on a new physical host server. Our entire network infrastructure will have shrink from ten physical servers to three over a period of two years.

How Does this Benefit Our Clients?

In addition to the need for greater storage capacity, PF Olsen is always looking for ways to make our systems more reliable and responsive, and to protect data.

PF Olsen's staff make a lot of use of computing systems, for communications via e-mail, correspondence, and report writing, as well as record keeping and data analysis. Being able to undertake these functions reliably and quickly enables us to service more clients and service them more quickly. We want to be able to answer your questions quickly and accurately.

We also maintain a wealth of data about our clients' forests, along with financial transactions, such as paying contractors and log sales, in a safe and secure environment. We need to maintain client confidentiality about that information but also be able to make use of that information to maintain and/or add value to our clients' assets. This IT investment is just one of many ways PF Olsen ensures that it remains the leading independent provider of professional forestry services in Australasia.