Harvesting the potential of forestry

2 Oct 2003

There is no getting away from the fact that the forest industry is facing major trading difficulties. But, as Rob McLagan writes in the New Zealand Herald, don't rush to write it off.

Peaks and troughs in the commodity cycle come and go, but trees keep growing. As a result, forest products, currently New Zealand's third largest export, are likely within 15 years to become the country's biggest earner.

During the last 50 years, the forest sector has experienced some major highs and lows. But after each downturn, the industry has bounced back with more resilience, to the point where it now employs around 23,000 New Zealanders.

Inevitably, growth brings with it challenges. And the current market difficulties need to be seen in the context of a rapid expansion from a modest base a few years ago.

Of the 22 million cubic metres (m 3) harvested sustainably in New Zealand last year, 60 per cent, or 13 million m 3, was processed into lumber, fibreboard, furniture, pulp, paper and the like. The rest was exported as logs.

Fifteen years ago, 95 per cent of the industry's exports were processed product. Logs barely featured.

In the intervening years we saw the volume of added-value products go from 8 million m3 to 13 million m3. It was a big increase, but not as big as the increase in log harvest.

It is a fact of commercial life that unprocessed commodities like logs are always subject to a high level of price volatility.

Right now, the log and semi-processed end of the market is experiencing very low prices and correspondingly low returns to forest growers. This is a result of depressed world markets, a high New Zealand dollar, higher electricity prices, increased competition from South America, in particular, increased freight rates, and some poor government policy settings.

In time, these factors will change and the industry profitability graph will trend upward again. It's in the nature of commodities.

The real question to address is whether the fundamentals of the industry are sound. Generally they are.

Pinus radiata is an environmentally sustainable product and is part of the solution to climate change. New Zealand has extremely favorable growing conditions for radiata pine; sound management and a skilled workforce; a world class research capability; and generally an efficient infrastructure.

We know the global demand for wood fibre is increasing at a steady rate and that it is becoming increasingly costly to harvest wood in competing sources of supply, such as Russia.

We also know that forests in many other countries are being protected for environmental reasons and that the pressure to stop illegal logging is increasing.

All these are positives.

However, let's not underestimate the seriousness of the current downturn. In the past 12 months, log prices to Korea have fallen by around 25 per cent, and average prices of timber to the United States were down around 29 per cent in June.

The response of some forest owners has been to reduce harvesting, resulting in some retrenchment in harvesting capacity. Unfortunately we have also seen a number of processing sector lay-offs.

There is some evidence that export prices and volumes have bounced off the bottom of the cycle. The United States market is slowly recovering, the Australian market is relatively strong, and the worst could be over in Asia, with prices stabilising, albeit at lower levels.

The reality is that all exporters will need to learn to live with a NZ/USA exchange rate close to current levels.

The adjustment will be that much more difficult if the domestic business environment is not made more sympathetic to business investment and growth.

Probably even more significant are the high tariffs and non-tariff barriers faced by the forest sector in overseas markets. Tariffs cost the forest industry (and New Zealand) around $45 million a year, and non-tariff barriers around $165 million.

A successful outcome to the Doha round of international trade negotiations is therefore especially important to the economic health and growth of the industry. Hopefully the disappointments of Cancun will be followed by real progress at the next meeting in the round.

Taken in the context of the long-term nature of forestry, crop rotations are around 27 years compared to wheat at 1 year and livestock between 1 and 3 years, the current downturn, while dramatic from a public perspective, is certainly not disastrous.

In fact, in one or two years the market position could be much more positive. Let's hope so.
In that time, employment levels in the industry will have increased significantly and the industry's role as an important driver of economic growth and job creation will have continued its long-run upward trend.

Let's hope, too, that an improved business climate has led to higher levels of investment in new or expanded processing capacity. This is needed to insulate the industry from the worst of the international commodity fluctuations.