Wood Matters: Issue No: 020 Date: May 2010

On 11th May Prime Minister John Key announced $321 million over four years in investment in new initiatives, with the centrepiece being a $234 million increase over four years in support for business research and development (R&D). There are also significant increases in support for talented scientists and science infrastructure.

The changes in science administration are aimed at better aligning our constrained Research Science and Technology spend to the needs of key sectors in which NZ has an international competitive advantage (of which forestry and wood processing is one). Industry is likely to have a greater say in what research is carried out and there is to be greater emphasis on enabling the private sector to make use of the research to generate economic activity and wealth.

The immediate task for the Crown Research Institutes is to get their Statements of Core Purpose drafted and presented to government for review and acceptance - behind this is the belief that the CRIs have been too focussed on their own profits rather than the profits of the sectors they should be servicing.

Meanwhile a core group of forest industry leaders involved in the commissioning and delivery of research have met in Rotorua and worked hard on compiling a Draft Statement on Research Needs for the Forest Industry. Once signed off by the respective industry bodies this will be discussed and fed into the newly merged MORST/FRST and made available to all relevant Crown Research Institutes.

The draft document is seeking to increase the focus on shorter-term research, the results of which can be more quickly applied in our industry, at the expense of some longer-term strategic research. It also seeks to increase FRST investment into solid wood processing at the expense of fibre and bio-composite products. The seven page document clearly articulates the key forest industry productivity, profitability and asset protection drivers and research topics for investment in these critical areas.

RFID Tags in Forestry and Log Tracking

The concept of tracking logs, including, if needed, silvicultural history, using RFID tags has been around a long time. Uptake of the technology has been constrained by the relatively high cost of the tags themselves, and development of appropriate sensors for log measurement. As the cost of RFID tags reduces and there is increasing opportunity to gain efficiency in log measurements and tracking using remote sensing rather than tapes and data loggers, RFID tags will come into their own.

RFID Harvester Head
The RFID-enabled harvester staples tags into logs automatically to help track timber moving through the processing line.

Most of you will not be aware that in 2002 Weyerhaeuser Inc. (US) attempted to lodge an RFID patent in all the major forestry countries of the developed world. Where successful this patent will give them the rights to claim royalties from anyone using RFID tags linked to a computer-based stand record system for log tracking purposes. Forest owners in US, Canada and Australia were caught napping and the patent application has been granted and is in force in those countries. In New Zealand CHH Forests got wind of the application and opposed it. When International Paper sold its NZ forestry and wood processing interests to Rank Group, Alisdair Woore of CHH Forests handed the ball to NZFOA to continue with the opposition process. Much to our surprise, the Assistant Commissioner of Patents granted the Weyerhaeuser application in January 2009.

A smaller group of forest owners got together and raised funds to lodge an appeal to the High Court. On 31st March 2010 Judge Duffy overturned the Assistant Commissioner's granting of the patent application on the grounds that "the claimed invention lacked inventiveness". Weyerhaeuser has not appealed Judge Duffy's decision. This means firms in New Zealand are free to engage whoever they wish to develop RFID -based technologies, without payment of royalties to Weyerhaeuser.

All NZ forest owners owe a debt of gratitude to Alisdair Woore and to Chris Goulding of Scion and those forest owners that had the conviction to fund the substantial legal costs of the High Court appeal.

Meanwhile the opportunity to reduce costs and improve log-tracking efficiency is to be discussed at a workshop jointly being organised by FFR and SWI in Rotorua on 26th May. My back of envelope calculations is that there is savings of several millions of dollars annually if we can measure and sell logs on the basis of remote sensing and recording. Our customers would probably be delighted as well once they got the confidence to rely on NZ seller data.

Should I Wait Until 2012 to Decide Whether or Not to Claim Carbon Credits?

Forest Enterprises Limited (FEL), a forest and investment manager in the Wairarapa and East Coast of the North Island, recently advised (most) post-1989 forest owners to wait until 2012 to decide whether to opt in to the Emissions Trading Scheme and claim carbon credits (NZUs). In 2012, should post-1989 forest owners decide to join the ETS, there will be time to do so before 31 December 2012, the last date to secure NZUs for the five years from 1 January 2008 to 31 December 2012. The thinking behind this recommendation is:

However, FEL also points out that it might be worth joining the ETS (at least prior to the end of 2012) even if you don't plan to sell your NZUs. It could be a relatively low-cost "insurance policy" against a successive government changing its position on accounting for carbon loss at harvest. Currently, the legislation is such that if you don't join the ETS and don't claim NZUs, you don't have to account for any carbon loss at clearfall. Faced with a huge fiscal cost when the large areas of early 1990s plantings mature, however, a government could conceivably legislate that carbon loss does have to be accounted for, whether NZUs have been claimed or not. Having NZUs in "the bottom drawer" could be very valuable if this happened.

