Last week I presented at the 6th Australia – New Zealand Climate Change and Business Conference in Sydney. The take home message was despite residual opposition from the farming sector, we are fortunate in New Zealand to have a pragmatic ETS in place. Most Australian businesses understand very well that the science around human induced global warming is robust and that ultimately Australia will be called to account to play its part in a global response. But the lack of a price on carbon and no political or public consensus on what must be done is making it impossible to support business investments into projects that will reduce emissions.
In New Zealand we have an ETS that is well-designed, not debilitating on business or consumers and flexible enough to encompass all sectors and all gases at a rate aligned to what our main international trading partners do. Our Australian cousins expressed envy at where we have got to compared to them.
But the NZ ETS is up for review in 2011. My presentation focussed on the enhancements we propose to promote to make our scheme more forestry-friendly. Key enhancements are:
Enhancements 1 to 4 above could be implemented at no cost to the NZ taxpayer. Items 5 and 6 are being promoted by NZ officials involved in international post-2012 climate change negotiations.
One complementary measure would be a requirement that all government funded buildings have a wood design option put forward and costed. This idea was promoted by the former Minister of Forestry, Hon. Jim Anderton, but was subsequently dropped, presumably under lobby pressure from the steel and concrete sectors. There are several advantages of such a regulation:
Such a policy would be entirely consistent with a statement made in a recent FAO report see article below: "Stable demand for forest products is one of the most important factors in avoiding forest land use change and maintaining stable forest cover to withstand global warming".
Forest Stewardship Council(FSC) is very important for forestry companies who are supplying logs to customers who require independent certification that their wood products are sourced from well-managed sustainable forests. FSC has banned the use of some chemicals used for weed control in forestry and wish to see an overall reduction of chemical use. Forestry companies with FSC certification, including PF Olsen , have been working closely with FFR to address concerns relating to herbicide use.
Two key reports have been prepared to provide a scientific basis for the ongoing judicious use of chemicals that FSC wish to restrict. The first evaluates chemical and non-chemical means of vegetation management and compares the economic effectiveness of the alternative control methods. Non-chemical controls were found to have a significant negative impact on the economics of plantation forestry. The second report evaluates the leaching risk of Terbuthalyzine, a herbicide commonly used to control forestry weeds. The work shows that the risk of leaching of this chemical is low under forest soil conditions, due to the high levels of organic carbon in the soils. This work has been favourably received by FSC and as part of an ongoing programme of research, it is hoped that it will contribute to continued, safe use of cost-effective herbicides by forest owners.
Standing for Light Detection and Ranging, LiDAR was originally developed for military purposes and adopted for commercial use in mining, civil construction and environmental areas some 20 years ago. It is now in use in the forestry industry. FFR has been researching the use of LiDAR in forestry and sees potential for far greater use of this technology to add value to forest owners in NZ. In conjunction with Waiariki Institute of Technology in Rotorua, a two day workshop is being organised on 22–23 September to provide a hands-on demonstration of the application of this technology and importantly to discuss what is needed to get wider uptake and use of LiDAR. For details on the workshop go to www.ffr.co.nz/lidar-workshop-22-23-september-2010-rotorua.
The main forestry applications for LiDAR are improvements in harvest planning and timber inventory.
Trees growing on the edge of a stand (photo on left) can grow quite differently compared to trees within a stand (photo on right). Obvious differences include branch size and height, however the differences extend to important wood qualities.
The bad news
Wood quality is negatively affected in edge trees. Solid Wood Innovation (SWI) trials have confirmed that all the wood properties known to be associated with stiffness (density, micro-fibril angle and % latewood) are adversely affected close to the stand margin. It is estimated that edge trees have 10% lower stiffness on average compared to trees within the stand. Edge trees are also shorter, more tapered (see figure 1 below) and have larger branches. Similarly there is a tendency for resinous characteristics to be more prominent along stand edges.
Figure 1: Tree taper with distance from the edge of the stand (averaged and smoothed data). Highly tapered trees occur 0-5m from the stand edge.
The good news
Edge trees are generally bigger; they have bigger diameters and more volume. So long as there is good segregation of log qualities it is possible to avoid sending logs with negative wood qualities to log purchasers and log processors who can't get value out of them. Also, the negative wood quality impacts decrease quickly from the stand edge; 5 to 10m into the stand (depending on the property concerned).
What can we do to minimise the negative impact of lower quality edge trees?
There are a number of management practises to address this issue:
- Good land preparation and planting practises that result in an even stocking of trees over all the plantable area – minimising gaps minimises the amount of stand edge.
- Well-managed thinning that results in even and appropriate stocking. Clumpy thinning can result in partial edge effects if the distance between trees gets too great.
- When undertaking standing timber inventory (such as sample plotting for volume and quality assessment), make sure the stand edge is appropriately represented in the sampling.
