In This Issue

• Clarky's Comment
• Carbon Forestry and the Emission's Trading Scheme
• Transfer of Research Outcomes to Practitioners
• Log Market
• John Deere Harvesting Simulator Provides Excellent Training Opportunity
• Invitation to Forest Owner's Association Proposed Commodity Levy Regional Workshops
• Gaining a Better Understanding of People Working in the Forest
• FITEC Teams up with Waiariki and Canterbury University to Provide Information on Forestry and Wood Industry Careers
• Danes Get Good Hits on Wood Promotion Video

Clarky's Comment

The forest industry is sometimes accused of not adding value by not processing more logs in New Zealand – so let's examine this issue a bit more closely.

1. The "Forest Industry" really comprises a biological business of investing in and growing a crop over a 25 – 30 year timeframe; plus a manufacturing industry of turning a raw material (logs) into something that is useful to people and can be sold at a profit. That may involve one or more specific manufacturing plant treatments.
2. It is the job of the forest owner to produce logs that are firstly of a consistent quality as all manufacturing is most efficient if the raw material input is consistent. Secondly the logs must have shape characteristics and internal wood properties that enable the manufacturer to efficiently produce a high proportion of wood products that can compete in high value/high volume uses. For example structural and appearance solid wood clearly wins over wood pellets in this regard.
3. The forest growing subsector adds value by turning a 40 cent seedling into a $200 series of logs up a single tree, provided it can do this and still generate an acceptable margin over the weighted average cost of capital of the investor. New Zealand forest owners have in the last couple of years been achieving this, and contributing more per annum to New Zealand economy per hectare occupied than drystock farming with which it competes for productive land. See the chart below that relates to the primary produce only (not processing contributions):

4. The fact that we do not process more of our logs within New Zealand relates to the small size of our domestic markets and international competitiveness of NZ-based wood processing. Exchange rate volatility makes investing in new wood processing a risky business when most of the additional volume needs to be exported. Nevertheless there are factors starting to come into play that will help mitigate this risk over time:
• China is expected to import more sawn timber, veneer and panels, and fewer logs as already high energy costs rise further, and the Chinese government regulates to direct scarce energy to higher-value manufacturing processes.
• The US housing market is expected to start recovering over the next couple of years. Once it does, expect demand for processed wood to rise.
• There is pent-up demand for housing in Australia and now also in Auckland, as well as the Christchurch re-build. NZ/Australia house construction has historically been a mainstay of the profitability of NZ sawmilling.
5. The single biggest contribution the Forest Industry collectively can make to New Zealand's economic growth is to process more logs within New Zealand. We cannot expect much in the way of new investment in processing logs within New Zealand until the profitability of NZ sawmilling improves. Any such investment will need to be large scale to be internationally competitive. To support large scale processing we need forest owners to focus on producing a consistent and high quality log that can be used primarily for structural and appearance grade timber and panels, at lowest possible cost. That must be the message to our young foresters, training organisations and the main focus of our Research and Development effort.

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Carbon Forestry and the Emission's Trading Scheme

Carbon Price

NZU prices continued to fall in late December and early January reaching an all time low of $6.40. They have since strengthened slightly and are currently trading around $8.

On December 22, the Government banned the use of industrial gas or `grey' CERs in the ETS, although emitters who have purchased these units prior to this date have until the end of 2013 to use them for compliance. This ban did nothing to stop the continued fall of NZU price as the market is already oversupplied. What are `grey CERs'? They are Certified Emissions Reductions units issued from projects to reduce the destructive HFC 23 or N₂O gases which are of questionable origin due to the low cost at which they can be eliminated. `Green' or non industrial gas CERs are still valid in the ETS.

So what has bought about the slight lift in NZU price? We have heard that some emitters are showing renewed interest in NZUs rather than CERs as they are concerned over taking a long-term position on `green' CERs due to the potential for limitations to be placed on the use of `green' CERs in the ETS in line with the EU and Australian schemes. The unrestricted importation of `green' CERs is untenable in the long-term as the resulting low NZU price doesn't encourage the reduction of GHG emissions or the planting of new forest to offset emissions - which was the intention of the ETS. The Ministry of the Environment has recently released briefing papers outlining this concern and the need for a reduction in offshore purchasing of units in the short-term. This news will likely increase the trade in NZUs and put upwards pressure on NZU price.

Post-1989 ETS Registration Deadline

If you want to claim your post-1989 NZUs for 2008 to 2011 by 31 March 2012, you need to get your forest registered before then. This deadline is for a voluntary emissions return. The final opportunity to claim your NZUs for 2008 to 2012 will require registration by the 31 December 2012. Despite low NZU prices, we are still seeing continued interest in post-1989 forest owners wanting to register into the ETS and MAF is still receiving a steady stream of applications. Many are registering for option value (claiming the 2008 to 2012 NZUs before they expire) and will decide at a later date if they should sell NZUs. If you require assistance to register, colin.hercus@pfolsen.com.

