Part I Processing Investment Impacts and Drivers
Introduction
The forestry industry has potential to contribute dramatically to New Zealand’s sustainable development and economic growth. This potential will only be fully realised if the large majority of wood produced in New Zealand is also processed here. During the past 20 years, however, investment in forestry processing has not kept pace with considerable increases in wood harvests. This study seeks to identify key factors that constrain 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 has been conducted at two levels. Firstly, it has encompassed a literature review, which has provided a factual basis for comparative analysis. More crucially, however, a broad series of interviews has been carried out, to identify experiences with constraints to investment, as well as recording a variety of industry views and perceptions of the principal issues surrounding investment decisions in wood processing in New Zealand. Thus, the study reconciles a melange of tangible facts, perceptions and experiences, which enables the identification of real barriers to investment, as well as several areas where information deficiencies may create perceived barriers.
Patterns in forest ownership and wood processing
Patterns of resource ownership in any industry are of crucial importance to the evolution of the industry. In forestry, issues of forest ownership and supply security are fundamental to investment in wood processing. 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. There are, particularly, some significant correlations between changes in forest ownership and processing investment that enable useful conclusions to be drawn regarding likely future patterns and constraints on new investment. These are discussed in the sections below.
Changes in forest ownership since 1987
From 1919 to April 1987, the New Zealand Government's forestry operations were conducted by a single agency, the New Zealand Forest Service. Through much of this period the Forest Service was New Zealand’s dominant planted forest owner. As shown in Figure 1, the Forest Service’s proportionate ownership of planted forests peaked in the mid-1960s, when the Forest Service owned almost 60 percent of the national estate.
Figure 1: Proportionate State and private ownership of planted forests in New Zealand
Source: MAF Statistics
In 1987, the government announced an intention to privatise public assets including forests. Government businesses were to be sold with the primary aim of reducing public debt, but also to avoid the potential for future calls from the businesses for government cash; to minimize the government's risk exposure in the business sector of the economy; and to enable ministers to concentrate on matters of economic and social policy. A major issue was the belief that rationalization of state forest assets would result in a more efficient, internationally competitive sector. The government's forestry assets were dispersed throughout the country and had been established to meet objectives other than the purely commercial aim of profit maximization. A 1988 Forestry Working Group noted: "It is generally recognized that the New Zealand forestry resources would benefit from rationalization. Ownership of forests does not often reflect sensible economic packaging." A particular concern was the need to provide security of supplies to processors in order to attract new investment into forestry value-adding industries. The sale of forests to enable processors to integrate supplier functions into their current operations was seen as a long-term optimal mechanism to achieve this end.
A first round of forest sales was in the form of a sealed bid tender, which closed in July 1990. Two bids, for 72 600 hectares of forests, were accepted and the government entered into a negotiated sales process that resulted in the sale of an additional 174 000 hectares of forests. The unsold state forests were grouped into three separate state-owned enterprises under the umbrella ownership of the New Zealand Forestry Corporation. The major forests of the central North Island (not offered for sale in the first round) were placed in the ownership of the Forestry Corporation of New Zealand. Timberlands West Coast, was given control of a select regional group of forests on the west coast of the South Island. The remaining forests, residual to the sales process and dispersed throughout the country, were grouped together as New Zealand Timberlands.
Table 1: Sales of State-owned planted forests 1990-1996| Date | Purchaser |
Area (ha) |
Price |
| Forests sold by tender | |||
| July 1990 | Earnslaw One | 23 801 |
102 |
| July 1990 | Fletcher Challenge | 48 852 |
262 |
| Forests sold by negotiation | |||
| August 1990 | Carter Holt Harvey | 100 208 |
410 |
| September 1990 | Juken Nissho | 43 531 |
126 |
| September 1990 | Wenita Forestry | 20 521 |
115 |
| October 1990 | Other | 9 793 |
13 |
| Forests transferred to SOEs | |||
| December 1990 | Forestry Corporation | 165 300 |
|
| December 1990 | Timberlands West Coast | 21 400 |
|
| December 1990 | NZ Timberlands | 116 900 |
|
| Sale of Timberlands and Forestry Corporation | |||
| April 1992 | ITT Rayonier | 97 453 |
366 |
| August 1996 | CNI Partnership | 188 000 |
2 026 |
Primary source: Brown and Valentine 1994
The motivations behind the specific groupings of forests into these three state-owned corporations were quite complicated. However, the basic reasoning was that the Forestry Corporation of New Zealand's forests were located in the Bay of Plenty in the North Island and represented the largest concentrated planted forest resource in the country. The scale of the forest industry in this region dwarfs that of most other regions and, for this reason, there was a good argument for these forests to be sold as an individual package. The Timberlands West Coast forests were subject to an environmental/commercial accord and it was therefore logical that these be held separate from the other forests. The forests residual to these two groupings were consolidated as New Zealand Timberlands.
