In This Issue

• Clarky's Comment
• Post-1989 Registration and Emission Returns
• Pre-1990 Forest Land Allocation Plan Update
• Proposal to Increase Sequestration Rates for Indigenous Forest
• Major Safety Initiative for 2010 Launched
• Log and Ocean Freight Market
• PF Olsen Presenting at Upcoming Wood Supply Chain Optimisation 2010
• PF Olsen and FITEC Develop Logging Business Master Class to Improve Logging Performance
• PF Olsen Welcomes New Team Member

Clarky's Comment

Why Aren't New Forestry Planting Rates Burgeoning?

It is widely acknowledged that having more trees planted is not only good for protecting steep hills from erosion and keeping streams clean and free of farm run-off pollution, but that it is one of the lowest-cost ways greenhouse gas emitters can meet their medium and longer-term emission liabilities under the Emissions Trading Scheme (ETS).

So why are so few new trees getting planted?

This month we had news of the default of an entrepreneur on commitments made to purchase land and treestocks for carbon farming. I do not know the details but suspect that access to investor funding was the primary cause. At PF Olsen we see uptake of the Afforestation Grant Scheme subsidy but little investment in unsubsidised new planting. This is despite the ETS legislation being in place and forestry projects indicating attractive double digit returns at $3,000/ha for land and $25/NZU. The returns are particularly attractive for existing pastoral farmers whose opportunity cost of land under extensive pastoral farming is far less than $3,000/ha. But even farmers are not planting trees. Demand for NZUs from NZ emitters cannot be fully met from forest supplies after 2012 under current legislation, so demand should not be putting farmers and investors off. So what are the blockages to material new planting?

1. Uncertainty over the future demand and value of NZUs / AAUs. The Copenhagen meeting in December 2009 failed to achieve a post-2012 agreement. If no follow-on agreement from Kyoto is in place in 2013, the AAU could become a worthless unit, and that will take away a market option for NZ forest owners, and therefore devalue the NZU.
2. Failure of Carbon Pollution Reduction Scheme (CPRS) in Australia. While the ETS and CPRS were not linked, the failure of the CPRS means that at-risk NZ industries with Australian competitors are now more at-risk. Business lobby groups are already calling for a suspension of the ETS, or at least additional taxpayer support for such firms. If granted this reduces the demand, and therefore price, for NZUs.
3. Investor concerns over carbon loss from fire, wind or disease.
4. Investor concerns over managing harvest liabilities, while still benefiting from the sale of some, or all, of the carbon credits. This is particularly a concern for the smaller investor that may have just one, or a few, age-classes.

What could be done to improve the environment for unsubsidised planting of trees, given that the NZ Government can only have very limited influence on the international or Australian regimes? I suggest:

• Certainty of allocation of pre-1990 forest compensation units after 2012.
• Clarity that international market options for forest owners will remain open, regardless of any linkage with a future Australian scheme.
• Introduction of Offsetting. Offsetting is the term used to recognise that trees planted on new land may be treated as continuation of a pre-1990 forest, allowing the harvested area to be converted to a higher and better land use.
• Introduction of Averaging. Under this concept those planting new forests would have the option to sell up to half the credits earned over a full rotation (with the other half retained by Government), and have no liabilities for harvest emissions provided the forest was replanted.
• Introduction of a National ETS Insurance Scheme. Under this idea the Government would retain a small percentage (say up to 0.75%) of all forestry NZUs registered, and underwrite forest loss emissions arising from natural disasters or force majeure events (wind, fire, disease, volcano).
• National works with Labour to agree on Stable ETS Legislation over multiple election cycles. Forestry is a long-term investment and requires long-term policy stability.
• Introduction of a Forestry-Friendly National Environmental Standard. Investors planting on steep erodible land need to have certainty over consent conditions that will apply some 30 years later at harvest time. Variation in the rules contained in Regional Council Plans and in some cases complex and onerous compliance provisions are not conducive to new investment on such lands.

It is unclear to me, at this stage, that these measures alone would be sufficient to encourage new planting, but they will certainly go a long way. There are other measures that would have little fiscal impact but send a strong message of Government support for the forestry sector that could be added to a package of changes. These are around tax treatment of forestry costs, support for market access, wood promotion, R&D and skills training.

