In This Issue

• Clarky's Comment
• Improvements in Trucking Efficiency Provides Win-Win for Forest Owner and Contractors
• Update on Emissions Trading Scheme
• Collaborative Research Holds Promise of Higher Value Wood Products
• Log Market
• Production Thinning Offers Best Way to Ensure Production of High-Value Sawlogs at Final Harvest

Clarky's Comment

Selling All our Wood - A Challenge and an Opportunity

The New Zealand pine log availability is set to rise from the current 20 million to 30 million m³ between now and 2020. Currently we process about 13 million m³ in NZ domestic mills, and export about 7 million m³, although in the first half of 2009 exports have increased while domestic mill processing has declined.

In many ways, we would be much better off with a larger and stronger domestic log processing sector. Value-added manufacturing would increase GDP and has the potential to increase log and forest values more than exporting a raw commodity. A thriving domestic log processing sector would probably provide more demand and price stability, reducing the wild swings in harvesting level which are disastrous for harvesting contractors and truckers. More domestic log processing would be good for employment.

Unfortunately, and despite support and promotion by PF Olsen, there appears to be little appetite for investment in new or expanded sawmilling, ply, veneer, MDF, particle board or pulp and paper manufacturing in New Zealand at present. Unless the relative economics of processing in New Zealand compared to other countries moves in our favour, we will have no option but to at least double the volume of logs exports over the next decade. Pruned log alone is set to expand by 1.5 to 2 million m³/annum.

Though not without its challenges, PF Olsen is optimistic about the industry's ability to market this additional volume, based on what we see as growing demand in China, India and SE Asia. Traditional supply sources in these countries cannot expand to keep up with big infrastructure development projects and rising per capital wood consumption. Then overlay the advantages of wood against alternate building materials in energy consumption and greenhouse gas emissions, plus international efforts to curb illegal logging and put in place mechanisms to pay developing nations not to deforest. New Zealand's sustainable pine forests start to look pretty interesting as a reliable and environmentally benign source of raw material.

Our optimism is supported by:

• Increased level of enquiry for logs, not just from "wanna-be" middle men, but also directly from end-users in China, SE Asia and India.
• Evidence that young, highly western-educated foreigners are establishing themselves in New Zealand to purchase logs on behalf of end -users. This gives a very direct channel to market and a long-term demand and commitment to purchase logs consistently.

The challenges we face include:

1. Our internal road and port infrastructure. These will need to be enhanced to cope with a doubling of log export volumes.
2. The skilled people and harvesting equipment to get these logs off steep remote hills and onto ships in an economic manner.
3. Access to bulk ships at viable prices.

These are not small challenges, but if not addressed forest owners will simply have margins eroded by high costs and a bidding war with each other for whatever the constraining factor is. So how do we avoid that? The low-hanging fruit include:

• Upgrade of road networks and bridges to cope with greater truck weights and dimensions. There is some good work under way by Government on this front.
• Convincing port companies that the export log trade is expanding and sustainable, but is only financially viable with improved on and off-port storage, in some cases linked with rail delivery to ship side. Port companies need to offer fair and equitable access to port facilities for new exporters, to allow innovation. We also need more efficient solutions to handling logs at off-site storage facilities.
• Regular ship calls, more stable shipping rates and more cooperation amongst exporters around sharing shipping space.
• More stability in longer-term customer sales contracts that will enable longer term harvesting contracts that in turn gives contractors and their bankers the confidence to invest in new equipment and skills development.
• Strong pan-industry support for R&D into improved harvesting productivity.

In summary, despite it perhaps not being the preferred option (over a bigger domestic processing sector), strong export sales channels are critical to making sure forest owner stumpage values are maximised. The "global village" is another way to view this marketing approach. Mills in China, India, or where ever, are potential clients of PF Olsen' forest owner logs. So long as they can pay best prices, and we can establish efficient supply chains to them, then the best net return to the forest owner will be achieved.

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Improvements in Trucking Efficiency Provides Win-Win for Forest Owner and Contractors

Crown Forestry's and Maori land owners' forests in the Far North (such as Parengarenga, adjacent to 90 Mile Beach, face the "tyranny of distance" more than most forests. During the peak of the diesel price last year, the cost of transporting logs to Marsden Point rose to just under $50/tonne (a distance of 261km). This sort of cost means the forest owner is left with little in the form of net stumpage revenue.

