Opening Address

"Future Wood Fibre Processing Challenges, Issues and Opportunities"

Murray Sherwin, Director-General, Ministry of Agriculture and Forestry, Wellington

56th APPITA ANNUAL CONFERENCE - Symposium - The Fibre Trail

"Fibre Supply in Asia - where does it come from and what is its future?"

Sunday 17 March 2001

Professor Johnston (Appita President), Mr Bain (Symposium Chairman), members of Appita, ladies and gentlemen -

It is a privilege to have been invited by Appita's Asia Committee to speak to this symposium on Future Wood Fibre Processing Challenges, Issues and Opportunities. It is of course a very timely discussion as New Zealand faces the challenge of utilising an expanding plantation wood resource of huge potential, but one created without a clear vision and strategy for how this potential can be fully realised. Therein lie the opportunities, the issues and the challenges.

We've heard for years now that the Internet will change reading habits and lead to a decrease in the use of newsprint and paper. Like you, I look at the size of my morning paper. And I notice that, at the first sight of a sizeable e-mail, we all click on the "print" icon. Certainly, my office is far from paperless, and I see no reason to suspect that this is about to change.

My recent appointment to the Ministry of Agriculture and Forestry follows the retirement of the former Director-General, Professor Bruce Ross.

Previously I was the Deputy Governor of the Reserve Bank.

My experience was primarily in the financial sector. But I have come to MAF excited about the opportunity of being part of New Zealand's major growth industry - forestry.

The Ministry of Agriculture and Forestry has three main roles. It provides services, including quarantine and biosecurity services, as well as administering the eighth largest plantation forest estate in the country. It sets regulatory standards for primary produce grown in New Zealand, and, following a recent government decision, will be responsible for food safety in the domestic market, as well as our more familiar role in respect of export food. Finally, it provides advice to Ministers on all aspects of agriculture and forestry, both domestic and international.

I note that the Ministry is perceived in some quarters as having become a little remote from the forestry industry over recent years. This is unfortunate because realising the potential in the plantation forest resource can best be achieved through a strong partnership between the industry and government's forestry agency. I hope we can work with industry groups towards building the relationship.

The importance of the forest industry is not just in what it contributes to the New Zealand economy today, but what it can contribute tomorrow. The industry's Vision 2025 is to grow forestry into New Zealand's number one industry by 2025. From a 5-billion dollar to a 20-billion dollar a year industry, from 4 percent to 14 percent of GDP, from the third to the largest export earning industry in New Zealand, and from the top 20 to among the top 5 global forest products suppliers. The potential is certainly there to achieve these goals, but less clear - and this is the challenge before us all - is how we actually get there. Log exports continue to grow and now account for more than 35 percent of the total roundwood harvested. But that hat doesn't seem like the route to the Vision 2025 objectives.

The pulp and paper sector is a vital component of the New Zealand forest industry. New Zealand's six pulp mills produced 1.5 million air-dry tonnes of wood pulp in the December 2001 year, of which more than half, were exported. The six paper and paperboard mills produced almost 840 000 tonnes, including nearly 350 000 tonnes of newsprint. Of this production, almost 500 000 tonnes were exported.

Last year pulp and paper exports were valued at $1.1 billion and made up 31 percent of total forest product exports. That is a very significant contribution to the New Zealand economy. But what of the future?

Very large areas of forest established in the 1970s are approaching maturity, and we can expect them to be harvested over the next decade. The so-called "Wall of Wood" has been widely talked about, and the Ministry's forest database provides us with good information from which to forecast future harvest levels.

But the "Wall of Wood" is the construct of a model. The methodology and assumptions behind that model are rarely given much attention. In the short-term that "Wall" may not be quite as steep as some suggest, as we move from a demand-influenced part of the model, to purely supply- driven forecasts.

In October, the Ministry projected the harvest to increase from its current level of 19-and-a-half million cubic metres to almost 24 million cubic metres in 2005/06. This level of harvesting is slightly ahead of the "late cut" scenario in the National Exotic Forest Description Wood Supply Forecasts in 2000. That suggested a harvest of 21.4 million cubic metres for 2005/06. But it is well below the 30.1 million cubic metres forecast under the commonly promoted "base cut" scenario for the same year.

But that is a description of the national totals - the macro view - only. Regional characteristics are at least as interesting and important.

It's clear that most regions have significant wood volume increases ahead. But the regions with the greatest increases in wood production relative to current processing capacity are Northland, the Central North Island, the East Coast, Hawkes Bay, the Southern North Island, and Nelson/Marlborough. Major investment in new and expanded processing facilities is required to deal with these gaps if the industry's Vision 2025 is to be realised.

Particular characteristics of the wood available in each region will shape the processing needs and opportunities in each region. For instance, in the Central North Island, Hawkes Bay and Nelson/Marlborough, the current fibre based processing capacity is of similar magnitude to the forecast regional production of pulp logs and thinnings. But forecast pruned and unpruned log production runs well ahead of existing solidwood processing capacity.