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Post-1989 Registration and Emission Returns

The first three months of the year have been very busy registering post-1989 clients into the ETS. This has enabled them to submit an emissions return by the 31 March 2010. The forests we have registered have been from 24 to over 1,100 hectares and we are pleased to say it looks like most of them registered in time, but it has taken a big effort, particularly from our mapping team.

One thing the last three months has taught us is not to underestimate the time it can take for MAF to process the registration applications and the amount of liaison required with MAF once the application is submitted. This was not helped by the fact that MAF received a large number of registration applications in the first three months of this year and will not be able to process them all before the 31 March 2010 deadline. MAF actually announced on the 24 February that any applications received after this date would be unlikely to be processed in time.

We found the most time consuming part of the process is dealing with land eligibility issues. Many of our applications showed up on MAF's 1990 satellite imagery as having woody vegetation that could be forest species, therefore potentially making the area ineligible as post-1989 forest land. It could have been gorse, which isn't a forest species, but it is up to the applicant to prove that the land is eligible or revise the application area. This involves sourcing records and/or aerial photography that are at least 20 years old on land may have changed ownership (several times). This can be very time consuming.

So to make sure you give yourself the best opportunity to become registered with the maximum eligible area by the 31 March 2011, don't leave your registration application to the last few months, as:

1. MAF could be inundated again by applications of those who leave it to the last few months. Registration applications can be made at anytime.
2. PF Olsen and MAF are also going to be busy over the next 12 to 18 months processing pre-1990 allocation applications.
3. We are not able to register all our clients at once and need to be working on applications throughout the year.
4. It will allow time to sort out any land eligibility issues your application may have.

If you would like to receive a post-1989 forest registration and emission return service offering for the next round of applications, please email Colin Hercus at colin.hercus@pfolsen.com.

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Pre-1990 Forest Land Allocation Plan Update

MAF has recently advised of new tentative dates for pre-1990 forest land owners to apply for their partial compensation/free allocation of credits - June 2010 to June 2011. This is a one off period to claim this credit allocation. Confirmation of these dates hinges on the Forestry Allocation Plan being finalised, probably in April or May 2010.

NZUs will be allocated to the following categories of landowners of pre-1990 forest land in the following amounts:

18 NZUs for each hectare of eligible land that is, or was, Crown forest licence land transferred to an Iwi under a Treaty of Waitangi settlement on, or after, 1 January 2008.

39 NZUs for each hectare of eligible land that was transferred (changed ownership) on, or after, 1 November 2002. What constitutes a land ownership change will be detailed in the finalised Forestry Allocation Plan.

60 NZUs for each hectare of eligible land not covered by the categories above.

Approximately 38% of the overall entitlement is to be transferred in Commitment Period 1 (1 January 2008-31 December 2012), and the remaining units (approximately 62%) after 31 December 2012. Should the rules surrounding the deforestation of pre-1990 forest land change for Commitment Period 2, the Crown has the option of withdrawing the remaining 62% of the allocation.

June 2010 to June 2011 is also the tentative timeframe to apply for deforestation exemptions for forest owners who have yet to deforest. If you have already deforested (changed land use) and are eligible for an exemption, you can apply for the exemption now.

If you have not already registered with PF Olsen to apply for your pre-1990 allocation or exemption and would like to receive further details on this service, please email Colin Hercus at colin.hercus@pfolsen.com.

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Proposal to Increase Sequestration Rates for Indigenous Forest

One of several changes MAF is proposing to the ETS is to change the sequestration rates for indigenous forests from the 3t CO₂/ha/year (each and every year) to rates that vary each year, and are higher overall.

Based on research by Landcare Research, a new table is proposed which effectively means that over 50 years, almost twice as much carbon sequestration could be claimed than under current Regulations (323t CO₂/ha as opposed to only 150t CO₂/ha), see link Amending the Climate Change (Forestry Sector) Regulations 2008 - Consultation Document.

