Introduction
Despite yet another apparent derailment of the Emissions Trading Scheme (ETS) after last year's election and appointment of a National-led Government, the ETS with regards forestry, is up and running and several important deadlines are looming. These are covered in Clarky's Comment and Forestry in the Emissions Trading Scheme.
Meantime, a Select Committee is reviewing the ETS. The terms of reference for the Committee is broad (see Terms of Reference).
The forestry sector finds itself in a difficult position of being in the ETS with its related obligations, but also the ETS being subject to broad-based review by a Select Committee. PF Olsen understand that this is very confusing for many forest owners, and we are working hard to crystallize out the critical action points that forest owners need to take to ensure they don't get caught out and that they make the most out of any opportunities available.
In the article Forestry in the Emissions Trading Scheme we cover some to the critical obligations and opportunities in more detail. As Peter Clark points out in Clarky's Comment we will be writing personalised letters to all PF Olsen management clients explaining their options and what action they can take. If you do not receive such a letter but would like to, please contact your local PF Olsen representative or call FREEPHONE 0508 PFOLSEN (0508 736 5736) or e-mail us at info@pfolsen.com.
Our other piece on the topic of carbon is to update you on the Voluntary Market. Regrettably, despite considerable effort by PF Olsen, we were unable to materialise any value from this project for post-1989 forest owners. We also remind you of an important Afforestation Grant Scheme deadline.
Peter Clark and Peter Weblin visited China in mid January. This was a follow up visit to a small volume of log sales PF Olsen has made direct to Chinese end-uses through NZ-based Chinese nationals. We also promoted NZ Radiata pine clear timber (to substitute for South-East Asian hardwood). See China Trip Report.
Other features in this edition of Wood Matters include a successful 2009 Safe Start programme and an update from Kit Richards on Forest Stewardship Certification (FSC) and the Kiwi programme.
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Clarky's Comment
Important Deadline on Claiming Compensation NZUs looming
The deadline for claims for compensation NZUs for pre-1990 forest landowners is 31st July 2009. For many forest owners this will not be a straightforward exercise as the area claimed must be consistent with (or at least no more than) area determination rules set out in the MAF. Simply using recorded Net Stocked Area may either overstate the claim (and risk delays and additional costs) or more likely will understate the area. At say $20/NZU and up to 60 NZUs/ha, any understatement is simply foregoing significant value for no good reason. PF Olsen management clients can expect individually addressed correspondence outlining our recommended course of action to maximise your claim within the rules Forestry in the Emissions Trading Scheme.
NZFOA Submission to Select Committee
NZFOA has prepared a submission to the Select Committee considering amendments to the Emissions Trading Scheme that PF Olsen fully supports. In summary this submission:
- Calls for maintenance of the existing level of compensation for loss of land value for pre-1990 forest landowners, but introduction of the rights to avoid deforestation liabilities by replanting an area different from the area harvested (offsetting). That would lower the cost imposition and constraints to land use change that is not addressed by the compensation units alone.
- Suggests timing of entry for liquid fuels, industrial processes, stationary energy and agriculture and wastes need to be maintained. Going soft on emitters risks removing the incentive to grow forests to sequester carbon - both demand and supply side need to be real for an ETS to function as the least cost solution for NZ Inc.
- Warns that further sheltering of the agriculture sector by taxpayers has consequences for land value and availability that will be negative for tree planting.
- Points out that the costs of deforestation to the nation could be significantly reduced if the domestic rules allowed replanting then removal of that young planted crop soon after planting. While this is bizarre behaviour that makes no sense from an environmental perspective, it is not excluded under the Kyoto rules and is only forced upon NZ by a bizarre Kyoto rule that does not permit relocation and land use change for planted forests. This could be combined with offsetting to ensure the atmosphere was no worse off, and fixed as part of the post-2012 negotiations.
- Supports an averaging option that would reward foresters with 50% of the maximum carbon sequestered in their forest; such units to be earned as the carbon is sequestered up to that level, with no harvest liabilities provided the forest is replanted. This option would enable farmers or other existing landowners to benefit from planting single age-class forests without concerning themselves with managing carbon liabilities associated with harvesting. Such an option must be additional to rather than replace the existing ETS post-1989 regime.
