Presentation to Pine Manufacturers' Conference

Murray Sherwin Director-General, Ministry of Agriculture and Forestry

10 October 2003

Throughout government there is a great deal of interest in the forestry sector. It is a sector with huge promise - especially for regional employment and foreign exchange earnings. It is also a sector that has created a number of frustrations.

Government - at many levels - wants to and is engaging with the forest sector. The Government wants to support the development of vibrant, internationally competitive wood-based businesses. The manufacturing sector, as represented by PMA, is vital and is closely aligned with all the Government's development objectives.

Indeed, the manufacturing sector generally (lumber, panels, mouldings, furniture, etc) has done very well, increasing its export earnings from $NZ1 billion to $NZ1.8 billion in just five years.

The Government has a key objective of raising New Zealanders' per capita gross national income to the top half of the OECD. The two key drivers for boosting per capita income are labour productivity and labour market participation. The forestry sector - and pine manufacturing businesses in particular - can make major contributions to both these drivers.

You are in a fiercely competitive environmental. I doubt there is a single participant at this conference that every day doesn't think about how they will improve labour productivity. Increased productivity requires increased skill levels, innovation in products and marketing and capital investment - especially toward skills-biased technological change.

You are also aware that your competitors in countries like China, Chile and Taiwan are investing heavily in these things, and that the myth of these countries rely simply on cheap labour for their competitive advantage is just that - a myth. You are up against sophisticated, innovative and capital and technology intensive businesses. You are also up against scale.

To compete, New Zealand businesses must be able to attract capital, both domestic and from offshore. And the forest sector has the capacity to absorb a lot of capital. The Forest Industries Council suggests up to $NZ 3 billion in new capital is needed by 2010.

This will only be achieved if sufficient returns can be made on that capital. Not only that, but New Zealand as a whole must continue to be seen as fitting within firms' strategic plans. If not, then even highly profitable investments may be passed up, if a firm has a strategy to invest in say Chile, Australia or China. And this doesn't apply to just large multinationals. In an increasingly globalised environment all businesses, be they based in New York, Melbourne or Waimate can choose to make their investments in New Zealand or overseas.

This fluidity of investment is perhaps no better illustrated than by McVicar Timber's decision to locate their new NZ$11 million 90 job sawmill in Australia. In its announcement McVicar's indicated that it did not see New Zealand as a favourable investment location at present.

And here is one of the key Government interactions with your sector. Establishing an environment that makes New Zealand an attractive place to invest.

In September this year MAF released a report that reminds everyone of some of the issues facing the New Zealand forest industry and of the need to focus government attention on it - along with other primary sectors.

MAF has become increasingly engaged in the Government's Growth and Innovation Framework initiative. MAF wants to ensure that the role of the primary sectors is fully provided for, and that any new initiatives to encourage growth incorporate the primary sectors.

MAF is also strongly advocating the inclusion of generic issues affecting investment - things like depreciation rates for new investment, resource planning and consent processes and infrastructure - are also on the GIF work programme.

There is much to do. Between 1993 and 2002 New Zealand investment in wood processing totalled $NZ 1.8 billion. Chile on the other hand invested around $NZ 6.4 billion in wood processing (much of which was in pulp and paper) between 1991 and 1999.

As a result log exports make up 20% of the value of New Zealand's forest exports, compared to less than 10% of Chile's forest exports. Chile's forest product exports are now around $800 million more than New Zealand's based on an almost identical level of harvest.

At its current levels of investment the New Zealand forest sector will struggle to remain competitive. The net result is a sector increasingly dependent on the vagaries of international commodity prices and the exchange rate.

That means a sector that is highly cyclical and - from an employees point of view - risky. People value job security, perhaps even more importantly, high calibre people need to know they have a career path available to them. And attracting high quality people to the forest sector is critical to its success.

There is a perception that forestry jobs are low paid and / or unskilled. That may been true for a proportion of jobs - but increasingly forest sector jobs are technically demanding and require high levels of skill and training. This trend will increase if New Zealand is successful in achieving skills-biased technological change.

So where does this leave us? Key issues are attracting capital and high quality people. Both these factors depend on the profitability of the New Zealand forest sector, and to some extent sentiment toward the sector and New Zealand in general.

