Cutbacks trim wall of wood

By PAM GRAHAM


The so-called wall of wood is a joke in the centre of the North Island where New Zealand's plantation forestry and wood processing was pioneered.

Rather than investment being made in anticipation of the harvest doubling, volumes are being reduced as new owners seek to rebuild the age of their forests.

The question is whether that, and a change in ownership of the Central North Island Forest Partnership and Fletcher Challenge Forest estates, will increase the cost of wood?

Harvard Management, the buyer of the CNIFP estate, believes there will be clearer price signals when fewer processing sites are owned by forest owners.

"We're confident that real log prices are going to be under pressure to rise because there is going to be clarity in the market," said Phil Langston of Kaingaroa Timberlands - the renamed CNIFP.

With respect to pulp wood, one view is that forest owners in the central North Island are lucky to have pulp and paper mills nearby because pulp wood is often marginally economic to move. Forest owners in other regions leave it to rot.

Wood fibre makes up about a quarter of the costs of a mill and any cost pressures are unwelcome as they battle to compete against new mills in other countries.

"There is a continuing flow of pulp wood in the central North Island," said Devon McLean, Carter Holt's chief operating officer for forests.

There would be some pressure with the harvest cutbacks, but the area wood was sourced from could be widened. He was not expecting a significant impact on the cost of wood fibre.

Mills take offcuts, thinnings and chip from sawmills. About a third of a log in a sawmill ends up as chip.

The piles of chip for export at the Port of Tauranga are depleted because pulp and paper mills can take all the domestic supply, but some sawmillers want to keep export channels open in case domestic demand changes.

The mills like wood chip because it has been improving in quality, is better for some of the products they make and is cheaper to handle.

Its availability will depend on whether new sawmills are built and how well existing mills source wood when the harvest is depleted.

The sensitivity of wood supply was demonstrated when Norske Skog and Carter Holt sued Fletcher Challenge Forests, arguing it should continue to own forests to meet perpetual supply contracts.

The companies announced a settlement last week, the details of which were not disclosed.

Wood supply contracts are at market prices. Price mechanisms are said to vary and have both domestic and international reference points.

One view was that Carter Holt and Norske were entitled to be upset because if Tenon, the renamed Fletcher Challenge Forests, ended up in the market, to meet old contractual obligations, it would push up prices.

The buyers of Tenon's forests were not prepared to take on perpetual supply obligations and it is not known if failed bidder, Harvard, would have.

Tenon paid a small amount of money to settle the lawsuit and said Carter Holt Harvey and Norske Skog were more comfortable with security of supply.

There are now five US pension funds, or timber management companies representing funds, in the centre of the North Island: Harvard Management, Hancock Natural Resource Group, Prudential Timber Investments, Ontario Teachers' Plan and Global Forest Partners, and a consortium of Auckland property investors owning land.

Peter Wilson, chairman of Evergreen Forests, thinks the new forest owners are "not dumb".

He said the central North Island forests were proven performers and with commodity prices at historic lows their downside risk was small.

"What is really interesting is we're seeing investors look at what are the alternatives for the land.

"I think the motivation of the group that is currently involved here is more of a nature of investing in a cashflow, rather than in an industry."