This change is believed to more accurately reflect actual sequestration rates (on average over New Zealand) and expected to encourage the initiation of more indigenous carbon-forestry projects.

As with sequestration rates of exotic forests a field measurement-based approach is still planned for forests larger than a specified threshold area. Consultation about the field measurement approach, including the value for the threshold area, is expected later this year.

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Major Safety Initiative for 2010 Launched

PF Olsen's chief safety initiative for 2010, and one that has been written into our 2010 Business Plan, is a series of Leadership in Management seminars. This programme is consistent with the Department of Labour's (DoL's) and New Zealand Forest Owners' Association (NZFOA) three 'key initiatives' to be worked on during the years 2009 - 2011, namely:

1. Leadership development - a cultural shift among current and emerging industry leaders.
2. Training for skill - as opposed to training for compliance sake.
3. Safety simplification - reducing the volume of rules, making the rules easier to understand, and reducing duplication.

The seminars are hot on the heels of another recent collaborative 'Leadership Development' initiative amongst PF Olsen, DoL and the Accident Compensation Corporation (ACC). This group organised a 12-month 'pilot' with 40 forest industry leaders and used Dr. Hillary Bennett to develop a framework for improving industry culture and leadership. The learning from this project will be used in the subsequent Leadership in Management seminars.

The programme will comprise four seminars. Each of these will be two hours in duration with a maximum attendance of 16 people per seminar. Principal contractors will be invited to join PF Olsen operational employees (and those that manage operational employees or interface with them) to learn and benefit from this important safety/productivity initiative.

The schematic below shows pictorially what are seen as the critical elements of growing a safety culture.

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Log and Ocean Freight Market

Export Log Market

The strong run in China is taking a breather. Stocks of Radiata, North American and Russian logs are high (more than two months). There are also high inventories of Canadian and Russian lumber.

It appears the Russian log tariffs are having some of the desired effects. There is increasing investment by northern Chinese in saw milling in Russia to avoid the log tax. Even just a basic primary break down of the logs and transporting them to China green-sawn avoids the log tariff. Russia has announced the formation of new special economic zones to encourage investment in value-added processing.

The high volume of lumber from Canada is still being stimulated by a decade-long salvage programme of thousands of hectares of timberland killed by pine beetle. Recently described as one of North America's largest environmental natural disasters, it is expected to lead to long-term shortages of lumber. The pine beetle is expected to kill a billion cubic metres of B.C. timber. An intense salvage program has been underway for 10 years, but the approaching end of sawlog-quality wood means the industry will be hit by supply curtailments at a time when the demand for lumber is climbing. Therefore the high levels of Canadian lumber coming into China are not considered sustainable and that bodes well for New Zealand log exports in the future.

The high China log stocks are partly due to working through the after effects of the Chinese Lunar New Year (mid February) described as the largest mass migration or pilgrimage of the modern world. This involves millions of Chinese working away from home returning home for the celebrations. Production at wood processing and wood using facilities stops for several weeks but deliveries of logs, at least from New Zealand, do not!

Also, unseasonably cold weather in, and north, of Shanghai and wet weather in the South has hampered the recovery of sales.

The Chinese government's efforts to curb growth by tightening credit may also be dampening demand somewhat.

It is too early to say this signals a change in the market and a market down-turn. If sales of logs off the ports pick up as expected, inventories could reduce quickly. Prices have slipped a little, but are still at historically high levels of around USD145/JAS m³ CFR for A grade (price delivered to China, free-on-board ship at China port).

Demand and price from India, Korea and Japan are steady.

Domestic Log Market

New Zealand log processors face increasing pricing pressure as at-wharf-gate prices for export log have continued to rise. Those exposed to the Australian market are faring better as good demand and favourable movements in the NZD/AUD cross rate support returns. Significantly higher volumes of wood products are also being sold by NZ processors to Asia, especially China, but this tends to be high-volume and low-value products, and the NZD/USD cross rate, whilst having fallen from its highs last year, is not providing much relief for exporters.

Some critical regional shortages of logs for domestic processing have resulted in significant increases in log prices this quarter. For the most, however, pricing is set for the whole quarter and sizable domestic log price increases are expected in the second quarter commencing next month.

