09 August, 2014

Forestry industry out on a limb

Tom Arup, Environment editor
The Age, August 9, 2014

In its heyday, the town of Cann River in the far east of Victoria was home to seven sawmills. But now just one remains .

Bob Humphreys, 70, has run it for 43 years. As a boy he spent school holidays working at the mill.

In all that time no changes have been as dramatic as those which have buffeted the industry in the past five years.

"Our critical mass has shrunk to such an extent that sooner or later it will no longer be viable. And we're rapidly approaching that point, I reckon," Humphreys says.

Forestry is one of the most disrupted industries in the country. On top of the challenges facing all heavy industry - the high dollar, international competition, falling commodity prices and relatively high cost base - the $7.5 billion timber industry faces specific difficulties at the heart of its business model.

A perpetual and heated environmental contest hangs over native logging, and plantation growers are still dealing with legacies from shambolic tax breaks and collapses. The markets for their products, meanwhile, are in a state of constant change.

The impact is broad, from small mills to the large state government-owned timber companies in NSW, Tasmania and Victoria.

Tasmanian forestry giant Gunns is the most celebrated victim, although, in truth, most of the industry is under stress, or if you are being polite, "in transition". And there is likely more pain to come.

The once-dominant native-forest chip export industry has been the hardest hit. Chips, not sawn timber, has sustained the industry for many decades.

"I can’t argue that there is no decline in the native forest industry," says Peter Mitchell, an experienced timber man and general manager of South East Fibre Exports, a mill and woodchip exporter on the NSW south coast.

"It is not happening because of green pressure. Not because of somebody sitting up a tree. It is happening because of the market."

International competition from plantations in Vietnam, Thailand and South America produce cheaper chips with higher yields. They are crowding Australia out of its traditional and once lucrative markets in Japan.

On the demand side Japanese buyers are less hungry as paper demand has flatlined and they are also confronted with a high Australian dollar. Some Japanese purchasers, mostly paper companies, are also reluctant to take woodchips from Australian native forests because of their contested environmental nature.

That has driven the volume of native hardwood - such as eucalypts - down from 10 million cubic metres to 3.8 million cubic metres. The industry has been cut by more than half in a decade.

The development of domestic hardwood plantations - such as blue gums - has added to competition for native chips.

Companies such as TimberCorp and Great Southern gorged on juicy government tax breaks and planted swathes of forests across southern and western Australia. When they fell over the estates were snapped up at cut price rates and the timber is now being flogged off, meaning production has soared 350 per cent to 5.5 million cubic metres in a decade.

The vast bulk of Australian export woodchips is now plantation-grown; they have replaced native sources in just a handful of years.

Away from chips, the market for higher-quality native sawlogs, which are used in furniture and housing, is also sliding as international competition, alternative products and a quiet global housing market have nibbled on the demand side.

And continued reductions in the amount of wood that can be economically or practically cut out of native forests in a sustainable way have also reduced the supply.

The impact of these reductions can be seen in the NSW government's recent deal to buy out a chunk of a sawlog supply contract with building giant Boral after modelling showed that, next decade, forests in the state's north would be less productive than expected.

In East Gippsland, Bob Humphreys once processed 65,000 cubic metres of native sawlogs a year across four mills in three towns; these mills employed 77 people. Now the remaining mill handles 11,500 cubic metres for sub-floor structures. He has kept the mill in the black through downsizing and a determination to maintain jobs in Cann River, where he employs 17 people. He says Cann River has become a ‘‘welfare town’’.

When a round tree is milled into square planks there is a lot of waste. As is the case with many mills, Humphreys sells the waste for wood chips.

He sells about 5000 tonnes a year to South East Fibre Exports, but in May SEFE announced an end to buying pulp logs or mill waste from East Gippsland from January.

"I am yet to find a market for my residues come the end of the year when SEFE stops taking them. And that may be a precursor to my final demise, I'm not quite sure yet,'' he says.

His experience goes to the heart of the native industry’s economic underpinning. The harvesters who cut down the trees are like millers in that they sell pulp logs - smaller or lower quality logs that cannot be used in saw mills - for chips and are now also facing weakening demand.

"Any forest owner needs a residue market to make things viable," Peter Mitchell says.

"It is like selling the cow and only selling the T-bones; it doesn’t make sense, you have to sell the sausages as well."

VicForests, which is in charge of harvesting native forests, is working to find alternative buyers for its pulp logs from East Gippsland.