- Recommends that the government cover carbon loss liabilities arising from catastrophic losses that are both uninsurable and outside the reasonable control of the forest owner. This is primarily to cover large scale wind or disease loss. It could logically be covered by the government retaining a small portion of the allocated NZUs until such time as a sufficient pool of NZUs was accumulated.
- Calls for recognition in form of free allocations to industry for emissions reductions made by the wood processing sector since 1990.
- Calls for inclusion in the post-2012 negotiations recognition of that portion of forest carbon that becomes locked up for long periods of time in construction and wooden furniture etc. This would reduce or at least defer liability for up to 20% of the harvest emissions in some forests. This is already on the agenda of NZ and Australian officials involved in negotiating the rules post-2012.
Korea Free Trade Agreement
For many years now Korea has been by far the largest destination for our export logs (around 50% of the total export volume in 2008). One of the constraints to direct investment in sawmilling and ply manufacture by Korean firms in New Zealand has been escalating import tariffs applied to processed wood products. Following a joint study the NZ and Korean governments are now calling for public submissions a Free Trade Agreement with Korea. PF Olsen is preparing a submission strongly in support of such agreement, and is actively involved in attracting Korean investment in wood processing to New Zealand. This work slots neatly into the roles I play on the Korea New Zealand Business Council and the International Business Council.
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Successful "Safe Start" Programmes Set Positive Theme for 2009
Rotorua's "Safe Start" was held on Wednesday 7th January at a Marae at the bottom of Rotoiti forest. Great weather set the stage for a great afternoon.
After a formal welcome onto the Marae, a contractor, Horo, performed our response to the traditional welcome. This was followed by a hangi lunch.
As guests were completing lunch a true-to-life mock accident unfolded. This included a helicopter retrieval of a person with severe leg injuries (see photo below).  The whole incident (including crash) was broadcast over a loud speaker system.
Peter Clark (PF Olsen CEO) spoke briefly and was then followed by Kingi Biddle, the guest speaker, whose message "painting the future" reminded guests to consider traditional Maori values, care of the forest and for those that work in it (see photo below).
An awards ceremony followed the speeches and it was pleasing to see Iwi doing so well among the award winners.
The entire event was recorded by Maori TV and then aired that Friday evening. Feedback has been very positive and relationships have been strengthened among staff, contractors and the local Iwi - beneficial owners of the forest lands. Thanks to the Marae for doing such a good job with the venue and catering.
Similar "Safe Starts" were held by PF Olsen around the country, including the West Coast of the South Island after PF Olsen took up management of that resource late last year. Research has shown that Jan/Feb can have high rates of incidents as workers return from a period off work. The objective of "Safe Start" is minimise injury during this period and set the scene for a positive and pro-active approach to safety for the year.
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Forest Stewardship Certification
Demand for certification services under PF Olsen Ltd's Forest Stewardship Council (FSC) Group Scheme has escalated in recent months. Drivers appear to be the tightening market conditions and the now almost complete move by all corporate forest entities in NZ to obtain FSC certification.
This trend had been expected on the basis that as wood supply catchments become dominated by certified suppliers and processors, smaller and medium scaled forest owners will also have to consider their competitive market position.
Over the past year the Group Scheme has grown in area by just under 5,000ha through the addition of three new clients ranging in size from just 54ha to 7,000ha (the growth was only 5,000ha due to some drop-offs related to changing land use). A number of new parties are, or are set to start, on the certification path and enquiries are continuing. Losses to the scheme owing to conversion to non-forest use is now also expected to decline following the introduction of the Emissions Trading Scheme and the penalties that apply to removal of pre-1990 forest.
Parties wishing to know more about certification under the Group Scheme should visit PF Olsen's website or contact the Environment Manager, Kit Richards on 07 921 7206.
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Kiwi Releases
 Just before Christmas PF Olsen contractors and staff were represented at a release of a young kiwi into the wild at a heavily pest controlled sanctuary on the outskirts of Whakatane. This bird was the offspring of a breeding pair that have been present in an operational forest managed by PF Olsen.
