Time to do a forest Fonterra

By JIM EAGLES

A campaign to create a Fonterra-type structure for the forestry industry has been launched in earnest by Fletcher Challenge Forests chief executive Terry McFadgen.

The idea of a more unified approach to forestry has been discussed privately and occasionally hinted at publicly by forestry leaders for some time.

But McFadgen used his speech to the annual conference of the Pine Manufacturers Association to bring the issue right into the open.

In particular he issued a challenge to the Government to create the regulatory framework - as it did when the dairy industry wanted to set up Fonterra - to clear the way for unification.

In his speech McFadgen painted a picture of a forestry industry facing a looming crisis.

The two listed companies, Fletchers and Carter Holt Harvey, had "destroyed huge amounts of shareholder value" and were now trading at 30 to 40 per cent discounts to analysts' values "which is a big message from investors and not a very pleasant one".

Levels of investment in the industry were nowhere near the estimated $3 billion required to process the 10 million cubic metre wall-of-wood about to come on stream. "In fact I see only a tiny proportion of that investment coming down the pipeline."

In addition, investment in distribution and marketing in the key markets of Asia, the US and Europe "has been negligible".

The fundamental problem, he said, was that there was no coherent sector view of how the forestry industry would create value for shareholders or how it would succeed in the global marketplace.

"We remain an industry which not only has no common vision but as often as not competes against itself - radiata against radiata - in export markets. "We still have no common brand, no common standards and no consistent value proposition for customers."

McFadgen said there were three main reasons this state of affairs must not be allowed to continue.

First, given that there was an estimated $15 billion invested in our forests - about half of it from domestic savings - "making a success of our forestry industry is not some sort of optional extra or icing on the cake for New Zealand, it is an absolute imperative".

Secondly, "if we don't get our act together ... the future upside ... is going to be captured by foreign investors who come in, pick up the pieces cheaply, and do what we ourselves should have done".

"Thirdly, unless we as an industry can get ourselves further down the distribution chains and closer to the end customers the true value in our radiata is likely to be captured by others ... especially the big retailers and distributors."

Forestry's plight, McFadgen said, was in sharp contrast to the country's most successful export sector, the dairy industry, which had followed a unified vision and strategy for years through the Dairy Board and now Fonterra.

If the forestry industry was to realise its true value to the country it would have to follow a similar track.

That would require consolidation of forests, a proper funding structure to pay for industry-wide activities, huge investment in offshore marketing and distribution, development of global brands, enforcement mechanisms to ensure a common approach and increased spending on research and development.

It would also need "Government policies aligned right in behind industry strategy", he said, and that must include a recognition that "if we want major new processing investment in this country we are going to have to facilitate it with financial incentives, accelerated depreciation or whatever".

In support of that approach he pointed out that "we can have all the new technology incubators we like but they won't add up to a fraction of the value we already have invested in radiata".

McFadgen told his industry audience that some of these issues had been talked about in the past but there was now "a pressing need for urgency. The wood is right on the horizon and we have barely got out of the starting blocks".

The industry initiatives being pursued under the Wood Processing Strategy were fine but they only scraped the surface of the problem.

"We have got to stop fiddling round the edges and start doing things properly. That is going to require commitment, leadership and a lot of funding. Most of all it is going to require a top-down industry plan and until we have one we will continue to sail in the dark.

"The dairy industry has proved we can take our land-based advantages and succeed in global markets despite our distance from customers. We can and must replicate that success in forestry."

Interviewed afterwards, McFadgen acknowledged that the idea of the forestry industry taking the Fonterra route had been "kicked around" by most of the key players in the industry for the last 12 to 18 months.

"I think people are gravitating to the concept as being economically sound," he said. "But it has been stalled by uncertainty over the future of the Central North Island Forest - which is a key forestry resource - and over regulatory issues."

McFadgen said he was not necessarily advocating an exact copy of the dairy industry approach with a single giant company but rather a bringing together of a highly fragmented industry so it could act in a more co-ordinated way.

"It doesn't have to be one organisation. There could be two or three. But we can't afford to be split into 365 sawmills, 1000 forest owners and 50 to 60 processors who all go their own way."

Very simplistically, what could happen was for Fletchers and Carter Holt Harvey, as the two biggest players, to get together and reorganise their assets in a more rational way. Then they could act as a focal point for other industry players to coalesce around.

"I believe a lot of people recognise that something like that needs to happen," he said. "But the minute the industry started down that trail it would run into regulatory barriers."

As to how that vision could be implemented, McFadgen - who will be stepping down from Fletchers next April - said he would leave the next moves to others.

But, he said, the first step probably had to come from the Government.

McFadgen's impassioned speech came on the same weekend that Chris Liddell, chief executive of Carter Holt Harvey, used the opening of Northport in Whangarei to call for a huge investment in infrastructure and more growth-friendly policies to allow the forestry industry to recognise its potential.