The state-owned company sold 200,000 tonnes of pulp log to SEFE in the 2012-13 financial year.

Nathan Trushell, director of strategy at VicForests, says it may not need to replace the entire volume of lost sales. He concedes there will be likely be a hit - though not as large as people suggest -  but he is giving little away about what VicForests might do.

He says there are a range of measures are on the table, from different harvesting techniques to selling logs as firewood.

Trushell says it is a chance to develop a more resilient industry that is domestically focused, and would likely be smaller.

Notwithstanding VicForests' struggles to break even, Victoria’s native sector has actually held up better than that of other states.

Victoria has become the largest harvester of native hardwood forests. But even Victoria has seen production fall by about a third to 1.3 million cubic metres over the last decade.

Crucially, the state's most lucrative logging region – the mountain ash forests region of the Central Highlands – has a stable pulp log customer in Australia Paper, which is owned by Japanese paper giant Nippon.

Australian Paper’s Maryvale mill in the Latrobe Valley uses VicForests residue along with plantation timber to produce Reflex printing paper.

VicForests and Nippon have faced staunch opposition from environmentalists and scientists campaigning to protect endangered species, such as the Leadbeater’s possum, and the mountain ash forests that were ravaged in the 2009 Black Saturday bushfires.

Ten years ago NSW produced roughly the same amount of native timber as Victoria; now it has dropped well below 1 million cubic metres.

The Forestry Corporation of NSW – also state-owned – has posted operating losses from its native timber operations of about $15 million a year since 2010-11.

These losses were easily offset by the returns from their plantation assets – largely softwood species such as pine trees that are used as sawlogs, mostly for housing.

The future of South East Fibre Exports is critical for forestry in the state's south. Long a profitable business, SEFE has struggled to break even in the past three years.

SEFE’s owner is also Nippon as well as Japanese trading company Itochu. Nippon for a long time also bought all SEFE's exported woodchips.

That came to an end when Nippon got access to higher quality chips from other sources. Nippon told SEFE it no longer wanted as much supply. SEFE then had to look to Taiwan and China where prices are lower and competition is no less intense.

SEFE does have a deal to buy Forestry NSW native pulp logs. That has a few years to run but if Nippon decides to shut SEFE when that contract is up then sawmills and native harvesting in southern NSW will face the same problems as their Victorian counterparts.

‘‘Our strength is [that] our customer is our owner. But they can only support us so long. And they can buy cheaper, better quality chips somewhere else; if they don’t it drags their business down,’’ Mitchell says.

While the falls in Victoria and NSW are large, nowhere has the collapse in the native timber industry been more dramatic than in Tasmania.

At its height last decade the state was processing more than 5 million cubic metres of native timber. In 2012-13, as exports to Japan collapsed, a little under 800,000 cubic metres was processed.

That plunged Forestry Tasmania to operating losses of almost $30 million a year. The bleeding has been stemmed courtesy of a government lifeline, but the future of the state’s industry is under another cloud.

The newly elected Hodgman Liberal state government, supported by the Abbott federal government, is in the process of tearing up a peace deal stuck between environmentalists, unions and industry in 2012 to end the forest wars that have plagued the state since the 1970s.

Plantation owners have faced their own issues.

It is true hardwood estates have grabbed the vast majority of the Australian export woodchip market. But they are selling a classic commodity and are also facing the same international competition and pricing pressures as native timbers.

Some plantations established under the MIS tax breaks, introduced under the Howard government, were put on marginal land with unrealistic expectations about what could be produced.

Plantings have now come to a halt and some are even being ripped out of the ground and returned to traditional farming.

In the 2013 financial year less than 2000 hectares of hardwood plantations were established. At the height of the MIS boom 76,000 hectares were planted in 2007 alone.

The large softwood plantation estate has hardly moved in terms of area or volume for about 25 years.

For pessimists wherever one looks forestry is not growing. Optimists, though, see signs of life in the woodchip market driven by emerging Chinese demand.

The consultant Wood Resources International reports that Australian woodchip exports increased in 2013 after falling to a 12-year low the year before. That increase almost exclusively came from plantation.

The first quarter of 2014 saw the largest shipment since 2010 at the same time as exports to China, for the first time, overtook exports to Japan.

The rub, WRI also noted, is that Chinese customers paid almost $30 less per metric ton - or 15 per cent less - than Japanese customers.

