WoodWeek 28 February 2018
Investing for the Next Downturn
The forestry sectors of Australia and New Zealand have had a good run over the past few years. Markets for domestic timber, export logs, and wood chips have all been strong, even approaching record prices. The Asia Pacific region has a tight supply demand balance largely driven by Chinese demand for all forms of timber, logs, wood chip, and wood fibre products. I was recently in the US, visiting our West Coast forestry investments, and Douglas-fir log prices have jumped by 50% over the past year or two on the back of supply disruptions from Canada and continuing strong Chinese demand. You might wonder if the so-called Super Cycle is finally here.
However, outside the Asia Pacific, the picture is less than rosy for forestry owners. There are large reservoirs of wood built up in the US South and in Northern Europe, reflecting the slow recovery of US housing since the financial crisis and the Euro-zone economic malaise of recent years. While sawmills have been making good profits, log prices have not responded because of the supply overhang. Inevitably, you would expect that the market will restructure supply to bring the excess timber in the US South and Europe to meet the excess demand in Asia creating, in the process, an equilibration of log prices.
Of course, readjusting timber markets is a slow process, but we have seen this before. After the 1990 decision by the US Fish and Wildlife Service to declare the Northern Spotted Owl a threatened species, a court decision led to a reduction in timber harvest in the West Coast National Forests by 80%, and log prices spiked to levels only now being re-tested. I am old enough to remember the response—massive increases in logging on private land in Washington and Oregon, re-tooling of West Coast mills to process smaller logs, road trains from the remote Canadian Northwest Territories bringing logs to sawmills in Alberta, and a planting boom in New Zealand. Ultimately, supply adjusted to meet demand.
Recent anecdotal evidence is that a similar response is starting to happen to current wood supply shortages in the Asia Pacific region. The CEO of Weyerhaeuser recently noted that they are aiming to triple containerised log exports from the US South to Asia this year, albeit off a small base. Europe and Eastern Russia are ramping up backhauling logs and lumber by rail to China and expect to increase this five-fold in the coming years as the infrastructure from China’s Belt and Road initiative is established. Brazil exported 390,000 bone-dry metric tonnes of hardwood wood chips to China in 2017, even with a three month round trip voyage. On top of that, China is steadily shifting from importing logs and woodchips to importing lumber and pulp. The message is that complacency in this positive market is not a good strategy.
The job now is to increase resilience and become as competitive as possible before the next downturn. In Australia, particularly, a forestry sector that was over- leveraged and largely supported by poorly designed retail funding was crippled by the financial crisis, and needed to be substantially recapitalised with international investment over the past six or seven years. This investment has been largely un-leveraged and focused equally on increasing asset value as well as cash yield, which has been important to rebuilding the forestry sector. Now much of the backlog of reforestation, thinning, and infrastructure upgrade has been completed, the forestry contractor base is also systematically upgrading equipment and expanding, and new skilled workers are being attracted to the industry.
But this is not enough. The plantation forestry sectors of New Zealand and Australia should be world leaders in competitiveness. A recent article by management consultancy McKinsey & Company suggests that an industry like ours, having an endowment from strong markets, should be tactically over-investing in capex opportunities, allocating capital to develop new markets, seeking out research and technology advantages, and upgrading workforce skills. I find that an exciting prospect. In our investments we are trying to follow that roadmap.
We have been heavily investing in both our forestry and processing assets to improve future profits, rationalising non-core and underperforming assets, diversifying markets and seeking partnerships for new market development, and now beginning to undertake greenfield plantation development in key areas. Building resilience and increasing our competitiveness as an industry means that we can weather the next downturn, attract more investment, and New Zealand and Australia can be a region that will continue to grow in importance in the global forestry sector.
This week we have for you:
One Billion Trees programme underwayCollaborative efforts towards the ambitious one billion trees target are well under way with the first areas of land needed for Crown Forestry planting this winter committed, Forestry Minister Shane Jones says.
“The tree planting programme will benefit New Zealand’s provinces, our environment and our people – it is a big boost for the forestry sector and will create more jobs and training opportunities to provinces that have been doing it tough for a while now,” Mr Jones says.
“Our climate change objectives will be advanced and our use of natural resources will be more sustainable and productive. We face a $36 billion potential liability by 2030 and planting trees is a sustainable and effective contribution towards our transition to a zero carbon economy.