How Will the Recent Chilean Earthquake and Tsunami Affect the Global Forest Products Market?

The Chilean Association of Export Manufacturers reported that a survey it undertook of its members revealed that 26% of them experienced damage at a medium to high level to their buildings and plants, whilst 43% experienced little damage and 21% were not affected.

In the pulp sector, CMPC, Celulosa Arauco and Constitución, have recently announced the detention of eight pulp manufacturing sites. Arauco is evaluating all the damages; however they suspect that during the month of March there will be no pulp production in Chile.

Whilst Chile exports few logs, it is a significant exporter of processed wood products. Market commentators generally expect that lower supply of wood products from Chile will bolster demand from other suppliers and potentially allow price increases.

Headwinds for the Handy-size Market (Ocean Freight)

Since ocean freight comprises around 50% of costs of sales for export logs (currently), the future direction of the ocean freight market and consequent impact on rates is critically important to the New Zealand forest owner.

The Handy-size vessels are those that ship our logs to Asian markets. They are smaller than the larger Panamax and Cape-size vessels, typically loading about 27,000 JAS m³ of logs. The global Handy-size fleet is a much older aged fleet than the other classes of merchant vessel and has fewer companies investing in new-builds. Bangkok-based Handy-size bulker specialist Precious Shipping is predicting a surge in the scrapping of vessels in the sector since a third of Hand-size vessels will be over 27 years of age by 2011. This is regardless of how the market performs.

The situation is very different in the larger sizes that normally dictate the overall movement of the dry bulk market. In the Cape-size sector 449 new-builds are due to be delivered over the next three years. Scrapping volumes are likely to be much lower than this though as only 100 ships, or 13.1% of the fleet, will be over 22 years of age by 2011 and likely to be scrapped in the next three years should freight rates reach low enough levels.

The chart below shows daily charter rates for a range of vessel sizes. The widely reported Baltic Dry Index (BDI) is a weighted composite index of a combination of these various sizes. The yellow line (the Supras) is the larger of the Handy-size vessels and slightly larger than the usual Handy-size vessels that ply the New Zealand to Asia log trade. Note the very high volatility of the larger vessel sectors but also the steady increase in the Supra's rates (yellow line) probably driven the aging fleet and lower rate of new-builds (discussed above). This would suggest a long-term firming rate influence until rates are high enough to stimulate significant new building of this class of ship.

Current Ocean Freight Rates for New Zealand Log Trade to Asia

The market has been volatile. After rates plummeted to spot rates in the low USD 20s per JAS m³ early last year, they developed a generally firming trend during 2009 to finish at a high for the year in the mid USD40s. Some easing at the start of this year, has been followed by a sudden increase in rates in the last few weeks. Spot rates are now around USD 50, which fortunately, commentators are suggesting could be a peak.

Indicative Average Current Log Prices

Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only.

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PF Olsen Presenting at Upcoming Wood Supply Chain Optimisation 2010

As physically remote countries, the quality of New Zealand and Australia's international supply chains have a significant impact on the ability of companies to compete in global markets. The structure of the supply chain has been a major issue for the forest products sector in maintaining its international competitiveness.

Volatile wood fibre costs, increasing energy prices and shifting product demand have all created significant pressures on forestry and wood products companies to reduce their costs and take advantage of demand opportunities.

To address the issue of inefficiencies through the wood supply chain, a wide cross section of forest products and logistics companies and leading technology providers have worked with the Forest Industry Engineering Association (FIEA) to design Wood Supply Chain Optimisation 2010. It runs in Melbourne on 19-20 May 2010 and again in Rotorua for New Zealand companies on 24-25 May 2010. See www.woodsupplychain.com for more details.

