In This Issue

• Clarky's Comment
• Lower Transport Costs from Longer and Heavier Truck/Load Allowances
• FSC Certification Continues to Grow in New Zealand
• Eco–labelling Continues Global Growth Trend
• Visit by FSC International Executive Director
• PF Olsen Environmental Management System is Heart of FSC Group Scheme
• "Dirtshop" Aims to Improve Operational Practices
• Forestry Scores High on Eco–services
• MAF Updates PF Olsen on the Emissions Trading Scheme
• Log Market

Clarky's Comment

Who will do the new planting?

Although still subject to Select Committee review and final legislation, the Maori Party support for National's ETS amendments has provided a clear incentive for the planting of new forests. Our calculations suggest a strong domestic demand for forestry credits after 2012, which cannot be met from existing post-1989 forests, even in the unlikely event that all post-1989 forest owners did enter the scheme. But who will plant new forests?

At PF Olsen, we get the impression that NZ industrial emitters are awaiting the outcome of the legislation and focusing on CP1 commitments rather than looking forward to when the 50% commitment phases out at the end of 2012. They have the option of meeting these short-term commitments by purchasing pre-1990 (free allocation/partial compensation) forestry NZUs that will become available or simply paying the $25/unit cap for the 50% commitment. Therefore new forestry planting from that source in 2010 appears to be limited at this stage.

The major emitters facing the biggest obligations are the thermal electricity generators, and the liquid fuels producers. But these firms can pass on any costs associated with meeting carbon emissions. Will they be motivated to invest capital in new forest planting?

Pastoral farmers own most of the suitable land for planting of new forests. This land is generally generating low returns under drystock farming (around 1% - 3% real). Returns from well-run carbon/timber forestry on that same land should easily exceed 10% real. Returns would be even higher if land value is discounted to its economic worth under drystock farming, excluding the capital gain expectation that underpins current land market values.

But our impression is that farmers are not yet motivated to plant new forests. Firstly, it takes cash - a rare commodity amongst drystock farmers. Secondly, do farmers really believe they will face any obligations under the ETS? Although the amendment has them coming in from 2015, the Minister retains discretion to review both time of entry (based on what Australia decides) and the rate of phase in. Along with the processor being the point of obligation, and the change to intensity-based emissions, the overriding message to the agriculture sector appears to be that the taxpayer will continue to subsidise most of its emissions and there is no compelling driver to plant forests as offsets.

That leaves investors interested in making money from the production and sale of forestry credits and in some cases timber as well. Such firms exist and some are very well resourced. The major constraint to investors planting new forests will be access to suitable land at the right price. The government has suggested a target of 50,000 ha/annum. That is a reasonable target. We used to plant that much each year during the 1990s. But since then pastoral hill country land values have doubled and there appears to be little appetite for farmers to exit or lease that land. Under these circumstances any attempt to secure 50,000 ha/year over the next decade will simply result in further escalation of land values. It will not take much of a land value increase to chase the carbon/timber forestry investors away.

The Afforestation Grant Scheme (AGS) has been successful in getting trees in the ground, albeit dominated by Regional Councils themselves investing on behalf of ratepayers, rather than private landowners investing. But this scheme deals with about 3,500 ha/annum, well short of the 50,000 ha target. An extension of this scheme would cause more planting, but in the end such subsidies simply flow through to land value, making it even harder for private investors to participate.

In my view it is not until the pastoral farmers feel compelled to plant trees as offsets, or to exit farming if they cannot meet costs imposed by the ETS, that we will see anything like 50,000 ha of new planting per annum.

For comment on this article click here.

Lower Transport Costs from Longer and Heavier Truck/Load Allowances

At present, a laden heavy vehicle that does not have a special permit must not weigh more than 44 tonnes nor exceed 20 metres in length. Under proposed new rules the maximum weights of laden vehicles with special permits will be increased on suitable highways and district roads linking forests, mills, processing plants, ports, railheads and customers.

In early 2007, the NZFOA prepared a report for the forest industry which identified major benefits from allowing longer and heavier trucks on selected parts of the national roading network. Subsequent work and lobbying has lead to the government recently announcing proposed changes to the Land Transport Rule that will bring New Zealand into line with other countries, and mean lower log and forest products transport costs, fewer trucks on the road and a big reduction in fuel use and greenhouse gas emissions.