“We have a strong base to build on, with the commercial forestry sector projected to plant half a billion trees in the next 10 years. We’re already seeing private landowners, government agencies, NGO’s, iwi, regional councils, nurseries and the private sector working hard to plant the other half a billion.
“Planting will be lower in the initial years due to natural seedling and land constraints, but will then ramp up quickly.
“Policies are being developed to avoid unintended environmental or economic outcomes, land is being secured, seedlings are being grown, private investment is being stimulated and infrastructure is being developed.
“All of this combined will see us go from 55 million trees this year, to 70 million in 2019, to 90 million in 2020. From there we will be aiming for 110 million a year over the next seven years of the programme.
“This year, almost 7.3 million trees will be planted through various Ministry for Primary Industries schemes – about half of which will be indigenous species.
“Planting will include both exotics and natives. We want to enable planting of a mix of permanent and harvestable forestry, using both exotic and native tree species on private, public and Maori-owned land. Species include radiata pine, red wood, totara, eucalyptus, Douglas fir and m?nuka.
“This is certainly about commercial crops, but it is also about environmental, regional and other gains as well.
“We are finalising an agreement with Landcorp to plant 1 million trees this winter and another million trees next year – about 2,000 hectares in total – and a review of its portfolio to identify any other potential land for planting.
“Landcorp are progressive land managers and have long seen the commercial and environmental benefits of forestry, with 10,000 hectares planted already.
“We expect to be able to make more announcements about where trees will be planted this year in the coming months.
“Today, we’re also opening applications for the Afforestation Grants Scheme (AGS), which provides $1,300 of Government funding per hectare for new forests between five and 300 hectares.
“I encourage landowners thinking about forestry to apply for grants through the AGS and we want to exhaust the full $6.5 million of available funding.
“Forestry is a great choice. It will help landowners to diversify their income, invest in their family’s future and improve productivity – as well as help to play their part in economic development and meeting environmental goals, such as tackling erosion,” Mr Jones says.
Applications for the AGS must be received by MPI by 14 May 2018. For further information visit www.mpi.govt.nz/ags.
Regional development funding announcedNorthland and the East Coast are the big winners from the first tranche of regional development spending announced by the Government on Friday.
The Hawke's Bay will see the Napier-Wairoa rail line return for logging trains while Northland will receive $17.35m for a variety of projects, including a $9m upgrade to a State Highway 10.
Regional Economic Development minister Shane Jones has secured $61.7m from Cabinet for the first round fo spending.
On Friday he announced where over $40m of that was going - with close to half heading to Northland and almost $10m to the Hawke's Bay.
The West Coast and Whanganui are also receiving millions in funding for bike trails and a port upgrade.
The further $20m will be rolled out over coming weeks.
"Our first regional packages support the regions most neglected by the last government: in Northland, Tair?whiti-East Coast, Hawke's Bay and Manawat?- Whanganui and the West Coast of the South Island," Jones said.
"We are providing an immediate boost to these areas by investing $61.7 million into forestry initiatives, tourism ventures, rail and roading projects, and supporting these regions develop their proposals further to help them get off the ground."
"If all the projects we're funding realise their full potential, this will equate to more than $344 million of public and private investment for our regional economies."
Jones expects the spending to create at least 700 direct jobs and 80 indirect jobs. That's close to $80,000 a job.
NZ First won the annual $1b Provincial Growth Fund fund to spend on regional development during coalition talks.
REGIONAL RAIL A FOCUS
Over $8m of spending is heading to regional rail regeneration.
Around $5m will be spent reviving the Napier-Wairoa line for forestry trains.
"The Government is making safety a higher priority when it invests in transport and taking logging trucks off challenging roads contributes to that," Jones said.
"KiwiRail's financial result released this week showed an 8 per cent revenue increase in its overall forestry business in the six months to December – a result being driven by strong growth in the volume of logs."
Another $3m will be spent on upgrading the Whanganui line. Kiwirail will also receive $750,000 to look at the feasibility of rail projects in Kawerau, Southland, and New Plymouth.
KiwiRail welcomed the move.
"This investment is a vote of confidence in our customers and our staff," chief executive Peter Reidy said.
"Moving logs by rail takes pressure off the roads, and reduces greenhouse gases – each tonne of freight carried by rail instead of heavy trucks means 66 per cent fewer carbon emissions."