In Otago/Southland it's the other way - the greater deficiency is in the capacity for fibre-based processing.

The regional dispersion of New Zealand's forecast increases in wood supply also means that very large scale processing options such as Kraft pulp mills, may not be realistic. The resource may be too scattered to make such investments viable.

And some wood processing investment opportunities may be mutually exclusive. Interestingly, for this forum, the 1992 New Zealand Forest Industries Strategy study saw fibreboard and CTMP (chemical thermo mechanical pulp) mills as mutually exclusive options in the development of the forest industry. Areas that could support CTMP facilities are building fibreboard plants. So what does the future hold for investment in New Zealand's pulping capacity? I would welcome your views. We have the impression that there is currently little prospect of greenfields investment, though there is likely to be some continuing investment at existing sites.

Wood fibre availability itself does not constitute an investment opportunity. Many factors must come together to support a competitive advantage in processing this available fibre.

The OECD defines competitiveness as "the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term".

There are two sides to competitiveness: the cost side, which means that, if costs are low, a country can export goods; and the non-price issues or, as the OECD refers to them, the "qualitative competitiveness" factors.

One of the more respected publications on international competitiveness is the World Competitiveness Yearbook published by the Swiss based International Institute for Management Development. The World Competitiveness Yearbook analyses the ability of nations to provide an environment in which enterprises can compete using 286 measures associated with economic performance, business efficiency, government efficiency and infrastructure for 49 industrialised and emerging countries.

The results in 2001 showed that New Zealand ranked 21st among the 49 economies analysed. New Zealand remained ahead of Chile, but had slipped somewhat behind Australia. There is certainly a challenge here for the government and industry - to improve our standing.

New Zealand's strengths were identified as a lack of government price controls, low incidence of tax evasion, a lack of corruption in the public sector, the role of corporate boards in preventing improper business practices, and the fact that the country's infrastructure is not affected by serious pollution problems.

The weaknesses included a lack of investment protection schemes for foreign partners, investment incentives not being attractive to foreign investors, the brain drain, and a concern that environmental protection laws were hindering business. (Note that there may be inconsistencies here, with respondents valuing a high quality environment, but at the same time expressing concern about environmental laws).

In a report prepared for MAF last year, Forest Research developed a wood processing competitiveness index. The index builds on the World Competitiveness Yearbook assessments by adding seven wood processing factors: the wood resource; wood processing development; market development; industry knowledge; investment attractiveness; energy; and the environment. Each factor was sub-divided into specific variables, that were then evaluated and ranked for New Zealand and five of our forestry competitors.

On a scale of 1 to 10, with 10 being the optimum, the results were:

  • USA 8.4
  • Sweden 7.6
  • Australia 7.2
  • Chile 7.2
  • New Zealand 7.0
  • Russia 5.0

New Zealand's competitive advantages were considered to be its:

  • wood processing development, with a relatively high level of technology in wood processing plants plus a broad spectrum of products;
  • industry knowledge development, with high knowledge of radiata pine, relatively high levels of education and training, and adequate labour skills;
  • investment attractiveness, with moderate wood and processing costs, generally adequate infrastructure, a favourable exchange rate, and relatively short distances to ports.

In contrast New Zealand's main disadvantage was the underlying weaker general industrial competitiveness compared with the United States, Sweden and Australia. The forestry variables where New Zealand did not score well concerned:

  • resource dispersion and diversification;
  • diversification of markets and products;
  • environmental legislation;
  • government incentives (i.e., relative lack of).

The numbers of products exported, and the numbers of countries exported to, were used as indicators of the maturity and competitiveness of the industries. Although market development for New Zealand wood products has improved in the last decade, other countries such as Chile have clearly outpaced us. That's a major challenge for the industry.

Let me turn now to the Asia Pacific region.

This region provides the dominant market for New Zealand's wood products. It accounts for around 98 percent (by value) of our current exports of forest products. APEC countries account for about half of the global trade in forest products. Key features are the dominance in the trade of forest products by the USA, Japan and Canada, the dominance of the USA and Japan as wood product importing nations (the two largest in the world), and Japan's preference for importing raw materials.

Despite the position of Japan and some others in preferring imports of raw materials over processed product, another feature of the APEC region is the expansion in the trade of processed forest products. This is due primarily to governments' policies encouraging domestic processing, as well as environmental pressures to restrict the tropical log trade. This has seen the increasing substitution of softwoods for hardwoods in some products, providing opportunities for softwood exporting countries such as New Zealand and Chile.

Of particular note here is the impact of China's increasing wood consumption. China is now the world's second largest consumer of forest products by value. By volume, it ranks second in consumption of wood-based panels, second for paper and paperboard products, and third for sawn timber. China's expanding consumption and limited domestic forest resources have contributed to a recent rapid increase in imports. China is now the world's third largest importer of primary forest products. The Chinese market provides both huge opportunities and massive challenges for the New Zealand forest industry.

