After years in the doldrums, forestry is booming. Could this be the start of a new golden age, or is the next bust already on the way? Nick Smith reports.
There's a superstition among forest workers that goes something like this: When the New Zealand economy booms, the forestry industry descends into economic hell. "And," says a forestry veteran who must remain nameless, "when everything else is f***ed, we're all right."
There's prior form for his belief. When was the
last time log prices boomed, planting rates soared and the industry was swamped with investor cash? That would be the early 1990s, when unemployment topped 10 per cent, recession cut a swathe through the productive sector, real wages dropped and retailing nearly drowned.
Today, nearly two years into a forestry boom and with general economic recessionary conditions still evident, forest workers and owners are bullish about their own prospects.
Don't say you haven't been warned.
The scale of the boom is startling: total log exports for the year to June were 9.8 million cu m, 42 per cent above the five-year average.
Exports to China increased 51 per cent to 5.3 million cu m during the same period, while the Indian market took more than 1 million cu m of New Zealand wood, a 100 per cent increase on both the previous year and the five-year average. In the three months to June alone, 400,000 cu m were exported to India.
"These are record volumes," says David Rhodes, chief executive of the Forest Owners Association. "Make no mistake; we are pumping now like we've never pumped before. This is a good news story."
The Ministry of Agriculture and Forestry shares his optimism, predicting strong Asian growth in demand for logs to continue, at least in the medium term.
"New Zealand is no longer reliant on the traditional markets [Australia, Japan and the US]," Rhodes notes. "We're part of Asia now and that's pulled us through, forestry more so than other [commodity] products."
Soaring Asian demand comes just as the fruit of New Zealand's last planting boom in the late 1980s and early 1990s becomes available.
"We're running at around 21 million cu m production," says Rhodes. "We can probably increase production by another 15 per cent over the next few years because of those plantings in the 1990s and that will take us through to the 2020 period."
The boom surely vindicates yesteryear's decisions by forest owners and investors to plant in big numbers. But, as Maf senior policy analyst Gerard Horgan drily notes, fortune hasn't always favoured New Zealand's strategic decisions. Indeed, present market conditions are a far cry from those that dominated for the past 15 years. Following the price spike of the early 1990s, log and timber prices remained stubbornly low. Some commentators believed the scale of new planting was an example of the "irrational exuberance" that accompanies a commodity boom.
Low prices and other market factors put ever increasing pressure on the nation's sawmills, and scores closed down.
"Putaruru closed, Kopu closed, Blue Mountain - large sawmills have shut," recalls Marty Verry, executive chairman of Red Stag Timber, which owns the country's biggest mill by capacity, in Rotorua.
In all, Verry estimates more than a quarter of the country's mills succumbed to what he calls "commercial Darwinism".
"Some of [the closures] are because companies have invested for export - appearance-grade timber to the US market - and the currency has knocked them around," he explains. "Some of it's about resources; on the West Coast they shut up the native forests.
"Others decided to just shut down once they realised they weren't going to be able to foot it with some of the bigger sawmills," he continues. "If you're going to invest in technology and [production] scale, then you can be quickly costed out of the market."
A boom based on raw logs isn't much cop for mills producing appearance-grade for the US, wooden framing for Australia, some timber for Asian markets and, predominantly, the domestic housing market.
The US and Japanese markets are dire, Australia is beginning to look shaky and everybody knows about New Zealand's housing market.
In June only 1373 housing consents were issued and, says Verry, "they were saying processing was going through hard yakka three or four years ago when the monthly building consents were up around 5200".
Both Verry and John Stulen, Forest Industry Contractors Association chief executive, remain cautious, rather than sceptical, about the sustainability of the present boom.
Stulen says it's too early to tell whether India really will deliver on its potential. "India's been promised as a market for years," he says.
"They keep telling us it's there for the future, but it's only a log market and it still hasn't fired completely," is Stulen's verdict.
Verry suggests that inventory decisions during the crisis may have played a major role in supporting log prices, and fundamental demand may not be as strong as many suggest.
"In 2008, everybody around the world got really lean with their stocking and inventory," he says. When the global recession abated and Asian and Australian growth picked up, "there was a big restocking of logs and timber".
This exaggerated underlying demand, Verry argues, "because you're processing not only what they need but also rebuilding stock".
The latest Agrifax report partly bears out Verry's prognosis. Log prices dropped again and, Agrifax analyst Jane Davidson says, are now 15 per cent below the peak in May.
Huge "in-market inventories" are to blame - Chinese and Korean ports have been full since late April.
"The market is clearly past its peak," comments Davidson. "[Prices] are now back at levels last seen in November 2009."
However, she points to the swift Chinese reduction in inventory and the winding down of Russian peak seasonal supply as reasons for confidence in a price recovery.
It's important to note, adds Stulen, that much of New Zealand's good fortune in China is based on misfortune in Russia.
Russia has imposed a tariff on its export logs, strangling supply to China. Recent damage from forest fires, the extent of which is still unclear, might further restrict supply.
As Rhodes notes, "New Zealand and Russia between them make up 80-85 per cent of China's log imports."
Stulen's point is that forest fires are one-off events and there is no certainty Russia will persist with its tariff-driven export policy.
One measure of industry confidence in export markets is employment intentions. According to Verry, "the processing sector is looking to see if [the boom] is sustainable".
"If they're not sure, they'll invest in plant and equipment," he says of his industry. "Only if they're very sure will they add another [labour] shift."
