CHH log strategy backfires

By PAULA OLIVER FORESTRY WRITER

Big changes have been made at the top of Carter Holt Harvey's Fibre Solutions Division, which has racked up losses from a controversial log market strategy, just two weeks out from an expected poor first quarter result for the timber giant.

Hit by falling markets in the past nine months, Carter Holt has been forced to combat high stock levels by selling logs at low prices. This is expected to hit the company's quarterly result hard.

Responsibility for the overstocking seems to fall on the company's Fibre Solutions division, which manages the harvesting of trees into logs, as well as the sale and distribution of logs and wood chips domestically.

The division last year embarked on a strategy to buy up logs throughout the country to lift prices and consolidate the industry.

But the move backfired when the markets into which those logs were to be sold crashed - leaving Fibre Solutions with high inventory levels.

Market rumours suggest that the division lost as much as $40 million, but company heads will not comment until the quarter result is released on July 17.

Fibre Solutions now has a new chief executive - Forest Resources leader David Denholm - who has put several new faces into the executive team.

The division's previous chief, Sara Lunam, is understood to have resigned.

Speaking from the United States, Carter Holt chief operating officer Jay Goodenbour confirmed to the Business Herald that changes were made to the Fibre Solutions team, but said he could not discuss why.

Mr Goodenbour said he was convinced that the division's strategy was sound and that the company overall needed to learn from what had happened in the down cycle.

"The underlying strategy itself is certainly sound and they're good people - people who can execute the strategy," he said of the team.

"We can't continue to just wait for the cycles to drive us up and down. We really are desperately trying to find creative and innovative ways to make this business earn the cost of capital return."

Mr Goodenbour said Fibre Solutions had been caught buying tracts of timber and then trying to sell them at a "lousy" time. He has previously described some of the buying in the South Island as "not so smart."

But his confidence in the overall strategy was not shared yesterday by a forestry analyst, who asked not to be named.

"Given that not many gave Jay much chance of success from the outset, this move has clearly not been a success," he said. "I suspect this quarter's result will see a large loss, which is largely the release of this excess inventory at a loss. It's hard to see how it's created much value so far."

Smaller timber industry players also criticised the price leadership strategy, claiming to have seen huge stockpiles of Carter Holt logs before the buying slowed down.

The alarm bells rang when Carter Holt issued its last quarterly result to March 31. It showed the overall Forests division had increased its sales to $160 million - compared with the previous two quarter results of $147 million and $154 million - but its earnings had failed by a big margin to match the increase.

To industry observers, that looked very much like selling a lot of logs at very cheap prices. One suggested that the strategy had failed because Carter Holt had tried to lift prices while lifting harvest levels.

It is understood that since Carter's South Island buying slowed, Chinese Government-owned Citic has taken up some of the available cut. The move has given Citic a stronger identity among local forest owners, who say they are disappointed that Carter Holt's strategy promised a lot but left some "hanging out to dry."

Claims that Carter Holt had increased its market share of New Zealand sales into Korea also met cynicism from industry players, who said the prices there were so low in the past six months that some locals had refused to sell.