The third stage in the privatisation of New Zealand's forests was the sale of New Zealand Timberlands. The preference for the sale of Timberlands was as a whole entity and this was largely based on the belief that its forests were too scattered to allow them, individually, to attract processing investment, along with a pragmatic desire to avoid the costs of government being left to manage a large number of small forests and prolonged sales rounds. The sale document particularly noted that an additional criterion under which bids would be assessed was the likelihood of particular bids leading to additional downstream investment.
A final privatisation phase was the 1996 sale of the Forestry Corporation. The corporation's assets were Crown Forestry Licences to planted forests, which had expanded to 188 000 ha in the central region of the North Island, processing plants in various locations, a nursery and a seed orchard. The substantial change in the ownership distribution of New Zealand’s planted forests is demonstrated in Figure 2.
Figure 2: NZ planted forest ownership in 1989 and 1999
1989 ownership based on area of 1.5 million ha
1999 ownership based on area of 1.5 million ha
Source: Clarke 2000
The overriding changes in forest ownership demonstrated in Figure 2 are a much greater diversity in forest ownership, and the numbers of international corporations that now have an ownership stake in the New Zealand forest industry.
Investments in processing facilities
The wood processing industry in New Zealand presently comprises four pulp and paper companies, eight panel products companies, around 400 sawmills and 80 re-manufacturers. At present, the industry processes around 11 million cubic metres of wood per annum. The distribution of ownership in the wood processing industry is significant to the extent that it enables the identification of potential constraints arising from wood supply issues, as well as providing an indication of potential sources and types of future investment. The following provides a brief analysis of the structure and investment history in each sector of primary wood processing.
Pulp and paperThe New Zealand pulp and paper comprises seven mills (the Mataura mill closed recently) with the bulk of capacity centred around the two international scale integrated pulp and paper mills in the Central North Island, Kinleith and Kawarau. Presently, New Zealand has four integrated pulp and paper mills with both Whakatane and Caxton supplementing their pulp production with purchases (or in-company transfers) of market pulp. Karioi and Whirinaki are dedicated pulp mills, while Penrose is a small papermaking facility without virgin pulping capacity, but with recycling facilities. Table 2 shows approximate production capacities at each facility.
Table 2: Estimated Maximum Practical Capacities for NZ Pulp and Paper Mills (1995) (metric tonnes)| Mill | Kraft Pulp | Mechanical Pulp | Newsprint | Paperboard/ Linerboard | Tissue |
| Kawerau | 290 000 |
330 000 |
420 000 |
||
| Kinleith | 450 000 |
300 000 |
|||
| Penrose | 60 000 |
||||
| Whakatane | 10 000 |
40 000 |
90 000 |
||
| Caxton | 30 000 |
50 000 |
|||
| Karioi | 140 000 |
||||
| Whirinaki | 250 000 |
||||
| Total | 780 000 |
760 000 |
420 000 |
450 000 |
50 000 |
Source: Various
Up to July 2000 the Kawerau mill was owned by Fletcher Challenge Paper, which was then taken over by Norske Skogindustrier ASA. Norske Skog has recently on-sold the Kawerau kraft pulp facility to Carter Holt Harvey. In addition, Carter Holt Harvey owns the Kinleith, Penrose, Whakatane and Caxton mills. Winstone Pulp International Karioi is jointly owned by two Indonesian companies, while Pan Pac Forest Products mill at Whirinaki is jointly owned by Oji Paper Company and Kokusaku Pulp Company of Japan. Both these mills generally direct the majority (if not all) of their production to their parent companies.
In terms of investment in pulp and paper production, the there has been no greenfields establishment in the past 15 years, however, there have been substantial brownfields expansions and upgrades completed, as well as the announcement of several large-scale upgrades that have subsequently been shelved. In 1999, for example, Carter Holt Harvey completed a US$168 (NZ$313 million) million modernisation program at Kinleith centred around a re-build of its No. 6 paper machine. A handful of similar scale modernisation programmes at pulp and paper facilities has seen around NZ$1 billion invested in brownfields upgrades in New Zealand during the past 15 years.