Over the last three years a monitoring and breeding project has received some financial support through PF Olsen and the forest owner. The monitoring included establishing how the birds fared when careful harvesting occurred close by in their mixed plantation and indigenous forest habitats and also involved the lifting of eggs for captive breeding at Rainbow Springs Kiwi Encounter in Rotorua prior to re-release to the wild.
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China Trip Report
12 to 18 January 2009
Background
PF Olsen is constantly being approached by log buyers to supply logs directly into Asian markets. Usually these approaches are forwarded onto the established log traders such as Pacific Forest Products who have done a good job serving the sector for some time. PF Olsen's interest in direct China trade stemmed from an approach from a particular consortium or log processors who were actively seeking to establish a more direct supply line from NZ forest owners to their sawmills. The objective is to create a more efficient supply chain, lowering their cost of logs, whilst at the same time increasing NZ forest owner returns and reducing price volatility. So far, container log trade, and half a break-bulk shipment has been made to this group. The severe market downturn late last year presented several challenges for the new project and it is still early days, but the model still has the potential to provide a valuable alternative for PF Olsen harvesting clients.
Visit to Meet the Buying Group
Peter Clark (PF Olsen CEO) and Peter Weblin (PF Olsen Marketing Manager) headed off into the cold China winter for eight days in January to learn more about the market and the buying group. The following is a mix of highlights of the trip, impressions, and key information gathered during the trip.
Chinese Log Market like a Fish Market
Despite a relatively high level of sophistication in the harvesting and shipping part of log supply to China, the sale of, distribution and processing of logs in China is low-tech. Logs are discharged at Chinese ports and stored by grade in various lots on the wharf. Each lot has an identification number and a mobile phone number posted on a log (see photo below).  Log buyers then inspect the logs and when they see a lot they like, they call the mobile phone number and arrange to pay for the logs (usually cash). They then get a release form that authorises them to load the logs into (usually) beat-up old dump trucks (see photo below) and transport the logs to their mill. They are pretty relaxed about what we would consider gross over-loading!
One of the noticeable aspects of walking around log stocks at Chinese log ports is difference in visual appearance of Russian log supply vs NZ Radiata. The photos below show Russian larch (left) and NZ Radiata pine (right). Despite the obvious size difference (noting that the Chinese preferred size range is 20cm-30cm which are easy to handle with the manual bench band saws) Russian larch typically has much better form, much tighter growth rings, smaller knots and less surface defects. These different qualities result in Russian logs trading at a premium of between US$10 and US$30/JAS m3.
 
Processing
Much of the NZ Radiata stills goes into relatively low-value temporary construction uses (albeit a burgeoning market in China, at least up until last year). The predominant dimension is 4cm x 9cm, rough sawn, and usually air dried. A typical sawmill comprises simple manual bench band saws operated by about six people (see photo below).
Each person is paid about NZ$15/day (10 hour shift) and the band saw unit cuts around 25m3 of timber per day. This equates to a labour cost of $3.60/m3. We were told that total green-sawing costs are NZ$10/m3. When compared to about $85/m3 green-sawing costs in NZ, you can see why it is so hard to compete in the sawn-timber market in China.
We met several log processors cutting and treating NZ Radiata for railway sleepers for Africa. Radiata was considered a particularly good species for this use as it doesn't shatter and took up treatment well.
Workers accommodation is modest, often on the mill site, and if fortunate enough to have family with them, the worker's children's playground is the log yard (see photo below). 
It is staggering to think that a high proportion of the around 35 million cubic metres of logs China imports (and much of its own domestic log supply) is processed this way. That's a lot of little sawmills!
Searching for Clearwood Opportunities
Finding high-value markets for increasing volumes of pruned/clear Radiata pine is of primary importance to any owner of pruned log resource. Therefore, part of the trip involved discussing opportunities to find markets for high quality clear sawn, kiln-dried Radiata.