There has been a lot of talk lately about the exchange rate. Some are suggesting government intervention to lower the exchange rate. Murray's comments and graph at end

There needs to other solutions. I have already mentioned the Growth and Innovation Framework and that MAF is pushing for a number of economy-wide issues to be considered under it.

In the forest sector specifically, there are two significant and exciting initiatives in place; the Wood processing Strategy and more recently the Forest Industry Framework Agreement. I have made sure MAF has dedicated resources available to commit to these initiatives.

The Wood Processing Strategy is a new approach. It establishes formal and informal relationships between industry, unions, local and central government. It is means by which key issues facing the sector can be identified and options developed to address these. A particular strength is the across-government nature of the WPS. Moreover, the forest sector has established a special relationship with the WPS's sponsoring Ministers - the Minister of Forestry, Hon Jim Sutton and the Minister for Economic Development, Hon Jim Anderton.

The WPS has in turn led to a number of other Government-industry initiatives, including:

  • an innovative and highly successful approach to regional transport infrastructure funding;
  • a work programme of market access initiatives developed on the basis of industry's stated priorities and now in its second year of implementation;
  • establishing a centre of excellence (called Radi) for training in wood processing; and
  • the Forest Industry Framework Agreement or FIFA process.

Right now officials from across government and industry representatives are working on details on a range of new initiative proposals put forward by the forest industry under the FIFA. These include proposals for additional Government resources in:

  • market development;
  • market access;
  • labour and skills;
  • bio-energy development;
  • regional land transport infrastructure;
  • biosecurity; and
  • alternative species research.

Officials are aiming to provide advice to Ministers by the end of the year. MAF has overall responsibility for this work programme.

Some of these proposals have the potential to be transforming in the forestry sector - especially in the areas of market development and market access. One key issue to work through over the coming months is how the various generic market promotion proposals that are currently being developed might fit together to ensure New Zealand has a complementary market development package that does not cause confusion in the market place. While the proposed FIFA activities may be valuable - perhaps a more enduring benefit will be if they can help catalyse new levels of dialogue and co-operation throughout the industry.

Both the WPS and the FIFA process have highlighted several significant issues in the relationship between Government and the sector. First, funding of industry good activities by the forest sector is to put it bluntly inadequate. The Government is looking for a credible partner. That means a partner that can bring adequate and reliable joint funding to projects. This might be in the area of market development under the FIFA, market access under the WPS or RS&T with the FRST. Whatever the activity, the forest sector's history of 'nickel and diming' and 'passing the hat' to fund such activities simply does not cut it, if the sector is looking to convince Ministers to jointly invest taxpayers' money in this sector. This is a $5 billion industry that wants to become a $20 billion industry by 2025. Two - recognising the commercial imperatives on individual firms, the Government is looking to encourage more cohesion and common objectives across the forest sector. Many issues that were previously in the industry's too hard basket are now bein g openly and constructively discussed under both the WPS and FIFA frameworks. I encourage as many of you as possible to participate and contribute to these discussions. Three - right now this sector has got government's attention. It should take advantage of its ability to deliver growth and innovation (especially in the regions), of the special relationship it has built up under the WPS, and of the imperatives created by climate change policies and being addressed under the FIFA.

  • The PMA is strongly, and I might say very ably, represented in all these activities - principally through the very valuable efforts of your CEO Lawrie Halkett.
  •  In many respects the forestry sector is leading the way in its innovative and constructive relationship with government. Re-establishing this relationship is not before time, though there are still many in the sector free-riding on the goodwill and efforts of others.
  • There is much talk in the forest sector about the role and number of the various industry associations. Perhaps there are too many, perhaps not. Who and how you are represented is clearly an issue for you.
  • But I would say this - if you want government to understand your needs and concerns you must have adequate representation in Wellington. And, if you want this interaction to be co-ordinated across the whole forest sector and consider over-arching issues, like trade access, infrastructure, RMA and market development, then there needs to be an over-arching industry body that can represent you views on these issues.
  • This is a very tough time for the forest sector, and there are no silver-bullets for that. Nevertheless, a number of factors have come together to make this an exciting time for the forest sector and its relationship with government.
  • MAF is fully committed to the forest sector and believes strongly in its future. We look forward to working with you and other industry groups and companies to ensure the Government plays its part in securing that future.

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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