PF Olsen is presenting a paper at both the Rotorua and Melbourne sessions. Titled "Sales and Operational Planning", the presentation will outline how PF Olsen has taken an IT-based approach to optimising customer log order files with (forest) resource and harvesting capacity. By extending the functionality of its proven Forest Information and Planning System (FIPS), PF Olsen has developed a robust and integrated system that draws on stand GIS data, inventory data, harvesting plans, crew capacity and market demand to optimally allocate logs to specific log purchasers. "This is an exciting development", says Peter Weblin, PF Olsen's Marketing Manager. " This application tackles one of the more complex and dynamic processes in forestry, but also the one that holds a lot of promise to increase returns through better allocation and minimising log inventory - the Just-In-Time operations management approach."

The paper will be presented by Stephen Bennison, PF Olsen's National Supply Chain Manager. If you would like to learn more about this application, go see Stephen at Wood Supply Chain Optimisation 2010 or call Stephen on 07 921 1899 or Peter Weblin on 07 921 1876.

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PF Olsen and FITEC Develop Logging Business Master Class to Improve Logging Performance

Over the past six months, eight PF Olsen-managed logging contractor business owners have been putting in the hours as part of a new program aimed at encouraging owners to work "on their business" and not "in it".

Sponsored by PF Olsen and FITEC and put together and presented by Trevor Best from Icon Business Solutions, the Logging Business Master Class empowers owners to identify all their objectives for owning a logging business and then develop their business into one that meets these objectives.

In six half-day workshops the course attendees are asked to consider:

• what their key stakeholders (themselves, their forest manager, the log customers and their employees) want and how well they are meeting those expectations?
• what are the key wealth drivers of a contracting business and how do they configure their business and its systems to ensure the owners of the business can take advantage of those key wealth drivers?
• what is the role of the business owner and are they doing the things they need to do to fulfill that role?
• do their operational, employee and financial management systems serve them in their efforts to achieve their targeted outcomes and what could they be doing in each of these areas of their business to improve outcomes?

Most importantly, the owners are encouraged to take action to improve their outcomes. Systems and tools are provided to make "giving it a go" relatively easy.

Being willing to try things is a fundamental quality of a person capable of thriving in a changing environment. An objective of the course is to get owners to try something, within the timeframe of the program, aimed at improving some part of the business and then report back to the group. Improvements in different areas of the business were reported. One owner showed how improvement in productivity measurement had led to changes in crew configuration that resulted in a large improvement to daily productivity. Another owner put effort into changing the public face of their business through their logos, uniforms and advertising which resulted in a significant increase in the number of replies they got to their recruitment advertisements.

Being willing to step out of your comfort zone is an act of courage and each of the participants can be congratulated for being willing to take that step.

This is what some of the participants said about the programme.....

"This course has been highly productive and informative. Over the past 6 months our business has taken a new direction moving forward. We have implemented all of what we learnt from this course which helped us tremendously", Ngahuia and Rod Hubbard, H and R Contracting Ltd.

"We found this course to be very rewarding in a lot of ways. It has forced us to take the time to look deep into the management side of our logging business and we are very excited to start implementing positive changes and just as excited to see the rewards these changes will bring. Thanks a lot for your knowledge and support", Kim and TJ Marsters, TJ Marsters Logging Ltd.

PF Olsen's interest in developing this programme was simple. It was based on our understanding that better harvesting outcomes for the forest owner will result from better run harvesting contracting businesses. "You don't get better value by just trying to leverage down harvesting rates", points out Peter Keach, PF Olsen's Operations Manager. "Lower harvesting rates and better overall harvesting outcomes will come from more productive and safer harvesting businesses. We are making these sorts of upskilling and training investments based on recognising that harvesting comprises 60-80% of the cost of sales of logs delivered to mill door. Improvements in harvesting efficiency translate to higher net stumpages for the forest owner."

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PF Olsen Welcomes New Team Member

Recently returned from his "OE" Jacob (Jake) Saathof joined PF Olsen in February taking a role managing road-line harvesting and engineering in the Eastern Bay of Plenty region.

Jake graduated in 2008 from the University of Canterbury with a Bachelor of Forest Engineering (1st Class honours).

Most recently Jake worked for Forests New South Wales in Australia as a Road Operations Officer where his responsibilities covered supervision of forest roading upgrades/construction in sensitive environments.

Jake has a good technical and practical understanding of forest harvesting having worked in both cable and ground-based harvesting crews in New Zealand.

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