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Transfer of Research Outcomes to Practitioners

An on-going challenge for those involved in industry research is how to get outcomes from research programmes implemented by those who own and manage forests. Value is not created for the sector or for New Zealand until the outcomes of research are actually implemented by investors.

FFR has put a lot of effort over the last 2 years into communicating research outcomes to members and as we approach the end of current Government funding contracts in 2013 greater effort will be put into this by FFR and our research providers.

It is useful to reflect on some examples of FFR tech transfer activities to demonstrate what has been made available from these programmes for forest owners. In the harvesting area an updated version of the "Business Management for Logging Handbook" has been produced and over 200 copies have been made available to harvesters.

Improving the use of remote sensing technologies has been a focus for FFR and workshops were run last year on the use of LiDAR and Rapid Eye satellite imagery in forest management. We are pleased to see the increasing application of this technology by forest managers.

A manual covering all aspects of Douglas fir management has been published and is available for those investing in Douglas fir forestry. In addition a two day workshop and field trip was held recently in Gore to provide industry members with an update on the latest research results. These include the first genetically improved Douglas fir seed from a new seed orchard in Southland. Workshops have also been organised to update industry members on the latest knowledge for growing Redwoods, Eucalypts and Cypresses.

FFR members, such as PF Olsen, now have a new version (Version 4) of the Douglas-fir Calculator with improvements that include:

• Improved productivity index algorithm.
• Batch run facility allowing productivity indices to be obtained.
• Removal of bias in growth model which caused under prediction in growth following thinning.

The planning tool Forecaster is an important way of making research results available to industry members. This has been significantly enhanced following user feedback and a number of new models arising from the research have been incorporated into Forecaster, including the Douglas fir growth model. In addition simpler Calculators are now available for Eucalyptus fastigata, Cypresses and Redwoods allowing forest growers to evaluate alternative forest management options. A kauri growth model that draws on 80 years of research is also now available.

Next month FFR is organising a field trip and workshop focusing on managing the risks of forestry operations on steep erosion prone land in a time of increasing high intensity storm events. This is at a time when there is increasing harvest activity on this steep land and there is increasing interest in forestry on steep land to reduce erosion and improve water quality. This is a very important and high priority issue for the industry to address.

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Log Market

Since our last market report, the NZ forestry sector took its annual break from business and endured an unpleasantly wet Christmas/New Year holiday period and China heralded in the Year of the Dragon with the largest modern migration of people's travelling to their home areas for the celebrations.

At the same time, the value of the NZ$ continues its steady appreciation against the green back, and ocean freight rates reduce to levels seen during the crash of 2008.

Domestic log prices have fallen slightly and export log prices have risen.

Export Log Market

Export log prices rose NZ$8-11/JAS m³ from December to February. The drivers were higher CFR prices (the US$ price in the destination port; in this case still being led by China), more favourable ocean freight rates, offset by a less favourable NZ$/US$ exchange rate. However, immediately after setting prices on, or close to, the 1^st February, market sentiment deteriorated and the NZ$ rose strongly in the first week of February.

As production resumes in China after their longest annual break - Lunar New Year on 23 January and the week long holiday afterward - total log stocks climbed to over 3.0m m³. This is the same level as prevailed in October when prices crashed dramatically.

This time, however, sawmill log stocks are low, and if off-take from the ports picks up strongly, stocks should drop. As yet (at time of writing) this is not happening, and sawmills are adopting a just-in-time approach to ordering, with a view to benefiting from a price drop.

The main determinant of the state of the market this year is going to be the economic growth rate in China (in general) and the state of the property market (in particular).

Last year it was announced that China became the largest importer of softwood logs and lumber in the world. The rate of increase has been phenomenal. According to Wood Resource Quarterly, the total value was nearly eight billion US dollars last year, an increase of 57 percent from 2010 and up from only US$ 70m 15 years ago. With increases so far ahead of GDP growth, this high rate of import growth is clearly unsustainable. This poses the risk that import growth slows such that the market cannot absorb the large increases in supply of logs and lumber from North America.

As mentioned previously in Wood Matters, the competitive threat has moved from Russian supply to North American supply. The one billion m³ of pine estimated to be killed by the mountain pine beetle is resulting in high volumes of cheap logs and lumber finding its way to China. To stimulate the salvage harvesting prior to the wood deteriorating too much, stumpage is set very low. Shipping is via low-cost Panamax vessels whose daily hire rate for 44,000 tonnage is similar to that of Handysize/Handymax vessels of 28-33,000 tonnes used in the New Zealand to China log trade. So despite the ocean freight journey being 50% longer from North America than from New Zealand, logs and lumber can be landed competitively in China, and this will act as a ceiling for New Zealand log price until this source of wood is exhausted (no-one is picking when this will occur at this stage).