Most of the 2,000 trucks in New Zealand's log and forest product transport fleet are modern vehicles with engines, brakes, steering and suspension systems designed for much heavier maximum loads. Up until now, this increased capacity has been wasted. The new rules will allow specific vehicles, on designated routes to take longer and heavier loads and more fully utilise their design capacity.

If these increases were applied to 40% of the forest products carried, it is estimated there would be a 20% increase in productivity (and therefore 20% fewer trucks on the road) and a 9% increase in fuel efficiency. That would mean 8,000 fewer forestry truck movements through Rotorua each year and 6,000 fewer through Nelson.

In terms of reducing costs, the changes are expected to yield savings of between $2 to $4/tonne. Based on a $30 stumpage, that represents a saving of 7 to 13%. These savings will assist the forestry sector in New Zealand to make some gains in competitiveness with Australia. A 2008 Road Transport Forum study revealed that New Zealand freight rates were 25% and 29% higher than Tasmania's and Victoria's (respectively) after excluding taxes and charges.

Safety is not compromised by this sort of innovation. In the past eight years, there has been a 70% reduction (per million km) in log truck rollover crashes, largely due a prior initiative to allow longer and lower loads on qualifying 22 m truck and trailer units from 2004. These units have a much lower centre of gravity than conventional trucks. Changes in truck configuration as a result of the new rule changes aren't expected to compromise safety in any way, as centres of gravity are kept low and rig's braking and steering systems are designed for much heavier weights.

For comment on this article click here.

FSC Certification Continues to Grow in New Zealand

The PF Olsen FSC (Forest Stewardship Council) Group Scheme continues to grow, keeping Kit Richards and other PF Olsen staff busy. The most recent addition is the 5,400 hectare Selwyn Plantation Board estate in Canterbury, which previously had its own FSC certificate. As part of the process PF Olsen's FSC Group scheme underwent a pre-certification audit which affirmed the Group Scheme's robustness, integrity and scalability. Another recent addition was the 775 hectares of forests on the Mangamingi Station in the Central North Island.

In total, PF Olsen now manages 90,000 hectares of forests with FSC certification.

And the rate of new editions is accelerating. Forests in the process of being certified by PF Olsen include 900 hectares of forests on Rangataiki Station (near Taupo), a 1,150 hectare forest in Marlborough and 300 hectares in the Rangatikei district.

One concern expressed by some forest owners is that by being in a group scheme they are vulnerable to the environmental performance of other forests and their managers (which will usually, but may not necessarily, be PF Olsen). Kit Richards, PF Olsen's Environment Manager is reassuring on this point - "If an audit reveals non-compliance in any specific management area or specific forest, that Group Member/forest manager must address the issue or risk losing their Group membership. It would take a series of failures to jeopardise the integrity of the Group Scheme. And in fact, we are experiencing the opposite - high compliances and very low levels of corrective actions."

If you want to see what forests are in PF Olsen's Group Scheme and how it is performing, the Annual Disclosures (current to 30 June 2009) are available on our web site at http://www.pfolsen.com/nz_index.php?sect=fsc&inc=ogs.

If you want to learn more about FSC and PF Olsen's Group Scheme visit our website at http://www.pfolsen.com/nz_index.php?sect=fsc and click on the FSC drop down menu for more options and information, or e-mail Kit Richards at kit.richards@pfolsen.com.

PF Olsen is currently developing its environmental management system for its Australian business and will soon be launching an Australian-based Group Certification Scheme (see PF Olsen Environmental Management System is Heart of FSC Group Scheme below).

For comment on this article click here.

Eco–labelling Continues Global Growth Trend

The latest statistics also show a growing global trend in environmental certification of forests and forest products. FSC now has 118 million hectares and PEFC (Programme of Environmental Forest Certification) 224 million hectares of production forest land under each certificate world-wide. A strong driver of this trend is increased consumer demand for products and services that are derived from environmentally credible sources under environmentally responsible management.

In August, what was billed as one of the most significant commercial commitments to forest stewardship in FSC's history, Kimberly–Clark Corporation announced a new fibre purchasing policy. Kimberly–Clark is the global leader in health and hygiene products with more than US$19 billion in sales and a No.1 or 2 market share position in more than 80 countries. Every day, more than 1.3 billion people use Kimberly–Clark products.

The policy is already making waves in the forest products supply chain, particularly in Canada, where many major players and concessions will have to move to FSC certification or cease doing business with, in some cases, their largest customer.