- Good log making to ensure all logs are in specification (at least visually).
- Non-visual segregation techniques such as log sonic measurement can identify low stiffness associated with edge trees to ensure logs are sent to the right log processor.
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Log Market and Ocean Freight
Export Log Market
August has seen continued reductions in wharf-gate prices around New Zealand. Export log prices fell some $2-6/JAS m³ as ocean freight costs rose and CFR prices continued to drop (CFR prices are the US$ denominated prices in destination ports).
The good news is that around mid August there was a strong signal that CFR prices had stabilised (at USD120/JAS m³ in China) and stocks were moving off the ports well in China. PF Olsen has had consistent messages from a range of end-users in China and log traders that prices have reached a trough and were expected to slowly improve from September. At the current price in the market, New Zealand Radiata pine is very competitively priced against alternatives such as Russian logs, US logs and lumber and domestic logs.
The state interventions to tighten credit and dampen property inflation in a bid to make China's economic growth more sustainable appear to be working as intended. Economic growth in China for the second quarter of 2010 is forecast at 9.2%, down from 11.9% and 10.7% growth in Q1 and Q2 respectively. Whilst this may dampen demand slightly (and has contributed to the weakness in the log market in the past four months) it bodes well for future demand and strength in this market in the future.
Whilst the tariff on log exports from Russia has reduced Chinese log imports from Russia, this has been partially offset by increases in lumber imports which have doubled from 2008 levels. This was very much the intention of the tariff; an increase in value-added processing in Russia, although reports suggest that the degree of processing is very minimal in some cases – just enough to be able to classify the product as lumber rather than logs and hence avoid the tariff.
India continues to be an important developing market. For the 12 months to June, over 1.0 million cubic metres of logs were exported from New Zealand to India, twice the volume from the prior 12 months.
Wharf-gate prices in New Zealand will be particularly affected by the NZ$/US$ exchange rate and ocean freight rates in September as CFR prices are expected to only firm slightly.
It appears that the recent upward movement in the NZ$/US$ has been affected by the newly announced quantitative easing (monetary policy) announced by the US Federal Reserve. This will tend to limit any falling the NZ$/US$ in the immediate future.
Longer-term, demand and prices are expected to continue their bullish trend. The level of enquiry for supply has not changed. Looking to New Zealand for sustainable and reliable supply of Radiata pine logs is being adopted as a long-term strategy for many Chinese log processors.
Domestic Log Market
Prices for domestic logs have remained stable with most price reviews occurring quarterly. Major export markets for New Zealand processed forest products have been largely stable with some weakness in US and Asian markets.
Both residential and non-residential sectors of the New Zealand construction market remain weak and whilst well above 2009 activity levels, are well below 2008 and five-year average levels. However, reduced capacity in production of staples such as framing lumber has meant most producers are able to sell current capacity without damaging price discounting.
Continued strong demand for pulp logs has seen a slight increase in average pulp log prices.
Ocean Freight
The drop in freight rates reported last month has reversed and risen just as rapidly.
At mid August the Baltic Dry Index (BDI) was just below 2,500, up from just below 2,000 as reported in last month's Wood Matters – an increase of 25%! As well as being influenced by increasing orders of steel and coal by China, the massive forecast reduction in Russian grain exports due to drought is also adding to upward speculation on freight rates. The expected lower Russian grain exports are pushing up grain prices which are expected to stimulate supply from sources that will result in greater freight-miles per tonne of grain.
As usual the Handy-size sector (used to freight NZ logs) has been less volatile.
Indicative Average Current Log Prices
| Log Grade |
$/tonne at mill |
$/JAS m³ at wharf gate |
| Pruned (P40) |
135 |
|
| Structural (S30) |
101 |
|
| Structural (S20) |
86 |
|
| Export A |
|
87 |
| Export K |
|
81 |
| Export KI |
|
76 |
| Pulp |
52 |
|
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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Carbon Market, Sales and Carbon Forestry
Domestic prices for NZUs has strengthened marginally since last month in line with slight firming of CERs. However the prospect of a big increase on the supply side from pre-1990 forest allocations, fisheries and trade-exposed industries is keeping price expectations down.
Domestic trading remains relatively light.
PF Olsen recently transacted a sale of aggregated NZUs from seven separate forest owners. The purchaser was a large NZ company.
Agrifax is reporting current pricing of $18.35/NZU up from $18.25/NZU last month.
FAO (the Food and Agriculture Organisation of the United Nations) has released a new report titled "Impact of the global forest industry on atmospheric greenhouse gases". The report outlines the global roundwood production, pulp and paper, and wood processing industry's contribution to climate change mitigation and aims to raise the industries' profile in international negotiations on global warming. So for those readers interested in such things, here's some detailed reading – the report comprises 72 pages.
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