Waste and synthetic greenhouse gas sectors are due to enter the scheme in January 2013 and the agriculture sector in January 2015. At that point, the ETS will cover virtually all greenhouse gas emissions and all direct sources of those emissions.
The panel notes the continuing uncertainty surrounding the future of international climate change agreements. But it believes New Zealand will continue to face strong international drivers to take responsibility for its emissions and that these drivers, including prospects for a new international agreement, can only increase over time.
"It is incorrect to say our international competitors are not taking any action to reduce their emissions. A range of countries, including Australia, the European Union, China and the US, have introduced or are planning to introduce measures that are not always emissions trading schemes, but they may impose comparable costs and reduce emissions by a comparable amount.
"It is in New Zealand’s long‐term economic interests to continue to change behaviour and that the incentives to do so should continue to increase through a cost on greenhouse gas emissions. Critically, the panel considers that it is important for the government to send a clear signal for the future evolution of the ETS, so that businesses and households have greater certainty and confidence in their long‐term investment and purchasing decisions."
The panel recommends the government makes a number of changes to the domestic ETS forestry accounting rules, consistent with those that New Zealand has been advocating for internationally. These changes, which have been sought by the Forest Owners Association from both the current government and the previous Labour-led administration, include the introduction of offsetting for forests planted before 1990 and liability reduction measures, including averaging, for forests planted after 1989.
It says it is conscious of the implications of diverging significantly from the international rules which place unnecessary restrictions on land‐use flexibility and reduce incentives for new forest planting. But the government should "make a hard‐headed national interest assessment, taking account of the international position when the Kyoto Protocol expires, the potential fiscal impact/risk and financial impact/benefit to foresters and other stakeholders."
Climate change minister Nick Smith says the report provides a good base for making future decisions about the ETS.
"Climate change policy comes down to a difficult choice between how much and how quickly we want to reduce emissions and how much households and businesses are prepared to pay," Dr Smith said.
“The current ETS legislation has the energy, transport and industrial sectors stepping up to a full obligation in 2013. The report’s recommendation to slow this by phasing it in three steps in 2013, 2014 and 2015 would ease the price impact on households and businesses. The report notes this slower timetable would not detract from investment in low-carbon technologies like renewable energy generation as they have quite long lead times.
“The recommendation to slow down the entry of agriculture by a more gradual introduction is also well considered. The government does not support the introduction of agricultural emissions into the ETS before 2015. The government also needs to consider the advice of the Agricultural ETS Advisory Committee on the practical implementation challenges. Agricultural emissions will only be included if practical technologies are available to enable farmers to reduce their emissions and more progress is made by our trading partners on measures to reduce emissions.
“It is significant the report and the bulk of the submissions to the review support most features of the ETS including the significant changes the government made around allocations in 2009. These are working well, have broad support and enable industry to plan for the future with certainty.
“This report confirms the government’s confidence in the ETS as the most effective way to reduce emissions at least cost. The scheme has seen a marked shift from deforestation to afforestation and from thermal to renewable electricity generation. Net emissions are down and New Zealand is on track to comfortably meet its Kyoto Protocol obligations.
“Climate change is a global issue in which the government is calibrating New Zealand’s approach relative to our key trading partners. Australia is particularly significant given the extent that our economies are integrated. The review panel’s approach fits neatly with the Australian Government’s carbon pricing proposals introduced to its Parliament this week. While New Zealand has started earlier and more softly, the two schemes will be closely aligned in 2015. This review positions us well to advance the joint officials working group announced by both Prime Ministers towards linking the two schemes for the period beyond 2015.
“We are advancing the detailed work on the 61 recommendations. There are both upside and downside fiscal implications in different recommendations that will need to be considered. Changes to the scheme would require legislation and the Government will finalise its policy once the detailed work is complete.”
The Emissions Trading Scheme Review Report is available here.
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Tenon has reported a net loss of $US 2 million for its 2010/2011 fiscal year on sales of $326 million. Directors believe this was a good result considering the dire state of the North American and Australasian housing markets.
Operating earnings or EBITDA (i.e. earnings before interest, tax, depreciation and amortisations) declined from $10 million (including restructuring charges of $2 million) in fiscal 2010 to $8 million in fiscal 2011.
Over the past five years Tenon has undergone a major business transformation the company’s 2011 annual report says has advanced the company in almost all aspects of its operations. From both an earnings and share price perspective, the significant gains realised from this transformation have, unfortunately, been ‘swamped’ by recession in the housing sector.
The following is an edited summary of the annual report:
The beginning of Tenon’s five-year transformation saw us complete a series of growth orientated acquisitions, including Southwest Mouldings (a leading millwork distributor in Texas) for $32 million, and the swap of our American Wood Mouldings joint venture holding for 100% ownership of Ornamental Mouldings ($38 million in equivalent 100% value terms).
As events transpired, these acquisitions were followed by the beginning of the deepest recession that has been seen in the US housing market since the 1930s.
So we then immediately set about significantly reducing our balance sheet debt as quickly as possible. At $52 million, our year end working capital level was in line with the levels reported at both December and June 2010, indicating that we have largely achieved the debt improvement to be gained from working capital optimisation.
We closed fiscal 2011 with net debt of $30 million, which compares with the $29 million reported in June 2010 and the $30 million level at December 2010.
Our fiscal conservativeness allowed us to pass through the global credit crisis without needing to go back to our shareholders and ask for a fresh capital injection. It also allowed us to operate within our bank ratios when others struggled to do so.
We have always consciously moved early to refinance the Group’s debt facilities when the opportunity has arisen to do so and on 24 June this year we put in place a new five-year syndicated debt facility. This provides us with far greater operational flexibility than we have previously had, particularly in that it has no fixed charges (e.g. interest) or leverage coverage ratio requirements.
