Executive Summary
During the past 20 years, investment in New Zealand forestry processing has not kept pace with considerable increases in wood harvests. This study seeks to identify key factors that are constraining direct investment in wood processing in New Zealand, and to suggest viable means of removing or reducing these constraints, or otherwise promoting investment in wood processing.
The study initially investigates patterns of resource ownership in the forest and wood processing sectors, noting that ownership and supply security are of crucial importance to the evolution of the industry. During the past 15 years there have been enormous changes in the structure of forest ownership in New Zealand, and these have dictated patterns of new investment in wood processing. Of particular significance have been the diversification of forest ownership and the entry of overseas companies as forest owners. Many of these have invested in wood processing facilities and the study identifies a strong link between forest ownership and investment in wood processing. Very few overseas companies have invested in New Zealand’s wood processing sector, without a prerequisite of forest ownership.
In terms of regional wood supplies during the next decade, the areas with potentially the greatest increases in wood production above current levels will be Northland (2.8 million m3), the East Coast (2.0 million m3) and the Central North Island (1.7 million m3). Northland and the East Coast are the regions where potential wood supplies will outstrip processing capacity by the greatest margin. In some regions processing capacity is generally expanding at a rate that keeps pace with increasing wood supplies. In the Central North Island, Hawkes Bay and Nelson/Marlborough current fibre-based processing capacity is of similar magnitude to projected regional production of pulp logs and thinnings, while pruned and unpruned log production will run well ahead of solidwood processing capacity. Conversely, in Otago and Southland the greater deficiency is in fibre-based processing.
The greatest challenges are likely to be in developing markets for products made from unpruned logs (both butt logs and top logs). At present, there appear to be few obvious markets for expansion. Thus, there may need to be significant investment in mills producing engineered wood products – as well as in market development.
The study notes that investment occurs if an adequate rate of return can be made at an acceptable degree of risk. At present a number of factors may be acting to reduce profitability and consequently constrain investment in wood processing. Without doubt, the single largest perceived obstacle to wood processing investment is the Resource Management Act 1991 (RMA). Almost every interviewee noted that the RMA comprised the most important regulatory barrier to investment, and some unequivocally saw the RMA as the principal constraint on investment in some regions. It should be noted that, in many instances, the RMA may be a smaller barrier to investment than this perception implies, but the cost uncertainties created by RMA processes are definitely a major factor shaping current investment intentions. Various other pieces of legislation including the Commerce Act 1986, the Overseas Investment Act 1973, and compliance with taxation regulations, were cited by interviewees as being constraints on specific investment proposals, constituting a burden on potential investors, or merely comprising a bureaucratic irritation.
The study investigates other constraints on wood processing investment in a framework of competitive advantage. This theory argues that competitive advantage is founded on a sector’s capacity to innovate and upgrade and derives from four core elements:
- Factor endowments;
- Firm structure, strategy and rivalry;
- Demand conditions; and
- Related and supporting industries.
In this framework, the study investigates potential non-legislative constraints on investment: transport infrastructure, energy infrastructure, labour issues, market development and market access issues, access to finance and certification. Comment is also made on the effects of less direct, or less general, issues such as biosecurity, carbon taxes, immigration, technical specifications, industry leadership and equitable treatment of overseas firms.
Transport issues, labour issues and market development issues are found to be perhaps the most significant. Key transport issues include the equity of cost-benefit criteria applied in road funding; port facilities in some regions, and the costs of sea-freight. Labour issues centre on the availability of skilled labour, efficiencies in skills transfer (between plants), and means of attracting high calibre people into the industry. Market development and market access issues focus on the need to develop new markets to ensure the potential value of increasing New Zealand woodflows is realised.
A section on legislative barriers to investment provides a discussion of key legislation affecting investment in forestry processing. It notes the impact of the Commerce Act 1986 on patterns of forest ownership, and consequent influences on the development of processing capacity. It also discusses taxation issues including the potential for making regimes applying to depreciation and R&D expenditure more favourable (and justifications for doing so). The fairly negligible impacts of Treaty of Waitangi issues, the Overseas Investment Act, and several other pieces of legislation are briefly discussed.
The Resource Management Act 1991, and problems pertaining to it, are examined in some detail. Seven specific issues are identified as creating significant constraints on investment, notably:
- The costs of going through the process;
- A lack of consistency between councils;
- Process delays and backlogs in the Environment Court;
- Time burden of consultative processes;
- High degrees of uncertainty and risk;
- Problems with inadequate science;
- Objections processes.
A cursory examination of financial performance of the wood processing industry notes that compared with other sectors in the New Zealand economy recent performance has been modest. The analysis focuses mainly on public domain information relating to the major listed companies.
The second part of the study focuses on comparing New Zealand’s wood processing industry with its counterparts in five competitor countries selected in terms of competitiveness and investment environment. It also analyses the main market risks and issues for the industry in the future. The countries selected for this comparison were Australia, Chile, Russia, Sweden and United States.
Benchmarking competitiveness was done by constructing a competitiveness index, which was based on two main sources. The first was the general competitiveness of a country and the second evaluated the different factors that affect competitiveness of the wood processing industry in particular.
To estimate general competitiveness, the results of this year’s World Competitiveness Yearbook (WCY) were used. The WCY ranks and analyses the ability of nations to provide an environment in which enterprises can compete.
General competitiveness Index| Country | WCY Index | Converted index |
| USA | 100.0 | 10.0 |
| Sweden | 77.9 | 7.8 |
| Australia | 75.9 | 7.6 |
| New Zealand | 61.7 | 6.2 |
| Chile | 59.8 | 6.0 |
| Russia | 34.6 | 3.5 |
Source: World Competitiveness Yearbook, 2001.