At present, "there's not enough certainty yet to add new processing operations or new shifts to operations - and that situation will remain until the second half of next year."
China, despite popular perception, is investing a massive amount of capital in clean technology and, adds Rhodes, in forestry too.
"They've probably increased their forest area by about 50 per cent over the last 15 to 20 years," he says. "China isn't a laggard in this area. They've got the objective of being 80 per cent self-sufficient [in log supply] by 2020."
The figure sounds as if it should spell doom for New Zealand exporters, until Rhodes points out that the 20 per cent shortfall in estimated Chinese demand constitutes 140 million cu m per year.
Our wall of wood is expected to push production to around 25 million cu m, a mere drop in the ocean of China's demand.
Agrifax's Davidson is enthusiastic about future demand trends, and not just China. "India is emerging as a key market for New Zealand log exports - it has recently overtaken Japan as the third biggest market for New Zealand logs," she says.
Maf's Horgan concurs, noting that a degree of industry caution is appropriate given the sector's boom-bust history. But Horgan insists there is no "irrational exuberance" around Maf's projections for future demand.
Much has been made of China's slowing economy but, as many economists have noted, the Government has deliberately squeezed the availability of credit because of fears the financial and housing markets were becoming overheated. Unlike former Federal Reserve Bank chairman Alan Greenspan, who preferred to let asset bubbles burst, the Chinese are pre-emptively leaning against an emerging bubble.
"The easing off may not be a bad thing because you don't want the boom-bust cycle," Rhodes says.
New Zealand's boom, according to the policy wonks and the forest owners, is set to continue and provide a real increase in sector earnings for many years to come.
It's worth pointing out that, in the absence of significant short-term employment gains and plant investment, that most of those riches will be heading offshore.
Much of New Zealand's 1.8 million ha of planted forest is in Malaysian, Japanese, Canadian and American hands.
Crown Forestry, including Maori-owned forests managed on their behalf by the Crown, constitute only the sixth largest forest owner in New Zealand, says Rhodes. The rest of the top 10 are foreign-owned.
But both he and Stulen praise the likes of Ernslaw One (Malaysian) and Juken (Japanese) as "good corporate citizens".
Compare the performance of foreign companies with our own Fletcher Challenge, which draws criticism for its actions in the 1990s that, its industry critics charge, exacerbated forestry profitability problems.
Stulen hopes the increasing domestic focus of the Superannuation Fund, not to mention the increasing muscle of KiwiSaver managers, will wrest back some domestic control of what Stulen considers a vital New Zealand asset. Maori too, he says, are beginning to assert control by taking back management of Crown forests. But he concedes that increased New Zealand ownership is, at this stage, just a hope. All stakeholders expect China to invest in the sector as it looks to ensure its future supply. The Koreans, reports Rhodes, are already investigating purchase options.
Future sustainability of the industry depends on New Zealand's ability to consistently meet international demand. That requires new planting, as well as re-planting of harvested wood.
Anecdotal evidence suggests new and replacement planting is gathering momentum since the introduction of the Emissions Trading Scheme.
But the overall record during the past decade is discouraging. To avoid the imposition of carbon charges, many small forest owners, particularly farmers, tore up and burned their forest, removing, says Maf's Horgan, an estimated 100,000ha from the nation's estate. This may be replaced but "only time will tell," he reports.
Uncertainty about the scheme, adds Rhodes, meant extremely low planting rates in the past five years. Verry: "A gap in the age profile of New Zealand's forests can wipe out an industry if people can't see continuity of supply further out."
Rhodes is confident the under-planting won't threaten New Zealand's markets, noting the 28-to-30-year life span of forest assets.
"You don't have to sell in any one year," he says. "If the price goes [down], you can ease production, grow it another year or two, stacking volume on for another year."
Long-term management is the key, a point touched on by Agrifax's Davidson: "If New Zealand can control its log supply, it is expected that export prices will be able to sustain their current levels."
The growing carbon market, adds Rhodes, will provide the necessary impetus and cashflow to ensure New Zealand retains its 13 per cent share of global supply.
Instead of a 28-year return on investment, the sale of credits means forest owners can generate revenue upfront, perhaps as much as 15 per cent of the total carbon cost of the tree.
For processors, the future remains uncertain until some semblance of health is restored to the important domestic market. The Government has announced an easing of restrictions around resource consents, which should provide a boost, but Verry wants urban development restrictions adjusted to support construction and domestic demand for timber.
"Our target product is primarily built around building consents in New Zealand." Verry says Australia has helped bridge the revenue gap caused by the housing market collapse but notes that timber suitable for framing is only a small part of any tree.
"You don't want to just sell 25 per cent and make heaps of money over there but then not be able to sell the other 75 per cent," he says. "Before you take on more logs, you'll try and get all those markets aligned to sell the entire log."
All stakeholders talk of the need for industry to co-operate to meet the sector's long-term goals. Evidence of this "common good" thinking can be found in forest owners' treatment of the processing sector.
Verry says processors can't afford to pay international log prices. "Fortunately, the suppliers have seen the need to support the domestic market [which is more profitable to forest owners]. A lot of them haven't chased the export dollar to its height."
It's not just altruism. If forest owners charged the full whack, the cost of house framing would increase, opening the door to metal framing as a competitive alternative, threatening the long-term future of the domestic wood market.
"They're conscious of that and they think long term," says Verry.
