Kaingaroa Forest.
Kaingaroa, managed by Timberlands, is New Zealand’s largest forest estate and a major log exporter. In part two of his series on the industry, Jamie Gray tracks its origins. Read part one on the top 20 companies here.
What started as an attempt to save New Zealand’s dwindling native forest estate has turned into the country’s third-largest export.
Kaingaroa, the country’s largest single contiguous estate, is where it all began.
The asset – now managed by Timberlands – has a long and storied past.
The idea of a planted forest emerged in the late 1800s, when early governments could see the rapid rate of deforestation of native species meant the country would soon run out of soft wood for construction and infrastructure.
Once the plantation forestry idea was conceived, Kaingaroa later became an employment option during the Great Depression.
Back then, the estate was ahead of its time in terms of social licence and sustainability, Timberlands chief executive Ryan Cavanagh says.
After scouring the world for the right species, the powers that be settled on pinus radiata, or Monterey pine, establishing the estate in the early 1900s.
Most of the planting happened around World War I and into the 1920s, and Kaingaroa is now on its fourth rotation.
Timberlands has a stand of trees – conserved within the estate – that is now over 100 years old.
“We would not cut them down even if we could, because they are too big,” Cavanagh, a former McKinsey & Co and Rio Tinto executive, says.
Another reason for planting out the area in the Central North Island was the soil was deficient in cobalt – making it undesirable for pastoral farming.
Kaingaroa, once part of the state’s Forestry Corp, became a corporate plaything in the 1990s and early 2000s.
Fletcher Forests, China’s Citic and Brierley Investments formed the Central North Island (CNI) partnership and bought the estate from the New Zealand government for $2.25 billion in 1996.
In that year, Fletcher Forests made a net loss of $749 million, mostly due to a $533m writedown of its investment in CNI.
The partnership went into receivership in 2001, and in 2003 the asset was sold to Harvard Management Company.
In 2006, the New Zealand Super Fund – the brainchild of a former finance minister, the late Sir Michael Cullen – bought 40% of the estate from Harvard.
In 2013, the Canadian Public Sector Investment (PSP) – one of Canada’s largest pension investment managers, with C$264.9b ($320.9b) under management – bought some of Harvard’s stake, taking the split to 40% NZ Super, 30% Harvard and 30% PSP.
Today, the split is NZ Super Fund 42%, PSP 55.5% and Kakano, a collective of North Island iwi (Ngāti Rangitihi, Ngāti Whakaue Assets and Te Arawa River Iwi Limited Partnership, Ngāti Whare, Raukawa, Te Arawa Group Holdings Limited and Tūwharetoa) with 2.5%.
Covering around 190,000ha planted forest, Kaingaroa is widely recognised as one of the world’s premier softwood plantations and is a major supplier of logs to the domestic and export markets, producing 4.5 million cubic metres of logs a year.
Cavanagh says the way Timberlands runs the estate differs from its peers.
First, it has a domestic forests policy – 65% to 70% of the crop is for local use, with the balance going to exports.
“We are different to most large-scale operations in New Zealand, [which] export first.
“Because we have effectively 200,000ha of contiguous estate, pretty much all of our customers are on its periphery, so we get economy of scale by being very, very close to our customers,” he says.
The asset has several things running in its favour, the first being some 10,000km of an internal, non-public roading network.
“For a lot of our customers, we can actually travel from where the trees are cut down to the mill gate without going on to a public highway, so that’s a big benefit for us.”
It also means its trucks can carry much bigger payloads because they don’t go on public roads.
Cavanagh says Timberlands uses sustainable harvesting practices.
Decomposing wood and debris breaks down over five to eight years, releasing nutrients back into the soil at a time when the young trees need them.
The plan is to double the estate’s annual production from the current 4.5 million tonnes to nine million tonnes by 2060.
Land use
Cavanagh pushes back on the view forestry encroaches on valuable pastoral land.
“Holistically, I think there is enough land in New Zealand to satisfy needs, whether they are in forestry, whether they be pastoral.
“There is enough to go around for the various land uses,” he says.
“The whole ‘social licence to operate’ challenge comes around with negative sentiment about forestry in the media, and that’s because we have not told our story.”
The Kaingaroa estate does not suffer the same climatic extremes as others because it’s landlocked and not exposed to sometimes damaging coastal weather extremes.
The fact Kaingaroa is planted out on a flat or rolling estate is another point in its favour, Cavanagh says.
“We just don’t have the same issues that they do with erosion-prone soils that they have, say, on the east coast.”
And because Timberland’s customers are so close to the resource, it doesn’t leave a lot of wood on the ground.
