Forestry looking for new direction

By PAM GRAHAM

The forestry story had it all last year. The players came from the industry's establishment, a bank consortium, China and the US, and included a receiver, a corporate raider, shareholder advocates, an international hedge fund, Maori land claimants and cows.

Yes, cows. A Fletcher Challenge Forests shareholder suggested some forest land should be converted to dairying and no one laughed.

The goal for all was making more money from forests. Central to that issue was the sale of the huge former state forests in the central North Island, in receivership for nearly two years.

The only deal that got up - the one involving the Chinese with Fletcher Forests and the banks - fell over because an alliance of Guinness Peat Group, the New Zealand Shareholders' Association and a pension fund manager from Ohio convinced enough Fletcher Forests shareholders to vote against it.

Rubicon, which owns 17.6 per cent of Fletcher Forests, and counts US hedge fund Perry Corp among its shareholders, was unimpressed.

In the middle of all of that action, Terry McFadgen, the outgoing chief executive of Fletcher Forests, stood up and asked the industry where it was going.

Where is it now? Plantation forests cover about 6 per cent of the country and 90 per cent of them are pine. Based on March 2001 figures in a Ministry of Agriculture and Forestry report released in December, about 68 per cent of the harvest was processed to some degree, the industry employed 23,500 people and was the country's third-biggest exporter, producing just 1.1 per cent of world forestry output.

By 2010 plantations will cover 8 per cent of the country, rising to 1.9 per cent of world output, and employ an extra 20,000 people and earn $5 billion more in income.

The industry has a narrow product base, a small number of markets and concentrated, but slowly widening, ownership. The big processing sites are in the central North Island, while new forests are growing in Northland and the East Coast.

About one third of exports are pulp and paper, a fifth are logs and wood chips, 22 per cent sawn timber and 14 per cent panel products. Four markets - Australia, Japan, Korea and the US - take three quarters of our forest exports by value.

"Many consumers and producers in Asian markets such as Japan, Korea and China continue to regard New Zealand pine as a cheap, weak wood only useful for low value end uses such as packaging," says the MAF report.

McFadgen, who admits he is a relative latecomer to the industry, makes several points about the future.

First, ownership of the Central North Island Forest Partnership (CNIFP) needs to be resolved.

"When you ask how are we going to get from where we are today to an industry-wide strategy, clarity of ownership of CNIFP is a critical element because it is a major part of the jigsaw," he said.

Second, "It is an industry where there is a lot of suspicion and poor relationships at various levels. I believe we have to change the way that we operate."

New Zealand, as Sir Dryden Spring put it, has to stop "competing with New Zealand".

One bold attempt at co-ordination has been made. Michael Stiassny, the receiver of the CNIFP forests, and Carter Holt Harvey agreed to try jointly to market logs, and want others to join the plan. More detail on how it will work will be made public this year.

The idea, which is not new, is that a bigger seller can deal with bigger customers, develop new markets and cut transport costs. There is no Opec for logs. When prices rise people cut more and when demand weakens there is no meeting of forest-exporting nations to discuss logging cutbacks.

It is generally believed that the big listed companies cut more logs when prices are lower, to meet their own targets.

"It has to be a proposition that works for everyone," McFadgen said.

Rens Bosman, a director of Trans Pacific Trading, a fast-growing four-year-old company which markets wood for forest owners and is run by former Fletcher and Carter Holt executives, said the proposal would only work if the new organisation was independent and information was transparent.

He said co-operation on transport would be easy, but the rest was harder.

The words "wall of wood" set him off. "We have slowly maturing forests for which exciting markets exist. It's an opportunity, not a problem."

For example, Bosman has shipped logs that have been dried, destained, cut to length and wrapped in plastic to a plywood manufacturer in Malaysia that usually uses hardwood. Radiata did the job and the customer achieved prices that made him happy.

Bosman said the best thing that could happen to the industry would be for the CNIFP to be sold to a non-processor.

"Imagine if the CNIFP sold its harvest on an open market that helped set a benchmark for stumpage, the price someone will buy the right to cut a tree and keep the wood for.

"If forest owners had better information about what their crop was worth and they had an idea about what the big guys were up to, better decisions would be made about harvest and therefore supply of logs."

Export Co, its working name, will focus on logs, while companies such as Fletcher Forests want to focus on marketing. The company has invested in distribution in the US, a huge market for pruned wood.

"Our focus is as much on marketing and distribution and having the positions in those overseas markets to distribute."

He says wood is no different to running shoes. There is a global supply chain. Labour-intensive processing will go to countries such as China, India and Vietnam. Thirty per cent of pine furniture imported to the US is already made in China.

"The issue for New Zealand is what part of that global supply chain are we going to be in."

Will it be product design and marketing?

Another issue to remember is the original land owners in the central North Island. Long-term, five or six tribes in the area will own much of the land where CNIFP trees now grow, because Crown land is sought as a way of settling Waitangi Tribunal claims. On settlement, existing trees can be cut and one more rotation planted, but then the landowner will decide what happens on their property.

In an attempt to fast-track a settlement, the Government has appointed former cabinet minister David Caygill to find out if there is ground for serious negotiations and a report will go to the Cabinet in March.

Being consistent with previous settlements and working with tribes of different sizes, with a wide range of claims, are among the considerable challenges.

One thing that did not change in 2002 was poor returns to shareholders; forestry is producing about a 3 or 4 per cent return on capital, McFadgen estimates.

"People aren't going to invest money for 20 years for those sorts of returns.

"The industry simply has to lift returns in order to continue to exist. I think it can."

Which brings us back to cows. Some forest land is suitable for other purposes.

"If the forestry industry continues to perform at its current level and if dairy continues to perform better, then yes there will be some conversions."