Source: Stuff News
Dryland Forests Initiative plans plantingsThe New Zealand Dryland Forests Initiative (NZFRI) proposes plan to plant 100,000 hectares of durable eucalypt trees - The group has just released a Consultation Paper as a first step towards developing a regionally based strategic plan for government and private sector collaboration to plant 100,000 hectares of durable eucalypt trees in NZ’s east coast regions as a part of the Government’s One Billion Trees programme.
The consultation paper: “Durable eucalypt forests: a multi-regional opportunity for investment in NZ drylands” outlines the case for durable eucalypts in east coast regions. The trees are considered an exciting alternative to traditional agriculture and radiata pine forestry.
NZDFI proposes these eucalypt forests and woodlots will be established in New Zealand’s east coast regions by 2030. These could generate an estimated $2 billion in annual sales of naturally durable timber products by 2050. Regional development and employment could be generated through local processing to produce high value export products that are a sustainable alternative to unsustainably logged tropical hardwoods.
Shaf van Ballekom is chairman of the NZDFI as well as CEO of Proseed Ltd, Austrasia’s largest producer of tree seed.
He says “Since 2008, over $3 million has been invested into the NZDFI’s tree breeding and research to develop the foundation of our vision for NZ’s east coast regions to have 100,000 hectares of durable eucalypt forests. The time is right to go out to the regions and to consult with people.”
“We want to hear from those in central and regional government who are involved in land management and regional economic development, as well as those in the forestry and agriculture industries who might want to take up this opportunity. We want to work with them to develop a plan to get durable eucalypts planted, commencing in 2020 – just two planting seasons away.”
To see full details, click here >>
For details of the NZDFI consultation paper click here >>
Source: NZ Dryland Forests Initiative
New round of forestry grants scheme opensAfforestation Grant Scheme 2018 funding round now open - Forestry offers a range of benefits – it can help you to invest in your family’s future, help diversify your income, improve productivity, help climate change, protect the environment and create jobs.
If you’re thinking of planting trees on your land, the Ministry for Primary Industries’ Afforestation Grant Scheme (AGS) could help.
The 2018 funding round for the AGS opens today (23 February) and closes on 14 May 2018.
The AGS contributes to the Government’s One Billion Trees Programme. Through the AGS, MPI provides grants of $1,300 a hectare for landowners to plant new small to medium-sized forests of between 5 hectares to 300 hectares.
The purpose of the AGS is to achieve a better environment through planting new forests. Whether it be carbon absorption or reducing land erosion, the scheme is already making a real contribution. Native or exotic trees can be planted and your application can include a mix of forest species. A forest species is one able to grow to at least five metres in the place you have planted it.
Every application is assessed against eligibility criteria, which includes a technical forestry assessment.
If you would like to apply or for further information, head to www.mpi.govt.nz/ags. If you would like to get in contact directly, please email firstname.lastname@example.org.
Forestry a success story for KiwiRailKiwiRail is reaping the benefits of an innovative growth strategy for its forestry business, designed to make the best use of its wagon fleet.
Its financial result released yesterday shows an 8% revenue increase in its overall forestry business in just the six months to December. That is being driven by strong growth in the volume of logs.
“We have been working closely with the industry to maximise our ability to meet the wall of wood now coming on stream, as the result of the large volume of trees planted in early 1990s,” says KiwiRail Chief Executive Peter Reidy.
“Our log wagon fleet has grown by 40% since 2011. We have some very clever thinkers on our team and have been able to do this in an innovative and cost-efficient way by converting wagons retired from our container fleet.
“This is happening as fast as possible, and we are running trains up to seven days a week in all our key forestry routes. However current demand is so strong we could be doing more.
“There are more than 130 additional log wagon conversions coming on stream over the next six months, which will allow us to meet further demand this year; and a further 200 wagon conversions are planned for the 2019 financial year.
“In the Bay of Plenty alone KiwiRail runs 60 forestry trains each week to the Port of Tauranga, from Murupara-Kawerau and Kinleith.
“Those trains are taking the equivalent of up to 340 trucks a day off eastern Bay of Plenty roads.
“KiwiRail is continuing to work with the industry to identify further opportunities to take more logs off the road and onto rail.
“We have already worked successfully with industry to develop log hubs in key locations on the network where local forests are not directly served by rail.