David Brand, chief executive of New Forests, runs a company which has snapped up 500,000 hectares of forests and land from the ruins of MIS ventures and Gunns.

His firm forecasts that the volume of the Asian woodchip market will grow by up to 25 per cent in the next two to three years on the back of Chinese, and possibly Indian, demand.

New Forests also expects the Australian hardwood plantation estate to contract by about 40 per cent, with owners, including New Forests, choosing not to replant some areas.

Brand says that, ultimately, the company aims to produce the same amount of wood over a smaller area by increasing the yield of the plantations that remain.

‘‘Effectively for the world to become self-sustaining we’ve got to be able to increase productivity as opposed to try to clear more native ecosystem for production systems,’’ Brand says.

What does that all mean for the future?

Once the post-MIS rationalisation is complete, plantation owners might back themselves to claim an ongoing slice of growth in the Asian markets.

But it is unlikely the woodchip exports markets will return to their former glory for the native harvesters.

‘‘For a resource like the mixed species [forests] in East Gippsland we can’t complete on price and quality against the blue gum plantations. And that’s the reality, and that’s one of the reasons why we are looking at alternatives,’’ Trushell says.

Many in the industry are eyeing off technologies that may chew up large volumes of lower-grade wood and continue to support the harvesting of sawlogs.

Jim Henneberry, who ran Australian Paper until February, points to bioenergy – where pulp is burnt in furnaces to produce energy – and other processes of feeding wood fibre into products such as biofuels, solvets, chemicals and others products as a possible transition point.

He says these new technologies are not going to be dominant, but they can contribute to a much more profitable, sustainable industry.

In that vein the industry is pushing for the burning of native timber for power to be included under Australia’s renewable energy target, which is under review.

Others are hoping that by gaining certain sustainability certification – namely from the Forestry Stewardship Council that is favoured by green groups – they will again secure access to prime international customers, and at least lessen the social and environment conflict around their operations. Both Forestry Tasmania and VicForests are pursuing FSC accreditation to different degrees.

In a sign that the threat to jobs is real the Construction, Forestry, Mining and Energy Union is becoming more vocal in its calls for government to support for the sector.

For example it is pressuring the federal government to use Australian Paper products in government departments over imported paper. CFMEU national secretary Michael O'Connor draws a comparison to other struggling manufacturers.

"The majority of jobs in the forest products industry are in the sawmills and in manufacturing plants. And it therefore faces the same challenges that other parts of manufacturing face, which is high Australia dollar, increased energy costs, increased competition from imports," he says.

Judith Ajani, a senior fellow at the Australian National University's Fenner School of Environment and Society, says talk of transition for native timber is wishful thinking.

A close watcher of the industry for many decades, Ajani says it cannot survive unless it can provide a cheap, high-quality and reliable supply for chips and sawlog products at a commodity scale.

And she says it has proven unprofitable to do so. She says ultimately Australia’s timber industry will be virtually all plantation-grown, bigger and more productive than what has existed under the native-dominated model of past.

Those who believe in the native industry argue it provides benefits from the social value of job creation in rural towns to the benefit of having timber companies as land managers that prevent fires and weeds infiltration.

Another prominent argument is that plantation timber cannot replace so-called appearance products, essentially high-end, authentic furniture and hardwood floors made from native timber.

"There will be need for wood products from native forests - whether that is to offset land costs or whether there are particular products that you can’t get from international (markets) or plantations," says Ric Sinclair, managing director of Forest and Wood Products Australia

Sinclair says he believes the future of the Australia industry will be focused around a handful of highly productive regions, both plantation and native, supplying a mix of high-value, manufactured products and underpinned by meeting smaller domestic needs such as timber for bridges and power poles and eventually the potential new markets of power and bio-products.

To achieve this investor confidence needs to be restored and better use made of the existing resource.

Ajani believes a bigger issue hanging over timber is resolving the social conflict between the environmentalists and industry. That means the transition to plantations.

The role of government is critical, says Ajani. Governments own most of the native-log resource; they will decide if trees are burnt for power.

She argues that with the growth in plantations and the fundamental market restructure, the forestry industry is already enduring, and Australia is more than 80 per cent on the way to a new model. It will fall to policymakers to decide whether the final step is taken.

"It is the government’s role to end conflict in society. And it now has a practical way to do it," she says.

"The question for government is, why would they keep it all going?"

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