Government Climate Change Policy Will Seriously Damage the NZ Timber Industry
14 December 2007
The government of New Zealand is introducing massive incentives to lock up our plantation forests so as to provide a carbon sink.
This will deprive the New Zealand timber processing industry of a reliable and sustainable log supply thereby undermining its international competitiveness and investment capability.
Timber processors will in effect be subsidising forest owners (who receive cash compensation) and other industries such as farming (with seriously bad carbon pollution) which are exempt for at least five years.
The timber industry has been deceived by a government which claimed to support value added processing and which has spent millions of dollars persuading timber processing investors that New Zealand could offer decades of growth, reliability and sustainability in its supply of logs for processing.
PRE-1990 FORESTS
1. Owners of pre-1990 forests (the traditional suppliers of logs to the timber processing industry) are being offered 55 million carbon credit units; 21 million units from 2008 and 34 million units from 2013.
2. The market value of these credits is forecast in the range $825 million to $1.6 billion.
3. We contend that this bounty never entered into the minds of the pre-1990 forest investors. It is a windfall due to carbon credit policy. That forest owners can persuade the government that the windfall (the tax on polluters) should be paid to them is due more to the political campaign waged by forestry lobbyists than the interests of taxpayers and certainly timber processors.
It is an unfortunate continuation of the distortions in forestry investment imposed by succeeding governments undermining commercially rational development. Forestry investment has a bad history of being tax driven and used as a platform for attracting equity investment on the promise of glittering long term returns, much to the misfortune of shareholders in publicly owned forestry companies and many other syndicated investors.
4. Forestry stumpages (the residual for the forest owner after harvesting and distribution costs) are under huge pressure due to the high exchange rate, global competition and escalating freight costs. Today, stumpages are likely to be on average in the range of $1 to $10 per m3.
5. The government’s carbon credit “subsidy� may be turned into cash of between $15 and $30 per m3. $15 is a government assumption. We believe, along with other researchers, that in future, units may be traded as high as $30 per m3.
In today’s market any forest owner would prefer to hold back harvesting in anticipation of a more competitive exchange rate, lower freight costs and improved market conditions.
Under this government policy there are two more incentives to delay harvesting (and withhold supply to the timber processing industry)
i) The likelihood that carbon credit unit values will rise into the future; especially if they are internationally tradable; and
ii) The delay in the cash costs of replanting (which has to be done to retain the credits).
Forest owners do not normally have the cash flow (operating cost) pressures of a processing plant, but they still need to keep harvesting to meet cash outflows. The effective cash subsidy of up to $1.65 billion created by the government will give forest owners sufficient guaranteed cash flow to hold back harvesting (which is what the government hopes anyway; it locks in carbon).
6. 400,000 ha of pre-1990 crown forests held by government and local body will undoubtedly be locked up.
POST-1990 FORESTS
These are forests which would be expected to start supplying the timber industry in about ten year’s time.
The owners of these forests will receive carbon credits which can be traded for cash of up to $30 per m3. If they cut down the trees and supply the timber processing industry the forest owners will effectively have to give that money back.
To remain cash neutral with their current position forest owners will need extra revenue from their timber processing customers to the equivalent of the value of the carbon credit – possibly as high as $30 per m3; an increase in log costs for the timber industry on today’s prices of about 40%.
We predict a major deferral of harvesting in the next ten years and a massive slump thereafter.
LOSS OF COMPETITIVENESS
To induce supply from the forest industry the timber industry will be forced to pay more – up to 40% more per m3. And increased freight costs will significantly shorten the viable log haul limits.
In the domestic market this will mean higher costs for all timber customers. There may be no loss of market share due to similar or even higher imposts on directly competing products (such as steel) but market responses can include changed design or customers simply switching spending to other goods or services with a higher perceived utility value (like an Australian passport).
In export markets the impact will be devastating.
Virtually all international competitors of the New Zealand timber industry source their supply from non-Kyoto forests. Not only can these competitors then beat our prices in export markets but also by way of imports, taking away our domestic market. Ironically lost production in New Zealand will be replaced by imports which have a higher carbon content – due to sourcing from non Kyoto forests and freight costs.
FALSE ASSUMPTIONS
The policy is built on the assumption that trees turned into, for example, sawn timber are effectively releasing carbon.
How can that be when over 90% of our production is heat or chemically treated so that it will outlast by decades the natural life of a standing Radiata Pine tree?
Once a forest reaches maturity further carbon absorption slows dramatically and the forest becomes merely a vehicle for storage of that absorbed carbon.
By harvesting that forest and storing the carbon in the form of sawn timber, for what could be centuries, it allows the forest to be re grown thus removing further significant amounts of carbon from the atmosphere.
These are facts backed up in research carried out by the New South Wales Department of primary industries that shows timber products store much more carbon dioxide – and continues to store it through out their long life service – than that emitted in their manufacture.
It is therefore our contention that sawn timber should share in the carbon credits.
MISALLOCATION OF RESOURCES
While processing in the forest industry will be heavily penalised from 2008, the heavy carbon polluting farming industry accounting for nearly half New Zealand’s emissions faces no such impost for at least five years.
UNEVEN IMPACT
The average percentage reduction in supply to the timber industry will not apply to every mill or factory. In some regions critical supply forests may be “locked up� (because of the owners wider strategic carbon plan) while others may be unaffected.
VOLATILITY
The uncertainty, confusion and complication about possible impacts will generally encourage forest owners to adopt a wait and see attitude. Foresters have described their future business as gambling – it is a Las Vegas policy.
No such wait and see attitude is practical in timber processing with ongoing committed cost structures. Mills have to keep operating.
There will most certainly be a “wait and see� attitude however with investment planning as no mill could afford to commit further capital until the risk hanging over future wood supply is defined.
INDECENT HASTE
Government seems intent on ramming through the policy for forestry by 1 January 2008. Is three months adequate time to consult on a change of this magnitude? The answer is obvious. And more disturbingly much of the detail is not likely to be disclosed until at least mid 2008.
TRUST
Once the scheme is in place there is enormous scope for tinkering with key parameters and definitions.
We expect the rules to keep changing, especially as New Zealand finds it difficult to meet its carbon commitments and as the fiscal temptation to lock up forests without private compensation becomes too great.
The intrusion of an enormous bureaucracy with its attendant costs guarantees an ever changing, volatile and costly policy.
IN SUMMARY
 Large scale private investment in the value added wood processing timber industry, encouraged by successive governments, faces enough risks and uncertainties with volatile exchange rates, high cost inflation and destructive regulations without the government now manipulating our raw material supply to achieve its own theological goals.
 The policy as enunciated could devastate the timber processing industry.
 To restore neutrality it is recommended that solid timber processors share the foresters’ carbon credit allocations. These should be applied at the same rate per m3 of sawn output.
PROTEST
We have a very short time in which to protest!
If the government is serious about introducing the Electoral Finance legislation then in 2008 the Federation will be effectively muzzled from protesting as it has in the past. It seems some sections of the community can plan civil war with impunity while long standing, decent, law abiding organisations such as ours will be steam rolled into policies which might see the extinction of our traditional livelihood.
We are asking each of New Zealand’s political parties to urgently address and respond to the issues we have raised.