Seven forestry factors were identified: Wood Resources, Wood Processing Development, Market Development, Industry Knowledge, Investment Attractiveness, Energy and Environment.
Once each factor was evaluated for each country on a scale of 1-10, they were combined with the general competitiveness index into a final weighted average index. The general competitiveness index was given a 40 percent weight in the final index, and the forestry factors a 60 percent weight in total. However, each of the seven forestry factors was given a different weight according to its relative importance in the competitiveness outcome.
The following table shows the final results for the Wood Processing Competitiveness Index including the evaluation and relative weight of each forestry factor plus the general competitiveness factor.
Wood Processing Competitiveness Index
The resulting index shows that New Zealand’s competitiveness in the wood processing industry is lower than the United States and Sweden, similar to Chile and Australia and significantly better than the competitiveness of Russia.
New Zealand’s major competitive advantages are its wood processing expansion development, its industry knowledge development and investment attractiveness. In contrast, its main disadvantage is a weaker general competitiveness compared with the United States, Sweden and Australia.
However, because of the subjective component of the evaluation method, the value of the index is more in determining the relative importance of the different factors and variables that were used in its construction, rather than the absolute values presented in the index.
In terms of evaluation of the business environment for the selected competitor countries in the last 10 years, the major key drivers for each country can be summarised in the following table.
| Country | Key Drivers For Investment |
| Chile |
|
| Sweden |
|
| United States |
|
| Russia |
|
| Australia |
|
Finally, in terms of markets, risks and issues, the following table summarises the issues and topics that are most relevant for New Zealand’s wood processing industry.
| Issue | Relevant points |
| Certification |
|
| Trade Access and Market Development |
|
| Biosecurity |
|
| Skills and Training |
|
The concluding section begins by examining the key factors driving processing investment overseas. This section notes three specific issues: availability of wood and fibre resources, a desire to capture value-added returns by processing domestically, and an ongoing pressure on companies to grow bigger and globalise. The section also identifies five features of the global forestry sector that are driving development patterns in forest products markets:
- Patterns of regional demand will not change significantly.
- Growth in consumption will continue to shift towards consumption of paper and reconstituted panels.
- Importance of a few forest product suppliers at the global level.
- Adequacy of wood supplies at the global level.
- Forest products trade.
The major impediments to wood processing investment are drawn together in a competitive advantage framework, with the addition of a governmental component.
The key factor endowment issues are deemed to relate to resource quality and resource distribution. At present, the costs of accessing wood supplies are not regarded as being a significant disincentive to investment. Resource distribution refers to the degree of regional fragmentation in the New Zealand forest estate, and it is noted that the forest resource is too scattered to make investment in very large-scale mills economic – e.g. new Kraft pulp mills. Resource quality – notably the technical quality of radiata pine – may also be a significant constraint on investment. The radiata pine estate has been created by a production-driven, rather than market-led, philosophy and this has created a resource of enormous potential, but not a clear vision of how this potential should be realised. The section on factor endowments notes that labour issues create significant challenges for the industry, but it is difficult to argue that labour issues are actually constraining investment.
Market development and market access are identified as probably the fundamental constraints on wood processing investment. A central issue – running through most facets of the industry – is that, at present, most markets are saturated, under-developed or inaccessible. The urgent need is for rapid development of new markets – especially in Asia, where opportunities certainly exist.
Freight costs comprise a significant component of the delivered costs of New Zealand forest products, and consequently, there is significant interest in continuous improvement of transport systems. Transport infrastructure is identified as a true constraint to investment only in Northland, the East Coast and West Coast. Distance to export markets, and the availability of cost-effective shipping options, remain significant concerns.
Government regulation of the business environment and economic settings are two key areas that may constrain investment. There is a clear perception that the largest single impediment to investment in wood processing is the Resource Management Act. In some instances the Commerce Act has probably resulted in specific investments being missed, but it has also doubtless facilitated other investments.
A section on possible policy initiatives argues that the development of a more questioning culture within the industry is a necessary step to continuous improvement, and to effectively reviewing and, if need be, altering directions. The study suggests that the challenges presented by the "wall of wood" suggest that New Zealand’s approach to forestry could be improved (particularly a shift from production-based philosophies to market-led philosophies). Certification is a component in this.
In terms of structural and ownership issues, the Study recommends further research into the dynamics of regional wood markets, to support future Commerce Commission decision-making. There may be also merit in providing information and assistance to Maori groups to raise awareness of potential opportunities in wood processing.
It is suggested that a formal and well-publicised market access information system be put in place as well as a suggestion that generic marketing retains an important role in ensuring that New Zealand radiata pine is positioned and marketed in a consistent manner.
A specific policy recommendation is that economic development be specified as a Transfund benefit parameter. Roading is an important infrastructural issue but, at present, infrastructural development as a means of facilitating economic development is not incorporated in road funding decisions. The sector as a whole needs to raise its awareness of the range of options for minimising the costs of sea-freight, perhaps by exploring innovative arrangements for delivery. Another option is formalising new consortiums for shipping and the establishment of an industry committee to analyse the entire forestry transport system (specifically including shipping) to investigate means of improving efficiencies and to raise awareness of the variety of options available to exporters.
A number of specific recommendations are made in regard to the Resource Management Act including: establishing ready-zoned industrial areas with consents already approved; programmes that make information sharing between councils more cohesive; streamlining of consent processes to minimise costs and delays; and increasing capacities in key bottlenecks, for example at the Environment Court.
Some broad points are noted in regard to the risks and impacts of adopting these policies.
Contact for Enquiries
Rural Affairs Coordinator
Sector Performance Policy
MAF Policy
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
NEW ZEALAND
Phone: +64 4 894 0675
Fax: +64 4 4 894 0745
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