Panel ProductsFibreboard capacity in New Zealand has grown rapidly over the past decade. Production of fibreboard in the year to September 2000 was 805 000 cubic metres compared with 248 000 cubic metres in 1987.
Substantial new capacity has been mooted during the past decade, although in some cases investment has been deferred. Table 3 provides a summary of production and capacity changes during the past five years. The largest MDF facility is at Nelson Pine Industries (a wholly owned subsidiary of Sumitomo Forestry NZ Limited), where three lines have been installed during the past 15 years. Rayonier’s mill in Mataura was commissioned in 1997. Carter Holt Harvey Panels - MDF at Sefton added a new production line in 1995, enabling the plant to manufacture the whole range of MDF products, including thin board. Fletcher Building manufactures medium and high-density particleboard, hardboard, ceiling tiles and medium density fibreboard.
Additionally, plans for several additional plants have been announced and shelved during the past decade including:
- the establishment of a new facility by Wenita Forest Products at Taeri (abandoned in the face of difficulties in obtaining an air discharge resource consent);
- plans by Juken Nissho to add a fibreboard facility to its Gisborne plant; and
- plans by CHH to add a fibreboard mill to its Eves Valley sawmill.
| Mill | 1995 Estimated Production |
2000 Installed Capacity |
| Carter Holt Harvey Panels MDF Sefton | 185 000 |
220 000 |
| Nelson Pine Industries | 210 000 |
400 000 |
| FBL Auckland | 42 000 |
45 000 |
| FBL Taupo | 175 000 |
160 000 |
| Juken Nissho Kaitaia | 85 000 |
85 000 |
| Rayonier Mosgiel | 0 |
170 000 |
| Total | 697 000 |
1 080 000 |
Source: Various
Plywood and LVL production have been growth areas in New Zealand’s forest industry during the past decade. New plants have been opened by Carter Holt Harvey (at Tokoroa) and Juken Nissho (at Kaitaiai, Gisborne and Masterton). In the ten years to March 2000, Juken Nissho has invested NZ$324 million in mills in New Zealand (along with NZ$294 in forests). Plywood capacity increases have raised production from 68 000 cubic metres in 1990, to 240 000 cubic metres in 2000. New LVL mills are presently being constructed by Nelson Pine Industries and Carter Holt Harvey (at Marsden Point).
Particleboard is produced at three mills in New Zealand. New Zealand’s most recently constructed particleboard mill, at Kopu, was completed in 1990.
Sawn timberThe much greater diversity of the sawmilling industry means that it is much more difficult to chart changes in capacity and investments in the sector. At present there are estimated to be more than 400 sawmills operating in New Zealand, and these range from facilities producing more than 250 000 cubic metres per annum, to small family mills producing less than 1 000 cubic metres. Table 4 shows changes in the number of sawmills, by capacity grouping, during the past 15 years. The general trend in sawmilling in recent years has been toward most production coming from fewer and larger mills, with the bulk of investment being in brownfields expansions and upgrades. For example, the New Zealand Timber Industry Federation estimates that in 1998 its members invested NZ$50 million in plant and equipment.
Probably the best indicator of increased investment in sawmilling is in the significant increases in sawn timber production during the past decade. These are shown in Figure 3. Production has increased from 2.1 million cubic metres in 1990 to 3.9 million cubic metres in 2000.
The past twenty years have seen significant evolution in the New Zealand sawmilling industry. Contractual arrangements for log sales were generally at favourable prices and this encouraged the development of a relatively inefficient industry and particularly discouraged investment in new technology.
Table 4: Number of sawmills in New Zealand by capacity| Number of mills | ||||
| Year | 0 - 1999 m3 | 2000 - 5 000 m3 | 5 000 - 19 999 m3 | >19 999 m3 |
| 1985 | 203 | 110 | 75 | 19 |
| 1992 | 143 | 39 | 45 | 22 |
| 2000 | 225 | 33 | 38 | 42 |
Source MAF Statistics
Figure 3: New Zealand production of sawn timber, 1987-2000 (000 m3).
