Bruised forestry industry in new challenge

CHRIS DANIELS surveys the wreckage of forestry's 2001 and finds renewed optimism is clouded by fears of the Kyoto Protocol.

Forestry investors had a rough time in 2001 - big corporate losses, the largest forest in New Zealand going into receivership and sinking wood prices.

But the industry is optimistic - more trees are about to be cut, wood prices have bottomed out and the world still needs wood.

In the year ahead, we will hear more from the big forestry companies about the perils of the Government's ratifying the Kyoto Protocol on global warming.

Timber Industry Federation executive director Wayne Coffey is no fan of the big forestry companies, aiming particularly withering criticism at the management of Fletcher Challenge Forests and Carter Holt Harvey for their behaviour last year.

The millions of dollars lost by the big firms last year demonstrated that it was not a good year for profitability - but the industry is not in dire straits.

"More wood is being produced, more is being sold, things are a lot busier," he says.

There is money to be made in forestry, but not, says Mr Coffey, if you run your business the way Fletcher and Carter Holt executives do.

Anyone who bought into these companies when the share values were high would have had a depressing year.

"Quite simply, the companies were not worth that much. But the companies do have assets - huge forests. And there are customers who want to buy them. What is difficult is getting a decent price.

"There is a lot of wood that has to be sold one way or another, and it will get a lot of cash as a result. But if you came in at the wrong values, it won't work."

Hanging over the industry like an ugly black cloud was the future of its biggest asset - the forests of the Central North Island Forest Partnership, or CNIFP, which went into receivership in February.

The joint venture between the investment arm of the Chinese Government, Citic, and Fletcher Challenge Forests, collapsed after commitments to bankers were not met.

Fletcher admitted that the $2 billion paid for the former state-owned asset was probably too much.

The collapse of the partnership, and the ensuing acrimony between Fletcher and Citic, was probably the low point of the forestry year.

Management of the forest was the job given to Fletcher - a task that it clearly did not do properly, says Mr Coffey.

"It collapsed under Fletcher management," he says. "They managed it into receivership. They still gloss over it and somehow the Chinese started to get the blame. But they had nothing to do with running it, it was just their money that got lost."

Receiver Michael Stiassny is now in the final stages of selling the forest. Industry insiders say two bids have got through to the final stages.

One is a joint bid from Citic and US forestry company Hancocks; the other is led by Fletcher, with financial help from an unnamed partner. The successful bidder will probably hear the good news in the next month or two.

Fletcher Forests is thought to be extremely unlikely to get back its outstanding loan to the partnership, which has a book value of $357 million.

Regardless of who buys this forest - the largest plantation forest in the world - it is unlikely that the banks will get all their money back from the collapsed venture.

While the ugly acronym CNIFP was tripping off everyone's tongue in the industry during 2001, the word on their lips this year will be the name of a Japanese city - Kyoto.

James Griffiths, chief executive of the Forest Industries Council, says industry concerns about the impact of the Kyoto Protocol on global warming will be articulated strongly and frequently.

Political parties are already starting to pick up on the industry's worries, and he suspects, and no doubt hopes, that Kyoto will become an election issue.

"It is going to change the economics of forestry globally," he says.

"We are wanting to attract international investment to New Zealand and the Kyoto Protocol might mean that New Zealand is less attractive as a place to invest in processing compared with Chile or Brazil, Malaysia, China, Indonesia - those places we sell to and compete with, which aren't subject to the Kyoto Protocol."

The Kyoto Protocol creates a new property right - "sink" credits for the carbon dioxide mopped up from the atmosphere by the growing trees in Kyoto forests - forests planted since 1990 on land not already forested.

These credits can be sold to those who need to hold permits to cover the increase since 1990 in their emissions of the greenhouse gases blamed for global warming.

Fears about the potential of Kyoto are nothing new, says Mr Griffiths, but as New Zealand ratification looms, they are closer to becoming realised.



"It's come to a head now that we've got a Government that says come hell or high water they will ratify it in September.

"We just don't see the logic in that at all.

"Early ratification is essentially anti-New Zealand. Ratifying first and being the first country to impose costs on its economy to reduce fossil fuel emission is not a New Zealand Inc strategy at all."

Look beyond the two local giants of Carter and Fletcher when surveying the New Zealand forestry industry, says Mr Griffiths.

"There are other companies who have done very well, thanks very much."

Last year around $3.6 billion of forest products were exported. The industry expects this to have increased to $4 billion by the end of this year.

Between 40,000 and 50,000 hectares of new forests were developed in 2001, says Mr Griffiths, a sure sign of confidence in forestry's future.

This year, when they are not fighting Kyoto ratification, New Zealand forestry companies will be renewing their efforts to dismantle the twin curse - tariffs and non-tariff barriers in Asia.

Another hurdle is that building codes in many parts of the world do not allow wood products to be used.

China's joining the World Trade Organisation last year has been hailed as a sign that the world's most populous nation will soon start accepting more New Zealand logs and wood products.

"It opens up whole new product markets for us," says Mr Griffiths.

The huge growth in Chinese demand for timber can be seen in the amount of logs Carter Holt Harvey exports to that country.

It sent 36,000 tonnes in the March 1999 year, 145,000 tonnes in the March 2001 year and 111,000 tonnes in the six months to September.

Despite these signs of vigour and growth in forestry, corporate results from the two big companies were nothing to cheer about.

In August, Fletcher Challenge Forests announced one of New Zealand's largest corporate losses - $749 million for the year to July.

The lion's share of this loss came from the $533 million writedown of Fletcher's share of the CNIFP.

A move to using market values to value its forests also led to a $174 million writedown of Fletcher's forest estate value.

Tough trading conditions and low wood prices were apparent in Fletcher's operating results, which showed revenue up 4 per cent to $648 million, but earnings before interest and tax down dramatically to only $3 million - from $28 million the year before.

Carter Holt results announced in October were not much better.

It reported a loss from operations of $25 million for the three months to September 30, after a net loss of $34 million in the first quarter.

Only by including a one-off tax credit of $40 million was Carter Holt able to report a second quarter net profit of $15 million.

This all came despite a rise in quarterly sales from $972 million in June to $1.08 billion in September.

Carter Holt had a first-half net loss of $19 million, compared with a profit of $176 million for the same period last year.

Analysts expect Carter Holt's earnings for last year to drop by almost two-thirds to 4.8 cents a share, according to the median forecast of four analysts surveyed by IBES International.

It also says that per-share earnings could rebound to 9 cents this year.

The sudden departure of Carter Holt chief operating officer Jay Goodenbour provided a strange end to the year for Carter Holt, leaving investors in the dark about what was going on in the company.

Mr Goodenbour said he was not pushed out of the job, but chose to leave.

Despite Carter Holt being the second-largest company listed on the Stock Exchange and Mr Goodenbour being the number two executive, management - including chief executive Chris Liddell - refused even to confirm the resignation.

Mr Goodenbour fell on his sword after the failure of Carter Holt's plan to buy log stocks across the country in a bid to keep prices up.

It was left with huge inventories of logs that it had to sell at bargain prices.

Attention is now being focused on the man in charge - Chris Liddell himself.