The few forest owners with post-1989 forests planted after 1999 have the opportunity to claim NZUs and sell them without the need to purchase all of them back at harvest (so long as they don't deforest). This makes joining the ETS and selling some of the NZUs more attractive as it takes away some of the carbon price risk.

This chart shows that a post-1989 forest owner with a forest established in 1999 (or later date) - represented by the thicker vertical black line - will be able to earn some NZUs that don't have to be accounted for at harvest time (so long as the area is replanted). This is referred to as the "perpetual" carbon pool above. Forests planted from 2008 onwards (earning NZUs from Year/Age zero on the chart) achieve the largest "perpetual" carbon pool, resulting in lower carbon price risk and higher profitability.

This advice is consistent with that of PF Olsen's. For the majority of post-1989 forest owners, unless you want to sell your carbon credits in the near-term, there is little need to opt into the ETS at the moment. This recommendation could change if it appears that many forest owners are delaying joining until the "last minute" which could risk bottle necks at MAF and professional service providers due to being inundated with applications. PF Olsen will try to monitor this situation as best we can and advise of developments.

Steve Wilton, Managing Director and founder of FE went on to say: "In our opinion, understanding these factors [about the ETS] should lead to a healthy degree of caution about the long term viability of carbon farming as a stand alone financial undertaking. Our view is that the underlying plantation forestry investment must itself be financially viable, and the carbon opportunity considered a potential added bonus, for so long as there is a market for carbon. No Forest Enterprises co-ordinated and managed forestry investment was established for carbon farming purposes."

The Carbon Market

Prices of most units in Europe continue their positive price trend with secondary CERs trading at around €16. Issuance of primary CERs is in a downward trend as the "low hanging fruit" of low-cost mitigation projects around the world reduces.

A combination of reducing issuance of primary CERs, tentative signs of economic growth in Europe and a firming oil price (especially in Euro terms) is likely behind this firming trend in carbon compliance units.

Trade in AAUs is far from transparent although market commentators are reporting some activity. Carbon Monitor recently reported Austria purchasing 1.4 million AAUs from Estonia. The reported price equated to €9.28/unit or NZD 16.57/unit at an exchange rate of 0.56. The integrity of these "hot air" units is questioned by many countries, and not recognised by the European Union Emission Trading Scheme, and arguably are not admissible in the NZ ETS. However, this price puts downward pressure on prices for New Zealand forest AAUs (converted from NZUs).

The New Zealand market is still very subdued with NZU prices recently falling to around $18/unit. Nigel Brunel of OM Financial made this comment in Point Carbon recently: "Some sellers want to cash in now, fearing the scheme will be called off, while the emitters are just sitting on their hands."

Despite the Australian government delaying the carbon pollution reduction scheme (CPRS) until 2013, New Zealand has remained steadfast on its plan to bring the energy producers, manufacturers and transport sectors into the NZ ETS on 1 July 2010, albeit at only partial rates of liability. It would appear increasingly unlikely that there will be a back down now. It is expected that once these emitters enter the ETS and have to start accounting for their carbon emissions that demand for (forest generated) NZUs will increase.

New Guidelines for Private Native Forestry in Northern New South Wales Completed

The New South Wales Department of Environment, Climate Change and Water (DECCW) recently printed a Field Guide for Private Native Forestry (PNF) in Northern NSW. This guide (written by PF Olsen Australia under contract with DECCW) is designed to help forest owners and harvesting contractors understand their requirements according to the PNF Code of Practice for Northern NSW.

The guide covers forest operations planning and execution, environmental management, forest infrastructure (roads, crossings, log landings), plus some basic information on mapping, measuring trees, and assessing regeneration. There are many diagrams in the guide and the wording avoids technical jargon wherever possible (a glossary is also included). The aim of the guide is to interpret a complex Code of Practice and provide guidance for anyone wanting to conduct or manage private native forestry in NSW.

Due to differences with forest type and geographic region, there are four Codes of Practice for PNF operations in NSW. Guides for the other three Regions (Southern NSW, River Red Gum Forests, and Cypress and Western Hardwood Forests) are nearing completion and will be available (both online and in printed booklet form) within the next few months.

The guide for Northern NSW can be downloaded from the DECCW website (http://www.environment.nsw.gov.au/pnf/). Hard copies of the guide can be obtained from PNF Regional Offices (listed on the same website) or by emailing Phil Lacy.

Dr Phil Lacy of PF Olsen is based at Coffs Harbour NSW and wrote the new "Field Guide for Private Native Forestry".