Radiata logs are prone to sapstain and it is difficult to consistently supply sapstain-free logs to export markets even with debarking and anti-sapstain treatment. In summer logs for export need to be debarked and anti-sapstain sprayed within 48 hours of felling to prevent logs being infiltrated with the sapstain fungus' mycelium which continues to develop inside the log during storage and shipping (despite have a prophylactic treatment on the exterior surface). This is difficult to achieve from ground-based operations and nigh on impossible from cable hauler operations.
Pruned logs supplied to local sawmills, on the other hand, can be more confidently supplied with (more or less) sapstain-free logs so long as logs are delivered within four to 14 days depending on weather conditions.
It is this limitation on the export of pruned logs that makes it all the more important to develop new markets for sawn and kiln-dried pruned/clear Radiata pine. In addition, the US Mouldings and Millwork market (traditionally a big market for us) is very soft with low prices and weak demand.
Unfortunately, however, it soon became apparent that at the present time, there were limited opportunities for this product in China, because:
- There is still sufficient supply of SE Asian hardwood logs at reasonable prices. In the future, this supply is expected to reduce substantially and prices rise as the unsustainably managed resource is depleted, environmental certification increases and illegal logging is curtailed.
- Low sawing costs in China are very hard to compete against.
- Interior fit-outs are dominated by cut stone (such as marble) and appearance metal trim.
- Ready non-wood substitution: on close inspection of what appeared to be wood trim we found it was often synthetic (such and vinyl with a wood finish). Wood look-a-like vinyl flooring strips and tiles were common in new construction.
Lanshan
Lanshan village and port is about 150km south of Qingdao City (at the bottom of the Shangdong province) and a five hour drive north from Shanghai. Lanshan Port has recently been significantly upgraded and expanded to increase the handling of imported logs (see photo below).  Log storage has been developed just off-port, a few kms inland. We arrived at Lanshan early evening after a hair-raisingly fast car trip from Shangahai and stepped out of the car into a minus 4°C twilight, with a stiff breeze to boot. When we there, authorities told us that 250,000 JAS m3 was in stock in the yard and 95% was Radiata pine from NZ. This was nearly maximum capacity for the yard. Lanshan was chosen for this development because of its good port, availability of lower-cost industrial land and central position/transport hub attributes. All around the port are timber processing plants, with many of the band mills described above. We were told of significant expansion plans. It was positive to see this type of investment and particularly the high market share of NZ Radiata.
Very little is wasted in China. We spotted these girls collecting sawmilling waste in one of the Lanshan processing yards (see photo below). We were told NZ$80/tonne is the price for this material for use manufacturing reconstituted panel products such as particle board.
 Market Hits a "Perfect Storm"
Our visit was during the start of the Chinese New Year holiday. This in China's one really big holiday and despite New Year being 26 January, the holiday starts early to mid January and runs through to early February. We were told that the usual practice was for sawmills to purchase log stocks prior to Chinese New Year in order to have stock immediately available for processing when operations commenced after the holiday. This year, however, Chinese New Year coincided with the global financial crisis and the announcement of the deferral of the final steps of the Russian log tariff. Consequently many log processing plants stopped production early (many sites were idle when we visited during the week 12-17 January) and log stocks at the mills were run down to very low levels. Because log prices were almost in a free-fall, saw millers wanted to stand back and pick up bargains in the New Year. Because there was destocking at the saw mills (no processing demand), log stocks at the ports ballooned, accentuating the perception of a very weak market. This created a market distortion and demand has started to come back into the market in the past few weeks. There is evidence of considerable activity related to restoration of earthquake affected areas in the north and infrastructure projects. At this stage it is unclear whether this demand will be sufficient to offset the big drops in demand related to export activity such as furniture manufacture.
Big Investment in Transport Infrastructure
A noticeable and positive aspect of China is its huge investment in a range of transport infrastructure. Whilst Shanghai was frustratingly slow to get around in taxis, this is more a function of 20 million people crammed into one city - motorways criss-cross the City frequently . Travelling from Shangahai to Yantai, however, was on multi-lane, well constructed Expressways for all of the 700 kms. The highlight of over-land travelling was taking the Mag-Lev train from Shanghai airport to the City centre. This 36km trip takes just 7 minutes in the train (one hour in a taxi) and reaches speeds of 431 km per hour. It feels like low flying! For proof, see photo below of the speedo which in prominently displayed in each passenger car.