Pruning, which allows the tree to grow without knots, stopped in 2017 when it became uneconomic.
The practice was restarted last year when Timberlands came to a commercial arrangement with some of its core customers.
Cavanagh says there is a huge cost in pruning, which is not recouped until harvest time several years later.
Timberlands employs 150 fulltime staff and 1400 contractors, but he says there is work to do in attracting people into the industry.
Investment case
NZ Super is not the only big pension fund involved.
Manulife manages New Zealand forestry assets for the Ontario Teachers' Pension Plan (OTPP) – one of the largest pension plans in the world, with net assets worth C$255.8b ($313.53b).
What’s the attraction?
“For pension funds like us, we are inherently long-term investors, so forestry is uniquely positioned as an asset class given its obvious long-term horizon,” NZ Super director of direct investment Brendon Jones says.
“You also get the usual arguments around the benefits at a portfolio level – generally, the correlation with equities provides a level of inflation hedging which helps protect overall risk-return outcomes.
“Some of the more recent interest in the sector has been driven by climate change – the decarbonisation side of things and the wider carbon opportunity that is becoming more a part of the conversation, but it feels like it’s in the early stages of development.”
The Super Fund has been in forestry since 2005.
“We have been here for a long time primarily through the Kaingaroa asset, but also through a number of forest assets in Australia, the US and Latin America.
“The thing with New Zealand forestry is that we have, at a macro level, a country that has developed a relatively stable economy.”
Investment in forestry in New Zealand is reasonably simple.
There is Overseas Investment Office regulation, but the special forestry test in 2018 provided a reasonable level of confidence for forestry investors to look here.
“The big driver for New Zealand is that we are the world’s biggest exporter of softwood logs.
“We have got some pretty good growth rates relative to the rest of the world, with our climate and rainfall.
“It’s a good place to grow trees – so we remain quite cost-competitive compared to the rest of the world.”
Jones says an investment in New Zealand forestry also provides a different exposure to end markets.
“In the US, most forest products are used domestically and some are exported with limited exports to Asia and China.
“Whereas the majority of our logs end up in China or Asia, so it’s a different exposure that you can get by investing in New Zealand forestry.”
Foresters typically pay 60-85c per seedling, depending on quality.
Twenty-plus years later, the gross value of logs from a pruned tree can be worth more than $200 per tree.
The main investment premise behind forestry is it’s an asset that keeps growing, regardless of what’s happening in world financial markets.
“You have got your biological growth, which is the interesting thing about the asset class, and you get some benefits relative to say equities and bonds,” Jones says.
“A stockmarket can go up or go down, but a tree continues to grow.
“There is an interesting dynamic here. I think for pension funds in particular because there is that long-term horizon, which makes it attractive.
“The new stuff is really about what the carbon opportunity is in some of these investments.”
Jones says the concept of “natural capital” has crept into the investment conversation over the last few years.
“It’s still nascent in some respects, but obviously when it comes to climate change mitigation, forestry globally is going to play a big role in that.
“It’s not a solution, but it does have a big role to play.”
Jones says Kaingaroa is recognised locally and globally as being a special forestry asset.
“It is its contiguous nature – one giant forest.
“A lot of forestry assets are probably a bit more sporadic or spaced out in terms of the portfolio.
“That scale enables you to do some different things with your contractors and your genetics that can really bring your costs down.
“We are probably the lowest-cost forest in New Zealand from a production perspective, so that’s a big attraction for us and for a lot of others, and that’s the scale aspect that you can really leverage.”
The estate was left relatively unscathed by Cyclone Gabrielle.
“These [weather] events can help the industry take a look at itself and see if we are doing everything we can and doing things the right way, and [whether there] can be room for improvement.”
The log market is more challenged these days because of a more subdued economy in China.
“I don’t expect things to rocket back to those record highs that we saw a few years ago, but those were abnormal times.
“That’s where having a domestic market as well is helpful, although they are having their own challenges, particularly from a costs perspective.”
From humble beginnings, forestry has become New Zealand’s third-largest export after dairy and meat.
In the June 2024 year, exports of forestry products from New Zealand totalled $5.75b – 57% of which was destined for China.
The Ministry for Primary Industries said forestry export revenue is expected to rebound 4% to $6b in the year to June 2025 year, recovering from domestic supply-side disruptions and slow global demand over the previous two years.
Early signs of increased building activity in China could lead to higher demand for logs and some processed wood products, but overall global demand remains low for wood products. On the supply side, closure of some wood processing plants will lead to lower production capacity in the near term.
“Uncertainty remains due to the instability of global economic recovery, potential trade barriers, and continued high input costs,” the ministry said in its latest Situation Outlook.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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