The way ahead for forestry: Value heading overseas

The Government is not going to like what Carter Holt Harvey is thinking about wood processing.

While Economic Development Minister Jim Anderton talks up new investment in processing, the nation's largest forest owner is fast coming to the conclusion that pulp and paper mills should be close to forests but other processing should be done near overseas customers.

The big thinking at Carter Holt Harvey these days is going into global cost comparisons, productivity and the investment portfolio of what chief executive Peter Springford calls a "multi-domestic" business. The company wants to be a domestic player in more than one country. It already regards itself as Australasian.

The biggest issue for the industry is where to process, said Springford. It was a bigger than the "today issue" of the high New Zealand dollar and Carter Holt was getting close to making a decision.

"For pulp and paper it probably makes sense to process close to the resource," he said.

But he could not see anyone building a new mill in New Zealand, citing higher electricity costs, and Government unconcern about them, among other things.

"We are coming to the conclusion that other value-added processing is probably better done closer to the customer. That is a message the Government will not like."

Players in the industry would find niche markets and different business models, he said.

"If this Danish furniture thing gets away, that's great."

Anderton has promoted the idea of a furniture-making joint venture with Fletcher Challenge. Industry sources expect Danish company Zenia House to unveil a New Zealand furniture range this month.

For a scale player like Carter Holt, the focus is on where the cost base is lowest and it is not New Zealand, said Springford.

He is eyeing China, rather than Europe. "We just have to find the right entry point into China and it won't be a very large one to start with," he said.

The company's Australasian focus has just been reinforced by a senior management reshuffle. Ian Unwin will manage wood processing across the two countries, Rhys Jones pulp, paper and packaging and Devon McLean forests, communications and Government relations.

The tissue business managed by Don Matthews is being sold in the belief that it is a fast-moving consumer goods business better run by others.

McLean has been told to look for a "go forward structure" for forests.

Globally, wood processors are arguing they do not have to own forests, and US pension funds with lower costs of capital have been buyers.

Carter Holt has said it is "long on forests" but that it is not a good time to sell.

Springford has talked about the Real Estate Investment Trusts in the US as an ownership model but says their tax structure is not workable here at the moment.

When it was put to him that Carter Holt could be a much smaller listed company in the future, he said, "Only if we don't buy something else".

The options for proceeds from the tissue sale include new investment, paying off debt and returning money to shareholders.

Springford is positive about the industry many investors have given up on.

You would have to go back to the 1970s to find a better year in Australasian building markets, and consumer demand is buoying the local packaging industry.

Even in export markets affected by the high dollar there is variety. The company is conservative about pulp and paper markets this year.

For log exports, price increases have compensated for increases in the currency and shipping rates but margins are still historically lean.

Carter Holt cut its harvest significantly in 2003 for the first time. It analysed the implications for seven months before implementing the decision in August.

Its harvest is now running at an annualised rate of around 4.9 million tonnes. The total this year will be down around 16 per cent from last year.

Competitors say the company cut too much in the past, reducing the age profile of its forests and aggravating the weak wood issue.

Springford said it wanted to send a supply signal to markets it could influence such as Korea but acknowledged volume per tree stem and wood quality would improve as well.

In hindsight, the company had probably cut forests to a lower age class than it would have liked to, Springford said. The forests were now analysed for value as well as cashflow, he said.

Logging contractors lost work but Springford said they had to improve productivity too. He acknowledged that some workers would be lost to the industry.

He believed also that the company had to "reinforce its values" after admitting that the properties of its MGP10 timber framing had fallen below the advertised standard.

Springford said he became aware of the issue around the time of raids by the Commerce Commission in late October. "We should not have delayed. I just think we got it wrong."

It was not easy to point fingers at individuals because there had been a lot of change in that part of the business. But he wanted to encourage people to stand up if they saw an issue.

His tenure has so far been best known for a productivity review.

It was started because even if the dollar returns to the long-run average around US57c this year, lost competitiveness with Chile has to be made up.

Springford is critical of new employment laws, saying courts should not be changing business decisions.

The company has invested $500 million in the past five years.

The forestry year

Exporters' returns were cut by a doubling in shipping rates and a six-year high in the New Zealand dollar.

The domestic building market boomed.

Carter Holt Harvey indicated a $900 million forest writedown, and cut its harvest by 15 per cent.

Huaguang Forests went into receivership.

Closures and redundancies were announced at sawmills and manufacturing plants around the country.

Carter Holt Harvey had a three-month strike at Kinleith, upgraded Whakatane and closed its Tokoroa sawmill.

Norske Skog said it would be closing one paper machine at Tasman

THE DEALS:

Receiver Michael Stiassny sold the Central North Island Forest Partnership to Harvard University endowment fund.

The receiver was also reported to have sold the Waipa sawmill to two Waikato businessmen for $1, but squabbling continued over the mill's ownership.

Fletcher Challenge Forests sold all its forests to a consortium of four New Zealand property investors - Trevor Farmer, Ross Green, Mark Wyborn, and Adrian Burr - a United States fund, Prudential Timber Investments, and the Ontario Teachers' Pension Plan.

A NZ Inc log export venture was set up under the name of Silva and achieved price rises in Asian markets.

A Timber Management Company was also set up and took over management of CNIFP forests from Fletcher Challenge Forests.

Rubicon increased its stake in Fletcher Challenge Forests to 19.9 per cent.

Rubicon shareholders, Guinness Peat Group and US-based Perry Corp, spent a year in court.

Citic continued to eye opportunities after walking away from CNIFP talks.

Danish furniture maker talked to Fletcher Challenge Forests about a New Zealand venture.

Evergreen Forests said it was planning a review, including of whether it will remain listed.

THE PEOPLE:

Wilson Whineray retired as chairman of Carter Holt Harvey, and was replaced by John Maasland.

Chris Liddell was promoted to chief financial officer of International Paper, and Peter Springford took his place in New Zealand.

Jim Anderton accused the forestry industry of damaging its people. Timber Industry Federation chief Wayne Coffey said the minister had his fingers in his ears.

Weak Wood:

Carter Holt Harvey admitted its structural timber was below advertised standards after being raided by the Commerce Commission.