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Log Market
The demand in NZ, Australia and US for structural and pruned lumber remains very weak and we can expect little improvement in pruned and structural log prices until confidence returns to the construction sector in those markets. There is weakness in pulp log prices and demand following softness in the pulp and paper and Australasian wood chip market.
Since the beginning of the fourth quarter last year C&F log prices (prices paid in destination ports) for export logs have dropped by US$50/JAS in China and Korea and up to US$70/JAS in India. Much of this has been offset by a rapid decline in ocean freight costs (down by around US$40/JAS from US$65/JAS to US$25/JAS) - see Ocean Freight below - and a more favourable NZ$/US$ exchange rate (declining). Some freight fixtures are reported to be sub-US$20/JAS (1 port to 1 port) but generally vessels are doing more multi-port deliveries as traders try to find regional strength in market demand.
A huge challenge for the log export trade has been trying to read the prospective demand situation in China and establishing satisfactory payment terms as banks closed up credit and Letters of Credit became difficult to establish.
However, PF Olsen is fielding strong enquiry from both direct end-users and traders active in China and India. Prices are likely to remain flat in the medium term as Russian supply is still active, but Chinese buyers at least are now nervous about the future of Russian log supply with punitive export log taxes deferred but not dismissed. Some are seeking to switch now to what they see as a more reliable and sustainable supply from NZ. The Chinese infrastructure stimulus package and rebuild of the earthquake damaged buildings in Sichuan will also help.
The NZX Agrifax Combined Log Price index stayed very stable compared to last month at $78/tonne. Interestingly, this is $7/tonne higher than the same time last year and $6/tonne ahead of the five year average.
Ocean Freight
The collapse in the break-bulk ocean freight market has lead to a new phenomenon whereby brand new break-bulk vessels are manned with a skeleton crew and cast adrift on the ocean. This is a result of the vessel not having an immediate commission, and it being too costly to be moored along-side port facilities.
A massive drop off in demand for break-bulk shipping has combined with a high number of new vessels rolling out of ship yards (stimulated by the very high ocean freight price 6-18 months ago). In addition, the price of scrap steel has dropped so much that scraping older vessels is unattractive at the current time.
The chart below shows the widely monitored Baltic Dry Index. Note that the index has reversed its rapid decline in recent weeks and started a small climb as demand for steel and coal to China increases after the Chinese New Year. 
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Update on the Voluntary Market
PF Olsen contacted a selected number of clients last year seeking approval to potentially involve them in a project aimed at crystallizing value out of their pre-Commitment Period 1 (CP1) carbon credits from post-1989 forests. These are the carbon units not covered, nor recognised, in the Emissions Trading Scheme (ETS).
We wish to make sure that all interested parties are aware that exhaustive research and dialogue domestically and internationally has resulted in our conclusion that it will not be possible to sell these carbon credits as voluntary emission reductions on the Voluntary Market.
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Afforestation Grant Scheme (AGS) Tender Deadline
Please note that if you are interested in participating in the next AGS tender round, the applications close 30 April 2009. The AGS was covered in some detail in Issue 3 of Wood Matters.
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Forestry in the Emissions Trading Scheme (ETS)
You will be aware that the ETS legislation that was passed last year, the Climate Change Response Act 2002, while currently the subject of a parliamentary review, remains in force. This Act creates two classes of forestry land: pre-1990 and post-1989 forest land.
Pre-1990 Forest Land
If you own pre-1990 forest land, then you are, by default, in the ETS and you will need to report and account for deforestation of areas that are not exempt. Harvesting a pre-1990 forest area is not deforestation if you replant the cutover or allow it to regenerate into a forest after harvesting. Deforestation of areas that are not exempt carries a liability depending on the age, species and location of the forest. Partial compensation for the impact on the value of your land is provided through the free allocation of NZ Units (NZUs). You need to apply for these units before the end of July 2009 (to be confirmed) if you have pre-1990 forest land. Any units allocated to owners of pre-1990 forest land can be sold and the proceeds from such sale will not be taxable income.
