Introduction
Welcome to another edition of Wood Matters. With the hurly burly of other business within PF Olsen, this edition is slimmer than usual. However, we have our usual insights from our CEO, Peter Clark, who puts a strong case that innovation is the only enduring competitive advantage.
We summarise the recent Government announcements on the New Zealand Emissions Trading Scheme and conclude that there is now sufficient certainty for forest owners and would-be forest owners to take action.
Feedback from a reader has lead the editor into additional commentary on long-term timber prices and some background to the 1993 price spike.
We report on the recent deferral of the Russian log tariff and have a brief commentary on the current state of the log market.
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Clarky's Comment
R&D and Innovation - Why it Matters
 PF Olsen is fully committed to research, technology and innovation. Its rapid deployment is a source of increased human productivity, safety and competitive advantage. In fact, and this applies whether we are talking NZ Inc., the forest industry or one particular firm, R&D and innovation is the ONLY long-term strategy that will sustain us into the future. Any of us can have the most customer-focussed, most efficient process and lowest cost or best value product and service offering now - but that is a temporary advantage without R&D and innovation. Just ask General Motors! Eventually, without continuously re-inventing, experimenting and finding new and better ways to meet customer needs, our competitors will always catch up or overtake us.
At the forest industry level PF Olsen has demonstrated its commitment to R&D as the single largest forest industry contributor to Future Forest Research. 14% of all industry funding into this multi-theme, multi-million dollar research collaborative comes from PF Olsen Ltd. In addition PF Olsen has contributed over the past 4 years to wood quality research carried out by WQI Ltd and has maintained a smaller contribution into its successor Solid Wood Initiative.
PF Olsen was a foundation member the Radiata Pine Breeding Cooperative that was formed in 1987 and has continued to support breeding research under its various industry structures ever since. The knowledge gained has not only heavily influenced the genetics our clients have planted but has also enabled PF Olsen to play an important role in the production of the very best in Control Pollinated pine seed for New Zealand forest plantations since the mid 1990s.
Overall, however, the funding of research in the NZ forestry and timber processing industries has lagged that applied in other primary sectors and in timber industries in some competing countries. The start-up of Solid Wood Initiative is a positive step and hugely important for both forest owners and processors as we grapple with turning a highly variable and expanding pine resource into products more valuable and easier to ship to market than logs.
The questions to ask when considering funding for R&D is not whether the specific projects being put up have a likely payback, but:
- What are the structures in place to enable our R&D effort to be well-directed, and flexible to changing demands and early findings?
- Are the mechanisms in place to enable R&D findings to be disseminated and quickly picked up by industry?
- Where will I be relative to my competitors in 10 years time if I do not innovate based on new knowledge?
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Emissions Trading Scheme Update
With Maori party support, the Government this week outlined planned changes to the Emissions Trading Scheme (ETS):
- Situation largely unchanged for forestry - the deforestation liability remains, the pre-1990 partial compensation/free allocation of credits remains, the < 50ha exemption for pre-1990 deforestation liability remains and the ability to enter post-1989 forests into the ETS and earn carbon credits remains.
- The proposals of "averaging" and "offsetting" and a force majeure for uninsurable losses as lobbied and presented to the select committee have not been taken up.
- Energy, transport and industrial emitters will join the ETS on 1 July 2010 but only be required to account for 50% of their emissions (up until 1 January 2013).
- Government to introduce a fixed-price option of $25/tonne (up to until 1 January 2013).
- Agriculture entering the ETS has been pushed out from January 2013 to January 2015.
Nick Smith had this to say - "The Government will be introducing to Parliament next week (week commencing 21 September 2009) a Climate Change Bill implementing these changes to the ETS. We will be continuing to work with Labour and other parties to try and build as wide a consensus as possible in this important policy area. Our objective is to have the revised law passed by the time of the Copenhagen climate change conference in December."
Heightened and Broad-based ETS Activity Expected
This strong hint of multi-party support bodes well for enduring legislation. So whilst there is still considerable detail to be revealed, there is a much clearer path for forestry now.
With this increased ETS certainty we are expecting heightened and broad-based interest in the ETS. Already we are getting considerable enquiry from forest owners for registering and selling carbon credits, and emitters interested in purchasing carbon credits. A big challenge for PF Olsen will be handling the work flow. In this regard, we request your assistance. If you are starting to think that you might wish to participate in the ETS, we encourage you to register your interest with us now. This will enable us to anticipate work-loads and make sure we have the management resources in place to deal with the demand. If we have to turn down, or queue work, our service priority will be to those that have signalled early on that they wish to work with PF Olsen.
