New Zealand wood processors face the loss of further volume in international markets and any increase in capacity looks unlikely without a policy shift in favour of greater use of timber in local commercial construction.
MPs considering rushed and flawed legislation to help improve the prospects of the sector heard time and again last week that local processing generally lacks scale. Those mills still competing in international markets are also facing increasing volumes of product from subsidised producers in China, Russia and Europe.
Paul Nicholls, chief executive of forester and pulp maker Ernslaw One, said the company would love to see more economically viable domestic processing.
"But you have to have demand and you have to be able to produce a product at a price that will command that demand," he told MPs on Tuesday.
That means producing at scale, and using the latest technology.
"Sawmills either get bigger or they get extremely small – they close," Nicholls told BusinessDesk.
One billion trees
New Zealand has embarked on a programme to plant a billion trees in the next decade to help meet the country's emissions targets and to underpin the long-term growth of forestry – the country's third-biggest export earner.
But two years after funds flowed for the new planting, we're yet to catch up with a processing strategy to get more value from those trees.
In that time, cladding and mouldings maker Claymark went into receivership after a sale of the business fell through. Queensland-headquartered XLam shut its Nelson demonstration plant in favour of production at the company's larger, newer cross-laminated timber production facility in New South Wales.
Red Stag announced a $20 million-plus investment in its own cross-laminated timber facility. China's Guangxi Fenglin Wood Industry Group announced a feasibility project on a 400,000 cubic-metre particle board plant in Gisborne, its third attempt at a New Zealand venture in six years. Last month, Carter Holt Harvey shut its Whangarei sawmill in favour of its recently expanded operation at Kawerau and plans to cut jobs at its laminated veneer lumber plant at Marsden Point saying it can no longer compete in the Australian market.
Forestry consultant Dennis Neilson, a former executive of Tasman Pulp & Paper and Fletcher Challenge, told Parliament's environment select committee that New Zealand's forest-growing sector is among the best in the world for technology, efficiency and supply chain management.
But the performance of the processing sector had "dropped off a cliff" since the 1980s.
Lack of investment
With the exception of a handful of players, he said most mill owners had failed to invest and were increasingly uneconomic against products from newer and larger mills being built – usually with state subsidies – in countries like Russia, China, the US, Finland and Germany.
The Red Stag mill at Waipa – the largest in the Southern Hemisphere – could produce all the sawn timber required in New Zealand if it ran 24 hours a day, seven days a week as most overseas plants do, Neilson noted.
Fewer than 10 mills could probably replace the more than 50 operating now, with only about a fifth of the current workforce, he said.
"Be careful what you wish for."
At issue last week was whether a claimed shortage of logs for domestic processing was real, and whether the cost of those logs – and hence all New Zealand timber - was being inflated by subsidised purchasing from China.
In Northland, where the harvest peaked several years ago and is in decline, officials have warned that up to a third of the region's milling capacity may be at risk during the coming decade if log exports remain at current levels.
But Jeremy Waldegrave, managing director of Whangarei-based NZ Forestry, said even with the harvest decline, there is still sufficient supply for local processors.
One of the challenges was the ever-tighter restrictions some mills were putting on the logs they would take, as they chased a narrower niche of products to remain viable.
That in-turn could reduce their choice of supply and the distance logs would have to be trucked. More bespoke length and grade requirements could also add to harvest costs, he said.
The issues and debates are not new, but there is now the added complication of sustained high log prices since 2014 and increasing log export volumes.
Pulp and paper maker Oji Fibre Solutions would like to expand its operation at Kinleith but is concerned there won't be sufficient fibre. Supplies of pruned logs, key for many smaller mills exporting appearance-grade wood to Australia and the US, are also projected to fall sharply from 2025, reflecting changing forest management practices 20 years ago.
China is driving that demand for logs and forest owners, including some with processing assets, acknowledge that subsidies within China may be driving the premiums being paid. But they don't see any easy answers.
The Wood Processors and Manufacturers Association is seeking some form of regulation – possibly indexing domestic log prices against a basket of international prices.
Red Stag chief executive Marty Verry said subsidies and the distorted log price are a serious problem. Already, mouldings made from New Zealand pine in China are coming to back New Zealand, Australia and other markets cheaper than firms here can compete with.
Indexing log prices seems overly complex. He favours countervailing duties if dumping can be proven, but that wouldn't be easy.
"We've got no visibility on stuff that is going on over there subsidy-wise," he told BusinessDesk.
State support common overseas
Neilson told the committee that almost all countries subsidise their sawmills in some way and China is not unusual.
But he said most Chinese mills can convert close to 70 percent of a raw log into timber, compared with 57 percent to 63 percent for New Zealand mills. Many veneer mills there can also peel much smaller logs than New Zealand mills will accept.
"Both of these Chinese efficiencies result in Chinese processors of New Zealand radiata pine being able to pay much more for their logs than New Zealand processors can afford to pay. It is simply a matter of economics."
The need to increase the scale of local processors, and to develop new product lines, has long been recognised in the sector.
Carter Holt commissioned its LVL plant at Marsden Point in 2001 to take advantage of the wood flow coming on stream in Northland. Three years later it was looking to add an 800,000 cubic-metre a year sawmill to create a "monster" site.
The latter didn't proceed but in 2003 the Verrys bought the Waipa mill near Rotorua and 14 years and $140 million later marked its expansion to an annual processing capacity of a million cubic metres of wood.
How to lift export returns?
The 2013 Woodscape report, commissioned by the Wood Council, had argued annual export earnings from forestry could be boosted to $12 billion by 2022 - double the $6 billion expected by then – by increasing the scale of individual processors and targeting higher-value uses for the industrial logs – A and K grades – that dominate the country's log exports.
It saw good potential returns from products like plywood, LVL and cross-laminated timber, as well as wood pellets and biofuels. Cross-laminated timber – used to make solid-wood wall panels, roofing and floors – was one of the fastest growing technologies globally at the time.
Forest Economic Advisors, in a November report to New Zealand Trade and Enterprise, made similar findings.
It noted that any firms looking to invest in new capacity for engineered products like LVL and CLT would have to be globally competitive to compete against potential imports from Europe and Australia.
New ply, particleboard or fibre board investment was possible, but would probably require an investor with existing distribution offshore. Getting access to affordable fibre could also be a challenge. Expansion of existing plants seemed more likely.
A new laminated beam product developed by Wood Engineering Technology in Gisborne could also meet the higher structural standards for timber in Australia, where New Zealand exports have been declining against increasing volumes from Europe, the report noted.
A new environment
But the world has changed radically since November, with a big near-term contraction expected in home building on both sides of the Tasman.
Red Stag's Verry said home-building here may be down to 40 percent of pre-covid levels by mid-2021 – similar to the trough after the global financial crisis.
That's increased the case for a zero-carbon construction procurement policy for government buildings.
Verry said favouring wood in public buildings – a Labour pledge going into the 2017 election - would improve developer understanding of products like cross-laminated timber while locking in long-term benefits through emissions reduction.
Cross-laminated timber is "the big opportunity." It can reduce steel and concrete use in apartments, offices and commercial buildings, and also lends itself to off-site fabrication, speeding construction.
Verry said the government's rebuild efforts will have an infrastructure focus and will protect jobs in the steel and concrete sector. Encouraging more investment in CLT – potentially $35 million plus land for a new plant – has the ability to create additional new jobs in timber and construction.
But, in the current environment, he said it will take a policy initiative by government to drive that shift and the investment needed.
"That's what would provide the step-change to help the industry get into that sector," he said.
"If it's incremental, especially going into a recession, we're not going to get any investment."