Log Market

Export

As reported last month, Radiata prices in China slipped and A grade is currently trading at around USD140-145/JAS m³ CFR. This is down from a peak in March of over USD150. This is an inevitable correction of a steady price firming trend for the past two years.

At USD150 Radiata becomes uncompetitive with the Russian log price and imported lumber (e.g. from Canada) is also better priced.

Russian log supply typically peaks over March to May and NZ Radiata deliveries are expected to remain high. Following that, demand in China typically softens a little during their hot season, June to August.

There have been steady removals of logs from China ports but inventory remains high at about two months supply and buyers remain cautious.

Attempts by the China government to keep the lid on growth should be seen as a positive development as this will discourage speculation and should make the strong growth rates in China more sustainable. However, the real estate/property market is continuing to boom which increases risk. A bust in the property market could have broader ramifications for the Chinese economy.

Other Asian log markets have experienced log price falls, particularly India, but continued solid economic growth has resulted in some additional demand. Japan has seen some increased demand due to loss of some supply from Chile (post earthquake). Korea remains steady.

The exchange rate has been volatile over the past month, buffeted by the sovereign deft problems in Europe (Greece, Spain, Portugal). However, the Kiwi $ has returned to a trading range of 0.70-0.72.

Ocean freight has been steady with spot rates for log bulkers around USD50/JAS m³.

Overall, we expect some continued weakening in NZD at-wharf-gate prices in the coming months. However, the underlying market sentiment continues to be strong and there are still high levels of enquiry for Radiata pine supply from New Zealand. As usual, what NZ forest owners receive for their logs will depend on how CFR prices, foreign exchange and ocean freight interplay over the coming months.

Domestic

The domestic log market remains steady. Pruned, structural and pulp logs continue to be in strong demand. The recent fall off in export log prices and increase in second quarter domestic prices will be tending to favour domestic supply from some forests, (depending on distance from port and domestic purchasers).

Summary

Domestic prices rose in April to reflect second quarter price negotiations and will generally remain at these levels until the next review to set prices for the third quarter (July - September 2010). Domestic log sales will provide some price stability and support levels for average forest returns as export prices are expected to be more volatile and likely soften further over the next few months.

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.

Russell's Report

PF Olsen Ltd forest managers will shortly be trialling a new system of measuring forests using a new inventory system developed by Scion researchers as part of the FFR Radiata Research Theme. The new approach to measuring standing forest has been developed with the aim of reducing forest inventory costs while still achieving the required levels of precision in the sampling process. Forest inventory costs are significant for forest owners and any cost reductions are always welcome for investors. The key feature of the new inventory system is that aerial or satellite images are used to assess the number of standing trees in a given area of forest. This is done by applying an algorithm that was originally developed by CSIRO in Australia to the digital image to count the individual stems in the stand or compartment. Once the stocking is determined a transect or line method is used to asses tree size, form and wood quality.. The advantage of this form of transect sampling is that fixed area plots, which are expensive to establish, are no longer required and the sampling can cover a greater proportion of the forest stand. Preliminary studies have shown that cost savings can be as high as 40% on easier terrain and on average 30-35% cost savings are possible.

Did You Know?

Wooden framed houses are better for the environment.

✘ A typical steel house frame has added 4.5 tonnes of CO₂ into the atmosphere - the equivalent to the emissions from driving 22,500 kms in an average car.

✔ A typical wooden house frame has absorbed 9.5 tonnes of CO₂ from the atmosphere - the equivalent of 47,500 kms of driving in an average car.

"Excellent, professional service has added value to our forestry investment"

PF Olsen Ltd has been managing the HG Leach forestry assets for the last 15 years. Over this time PF Olsen has managed various operations including establishment of new forest, silvicultural tending, harvesting and processing wind throw insurance claims.

Eric says: "PF Olsen has provided us with an excellent, professional service for many years and has added value to our forestry investment over this time. PF Olsen provide expertise and sound advice, are well organised and it is always a pleasure to deal with their team and they deliver the goods as promised."

"PF Olsen achieved full compliance with Regional Council requirements"

George Parkes signed up with PF Olsen Ltd to manage his woodlot harvesting and marketing. The harvesting was done from December 2009 to February 2010 and coincided with good summer weather and a favourable log market.

George says: "I was impressed with the harvesting contractor, who left a tidy cutover and logged all the trees off some very difficult areas. PF Olsen's communication was good. The Auckland Regional Council seemed to take a special interest in this job as it is in the area of the Whangateau Harbour and their audits during and after the operation revealed full compliance with their requirements. We had good weather and a buoyant export market (so I am told) and this will have helped the profit result being better than PF Olsen's estimate. PF Olsen clearly did not try and win the work on the basis of inflated profit expectations."

In This Issue

Clarky's Comment

RS &T - The Rules are Changing