“This sees significant volumes of logs now moving to Napier Port and CentrePort from log hubs in Masterton, Whanganui and Palmerston North, rather than travelling by road.
“Consolidating volumes and running to export ports by train is a cost-effective option for forestry owners/harvesters.
“We bring benefits of economies of scale, particularly where forests are a long way from an export sea port. In addition our trains mean fewer trucks on the road, and lower carbon emissions.
“Rail generates 66% fewer carbon emissions compared to heavy trucks for every tonne of freight moved.
“This strong forestry result comes from KiwiRail’s proactive approach to helping New Zealand shift its exports as sustainably and efficiently as possible.
Environmental society want natives in planting planThere are urgent calls for a detailed implementation plan before the new government starts planting a billion trees over the next 10 years. The chief executive of the Environmental Defence Society Gary Taylor says natives should be a major part of the billion tree plan.
On National Radio late last week Kathryn Ryan spoke to Gary Taylor and Professor Euan Mason from University of Canterbury's School of Forestry. Mason has done research looking at what forestry can do to help New Zealand meet its emission targets. His team has been analysing the benefits of planting radiata pine on erosion prone land.
To listen to the interviews click here >>
Source: Radio NZ
Log export growth boosts port returnsPort of Tauranga continues to grow as an international hub port, resulting in increased trade volumes and profits for the first half of the 2018 financial year.
On Friday Port of Tauranga day announced a half year Net Profit After Tax of $47.1 million, a 12.6% increase on the same period last year, following strong growth in most cargoes.
Half year trade volumes grew 13.4% to 12.5 million tonnes, contributing to a 12.8% increase in revenue to $141.4 million for the six months ending December 2017.
Port of Tauranga Chair, David Pilkington, said the impressive results demonstrated the continued consolidation of a “hub and spoke” port network in New Zealand.
“Tauranga serves as a hub for New Zealand shippers looking to quickly and efficiently move cargo to and from North Asia, and South America via big ship services,” said Mr Pilkington.
“Tauranga is the only New Zealand port able to accommodate the larger container ships on these international services.”
Growth had accelerated following the September 2016 completion of a major dredging project that was the culmination of a $350 million expansion programme.
Bulk cargoes are also increasing in volume. Mr Cairns said export growth had been driven by logs, which were in high demand by China and attracting record prices. Cargo Trends
Log exports are buoyant on the back of strong demand from China and record prices for top quality logs. Volumes increased 12.5% to 3.3 million tonnes for the six month period.
Other forestry-related exports increased slightly, rising 2.6% to 1.1 million tonnes.
Dairy product exports increased 2.8%, while meat exports rose 17.3% in volume. Steel exports increased 40.9%.
The total number of containers handled increased 15.8% to 590,803 TEUs.
Large forest conversion underwayNZ’s largest pine-to-native forest regeneration project reaches major milestone - The last pine trees have been felled in a major Hawke’s Bay conservation project that aims to convert a 4,000-hectare pine plantation back to regenerating native forest.
Over 3,500 hectares of the Maungataniwha Pine Forest have now been logged since 2006 and are now in the process of being re-converted back to native forest by land owner Simon Hall, Chairman of the Forest Lifeforce Restoration Trust.
The land lies adjacent to the Maungataniwha Native Forest, a 6,120-hectare swathe of New Zealand bush straddling the ridge system between the Te Hoe and Waiau Rivers in northern Hawkes Bay, bordered to the north by Te Urewera National Park and to the west by the Whirinaki Conservation Forest.
The conversion of the Maungataniwha Pine Forest is the largest project of its kind in New Zealand. It is the Forest Lifeforce Restoration Trust’s biggest and most expensive single undertaking.
The FLR Trust has gradually been taking over control of the block from Matariki Forests, which has held the licence to log the pine.
The aim is to re-vegetate the area with indigenous forest.
There is sufficient native species seed in the soil to enable natural regeneration but the major challenge, and cost, is the elimination of regenerating pine seedlings which crowd out the slower growing native forest species.
The grasses are the first to take hold; native species like hookgrass and toetoe. Then shrubs or small trees like mahoe and wineberry. These are followed by mountain cabbage-tree, kanuka and native fuschia. Once these species have re-colonised the land the stage is set for larger stuff such as red and silver beech.
Native birds such as kereru and silvereyes play a vital role in the regeneration.