Source: MAF Statistics
The advent of the free-market economy and forest privatisation applied considerable discipline to the sawmilling industry. In the five years subsequent to privatisation, large numbers of mill closures (more than 200) and supply disputes bore testament to the realities of exposure to market forces. In general, this has led to the emergence of a significantly different sawmilling sector, which is leaner, more commercially astute and focused on the bottom-line. At the same time as sawmills were adapting to the changed commercial environment, the new corporate ownership of forests was introducing new, resource based challenges for the sawmilling industry to cope with. In pursuing IRR-based strategies, the average harvest age of trees fell from around 35 years, to about 28 years. This meant mills had to process generally smaller logs with different (generally lower quality) wood properties. In part, this drove perhaps the most significant change in sawmilling, the advent of large volumes of kiln-dried lumber, which in turn has enabled radiata pine to attain dominance in structural framing markets in New Zealand and Australia.
Sawn timber consumption in New Zealand is strongly related to housing construction rates and demand for packaging timbers. About 60 percent of sawn timber production is used in dwelling construction and the remaining 40 percent goes into industrial applications and furniture. New Zealand's sawn timber producers are increasingly reliant on export markets to fuel the industry's expansion. Sawn timber exports have grown from an average of 300 000 cubic metres per annum in the 1970s to 1 527 000 cubic metres in the year ended September 2000.
Links between forest ownership and wood processing investment
The primary link between forest ownership and investment in wood processing is security of wood supplies. An optimal situation for a company is to have vertically integrated forest supplies and processing industries to ensure this security. This does not necessarily entail ownership of forests. In theory, a long-term supply contract with a beneficent state owner might well be a far more attractive option for a company in that it frees up capital for investment elsewhere and the state may well be prevailed on to supply logs at below-market prices. The reality, however, is that most processing companies appear to prefer having complete control of a significant volume of their wood supplies. Table 5 shows patterns of overseas investment in forests and wood processing in New Zealand.
Table 5: Overseas investment in forests and wood processing in New Zealand.| Wood processing | Forests | Wood processing and forests |
| Brightwood (NZ) | Blakely Pacific NZ | Carter Holt Harvey |
| Grand Pine Enterprises NZ | Fletcher Forests | Craigpine Timber |
| Gunns | Evergreen Forests | Earnslaw One |
| Norske Skogindustrier | Hansol NZ | CNI Partnership |
| Panahome Innosho | RII NZ | Juken Nissho |
| Tachikawa Forest Products | Southland Plantation Forest Company | Nelson Pine Industries |
| TreeOne (NZ) | Pan Pac Forest Products | |
| Rayonier NZ | ||
| South Wood Exports | ||
| Wenita Forestry | ||
| Weyerhaeuser NZ | ||
| Winstone Pulp |
Source: MAF
Table 5 clearly shows far greater numbers of companies with joint forest ownership and wood processing facilities, than of wood processing facilities alone. Notably, much of the overseas investment in wood processing has occurred in the period post-forest privatisation, with companies such as Juken Nissho, Earnslaw One and Wenita Forestry active in the initial privatisation rounds. Companies such as Rayonier, Weyerhaeuser, and CITIC (as part of the CNI Partnership) have obtained significant forest ownership in later rounds, or through the on-sale of forests, and their investments in wood-processing facilities (in the cases of the Rayonier and Weyerhaeuser) have come more recently. On the other side of the ledger, Nelson Pine Industries, Pan Pac and Winstone Pulp made investments in New Zealand prior to privatisation – but, initially as joint venture partners with New Zealand companies.
A handful of companies, Brightwood, Grand Pine Enterprises, Gunns, Panahome Innosho, and Tachikawa, have established new wood processing plants without having made a complementary investment in forest ownership – as have companies such as NDG Pine, which has shifted operations from the US to New Zealand. These investments are estimated to total around NZ$100 million, compared with the NZ$2.5 billion of investment in wood processing recorded by MAF. The clear lesson is that New Zealand should look to overseas forest owning companies as the primary source of overseas investment in wood processing. In part, this is because of supply security issues, but more generally forest ownership provides an active stake in the whole forestry industry. At the same time, the rapidly changing supply situation implied by the "wall of wood" will create new potential for overseas investment by "non-forest owning companies – a key question is how this investment potential can be effectively marketed offshore.
Domestically, forest ownership is less of a determining factor in wood processing investment – in fact the majority of new projects have been initiated by independent processors that are not forest owners. Very large-scale domestic processing investment tends not to be undertaken without some degree of resource ownership, however. This is probably related more to finance and capital issues and the existing structure of industry, than any requirement to own forests (for example, the establishment of the Kawerau pulp and paper mill was founded around long-run government supply contracts).
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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