The definition of pre-1990 forest land generally includes more land than the forest net stocked area. We can allow for the growth of the tree crop edge as trees grow older and we can include stocking gaps of less than one hectare. We have to exclude areas outside your legal boundaries.
Decisions to be made by pre-1990 forest land owners[1]
If you own pre-1990 forest land, the key decision you need to make now is whether to:
- apply for an allocation of NZUs as partial compensation for the imposition on this land of deforestation liabilities pursuant to the Climate Change Act - from April 2009 to 31 July 2009 (to be confirmed); or
- if you are eligible, apply to have your land permanently exempt from the NZ ETS (under the "50 ha threshold exemption" or the "tree weed exemption") - from April 2009 to 30 June 2009. Pre-1990 forest land that is exempted does not qualify for an allocation of NZUs, but it is possible to exempt parts of your pre-1990 forest land and claim an allocation for the remainder.
- Any deforestation of pre-1990 forest land > 2 hectares in 2008 should have been notified to MAF by 31 January 2009. Deforestation since 2008 must be notified to MAF within 20 days of the deforestation. Note that deforestation is harvesting, followed by a change to another land use (e.g. to grazing).
PF Olsen has familiarised itself with the Regulations that govern this process and consulted with MAF to clarify issues. We can undertake the whole process of applying for and registering (on your behalf) pre-1990 forest land free allocation units. Our mapping expertise and understanding of the requirements puts us in a strong position to ensure that application deadlines are met and the claimed area is maximised (without breaking any rules). As part of this service we will advise you of the areas we have assessed before we make the application.
You have the option of making these applications yourself. Alternatively, you can appoint PF Olsen to manage this process on your behalf. We have put together competitively priced service packages that will:
- Ensure clients fully comply with ETS legislation and regulations.
- Maintain client ETS transaction, measurement, calculation and other required records (through our management systems and disaster recovery processes) for the minimum 20 year period as required by law.
- Maximise the benefit and returns legally available to forest-owners from the ETS.
Post-1989 Forest Land
PF Olsen also offers a service in respect of any post-1989 forest land you may wish to enter into the ETS and claim changes in carbon stock.
While it is possible to join the ETS with post-1989 forest land now, we suggest that you defer this decision until:
- It becomes clear if there are likely to be significant changes to the ETS from the current government review affecting the rules for post-1989 forest land owners;
- There is a greater understanding of the likely depth of the NZU/AAU market and greater price discovery;
- Instruments and strategies to reduce, or eliminate, the NZU price risk are developed and made commercially available. PF Olsen is currently working on such a strategy.
If you delay joining the ETS, you do not forgo claiming carbon stock changes for 2008. These can be claimed retrospectively any time up to March 2013.
Arguments we have heard supporting joining the ETS now (rather than delaying joining as above) are:
- You achieve a higher price for your NZUs now than later. This seems very unlikely since there will be no demand for NZUs until the emitters join the ETS.
- Being first-in to convert NZUs to AAUs before the 10% threshold is met. We consider it very unlikely that the threshold is met in year one, two or even three (of CP1). It may well not prove advantageous to convert NZUs to AAUs.
- You will achieve a higher price for AAUs now than later. This seems unlikely considering recent steep fall-off in global economic activity, big falls in commodity prices in general and steep falls in carbon price in particular (CERS currently down to 10 Euros).
We suggest you be vigilant evaluating claims by any party advocating joining the ETS now to capture some market advantage in selling NZUs or AAUs currently. Is there an ulterior motive?
Pooling of NZ Units
PF Olsen has the ability to pool NZU credits allocated to their clients and sell these credits on their behalf. This could confer scale, pricing and brokerage benefits.
PF Olsen clients will shortly be receiving personal letters with more detail on what to do and service options available from PF Olsen. If you would like to receive similar information, or you are a PF Olsen client but did not receive your letter, please contact your local PF Olsen representative or call FREEPHONE 0508 PFOLSEN (0508 736 5736) or e-mail us at info@pfolsen.com.
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