It is expected that these steps toward FSC–labelled product by one of the most successful consumer and professional brands in the world will raise FSC into the consciousness of not only 300 million American consumers, but consumers world-wide.

Features of the new fibre policy are:

• By the end of 2010, Kimberly–Clark will reduce its use of non-FSC certified Canadian Boreal fibre by 50 percent or more, as compared to its 2007 level of use.
• By the end of 2011, Kimberly–Clark will stop purchasing non-FSC certified wood fibre from the North American Boreal region.
• By 2011, Kimberly–Clark will ensure that 40 percent of its North American tissue fibre is either recycled or FSC certified - a 71 percent increase from 2007 levels.
• Kimberly–Clark will support programs for the identification and mapping of Endangered Forests and High Conservation Value Forests to ensure that such areas are designated for appropriate protection.
• Kimberly–Clark will leverage its global buying power to encourage suppliers to practice high levels of sustainable forestry management and work with suppliers to help it achieve its FSC preference.

For comment on this article click here.

Visit by FSC International Executive Director

Andre de Freitas, FSC International's Executive Director, recently visited New Zealand and attended a NZ forest industry presentation and tour. A long-standing issue with FSC in New Zealand has been the conflict arising around chemical herbicide use, principally hexazinone and terbuthalyzine. Currently under temporary derogations for controlled use in FSC certified forests in New Zealand, there is a fear that a possible future complete ban on chemical application could potentially make forestry economically unviable in many areas.

The visit by Mr de Freitas was an opportunity to discuss this issue and present NZ's case for continued controlled chemical use. At the conclusion of the visit there was a sense that FSC was receptive to the unique issues and challenges facing commercial production forestry in New Zealand and confidence that a workable solution will be found for continued FSC coverage. This would include an industry-coordinated research effort to which PF Olsen is a major contributor via Future Forest Research's Environmental theme.

On a related matter, FSC Principles and Criteria have recently been reviewed. Whilst there are some issues, the new Principles and Criteria show a general improvement in terms of recognition of the realities of responsible forest management in New Zealand.

To learn more about FSC internationally, see http://www.fsc.org/.

For comment on this article click here.

PF Olsen Environmental Management System is Heart of FSC Group Scheme

A crucial enabling capability behind PF Olsen's FSC Group Scheme is its IT–based Environmental Management System (EMS) a sub-system of FIPS. FIPS is a full enterprise management system which integrates data and forest management and business processes across all of PF Olsen's business and the forestry businesses of PF Olsen clients.

Over the past three years, there has been significant development work in FIPS to improve the EMS. "When I reviewed our EMS a few years ago, I discovered many management processes which could be improved by incorporating them into FIPS", explains Kit Richards, PF Olsen's Environment Manager. "We now attain high compliance levels over an increasingly large portfolio of forests, with reduced overhead costs. This just wouldn't be possible with a paper-based system."

Some of the management processes now incorporated into FIPS include:

• Environmental monitoring.
• Education and training.
• Incident reporting and management.
• Auditing and corrective action management.
• Consultation and stakeholder communications.
• Protected ecosystems management.
• Resource consent management.

PF Olsen's EMS experience and developments will be presented and demonstrated at the ForestTech 2009 event in both Rotorua (New Zealand) and Albury (Australia) in November (see www.foresttechevents.com). This event, organised by the Forest Industries Engineering Association, is an independent showcase for new tools and technologies to improve key operational, planning and strategic decision-making. The Albury ForestTech event will also mark the launch of PF Olsen's Group Certification Scheme for Australia covering both FSC and AFS (the Australian Forestry Standard).

For comment on this article click here.

"Dirtshop" Aims to Improve Operational Practices

PF Olsen is collaborating with Opus International Consultants Limited and Andy Woolhouse (of EMTS Limited) to improve management of forest engineering operations, through on-site workshops (or Dirtshops). The on-site workshops will be attended by PF Olsen operations managers and forest engineering contractors and are aimed at minimising environmental risk associated with planning and execution of earthmoving and harvesting operations.

Research shows that well-managed commercial production forest management on steep hill country has similar erosion and sediment effects as native vegetation most of the time, and well below pastoral land use over the long-term (see http://www.hbrc.govt.nz/Land/PakuratahiLandUseStudy/tabid/299/Default.aspx and Forestry Scores High on Eco–Services below). However, roading and harvesting present short periods of heightened environmental risk.