By volume, the importation of softwood log and softwood lumber to China fell 10 percent in the fourth quarter of 2011 (from the third quarter). The fall was mostly from Russia; lumber from New Zealand and logs from Canada actually increased slightly during the fourth quarter.

Gross domestic product growth dropped in China to 8.9% in the fourth quarter of 2011. With a weak USA economy and deteriorating economic conditions in the Euro zone, there is risk of further drops. Economists typically view growth of 7-8% as the bare minimum to generate enough jobs to help China absorb the urban influx of rural migrants and maintain social stability. The Chinese government still has plenty of policy instruments it can use to stimulate economic activity such as lowering interest rates. However, high levels of local government debt and very high levels of unsold housing stock in the large cities will require deft interventions to create sustainable growth without the distortions of an over-heated property market and the spectre of high inflation.

The exchange rate has moved unfavourably for at-wharf-gate prices moving from 0.778 (NZ$/US$) at the start of January to 0.835 by early February (an appreciation of 7.3%). This is equivalent to a movement of around US$9-10/JAS m³ at current CFR log prices (prices at destination port).

The ocean freight market has been very weak since the start of 2012. The Baltic Dry Index (BDI) fell to 702 in late January 2012. All market segments are now at levels close to the lows experienced in 2008 in response to the global financial crisis (see chart below). Whilst this is good news for shippers, providing freight rates in the low NZ$30s per JAS m³ to China/Korea/Japan, it also reflects low demand for commodities. The concern is that it could be a harbinger to a softer log market.

Rates are not expected to fall much further; the relatively old-age of the Handysize fleet and relatively few new-builds in the pipe-line, along with increased scrapping of older vessels (stimulated by the low hire prices) will tend to balance up supply and demand.

Nevertheless, at present, the very low ocean freight rates are providing a useful offset to the appreciating NZ$ and were material in allowing NZ$ at-wharf-gate prices to increase in February.

Domestic Log Market

Positive developments in the NZ economic outlook include GDP continuing to expand at a reasonable rate, unemployment falling to 6.4% and the BNZ business confidence survey showing a net 13% of respondents expecting economic conditions to improve over the next 12 months (up from 3% in December).

Dwelling consents are still historically low (less than 15,000 per annum) but there is optimism that the Christchurch rebuild will commence in earnest this year. The stuff.co.nz website said recently "barring another big earthquake, insurers say rebuilding and repairing quake-damaged homes will pick up from almost nothing to a multi-million dollar push in the first quarter of this year. But the rebuilding will be uneven, with the area of 'low-risk' – rural Canterbury and Western Christchurch – given priority over hard-hit areas in the east of the city and the Port Hills." An uplift in house construction in Auckland is also being forecast stimulated by a shortage in housing stock.

PF Olsen hosted senior managers from a large North American sawmilling firm, interested in investing in NZ sawmilling. They advised that the drop off in household formation rates and increased housing demand in the USA has resulted in unsold housing inventory lowering from 13 months (its worse level in recent history) to only six months; six months and lower is considered a bull market by the lumber sector. Part of this rebalancing came from the large USA house construction firms switching their attention from new-builds to purchasing bank foreclosures. Many of these houses end up in a poor state of repair and provide meaningful work for the builders to restore. At the same time, the low purchase price of the houses from the banks restores the builder's balance sheets and at the same time reduces the amount of new housing stock coming on the market. Whilst this improvement in the property market is still likely to be slow (meaningful reduction in the unemployment rate is needed), there have been promising price increases in structural lumber and moldings and millwork. This should bode well for NZ lumber exports in the future.

The North American sawmilling managers saw good potential in New Zealand sawmilling with a focus on the high quality product for the North American and European market. They considered FSC (environmental) Certification as an important part of the product offering from New Zealand.

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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John Deere Harvesting Simulator Provides Excellent Training Opportunity

Waiariki's School of Forestry and Primary Industries has secured the loan of a John Deere E Series Harvester / Forwarder simulator from John Deere US, through the assistance of Cable Price (NZ) Ltd. Waiariki Institute of Technology has responsibility for this simulator but it is keen on making it available to organisations within the NZ forest education sectors and the NZ forestry industry.

The simulator was first showcased at the PF Olsen Forest Industries 2011 Expo in September of last year.

The simulator provides a great opportunity to get the "feel" of operating a real harvesting processor without the cost and safety risk of doing so in the field. Just as flight simulators play a significant role in training pilots, this harvesting simulator is expected to have a similar role in training harvesting processing operators for the NZ forestry industry.

