15 May, 2006

ARTICLE: Timber sale gets strong price growth for coffers

Philip Hopkins

The Age, May 15, 2006

Cutting to the chase. Some in the timber industry believe the prices achieved have been manipulated.

VICFORESTS' first auction of native forest timber has dramatically increased the money going to Treasury's coffers, but has been strongly criticised by the timber industry.

The weighted average price of timber sold was 43 per cent higher than the prices paid by timber mills under the current licence system. Some wood lots were 118 per cent higher, while others were 22 per cent lower.

VicForests' sales director, Matthew Crapp, said the percentage increases were on top of the 10-20 per cent price rises for licensed timber brought in last year.

The auction was the first in the new timber sales system that VicForests, the State Government's commercial forestry arm, will progressively introduce over the next decade.

The current system, where sawmills receive long-term licences and VicForests sets the prices for the various sawlog grades, will be phased out.

All native forest timber will be sold at auction by 2015.

A total of 174,100 cubic metres of sawlogs in 47 lots was sold, with forward sales spread over all years until 2014-15. Revenue was $3 million higher over the 10 years than it would have been under the administered system.

Mr Crapp said the catalogue was small, but gave bidders the opportunity to use the new system. "The system worked well and is broadly accepted," he said.

The average lot size was 1610 cubic metres, with the largest 5000 cubic metres and the smallest 500 cubic metres. The 931 bids involved 14,000 different price calculations.

A total of 42 bidders qualified for the first two auctions, and 34 eventually placed bids, with 18 successful. All were Victorian domestic processors.

Mr Crapp said competition was strongest for the higher-grade lots, which was reflected in the higher prices.

"The higher-grade logs tended to go to the value-adding sawmills," he said.

"Bidding dropped during rounds three and four, when most lots went above the administrative price levels."

Mr Crapp said the specialised, mixed species lots from East Gippsland, such as yellow stringybark and silvertop ash, received the best prices.

Longer-term lots outperformed the shorter-term, and larger lots were also more popular. The prices would be more moderate in the long term, he said.

The director of operations at the Victorian Association of Forest Industries, Nick Murray, said while industry accepted the auction model, it was not a true market-based system.

"It is conducted by a monopoly supplier that, with other parts of government, dictates the release of wood to the market in terms of volume and tenure," he said.

"It thus has the ability to manipulate both to extract the maximum price from buyers."

Mr Murray said despite the State Government's formal commitment to a sustainable yield of 560,000 cubic metres of sawlogs, industry remained uncertain about the total volume of wood available in the future. This uncertainty created an artificial market environment and helped explain why the auction prices were so high.

Mr Murray said the prices were much higher than administered prices for wood in other states. "These higher prices are not necessarily a reflection of the intrinsic commercial value of this wood," he said.

Mr Murray said bidders marginally costed the wood and offset this against wood supplied under the supply contracts.

The small catalogue lots also gave the market the chance to "cherry pick" prime lots, while other bidders used the auction to improve their wood quality so as to forfeit supply of lower-quality wood, he said.

Mr Murray said many big businesses did not win any wood, or only small volumes. This indicated the prices were unrealistic and uncommercial for business of scale, he said.

VicForests will hold a second auction this month for 680,000 cubic metres of sawlog. Mr Crapp said this would give an indication of what the future timber industry might look like.

Original article

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