Opus has run similar workshops for its own staff and contractors in the civil engineering environment and is currently working with PF Olsen to adapt them for forestry conditions and operations.

With the increased frequency of more intense weather events it is critical that we find engineering solutions that minimise adverse environmental impacts but are still cost-effective and maintain the economic viability of forestry on this class of land.

For comment on this article click here.

Forestry Scores High on Eco–services

A common source of ire for forest owners is that despite forestry providing society with a range of eco–services (such as soil and water protection, carbon sequestration, species diversity and enhanced amenity/recreation), it is sometimes portrayed as an environmental villain. The research on soil and water protection is unequivocal. In the research report "Water quality in low–elevation streams and rivers in New Zealand: recent state and trends in contrasting land–cover classes" (New Zealand Journal of Marine and Freshwater Research, 2004, Vol. 38: 347-366) it is stated: "E.coli and dissolved nitrogen and phosphorous concentrations in pastoral and urban (land) classes were 2–7 times higher than in native and plantation forest classes, and median water clarity in the pastoral and urban classes was 40-70% lower than in the native and plantation forest classes. Water quality state in the pastoral class was not statistically different from that of the urban class, and water quality state in the plantation forest class was not statistically different from that of the native forest class."

See also Pakuratahi Land Use Study for a report on a study reported by the Hawke's Bay Regional Council.

The important point to realise is that the economics of forestry is highly sensitive to costs. Whilst the requirement for environmentally responsible management is not questioned, over–restrictive conditions on herbicide use or on forestry engineering could easily tip the balance of forestry's viability. Ironically, a narrow and inflexible approach to one environmental issue could result in a much larger and wider–scale set of adverse environmental outcomes resulting from reduced forest land–cover.

For comment on this article click here.

MAF Updates PF Olsen on the Emissions Trading Scheme

Last week MAF held a one-day workshop for PF Olsen staff to update us on the recent changes to the Emissions Trading Scheme (EMS) and to provide guidance on how to set up accounts in the New Zealand Emission Unit Register (NZEUR) and join the ETS. This was a highly informative session and PF Olsen thanks MAF for the effort it went to. A lot of material was covered, but highlights that may be of particular interest to readers are bulleted below:

• If you have deforested, you are required to notify MAF by 31 January 2010, submit a return by 31 March 2010 and surrender units in April of 2011.
• The Allocation Plan, outlining the process for applying for partial compensation credits for pre-1990 forest land, will come out sometime in 2010 (we expect early 2010).
• Currently 149 entities have joined the ETS (with post-1989 forest land). Currently all applications are being audited (100% audit).
• There is evidence of a lack of understanding of the ETS in applications (both forest owners themselves and by third-party/consultants applying on behalf of forest owners).
• There is a general expectation that a measurement-based approach will be introduced in the future (as opposed to table-based approach which is the only approach available now).
• You must open a NZEUR account prior to joining the ETS.
• There is a $550 (inclusive of GST) set charge for applying to join the ETS - additional charges will be made if the application takes longer than a set time.
• The onus of proof of eligibility (of post-1989) is on the applicant.
• Records must be held for 20 years.
• All liability lies with the applicant and penalties for offences may result in fines up to $50,000 or imprisonment.

A lot of time was spent discussing mapping (post-1989). PF Olsen is working with MAF to ensure that its application process is efficient and minimises the amount of time both parties have to spend on each application (to avoid additional costs being charged). MAF emphasised that carbon accounting areas (the unit of land over which you account for carbon stock changes, CAAs) are permanent and to make sure you get it right first time. For post-1989 forests planted prior to 2006 about 1996^[1], the choice of CAA will materially affect how you earn and surrender credits. An example was given how one configuration of CAAs resulted in 150 credits earned in CP1 and another configuration of CAAs resulted in nil credits earned, also in CP1 (same forests, same total net stocked area). There are also important implications for treatment of stand boundaries, stocking gaps and the "15m rule".

Will there be a market for my carbon credits?

One of the important issues facing would-be forestry Emission Trading Scheme (EMS) participants is "Will there be a ready market for my carbon credits and what price will I get for them?"

