Major impediments to forest processing
Section I noted that ability to earn a competitive rate of return at a given level of risk is the primary determinant of whether investment will occur. At a national level, this is largely dependent on competitive advantage and its four cornerstones: factor endowments; firm structure, strategy and rivalry; demand conditions; and related and supporting industries. A fifth, and crucial dimension, is the role of government in creating an environment that enables business to thrive. The major impediments to wood processing can consequently also be identified in the context of these five spheres.
1. Factor endowmentsThe key factor endowment issues that are impediments to investment mainly relate to resource quality and resource distribution. Resource distribution refers to the degree of regional fragmentation in the New Zealand forest estate, which impedes investment in very large-scale processing, for example new kraft pulp mills. The forest resource is just too scattered to make such an investment economic. Resource distribution means that opportunities to benefit from economies of scale may be limited in some regions and thus we need to look more closely at a host of niche opportunities to maximise profitability.
Resource quality may also be a significant constraint on investment. In general, New Zealand has taken a doctrinaire approach to establishing radiata pine forests according to fairly rigid management prescriptions. In essence, the radiata pine estate has been created by a production-driven, rather than market-led, philosophy. The current industry generation has, consequently, inherited a resource of enormous potential, but not a clear vision of how this potential should be realised. In the word of one interviewee, "we have created a monster" – the challenge is what to do with it.
A primary issue is that radiata pine has been promoted as a utilitarian timber suitable for a wide-range of end-uses. There are, however, only a few markets in the global context where it has a natural advantage over other species. MDF production, where radiata-based MDF has a market-based colouring advantage and newsprint and paperboard, where radiata’s long fibres confer strength advantages are two markets where radiata may command a price premium. In sawn-timber markets, however, radiata is merely an acceptable substitute for many species - in the US, for example, radiata substitutes for ponderosa in shop and millwork grades – but, its main advantage is price competitiveness. Radiata pine’s acceptance as a structural timber is largely confined to Australasia, and while it performs adequately in this role, there is little illusion among New Zealand processors that other species (e.g. Douglas-fir) are technically superior.
The purpose of the preceding discussion is to lead into the concept that a principle challenge for industry, at the generic level, is to shift from the production-based philosophy to a marketing philosophy. By way of illustration, at various times during the past decade the concept of marketing radiata as "New Zealand Pine" (or variations on the theme) has been mooted. The much more important question, which has received less attention, is how should this New Zealand Pine be generically positioned in the market – given a realistic assessment of its technical properties – and particularly, how can this be done in a way that integrates, or at least doesn’t disadvantage, the marketing efforts of individual companies. Industry needs to consider how best to access and disseminate the skills that will ensure a strong shift towards this marketing philosophy. It may be that greater attention should be paid to marketing in standard forestry training syllabuses, but there may be also significant merit in greater cross-disciplinary recruiting.
Labour issues create significant challenges for the industry and there appear to be shortages of skilled labour in some regions as well as inefficiencies in the transferability of skills. In general, however, it is difficult to argue that labour issues are actually constraining investment. There is concern at ageing, shrinking populations with a diminishing proportion of skilled workers and possible outcomes in the future.
2. Firm structure, strategy and rivalryIn general, there are few issues relating to firm structure, strategy and rivalry that require redress. Independent processors retain concerns that their access to wood supplies remains protected from dominant suppliers, and it is noted that, as a general rule and to certain limits, fragmentation of forest ownership creates investment opportunities – and interest (though probably closing doors to very large scale investments). In general, however, it is difficult to argue that structural issues are a generic impediment to investment in wood processing in New Zealand. Structural issues certainly are likely to impact on individual companies – both positively and negatively.
3. Demand conditionsMarket development and market access are probably the fundamental constraints on wood processing investment. If markets for product exist – at the right price – then investment will occur. 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 – and this requires government (to remove market access barriers) and industry (to lead market promotion) to work in partnership to ensure success.
4. Related and supporting industriesFreight 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. Development of transport infrastructure is variable throughout New Zealand, though it is probably only a true constraint to investment in a few specific regions – notably Northland, the East Coast and West Coast. Distance to export markets, and the availability of cost-effective shipping options remain significant concerns, and doubtless affect costs to sufficient extent to make some New Zealand products uncompetitive (thus constraining investment).
Other infrastructural issues may result in higher-than-need-be costs for wood –processors, but in general interviewees identified no infrastructural issue as being of such significance that it alone thwarts investment.
5. GovernmentGovernment regulation of the business environment and economic settings are two key areas that may constrain investment. As noted earlier, there is a clear perception that the largest single impediment to investment in wood processing investment is the Resource Management Act and a number of issues have been noted in this regard. In some instances the Commerce Act has probably resulted in specific investments being missed, but it has also doubtless facilitated other investments. A variety of other legislation creates challenges or obstacles for industry, but it is difficult to argue that these have impeded investment. The issue of investment incentives is dealt with below.
Economic policy settings have significant impacts on the competitiveness of commodity exports. The effects of exchange rates, interest rates, government deficits and suchlike are well understood and it is not proposed to provide discussion on economic theory here.
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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