Under PF Olsen's management of Crown Forestry's Parengarenga cutting rights Carter Holt Harvey Wood Products purchases the majority of the harvested volume for its Laminated Veneer Mill at Marsden Point. In addition, some logs are exported via North Port (at Marsden Point also). That means a lot of logs (some 80,000 tonnes per year from this forest alone) travel long distances at high cost.

To look for improvements, PF Olsen and Crown Forestry met with Toll New Zealand (owner of the local log freight operator Kaitaia Transport Ltd). The nature of the meeting was refreshingly open, with all parties signing a confidentiality agreement to enable the books to be opened and to gain an understanding of each other's position.

"Admittedly, we were a little bit wary when Toll New Zealand (a large Australian-based freight forwarder) purchased Kaitaia Transport", said Peter Weblin, PF Olsen's Marketing Manager. "We had a preconception that they may operate like a heavy-handed corporate. We were pleased to be proved wrong. We found them to be very personable, professional and open to new ideas".

At the meeting Toll shared their analysis that showed some of their older trucks were not economic to run and they had to either replace them, or charge higher freight rates to stay profitable. Their preference was to get better utilisation of the high-performing trucks in the fleet and retire the older vehicles, without having to purchase new ones. Further discussions revealed that higher utilisation was restricted by the hours during which trucks could be loaded in the forest and unloaded at Marsden Point.

Toll then calculated an alternative freight rate based on being able to achieve the higher utilisation through double-shifting trucks.

It was then up to PF Olsen to ascertain the feasibility and cost of providing the extended loading and unloading hours and prove a business case for the change.

The final agreed solution can be summarised as follows:

• Double-shift five trucks per day to Marsden Point - total of 10 loads per day.
• Load out from the forest from 5am each morning.
• Drivers changed at Toll depot for an afternoon run.
• Second shift trucks loaded in forest between 3:30pm and 5:30pm depending on what sort of a run the morning trucks had.
• Unloading hours at Marsden Point extended until 11pm.
• The double-shifted loads are isolated in PF Olsen's WoodTrack system and paid at a lower double-shifting rate (9.6% below the standard rate).

To extend the loading hours the logging contractor, Herb Adams, is paid an additional rate for the full month's volume.

To extend the unloading hours at Marsden Point there is an additional charge for longer attendance of a loader driver.

The net effect of this initiative is a net saving of around $12,000 per month. This is a welcome benefit for net stumpages that struggle with such long distances from forest to market. "As the forest owner, we commend the initiative that Bob Shirley, PF Olsen's Kaitaia Branch Manager has shown in sensing the opportunity and then leading the process and working with us and with Toll in bringing this prospect to fruition", said Warwick Foran, Crown Forestry's National Manager of Operations. "In these difficult times it is extra important that forest management companies are focused on forest owners' bottom lines."

This shows what can be achieved when parties are prepared to understand each other's situations and work openly and cooperatively together. PF Olsen would like to thank Adams Logging, Toll New Zealand, Crown Forestry and Carter Holt Harvey Wood Products for all working together to make this initiative become a reality.

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Update on Emissions Trading Scheme

This is a really short piece!

There has been a general hiatus in news regarding the review of the ETS since our last issue of Wood Matters in which we covered the (then) recently announced amendment Bill (see Issue 10 of Wood Matters, Introduction).

Rather than go round in circles speculating what may or may not come out of the review, we patiently await some concrete outcomes; ones which we hope will be of sufficient substance and of a sufficiently enduring nature to enable sound decisions to be made by forest owners, and would-be forest owners.

PF Olsen has spoken to its written submission to the select committee and continues to lobby politicians and MAF.

Please remember that the Afforestation Grant Scheme - AGS and the Permanent Forest Sink Initiative - PFSI are currently up and running. The AGS allocations are proving to cover all establishment expenditure and are becoming increasingly popular. The PFSI may suit specific situations of either very long-lived rotations, or situations where economic harvesting in unlikely to ever be viable. The AGS is covered in more detail in Issue 3 of Wood Matters. (N.B. Since this article was written allocations for indigenous forest projects have proven to be quite low as many of these have involved fencing off areas to encourage natural regeneration.)

If you would like more information on how you may be able to benefit from the AGS or PFSI, please contact your local representative, or call us on FREEPHONE 0508 PFOLSEN (736 5736) or email us as info@pfolsen.com or visit our website www.pfolsen.com.

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Collaborative Research Holds Promise of Higher Value Wood Products

Gaining a better understanding of the quality of Radiata pine.

