Credit: Original article can be found here
Thirty years ago the Government sold off much of its Crown forestry estate.
Today it’s looking to forestry, now largely in private hands, to achieve many aims. Help offset carbon, provide enough timber for our housing industry, earn export income, and supply biofuels and biocoal to fill our vehicles and boilers.
But some in the industry believe those aims are in jeopardy because of the sheer amount exported overseas, in raw form to one market.
Last year 80 per cent of our US$2 billion (NZ$2.8b) log trade was earned in China.
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Under geo-political pressure, Foreign Minister Nanaia Mahuta recently urged exporters diversify their markets more widely.
But her warning falls as international log prices have reached historic levels. Good news for exporters but bad news for domestic mills which have to pay the international price for local logs.
The Wood Processors and Manufacturers Association claims New Zealand’s wood industry is not only too reliant on exporting but ignoring protectionism by our trading partners.
Association chief executive Jon Tanner and chairman Brian Stanley claim China is subsidising the logs when Chinese importers sell them to processors at a cheaper price than they were bought for.
Tanner says that is artificially raising log prices, against World Trade Organisation rules. But New Zealand won’t speak out.
“It’s like world trade is a black and white board, and New Zealand is playing a game of checkers, and everyone else is playing chess,” he says.
In his view, other countries are acting protectively too, placing exporting bans to protect their own wood supplies.
Canada has shut off its log exports so it can supply the United States housing market. Russia plans to stop exporting softwood and hardwood logs next year to encourage investment in its own lumber kilns, Tanner says.
However, New Zealand forest owners enjoying the high prices find it irrational that you would not make hay while the sun shines.
“We have responsibilities to our forest owners to optimise return on investment but also to manage and mitigate risk,” Forest Owners Association president Phil Taylor says.
He also rejects a long-held claim by processors that the owners won’t offer long-term supply contracts to local mills, preferring the export markets.
About 44 per cent of logs are not export quality and those logs stay here. So the issue is not supply but price, he argues.
“The big challenge for the majority of our domestic processors is that they do not have the economy of scale,’’ he says.
“So their response, given the log cost makes up a very significant proportion of their overall costs, is to try and get increased log supplies to compensate for that lack of scale and productivity.”
However, Tanner maintains that even the cost of non-export logs have been influenced by export demand, leaving mills no respite.
Approached for comment, Trade Minister Damien O’Connor said that the Government had increased resources to identify and resolve non-tariff and regulatory barriers faced by wood processors offshore.
When China is self-sufficient
In less than 20 years, wood has become a big earner for New Zealand and forest owners say China has been a good customer.
China is easily the world’s top importer of rough wood (logs), taking more than half of global exports.
And New Zealand is China’s top supplier, contributing about a fifth of its log imports.
This has made New Zealand the top log exporter in the world. Logs now make up about 5.2 per cent of our total exports, and China is paying top dollar.
But China also has plans to become self-sufficient in many areas of its economy.
By 2035, it plans to build 20 million hectares of national reserve forests to meet its timber needs.
Other countries are following suit. New Zealand’s forests grow fast, but everyone has started planting, says Karl Gradon, of the East Coast’s economic development agency Toi EDA.
“There’s going to be a glut of forests coming on and yes, they may take longer but they’re actually planting them for carbon, not for fibre. Whereas we’re planting them for fibre and the second piece is carbon. It’s quite a different model.”
That leaves a question mark over how many logs China will require in the distant future, and whether New Zealand is properly prepared.
Stanley says the forests here are owned in large part by foreign interests, whose key interest is cash, “whereas [in other countries} most of the other forests are all government owned.”
In a worst case scenario, Tanner says that if New Zealand was to be faced with a sudden glut of wood, it’s quite possible the local mills would be gone by then, replaced by timber imports.
“You will see the wood processing sector disappearing from New Zealand and we will be log exporters [only].”
David Turner, executive director of Kawerau-based Sequal Lumber, agrees the log export trade with China is “significantly distorted” but he believes this is partly a product of policies in other countries and an absence of strategic thinking here.
He blames successive governments for allowing wide access to New Zealand’s raw resources without ensuring the same for its added value goods.
“Regulation of log exports is a pretty blunt instrument, but there are other ideas and other concepts that could be utilised to ensure that trade distortions are addressed.”
And the impediments are complex. Take the cost of railing value-added products versus raw materials here, he says.
“Most countries in the world would differentially price … in favour of the impact on their people, not in terms of exportation of raw materials. We’re the only country in the world that would do this.”
In the short-term at least, New Zealand’s log industry is probably safe, says Murat Ungor a trade expert at Otago University’s department of economics.
The Russian log ban will only increase China’s demand for Kiwi wood, and New Zealand’s free trade agreement with China, renewed in January, should make it easier and less expensive to do business in China.
China is also reluctant to increase its pollution levels by cutting too many trees, Ungor says.
“The Chinese government is very serious to achieve environmental-friendly growth.Therefore, I still think that there will be a steady demand for New Zealand-produced log and wood products.”
However, he agrees that diversifying export partners and goods would be smart.
“This does not mean that New Zealand should reduce its economic transactions with China. On the contrary, what I am suggesting is to expand the size of current trade agreements with new partners, or by signing new bilateral or multilateral agreements.”
The Forest Owners Association is also broadly positive about the future. Taylor thinks it unlikely China will be self-sufficient in every area of the wood market, and other markets will arise.
In the end, the decider might be New Zealand’s own natural constraints.
The “wall of wood”, planted in the 1990s, is close to, if not at, “peak wood,” and future exports will depend on how much is replaced.
Meanwhile, at home
Work is afoot to improve the local wood industry, largely through new plantings and research.
Forestry Minister Stuart Nash, a forestry graduate, is waiting on an industry transformation plan by Te Uru Rākau – New Zealand Forest Service, due later this year.
Although details are scarce, the plan is expected to contain business plans not just to scale up processing, but use the waste residue more profitably with fuel alternatives.
With new housing on a high and a shortage of timber, milling is in the spotlight.
“Part of the industry transformation plan will be looking at how we also develop export markets for our products, so at times of peak demand in New Zealand we can switch from exporting to using it domestically,” Jason Wilson, director of sector investment at Te Uru Rākau, says.
Nash has also come under criticism recently for stating that “innovative building products made from local wood will replace products such as concrete and steel”.
Steel and concrete groups interpreted this as a “wood first” policy.
Troy Coyle, chief executive of Heavy Engineering Research Association, says it is “akin to the Minister of Primary Industries telling a chef to use apples over oranges”.
“While wood is absolutely right for many jobs and applications, mandating its use for all projects could create economic and other problems,” she says.
Climate change and carbon sinks are another inescapable part of the wood industry’s future.
This week the Climate Change Commission recommended many more plantings, with 300,000 hectares of new native forests and 380,000ha of new exotic forests to be planted by 2035.
But plantings and innovation aside, a thriving export timber industry still eludes New Zealand.
Brian Stanley says competitive log prices and long term supply contracts could change that.
“You could satisfy the New Zealand market probably with about two saw mills, but if you’re going to have a number of sawmills processing logs, they need to have a very strong export market for the sawn timber.
“Nobody’s going to invest hundreds of millions of dollars into a big-scale saw mill unless they do have a long-term contract.”
With “clear evidence” that local mills are paying log prices “well above what anyone else is paying in the world”, the odds are stacked against them, he says.
“We can’t export it competitively.”