The Asia Pacific region has also seen major changes in trading patterns, largely as a result of increased trade among developing countries and rapid economic growth. This has been helped along by the reduction of trade restrictions - part of the global trend towards trade liberalisation.

While trade liberalisation is progressing, some countries are also making increasing use of export restrictions such as bans, levies and quotas to address national environmental or market problems. According to an FAO report on the State of the World's Forests 2001, countries as diverse as Canada, Indonesia, Mongolia, the Philippines and the United States have various forms of bans or very high export taxes in place to serve a range of domestic objectives.

Here in New Zealand the government is attempting to work more closely with the forest industry and to tackle factors hindering the development of wood processing in New Zealand. In April last year, the Government initiated the Wood Processing Strategy. It is a joint, "whole of government" (involving eleven different departments) and forest industry exercise.

A Steering Group was established, chaired by the Deputy Prime Minister, Hon Jim Anderton, with Forestry, Science and Energy Minister, the Hon Pete Hodgson, as the vice-chair. The thrust of the work has been to identify and push back the obstacles for investment in wood processing. This is being done through joint industry/government working groups developing strategies to knock down or reduce barriers.

So, what have we seen from the Wood Processing Strategy?

  • An excellent report was produced last September on problems and impediments imposed by Resource Management legislation and its implementation through regional and district plans. Subsequently, an industry code of practice dealing with technical matters often associated with resource consent applications, and a "best practice" guide for local authorities, is being developed. It is anticipated the draft code of practice will be available next month.
  • In terms of infrastructure - an integrated transportation study undertaken in the Tairawhiti Region (that's the Gisborne and Wairoa Districts) identified the need for $120 million for road upgrading and new feeder roads.
  • This study was extended to the Northland Region, and Nelson is likely to be the third region where transportation is reviewed. Some part of the new fuel taxes announced a couple of weeks ago will be credited to these regional roading developments.
  • In the field of employment, skills and training - there's been a lot of activity in the areas of harvesting and forestry contracting on the East Coast. Among the activities is a new facility in which forestry workers in the area can receive income supplementation while undergoing training and moving towards full productivity.
  • Under the auspices of the New Zealand Forest Industries Council, substantial progress has been made in the area of National Certification over the last year. A National Initiative for New Zealand Forestry Certification was launched last May, with the subsequent development of draft performance standards by a Plantation Management Technical Committee. The development of pilot group certification schemes for small forest owners and a chain-of-custody certification scheme for small to medium enterprises, is now being considered.
  • Investment Promotion - A report was prepared for Investment New Zealand in September titled "The Business Case for Investing in New Zealand Value-added Processing of Solid Wood and Other Wood Products"
  • Biosecurity has been a big issue here in the past year. The appointment by the Ministry of a Forest Industry Liaison Adviser has seen major improvements in relationships and communications between forest growers and the MAF Biosecurity Group. The Biosecurity Council now has Primary Industry representation, and Forestry Biosecurity and Forest Product Exports Committees have now been established.
  • Trade access is, as we know, a key issue for forestry - the Trade Access Working Group is developing a strategy for addressing issues around wood use standards and building codes, particularly in Japan, China, Taiwan, India and Korea. Urgent work is underway to address a draft Chinese building code that discriminates against New Zealand radiata pine and is heavily orientated towards North American species and US timber sizes.

Of course, not connected with the wood processing strategy, but also of real significance, is the success in including trade in forest products on the agenda for the Doha WTO Round negotiations.

New Zealand is about to enter another key phase in the maturation of the forest industry - the utilisation of the wood resource from the second planting boom.

Sixty years ago the government approached a similar situation with wood from the first planting boom. Back then it built sawmills at Waipa and Conical Hill. These served as demonstration and development units for production and marketing techniques - for the sale of exotic plantation grown timber, to a market that was used to indigenous timbers. Under the 1943 National Pulp and Paper Scheme the government very nearly established a newsprint and pulp and paper mill as well. (A change in government led to a decision that private ownership would be preferable).

In many respects the challenges, issues and opportunities associated with today's fibre trail are similar to those of sixty years ago. An expanding wood resource must be sold into new markets if its potential is to be fully realised. Today's strategy is rather different, with government and industry working in partnership to alleviate the impediments to private investment in wood processing facilities. The question is, will it be equally successful in achieving its objectives?

Ultimately, the investment in new processing capacity will occur when investors are confident that they can achieve the financial returns needed to satisfy shareholders after adjustment for risk and the cost of funds. The forest resource is available. The public sector can assist by helping reduce some of the risk factors, by ensuring that the necessary physical and regulatory infrastructures are in place, and by constraining compliance costs.

In the end, the private sector must make judgements about the available markets and the production technology to transform the current forest resource, profitability, into a marketable product.

I wish you well for your technical programme and workshops on "The Fibre Trail". I will be interested to learn where the trail leads.

Thank you

Contact for Enquiries

Director-General
Ministry of Agriculture and Forestry
PO Box 2526
Wellington

Tel: +64 4 894 0100
Fax: +64 4 894 0720
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