The year began reasonably, but then US economic growth faltered in the second half, due to a combination of extreme weather conditions, high gasoline prices, global industrial supply chain disruptions following the earthquake in Japan, and most recently, the US federal budget debacle. These factors were reflected in lower consumer confidence, with many preferring debt reduction as a better use of discretionary income than investment in housing – whether that be house purchasing or home remodelling.
The latter part of the second half of the year saw a lower level of demand than the first, as uncertainty grew about the strength of the US economic recovery. These factors all flowed directly through to a lower demand level in the US housing sector, with operating revenues among US publicly traded wood products companies being down approximately 12% in the last quarter of the fiscal year compared with the corresponding quarter in 2010.
Added to the difficult US operating environment was the strengthening of the NZD:USD exchange rate, which moved from an opening level of 69 cents to close the fiscal year at just under 82 cents, averaging 76 cents for the year.
In addition, our manufacturing operations at Taupo suffered significant cost pressures
from increasing pruned log prices (a result of the strong China demand for wood fibre to meet China’s domestic growth needs).
This pressure was partially offset by the use of logs from our residual forest assets which act as a partial natural hedge to movements in log (i.e. feedstock) prices into the Taupo mill. Other hedging strategies included a three-year electricity hedge over one-third of our electricity usage at Taupo, interest rate hedges over greater than 50% of our drawn debt, and continuing active foreign exchange cover.
A number of key initiatives, including our ‘One-Company programme’ also did much to reduce operating costs and to improve relationships with customers.
The first phase of this programme saw the elimination of $5 million per annum in administrative and back-office costs. The second phase involved a fundamental restructuring of the way in which Tenon services its core customers.
Each customer now has a single interface at Tenon, no matter from where in the world, or in which Tenon manufacturing entity, their products were produced. This change resulted in a higher level of service delivery and product innovation, tighter customer relationships, and as a result the emergence of new business and product opportunities with our key customers.
Our US full service distribution businesses which now service some 40% more retail stores today than they did at the cycle peak in 2006-7. And almost 20% of our US distribution revenues today are from new products we have introduced in the past 5-6 years.
Our 100%-owned manufacturing operations in both New Zealand and North America are an important source of innovation for us in our product offerings to our customers. They also offer certainty of supply needed when industry supply chains face serious circumstances outside their control (for example, the Chile earthquake which disrupted manufactured product supply out of that country only a year ago).
In addition, our Taupo manufacturing site is well placed to supply FSC certified wood product that meets the needs of the US market – particularly high value clear lumber, boards and mouldings from New Zealand’s high quality pruned radiata forests. This offers us a strong competitive advantage over lumber sourced from other markets.
Our logistics platform combines this internally manufactured product together with extensive third-party sourcing across three continents, to bring a total portfolio of select millwork products to our customers. In our full service distribution operations, a fleet of trucks on programmed destination ‘runs’ make daily deliveries of products that have originated not only from Tenon’s owned manufacturing sites in New Zealand, the United States and Canada, but also from third-party production facilities in other countries – for example, from China, Brazil and Chile.
This aspect of the business has become more complex as the third-party sourced volume sold through our distribution businesses has grown. To put the scale of this third-party sourcing into perspective, today Taupo (New Zealand) manufactured product represents less than 10% of our total US distribution sales.
Our unique mix of owned manufacturing facilities, a world-class logistics platform with extensive third-party global sourcing, a proprietary customer performance management programme, established relationships in the leading market channels, and a focus on innovation and the customer in everything that we do, that has allowed us to build a leading industry position. This enviable position has been built in an operating environment that the US housing sector has not seen since the 1930s depression era.
In five years new housing starts have declined quite dramatically, from a peak of 2.3 million
houses a year in 2006 down to only 600,000 a year today – a fall of almost 75%. At the same time, the inventory of homes available for sale as measured in months of supply, has risen from a long-run level of 5-6 months to 9.4 months today. There has been a similar dramatic decline in remodelling spend in the US over the same period.
To lessen the impact on us of this recession we have been accessing opportunities outside of the North American market. By way of example, from its beginnings only a couple of years ago, the volume of manufactured product out of our Taupo site being sold into the China market already represents over 15% of all of our third-party sales from New Zealand.
With an industry-leading position firmly established, Tenon is now very well positioned to take advantage of future growth opportunities.
In the US, consumer confidence is unlikely to be restored until house prices begin to rise – and neither of those two things can occur until credit availability for house lending is once again freed up.
On the positive side, fundamentals that will support and drive, a recovery in the US housing sector include –
§ US housing affordability at 40-year highs;
§ US new home inventories at 40-year lows;
§ US mortgage rates at 40-year lows;
§ Robust population growth in line with long-term trends;
§ Housing starts per head of population growth at 60-year lows;
§ An aging US housing stock, with two-thirds of the total being greater than 25 years old; and
§ US housing activity at well below underlying long-term demand.
However, there are also some considerable hurdles to be overcome first. These include the high unemployment level in the US, the back-log of foreclosed properties and unsold existing housing inventories. Home prices have fallen 30%+ from their peak and have not yet stabilised, and there is restricted access to mortgage credit.
In addition, Tenon is likely to continue to be affected by a strong NZD:USD exchange rate.
Shareholders can expect to see Tenon involved in the following activities in 2012 –
§ New product innovation in high growth applications – particularly in the large outdoor segment. The intention is to announce a major new initiative this financial year
§ A restructuring of our NZ operations – to ensure they can operate profitably at a high NZD:USD exchange rate
§ Active participation in emerging supply trading opportunities – this may involve investment in wholesale markets in order to provide greater supply chain visibility; and
§ Growth into non-US markets, China, Australia and Europe in particular.