Forest owners wait and wait

By PAM GRAHAM

Waiting, cutting costs, working smarter, but mostly just waiting. It's the same for big and small forest owners alike.

Lately the wait has been for a flood of Russian softwood into China to abate, for the New Zealand dollar to retreat and for vessels diverted to Europe because of the poor Australian grain harvest to return, lowering freight costs. Before that it was the Asian financial crisis.

In forestry, hard yards put into smarter processing, better marketing, improving and certifying product and lobbying against trade barriers have been running against global trends for a decade. It is testing the faith.

This week Carter Holt Harvey, owner of the nation's biggest forest estate, announced it was leaving some trees to grow. They will increase in value while the Russians cut out forests near railheads and on flat land and the South Korean economy is in recession.

China takes about 20 per cent and South Korea about 50 per cent of our log exports.

Small investors in forestry such as the National Party's finance spokesman, Don Brash, and Shareholders Association chairman Bruce Sheppard are philosophical.

"I'm one who held out high hopes for forestry investment in the long term, and like others don't feel terribly happy with the value of my investments at the moment," said Brash. "I hope I live long enough to see the ups."

Sheppard said: "I love forests and I have two of them." He has eight years to maturity "to hope and pray" on a pine forest and 40 years to "pay dirt" on a douglas fir one.

Small is beautiful because the big companies have overheads, processing plants to feed and "stupid debt", according to Sheppard.

Carter Holt's move is a reminder, said one analyst. "It goes to show any investment - particularly in a commodity and when you have to make such long-term decisions - carries risks because of the nature of the world."

Tax breaks also enticed investors into the sector.

"A few years ago everyone said forestry was a big winner. Events since then have shown maybe it is not such a big winner, though it does have a future."

ABN Amro, in a report this week, said globally investors were turning to cyclical stocks because of optimism about the world economy.

Still, Carter Holt was a essentially a pulp market player and there was no need to hurry to position for the recovery.

Pulp prices are retreating from recent gains. The Kinleith BKP export price rose US$69 a tonne to US$493 in the last quarter but a softening is expected in the next quarter. Prices were closer to US$700 a tonne in 2000.

For wood product exports, oversupply and severe pricing pressure are being experienced in Asian markets after weak US market conditions caused producers selling to the US to divert to Asia.

For logs, Carter Holt reported a 1 per cent rise in US dollar Japanese prices and 7 per cent rise in Korean prices in the last quarter but the gains were eroded by the Kiwi dollar and higher freight rates and Korean demand is predicted to soften.

Despite increasing interim profit by 26 per cent, a promise of a "prize" from a review of 14 businesses for efficiencies and hints of major gains at the Kinleith mill after the strike there, Carter Holt's shares fell 8c to $1.60 last week. The price is well short of the $2.69 net asset backing.

Australian fund managers have spurned the stock, some saying they like the management but won't touch the company because of the unpredictability of commodity prices. Carter Holt's promotion of its Australian story - it has $1.4 billion of assets there returning their cost of capital - has won it media coverage, but not new investors.

The stakes are large for New Zealand as well as Carter Holt. About 6.4 per cent of our land area is covered by plantation forests and Carter Holt remains the sharemarket's second-biggest listing behind Telecom.

Fletcher Challenge Forests, the forest remnant of the broken-up Fletcher Challenge conglomerate, has slipped to number 32 in the benchmark index. The company has an information memorandum out for the sale of its forest estate after deciding there is no need to own trees to secure wood and that its future lies in processing products for its expanding US distribution network.

The transaction will provide a benchmark for the industry which will work back from the price to assumed discount rates and cashflows for their own valuations.

"It will be one transaction between willing buyer and seller," an analyst said. "It will provide more information but it won't be the be-all and end-all. The buyer might buy well, for example."