For the past six years PF Olsen has been a shareholder in the research company WQI Limited. What's more, WQI has been a tenant in our office here in Rotorua over that period giving us a great opportunity to learn about and apply their leading-edge research results in our forest and harvesting management.

WQI was established as a 1:1 funded research partnership between Government and Industry. The company's mission has been to develop commercial tools and technologies for segregating Radiata pine (trees near harvest, logs, lumber) based on wood quality features.

It is common knowledge that Radiata grows fast and has good form but we also know it has highly variable internal properties which makes processing a challenge.

The value driver behind better and earlier identification of wood quality features (and improved segregation of logs or semi-processed product) is the elimination of waste. This waste arises when cost is incurred on a log or semi-processed product that is not suited to purpose and ends up being rejected or fails to meet end-use performance requirements. A simple example of this is transporting a log with insufficient density or strength to a structural sawmill, only to have it rejected and have to be on-carted to another mill or to the port. A more complex (and much more costly) example is processing a clear Radiata pine log into decking timber, only to have it bleed resin once installed in the deck and have to be replaced. The exhibit below shows a conceptual model of this situation and how segregation early on in the supply chain (e.g. in the forest) results in the greatest benefit as it has the greatest potential to eliminate waste.

What properties are we talking about? Density and stiffness are important and are without doubt the key properties for structural applications. Research and development into these properties is well advanced and in routine commercial use. For example the Hitman is routinely used by PF Olsen and others in the field for the segregation of logs based on stiffness. The FibreGen ST300 does the same for standing trees.

But there are other properties we need to be able to map in Radiata which also have a major effect on its utility, especially for appearance products. Resin defects (pockets, streaks, canals etc) lead the list as they are unacceptable in appearance products such as mouldings and finger-jointed/treated/painted fascia. WQI research has added considerable understanding to where resin is likely to occur, what causes it, how to assess stands for it's incidence and how to segregate logs based on the predicted level of resin defects. This type of information is being used by PF Olsen in recommending to clients whether or not pruning is advisable in various parts of the country.

Another property affecting Radiata's utility is stability (commonly referred to as warp). Warp is particularly associated with core wood, but wood that has compression wood and large gradients (pith to bark) in stiffness or density is also more prone to warp. Warp affects the efficiency of processing Radiata (degrade to waste) and how our products compare with equivalent products made from other species (e.g. Ponderosa pine) in export markets. WQI has helped identify the causes of warp in Radiata and in doing so unravelled what has been a complex problem with an elusive solution.

Lumber scanning technology is now being developed which will segregate Radiata into certified stability grades, something which has long been seen as the "holy grail" in this area. How to grow Radiata to increase the yield of warp free lumber will come from this research also.

"When times are tough," observes Dr Keith Mackie, CEO of WQI Limited (photo right), "innovative companies invest more in R&D." Well times are certainly tough and PF Olsen is maintaining its long-standing support for companies like WQI Limited. These investments sustain key research capability which has been the backbone of the Radiata plantation resource in New Zealand and which will lead the all-important process of reducing waste and leveraging Radiata pine into higher value end-uses.

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Log Market

Domestic Market

The pruned log market has started to show some strength with the rather over-used "green shoots" metaphor seeming (reluctantly) an apt description:

• Whilst the US housing market is still very weak, there are signs of improvement. Single-family housing starts are expected to fall to an average-annualised rate of only 370,000 in the first half of 2009 (the lowest level in 59 years), however RISI is forecasting an annualised rate of 700,000 by the end of the year (Note: single-family housing starts are a more relevant lead indicator for timber consumption as they consume a lot more wood than multi-family housing starts).
• NZ Radiata Mldgs&Btr was described as "firm and tight on the supply side" recently in the Crows Market Report.
• Remodelling and home improvement work is supporting the market.
• The Crows Lumber Composite Index has risen from lows of 180 earlier this year to 226 currently.
• Whilst Radiata pine has made healthy gains in price in the past few months, Ponderosa pine has made even larger gains and 5/4 Mldgs&Btr currently trades at a premium of over US$100/mbf (historically both species trade at similar prices).
• New Zealand producers are finding attractive alternative markets for clears e.g. Europe.

A large detractor from recent gains in price, however, has been the appreciation in the NZ$. The chart below shows this trend.

During the second half of last year, the $US price of Mldgs&Btr tracked down but was offset by a downward trend in the $NZ so on balance $NZ prices rose. However, a trough in $US prices earlier this year coincided with an appreciating trend in the $NZ. As a result $NZ prices fell away significantly, adversely impacting NZ sawmiller's returns. Fortunately this adverse trend is showing tentative signs of abating.