Engaging PF Olsen as your carbon forestry manager will keep all carbon credit sales options open. You may wish to sell your carbon credits yourself or you can aggregate your credits with other PF Olsen client's credits to form more marketable packages. This is important as most carbon credit buyers will be looking for sales of relatively large volumes.
In the sections below we outline situations which may describe your situation, or an area you are interested in learning more about. At the end of each section is a place for you to "click" and respond. Please take the opportunity to make a response so we can follow up with you.
What Should I Do as a Pre-1990 Forest Owner?
As previously advised, pre-1990 forest owners should all apply for their partial compensation/free allocation of New Zealand Units (NZUs - carbon credits), unless you are eligible and wish to apply for the less than 50 ha exemption from the deforestation carbon liability. Details are still forthcoming from the Government in the form of a revised Allocation Plan and deadlines. However, if you are a pre-1990 forest owner you should make sure now that you have a failsafe way of ensuring you don't miss out on this opportunity.
One option is to appoint PF Olsen to make the application for you. This will make sure critical deadlines are met, all mapping and documentation is correctly processed and, most importantly, the maximum number of units is applied for. If you have not already taken up this option, but wish to do so, click on the link below and we will forward you further details and how to register for this service.
Simply click and press Send and we will forward you details. (If you have already responded and sent a form to us, you don't need to respond again).
Important note: If you planted a forest some time after 31 December 1989 on land that was scrub covered as at 1 January 1990, the Ministry of Agriculture and Forestry (MAF) may interpret the land as pre-1990 forest-land. The issue here, is that if you think you have post-1989 forest-land, but actually have pre-1990 forest-land, you could inadvertently forgo the partial compensation/free allocation credits, and also be ineligible to earn carbon credits from your forest's growth. If you are in doubt you should either make an application for pre-1990 credits and see if it is rejected or contact MAF to see if they can assist you with making this call.
What Should I Do as a Post-1989 Forest Owner?
The ETS provides an opportunity to gain annual revenues from carbon sequestered in your growing forest. As we have stated before, you can enter your post-1989 forest into the ETS at any time up to 31 March 2013 and claim the credits from 2008. Up until now we felt there was insufficient certainty for most forest owners to justify the hassle and expense of registering (and the window of filing 2008 returns closed 31 March 2008).
As mentioned above, the recent Government announcements, and political support for the planned amendments suggests that there is sufficient certainty for those post-1989 forest owners who wish to join the ETS to do so and start getting prepared to lodge an emissions return between 1 January 2010 and 31 March 2010. Prior to that, a forest owner must register in the ETS and register as a user in the NZ Emission Unit Register and open an account. The most complicated part of this process is forming Carbon Accounting Areas, which will have an important bearing on managing your carbon risk profile.
If you are still uncertain about whether or not to join the ETS, our technical paper may help. To order a copy, simply click and press Send and we will forward it to you. Also see Reflections on the Possible Market for NZUs below.
If you would like to register your interest in PF Olsen possibly providing carbon management services (no obligation), please Simply click and press Send and we will put you on our e-mail communication data base.
What Should I Do if I want to Establish a Carbon Forest?
The best returns from carbon forestry will come from establishing new post-1989 forests and being able to claim the carbon credits through the full rotation. Whilst you have to account for carbon loss at harvesting, so long are you replant, you only have to account for around 80% of the total carbon claimed. This is due to carbon stored in the trees branches, stumps and roots remaining on the site. A carbon and timber forest not only can provide impressive returns on investment, it can also bring in early cash flow (from age four onwards). The chart below shows the carbon profile of a Radiata pine stand (tonnes CO2/ha).
If you would like to receive our technical paper outlining in detail the opportunities to profit from planting a new carbon forest, and the risks involved, Simply click and press Send and we will forward you the paper.
If you would like us to assist you with establishing a new carbon forest, click here to e-mail us your enquiry and contact details.
Reflections on the Possible Market for NZUs
Due to the transitional phase for emitters and a cap on the ability to sell carbon credits offshore (via converting an NZU to an AAU), supply of NZUs from forestry could exceed available sales. Our analysis shows that if all partial compensation/free allocation NZUs are claimed and hit the market, there will be insufficient sales opportunities if all post-1989 forest owners choose to join the ETS and sell their credits, in CP1 (2008 to 2012). Please note, there are two big ifs there, and the level of uptake of post-1989 forest owners in the ETS is (very) unclear. But if this were the case early registration of credits in the emissions register could have a sales advantage. On the other hand, once the price cap of $25/unit is lifted 1 January 2013 and emitters have to account for more of their emissions, the price might of NZUs might rise.
