Business 2000: Fortunes contrast for timber giants

By PAULA OLIVER

The forestry industry could have ended the year on a positive note, but instead 2000 is more likely to be remembered for a nasty public spat, endless speculation over the future of an old giant and unflattering stock performances.

Tagged by brokers as a year of uncertainty, 2000 could not have been more different for the industry's two biggest players, Fletcher Forests and Carter Holt Harvey.

Fletcher Forests, crippled by debt, returned a better annual result than many expected. But the weight of its parent company's separation process ensured that it was never going to enjoy an easy year.

Fletcher Challenge began its restructuring in earnest in April, when it sold its Paper division to Norwegian company Norske Skog for $5 billion. The deal opened the door for the sale or spin-off of its remaining three divisions - Building, Energy and Forests.

Attention swirled around Forests' future from the moment Paper was dispatched. Rumours of interest from US-owned Weyerhaeuser, and Seattle-based Plum Creek Timber in late April caused furious trading in Forests' shares, pushing the price up 14c to 80c within a week. As speculation intensified about an imminent sale, Forests' share price peaked at 91c. But shareholders' smiles were to be shortlived.

By November, Forests had hit rock-bottom, diving to an all-time low of 24c. Playing a big part in the drop was its bitter dispute with Chinese partner Citic over the management of the Central North Island Forest Partnership - encompassing the country's largest forest, Kaingaroa.

Citic claimed in late 1999 that Fletcher was selling too many logs to itself, when the partnership could gain better returns in other domestic and export markets.

Credit Suisse First Boston analyst Andrew Mortimer said the deepening dispute was the low point in the forestry year.

As a less-than-rosy picture of the partnership's financial status emerged later in the year, Citic claimed that the parties would each need to inject $US100 million to save it from breaching its banking covenants.

That was rejected by Forests, and in the ensuing war of words Citic's public relations firm sent out a press release effectively accusing Fletcher chairman Roderick Deane of racism.

Analysts agree that the partnership seems certain to break its covenants. Fletcher says log prices are at the bottom of their cycle, and admits that the $2 billion it paid for the forest estate was too much. The future remains uncertain, and the possibility that the banks may step in is being openly discussed.

If the dispute did nothing else, analysts agree, it tarnished Fletcher's attempt to sell Forests. Instead, Dr Deane and his team went for a recapitalisation option, and launched a rights issue which sent the Forests share price to its low point. Shareholders approved the issue at a marathon annual meeting, during which Dr Deane handled hours of intense questioning with his usual polish.

Underwriter Credit Suisse First Boston was faced with a 39 per cent overhang when rights ceased trading, and analysts were quick to point out that the brokerage could now be seen to be in control of Forests' future.

One analyst said the future of Forests seemed to be out of the hands of the Fletcher board now, and Credit Suisse would be looking to set up a deal to get a new cornerstone holder into Forests as soon as possible.

At the other end of the forestry spectrum in 2000 was Carter Holt Harvey.

In October, chief executive Chris Liddell tried hard to play down the best half-year earnings for five years, arguing that the 100-year-old giant was still not making a satisfactory return on its capital base.

"I don't want to sound unsatisfied forever," he told analysts.

But the analysts agreed that Carter's resurgence would be difficult to maintain for the rest of the financial year, as the effects of an unprecedented slump in Australian building activity hit. New Zealand activity also dropped.

Describing the Australian slump, Carter Holt wood products chief executive Devon McLean said it had gone from the hottest market in a decade to the coldest in the space of six months.

The boom and bust was a result of the July introduction of GST across the Tasman, which saw a frenzy of activity as people rushed to put up new houses before construction prices rose.

The ensuing slump forced Carter to mothball a small South Australian sawmill and look for new markets for its products. Most industry players expect the market to pick up again next month, although it could be April before any positive effects are felt.

Carter's other casualty of the year was its Mataura paper mill in Southland, which lost its long battle against international competition in July.

Mr Liddell described the mill's mothballing as the "worst decision I have had to face up to in my time as chief executive." One hundred and fifty-five staff were left without work.

The flipside of the closures was Carter's $423 million investment in five plants in Australia, which are said to be trading well. Described as a "strong strategic move" by Mr Liddell, the purchases increased Carter's presence in both the medium-density fibreboard and timber markets.

Enthusiasm over the purchases was not matched by Carter's share price, which failed to fire all year. After opening at $2.50, it dropped as low as $1.57 before ending a lacklustre year on $1.62.

One analyst put the flat performance down to uncertainty over what Carter planned to do with the remaining proceeds of the $2.5 billion sale of its Chilean assets.

"It's not quite clear what they'll do, and people are a bit nervous of it, which is probably why it's still a bit cheap."

The hot topic of discussion at the forest industry's annual conference in October was the struggle to cope with a "wall of wood" expected to become available in the next five years. As several large plantations mature, the $5 billion forestry harvest will almost double.

Concerns are focused on a lack of necessary infrastructure to handle the increase - particularly a lack of suitably trained staff and investment in roading.

Deputy Prime Minister Jim Anderton told the conference that massive redundancies, a poor safety record and a lack of investment could combine to foil the industry's chance to flourish.

Forestry Minister Pete Hodgson admitted roading was a problem, but told industry players not to expect a cash olive branch to kick-start change.

"The taxpayer doesn't have a spare billion," he said.

Analysts agree the industry is not nearly ready to make the most of its potential windfall, but point to Carter Holt's construction of a $131 million laminated veneer lumber plant in Whangarei as an example of one commitment.

"It was some new investment, which New Zealand is very short of in the sector," said Andrew Mortimer of Credit Suisse First Boston. "It's needed, if the industry is going to process this wall of wood."

The plant is almost ready for operation, and will be joined by another $80 million laminated veneer lumber processing facility being built by Japanese-owned Nelson Pine Industries this year.

Herald Online features:

2000 - Year in Review

2000 - Month by month

2000 - The obituaries