Specific regional shortages have led PF Olsen to actively support selected domestic processors even if export prices are higher. This support for the domestic sector is important as inevitably there will be times in the future when the volatile export market is unattractive for certain grades of log.

Structural log demand continues to be weak with many of the larger buyers restricting uptake to long-term wood supply agreement volumes only.

Export Market and Ocean Freight Rates

China continues to dominate the market and has been surprisingly resilient to a significant increase in New Zealand Radiata pine volumes, despite some serious port congestion in the smaller Chinese ports such as Lanshan. In addition to the significant government stimulus programmes and the massive earthquake re-build programmes, Russian log supply is down about 25% compared to last year. This has been sufficient to support a continued commitment to increase volumes of NZ Radiata pine to China with volumes supplied so far this year already exceeding total supply for the whole of last year.

Despite steady increases in log price in China, NZ at wharf gate prices have fallen over the past three months as a function of the appreciating NZ$ and a big increase in ocean freight rates. For Handysize vessels (the vessels used to ship logs from NZ to Asia), the ocean freight rate has risen from the low US$20s/JAS m³ earlier this year to spot prices as high as US$38/JAS m³ currently. Vessel availability has tightened up as China has embarked on a big buy-up of iron ore and base metals such as copper. In fact, purchasing of copper by China hit an all-time record high earlier this year, with much of the metal going into stock. This demand is now abating.

In recent months the Baltic Dry Index (a global reflection of ocean freight rate across all major vessel classes) has come off recent highs as shown in the graph below.

The BSI T/C average (most relevant to carriers of NZ logs to Asia), however, has shown more resilience, although there are current signs that rates are starting to fall now.

Agrifax reports that total NZ log export volumes for the three months to May were 51% higher than the same period in 2008 and 34% higher than 2007.

The overall view is that NZ wharf gate prices will be firm to increasing for the balance of the year.

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Production Thinning Offers Best Way to Ensure Production of High-Value Sawlogs at Final Harvest

Last September harvesting contractor Luke Eder relocated from the West Coast to Christchurch. At that time he had a feller/buncher that was suited to the West Coast conditions and high production harvesting. PF Olsen worked with Luke and his finance company to trade that machine for a Waratah head. This machine's base has no "tail swing" so is ideal for the confined conditions experienced when production thinning. It is a lot more flexible than a feller/buncher which is important in woodlot harvesting. The base is also self-levelling giving it the capability to work comfortably on steeper slopes.

This machine was not purchased specifically for production thinning but when the opportunity arose the crew took up the challenge. Their first assignment was a stand in Selwyn Plantation Board's Chaney's Forest. The stand had missed the ideal time to undertake a thin-to-waste operation and consequently the cost had increased to $460 per hectare according to forest manager Tim Hinton. In contrast, the production thinning project is currently returning a small profit to the forest owner.

The photo below shows the log grades being produced, predominantly posts and industrial grade sawlogs.

It is important that management of production thinning is driven from a silvicultural perspective (enhancing tree crop value) rather than a harvesting perspective (maximising returns from harvesting). If managed poorly, damage to the remaining crop can vastly outweigh any cost savings. This is where the right machine with a skilled operator is invaluable. In this project out-rows are being used for log extraction. The selected cull trees are felled, delimbed, cut up and bunched into the out-row. The unmerchantable part of the log is cut off to shorten the stem length and reduce the chance of it banging against remaining crop trees during bunching or extraction. This also means nutrients contained within the tree's needles, branches and stem are recycled back into the standing trees.

Extraction is with a grapple skidder that reverses down the out-rows to collect the logs.

There is also the potential to production thin some Douglas fir stands and the crew in conjunction with advice from PF Olsen, is weighing up the option of purchasing a forwarder.

If this stand had been left unthinned, suppression from the high stocking would have prevented the production of higher value large sawlogs. Not thinning the stand would have also increased the incidence of 'black' or bark-encased knots, further reducing the value of the stand at harvest time.

Whilst not appropriate in all circumstances, well-managed production thinning in selected situations can not only avoid costly thinning-to-waste but also provide modest revenue and still result in the production of high value logs at harvest. If you think you may have a stand suited to this type of operation please contact your local representative, or call us on FREEPHONE 0508 PFOLSEN (736 5736) or email us as info@pfolsen.com or visit our website www.pfolsen.com.

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