It takes a decade to clear logged land of wilding pines completely and to get it to the point where it can be described as fully regenerated. During this time the land is nurtured, treated and monitored by the FLRT to ensure that the species they expect to appear do so.
About a third of the area, 1,400 hectares, can now be described as clear of regenerating pines and successfully regenerated with native species.
The Trust, which was established in 2006 to provide direction and funding for the restoration of threatened species of native fauna and flora in forests within the Central North Island, uses a mix of aerial spraying and manual clearance methods.
DOC is interested in the land stewardship methods and spray mix used by the Trust to encourage the growth of native plants while inhibiting these ‘wilding’ pines.
“Conservation in New Zealand is no longer the preserve of government agencies,” said Trust Chairman Simon Hall. “The job’s too big and complex. Everyone has a role to play, ideally working together as much as they can.
“We’ve been delighted with, and very grateful for, the support of DOC. It’s been vital to helping us get the job done.”
Mr Hall said it was the end of an era and that the pine forest had provided livelihoods for many people, from planting it to managing and harvesting it. But he was pleased now to be able to start completing the process of returning it to its natural state.
In addition to its native forest regeneration work the FLRT runs a restoration project aimed at boosting the wild-grown population of the flamboyant and extremely rare shrub called the kakabeak, seeks to provide a secure breeding habitat for the Blue Duck (whio), undertakes various pest control and eradication initiatives and assists with the re-introduction of forest birds to previously abandoned habitats. It’s also fast carving out a name for itself as one of the most prolific and successful kiwi conservation initiatives in the country.
About the Forest Lifeforce Restoration Trust - The Forest Lifeforce Restoration Trust was established in 2006 to provide direction and funding for the restoration of threatened species of fauna and flora, and to restore the ngahere mauri (forest lifeforce) in native forests within the Central North Island.
It runs eight main regeneration and restoration projects, involving native New Zealand flora and fauna, on three properties in the central North Island. It also owns a property in the South Island’s Fiordland National Park.
SCION Log Price Outlook survey still openThis is a gentle reminder that Scion’s Log Price Outlook will remain open for one more week. Please navigate your way to the following URL if you are interested to participate: https://www.surveymonkey.com/r/LPO-Feb2018
Participation is strictly confidential and takes 3-4 minutes.
NZ Superfund sheds carbon risksThe New Zealand Superannuation Fund has been divesting investments with carbon exposure as it believes the emission is currently underpriced and represents a risk for the future.
Outgoing Super Fund chief executive Adrian Orr told Parliament's finance and expenditure select committee this morning that the fund committed to reducing its portfolio exposure to carbon reserves by 40 percent and carbon emissions by 20 percent by 2020, and is "almost there now".
The decision to reduce the fund's exposure to carbon hasn't come under its ethical investment commitment, but instead under its mandate to maximise return without undue risk, Orr said.
"We put it up there because it's our belief that carbon is mispriced globally, because there is no global price for carbon, and investment behaviours suggest at some point there is going to be winners and losers through this. We don't know what that looks like, so by not doing anything we are taking on undue risk - we're overexposed to carbon," Orr said.
"We swapped out close to $1 billion of assets from carbon to non-carbon companies, and you can do that overnight," he said. "The harder bit is about engaging with external managers about what their view is on carbon exposure to work on the remainder of the portfolio, as well as to assess investment opportunities going into the climate change world as well, alternative energies, ways of building communities."
"It's going to affect everyone in so many different ways, and it's saying how can we try to be at the front edge of those investment opportunities. That's hard, because it's going into the future, but the simpler part is first and foremost reduce our exposure."
Orr will leave next month to head up the Reserve Bank, with the fund's chief investment officer Matt Whineray taking over on an interim basis. The Super Fund has said it would like to find a replacement by mid-May, and said today it has appointed a recruitment agency for the task.
Buy and Sell
... and finally ... driving humour ...
So I was getting into my car to go into town yesterday, and just down my street
bloke on the footpath waves me down and says, 'Can you give me a lift?'
When a man arrived home from work, his wife was waiting for him. She sat him down and told him she had good news and bad news about the car.
"Right," he said. "What's the good news?"
She said: "The air bag works."
A man in California man has invented a robotic parking attendant. He's calling it at the Silicon Valet.
If you smuggle cars into the country, is it called trafficking?
That's all for this week's wood news.
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