If this all sounds a bit gibberish to you, it's not surprising. However, if you think you there is potential for you to benefit from carbon forestry, taking the step of joining the ETS, registering as a user in the NZ Emission Unit Register, opening an account and filing an emissions return is still a relatively low cost commitment - and you can review the options of what to do with your NZUs on an ongoing basis. I guess you could call it getting Carbon-Ready.
PF Olsen is still actively developing mechanisms to increase the options and returns from carbon forestry. These include -
- Aggregating carbon credits to create more attractive sales packages for domestic and off-shore emitters and carbon purchasers.
- Creating a carbon pool for forest owners to mitigate carbon price risk and create economies of scale.
- Opportunities to sell carbon credits forward.
- Selling NZUs with no liability at harvest time.
Now that there is more certainty with the ETS, these developments will advance more quickly.
If you are interested in possibly participating in any of the above opportunities, please register your interest by Simply click and press Send and we will put you on our e-mail communication data base.
Tree-stock availability for 2010 Planting
High current harvesting levels (requiring restocking next year) and expected 2010 ETS and Afforestation Grant Scheme (AGS) planting is expected to result in tree stock demand in 2010 exceeding supply. Our market intelligence to date indicates that almost all of next year's planned production is already spoken for.
PF Olsen has a small quantity of uncommitted GF Plus container-grown Radiata seedlings available for 2010. If you wish to enquiry how you can secure these, please click here and detail your needs.
Planting NOW
We also have some GF Plus container trees available for planting now. Being container grown they can be planted out much later in the season. If you have land that can be grazed hard and planted soon, this remains a viable option to get your forest growing now. Click here to enquire.
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Feedback on past Articles
Thanks to those that have made the effort to provide feedback on Wood Matters articles. If you have not noticed, at the end of each article are the words "For comment on this article click here." Please feel free to click and have your say!
As Wood Matters evolves, we would like to develop bulletin boards or forums in which readers can post comments and even comments on comments. I think blogging might be the internet term for such a phenomenon. In the meantime, however, we welcome your feedback and comments on what you think of Wood Matters content, what you would like to see, or any other comments you may have or wish to make.
A special thanks to Rory O'Malley, an historian and economist from Australia. Rory made a comprehensive e-mail reply to our article Can an Understanding of the Global Commodity Market and International Trends Assist us in Timing our Harvesting Better?.
Amongst other things, Rory challenged the NZ forestry sector to become better at understanding the global influences that affect the economic environment in which we practise forestry to enable us to make better decisions.
More specifically Rory asked what were the drivers of the dramatic global timber price spike in 1993.
During 2002 and the first part of 2003 log prices globally increased dramatically. As we saw in the graph in the last Wood Matters, Douglas fir price in the US doubled from USD130/m³. This was followed by a rapid decrease in prices. The same pattern can be observed in A grade export log price in New Zealand (see graph below).
A characteristic of this period was a rapid rise in the environmental movement in the US which was moving from a popularist base to a strong political/legislative base. At the time, the iconic endangered spotted owl captured the imagination of the American people and large areas of formerly commercially available timberland was locked up for conservation. This raised serious global supply concerns which snowballed and culminated in a price bubble.
What is particularly concerning about the price series above (which is inflation adjusted) is that real prices have declined from the 1993 spike to 2005 and have barely risen by more than the rate of inflation since then. This is one of the reasons PF Olsen see R&D and market development as two imperatives to lift NZ timber values up to higher levels (see "Clarky's Comment").
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Russians Announce Log Tariff Delay and Log Market Comment
An important announcement in early September was Russia planning to delay the imposition of its final and steepest export log tariff increase until 2011. The threefold tariff increase was originally planned to be imposed in 2009, then later deferred until 2010. This latest deferral is reported to be due to the financial crisis ill-affecting the development of domestic processing facilities in Russia aimed at enabling it to add value to its enormous forestry industry. The announcement was met with relief from European Union paper makers, particularly those in Finland and Sweden, who have been highly reliant on Russian logs.
The announcement has had no noticeable impact on the Chinese log market. Demand for Radiata pine continues at high levels (around 4.0 million JAS m3 annualised) and prices have continued to firm. However, the appreciating kiwi $ continues to erode these price gains, with just small increases in at-wharf-gate prices. The Korean market has strengthened and is offering prices on par with China. This is a welcome development as it will take some volume pressure of China and provide a more diversified sales mix.
There has been little change in the domestic log market over the past month.
The NZX Agrifax Combined Log Price Index, which measures returns from the whole forest, lifted by NZ$1/tonne in September to $74/tonne (NZ$3/tonne below the same time last year).
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