The simulator is also being used to promote careers in forestry at expos by giving people the "hands-on" opportunity to see how advanced technology is being used to make working in the forest more productive and safer.

Waiariki has incorporated use of the simulator into several of their forestry courses, particularly the harvest planning modules of the L5 National Diploma in Forest Management.

For those interested in booking the simulator, contact Jackie Gainsford at Waiariki.

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Invitation to Forest Owner's Association Proposed Commodity Levy Regional Workshops

The FOA is currently looking at a compulsory commodity levy under the Commodities Levy Act. This would involve forest owners voting on whether the industry should compulsorily fund the pan-industry good activities such as training, biosecurity risk readiness, R&D, fire campaigns, wood promotion etc.

The current FOA membership fee and targeted levy structure brings in income from FOA members. There are thousands of small forest owners in New Zealand. Therefore on an area basis almost one third of forest owners do not contribute to the association, and on a number-of-owners basis only a small percentage contribute. A voluntary levy is inequitable as it allows non-paying growers to benefit from the contributions of others. It is not possible to restrict the flow of industry benefits arising from FOA activities exclusively to FOA members. The results of FOA input to communication, policy development and research for example are nearly always available across the industry and cannot be restricted to FOA members. Projects undertaken by FOA benefit the industry generally. A compulsory levy on log production is equitable, as eventually the majority of forests are harvested, and the levy will be imposed at the time of cash generation for the forest grower.

The proposed Commodity Levy will be on all harvested logs from plantation forests that are either exported in log form or processed in NZ. This includes all species and all production that leaves the forest in log or chip form. A referendum will be held to obtain approval for the Commodity Levy from participants.

The levy will be administered by either the New Zealand Forest Owner's Association Incorporated or a body set up specifically to manage the levy funds. The reasons for moving to a commodity levy, and how levy payers can have their views listened to and incorporated into the final proposal will be presented at regional workshops.

FOA wants your feedback and views. This is an opportunity that you can't afford to miss! Come along and be informed, and then tell FOA what you think.

Schedule for workshops:

Please RSVP to Diane Davidson: Diane.davidson@nzfoa.org.nz if you are able to attend.

Full details of background, reasons for and other supporting information is available on the FOA website.

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Gaining a Better Understanding of People Working in the Forest

Last year, as part of the Crown Forestry West Coast Forests Forest Stewardship Council (FSC) audit, PF Olsen was asked if any forms of social survey had been undertaken.

Stemming from this, it was decided to design a survey that might be tested in the West Coast then if successful, expanded to the remaining PF Olsen contractor base.

The survey was designed to cover a number of areas as listed below:

• Safety
• Training and experience
• Industry
• Work motivation
• Financial security
• Family
• Community
• Demographics

A key concept behind the survey was to ask questions that gauged underlying attitudes and morale within the workforce in ways that could be repeated in future surveys to reveal trends.

With a very full participation rate from West Coast contractors some interesting statistics have been obtained which will be shared with participants.

This initiative not only ensures that the forest owner is complying with it's FSC obligations, but also provides an opportunity to increase the quality of engagement of people working in the forest and design and implement improved safety management initiatives.

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FITEC Teams up with Waiariki and Canterbury University to Provide Information on Forestry and Wood Industry Careers

FITEC, the forest industries training organization, is collaborating with the Waiariki Institute of Technology and Canterbury University to put together a comprehensive forest and wood industry careers booklet for students and parents covering roles at all levels in all sectors.

"It is some time since the industry had such a booklet. Probably the last most effective one was back in the New Zealand Forest Service days during the 1980s", says Ian Boyd, FITEC CEO. "It is now needed again to describe the diversity of careers available in the current environment. I'm also aware we are competing with other areas of the Primary Sector who have some very impressive publications out there".

This is an excellent initiative to attract keen, motivated and talented people to the forestry sector which has the potential to grow significantly over the next 15 years. This will assist the sector perform to its maximum potential and get the greatest return for investors.

Drafts will be reviewed by forest industry associations and other key industry participants so a relevant publication is achieved and it gets total industry ownership and involvement.

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Danes Get Good Hits on Wood Promotion Video

The Danish Wood Initiative has come up with a fantastic video highlighting why wood is the World's Most Environmentally Friendly Raw Material.

For comment on this article click here.

Wood Matters is a publication of PF Olsen Limited.

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Disclaimer

The information contained in this letter is based on information gathered and prepared by PF Olsen. Whilst every effort has been made to ensure the accuracy and relevance of such information, PF Olsen accepts no liability for the use of such information or views and opinions expressed. We suggest you check with your PF Olsen forestry advisor before you act on any information contained on this newsletter to ensure that the advice you receive is current and specific to your particular situation.