To answer the first part of the question, PF Olsen has projected the likely supply and demand balance of carbon credits in New Zealand for commitment period one (CP1, 2008 to 2012) and two additional five year periods. Some important points to note are:

• The partial compensation/free allocation of units to pre-1990 forest owners will potentially supply a lot of credits to the market for CP1 and the next commitment period.
• Demand is muted in CP1 by the gradual phase-in period for the energy and transport sectors into the ETS (Agriculture will not be exposed until after 2015, if at all).
• There is a limit to how many domestic credits (NZUs) can be converted to the international AAUs, and therefore exported in CP1. This limit is expected to be effectively 24 million units for conversion of forestry NZUs to AAUs.

The chart below shows three scenarios, all with the assumption that 50% of the eligible post-1989 forest owners join the ETS and make their carbon credits available as potential supply. The three scenarios presented are:

1. Low new forest planting (5,000 hectares per year).
2. Medium new forest planting (20,000 hectares per year).
3. High new forest planting (40,000 hectares per year).

On this basis, there will be a surplus of units (i.e. a surplus above the domestic demand and ability to export units) in CP1 but a deficit in subsequent years. It is unclear how big the uptake will be by post-1989 forest owners. We expect that large multi age-class forests owners will be most keen to join the ETS as they have a natural hedge for carbon price risk. Small, single/few age-class forest owners, however, may be more cautious about joining, as it is more difficult to address the carbon price risk.

The situation is more positive for new forest owners. They will earn more carbon credits than they have to account for at harvest (as opposed to post-1989 forest owners with existing forests who will mostly have to account for all the earned carbon credits at harvest), by the time their new forests are sequestering meaningful carbon, there is expected to be more demand than supply, even under the High new forest planting scenario.

PF Olsen progresses with developing carbon forestry opportunities

PF Olsen has had a busy month seeking out the best commercial angles in carbon forestry for clients, and how existing forest owners and would-be forest owners can get the most out of the ETS. Highlights include:

• Very high response rate to our last Wood Matters from those wishing to register their interest with PF Olsen and/or seeking additional information. If you intended to respond, but didn't, please use this link to go back to the last issue of Wood Matters, and you can click on the appropriate responses available throughout the various articles.
• Advanced discussions with third-parties to offer services associated with a carbon fund/pooling carbon. One such benefit of this initiative is expected to be the ability to sell carbon credits and lay off the carbon price risk.
• Service packages related to establishing holding accounts in the NZEUR, joining the ETS, cost-benefit analysis of specific forest owner situations and development of specific client carbon forest strategies and projects.

We will be doing our best to keep those that have registered informed of our progress.

For comment on this article click here.

Log Market

Stability describes the current log market (unusually). Whilst there are fluctuations in various economic drivers, the net effect is little change in price and demand. The NZX Agrifax Combined Log Price Index which measures returns from the whole forest remained unchanged in October at $74/tonne.

Domestic market

Domestic log demand and prices remain steady. Improved lumber prices in the US and Asia are being offset by the strong NZ$. Market conditions are showing signs of improvement in Australia and New Zealand as the housing market sees increased activity.

Export market

The Korean economy is maintaining its export-led recovery. NZ Radiata pine log prices are now on a par with China and more NZ log volume is going to this market. This will lower volume pressure to China as increased summer harvesting volumes come to market. A competitive Korean market should also underpin China log prices, which are getting high in comparison to the alternative domestic, Russian and North American logs. Since January of this year, A-grade logs in China have increased from US$80/JAS m3 CFR to the current US$115. However, much of this price increase has been off-set by the increase in the value of the NZ$ and higher ocean freight rates.

But don't hold your breath for a NZ$ at-wharf-gate price spike if the NZ$ or the ocean freight rates plummet. Each of these developments would immediately put downward pressure on China CFR prices.

Log export volumes for the June to August 2009 quarter were 33% higher than the same period last year, and 45% above the five-year average for the same period.

Ocean freight

Pacific handy-size fixtures (setting the ocean freight rate for NZ logs to Asia) have remained steady of the past couple of months, at the relatively high levels of around US$43/JAS m3 spot basis. This trend is somewhat at variance to the Baltic Dry Index (see chart below) which saw the index reduce from June through September. Low levels of inbound cargo, loss of some vessel capacity and high vessel demand from NZ shippers has contributed to supporting higher rates in this segment of the market.

The outlook appears to be a global growth story. If aggregate global growth continues to advance from the lows precipitated by financial crisis, ocean freight rates are likely to stay at least at current levels. Some increase in NZ demand for bulk commodities may increase inbound cargoes such as fertiliser and have some downward pressure on rates, but this isn't expected to be significant.

For comment on this article click here.