Dileepa Fonseka
Wellington, June 6, 2020
A new Bill has forest owners fuming, but it could be the tip of the iceberg for them if New Zealand First are re-elected to Government
Forest owners feel blind-sided by a Bill before Parliament, but more changes could be coming.
Forestry Minister Shane Jones said that the owners of forests have not lived up to their end of a social contract to grow the domestic wood processing industry.
He signalled that they could expect harsher treatment next term if New Zealand First were re-elected to government.
Reversing exemptions
That could start with reversing forestry’s special exemptions under the Overseas Investment Act, and could see New Zealand First could join forces with National after the election to make that change.
“Is it sustainable to give foreign forestry investors an exclusive free pass under the overseas investment criteria? That is the political question. The National Party believes that they should no longer have that privilege,” he said.
National Party Forestry spokesman Hamish Walker said his Party opposed the Bill and the way it would interfere in the free trade of logs, but he was glad Jones appeared to be signalling a re-think of the Overseas Investment Act “carve-out.”
“If we are lucky enough to govern post-September 19, we will certainly be looking at the ridiculous carve-out rules which incentivise foreign owners to plant trees, often on productive land,” he said.
Unfair trade
A steady tension has been building between forest owners and Jones over the shipping of logs to China. Some in the wood processing sector – who turn logs into products for the construction industry and others – have said that log exports had come at great cost to New Zealand’s own manufacturing industry.
We are China’s largest supplier of logs and supply over a quarter of their market.
That lucrative trade has not been a fair one according to advocates for wood processors who allege that China generously subsidises its wood processing industry allowing them to pay an artificially high a price for our logs then process them offshore to on-sell as higher value products.
Wood Processors struggle
Wood Processors and Manufacturers Association of New Zealand Chief Executive Jon Tanner said our wood processors struggled to match the prices Chinese buyers could pay and that had led to the demise of six wood processing facilities in six months.
Adding fuel to the fire are the geographic origins of the different industries involved.
Wood processors employ people onshore and are an important source of employment in some rural areas. On the other hand, a large proportion of our forests – who profit most from the log trade – are owned by offshore interests.
Industry analysts and economists are sceptical of the claims of those wood processors and Jones.
To them, we are not processing more logs domestically because our wood processors do not have the economies of scale to compete.
One economist said that if we removed the Chinese market from the equation our country would simply be left with an oversupply of logs.
“I will force them to harvest’
As Forest Owners Association President Phil Taylor tells it, the Bill caused alarm within his membership because it had unfolded in a similar way to a warning Jones had issued to the group’s members shortly before lockdown.
At the meeting, one forest owner told Jones that if he put in place measures to restrict the export of logs or their price owners of forests simply would not harvest them.
He said that in response, Jones said: “I will use emergency powers to force them to harvest.”
Caught by surprise
On the evening of May 14, 2020, they saw that vision come to life when Jones introduced the Forests (Regulation of Log Traders and Forestry Advisers) Amendment Bill under urgency – catching forest owners by surprise.
“I think that the Minister is being a little bit disingenuous when he says that we are barking at shadows here,” Taylor said.
Opposition MPs pounced on it as having been introduced without the industry having seen its contents. Critics included Todd Muller (pre-leadership change).
“Mr Jones says this has been out in the field for a number of years, that he has had close conversations with the forestry sector,” Muller said in Parliament.
“Well, they have not seen it. In fact, they are only going to get briefed on it tomorrow….he has the audacity to come and say that all this now can be discussed, debated at a select committee, and reported back in three weeks. That is arrogance in the extreme, and we are seeing yet again the fusion between a man with the particular view on a model—he wants to see an economic model that he controls rather than the free market.”
While the Bill’s title and purpose of regulating log traders and forestry advisers seemed relatively tame one a specific clause – 63ZZC – has attracted the ire of forestry owners:
“The forestry authority…may set standards for…sale and purchase agreements for domestic transactions or exports; and (iv) other sale and purchase requirements”.
In this part of the Bill, critics have seen the possibility for the Government to give domestic wood processors first right to access the log supply before overseas buyers can bid for it.
How many logs do we need?
We harvest around 35 million cubic metres of logs every year. From that, 15 million (42%) is sold on the domestic market to wood processors (sawmills).
The rest is exported, of which China is the major customer (consuming approximately 80% of our log exports). Most of the logs processed here end up exported as products like paper or medium-density fibre-board.
The processed goods that are not exported are largely used for residential construction.
That market is relatively safe from overseas competition because regulations passed after the leaky homes saga meant timber used for home construction had to be specially treated to prevent the build-up of fungus and “Auckland brown rots”.
Opponents of the Bill argue that the fact that most of our logs are exported is evidence that there is no shortage of logs for our domestic wood processors.
Price, an issue
However, Wood Processors and Manufacturers Association Chief Executive John Tanner said the issue was one of price. Wood processors had to pay high prices for products harvested locally – prices he alleged were higher than those paid by competitor mills overseas who had constraints in place on competition.
“What we are trying to do is achieve a fair price in the market for the raw materials. When that happens, everything else behind it can then grow,” he said.
Westpac Economist Paul Clark said that he understood the need to build up domestic processing capability, especially in the wake of Covid-19.
“The problem here is the local processing industry is essentially the second port of call. The first port of call is the export market. China is by far our biggest export market for logs. It creates a dependency so if they catch a cold we go down as well,” he said.
However, local competitors had higher processing costs than the big mills in places like China and Russia. Most of those mills could operate at that scale because they had a constant stream of logs and very generous state subsidies.
Jones admitted that we could never match that level of state support, but forest owners and investors could play a bigger role.
New Zealand First’s stand
“We need a situation where foreign capital is employed in such a way that it boosts productivity and it leads to the development of our nation. I don’t know of a single voter who thinks it’s a good idea to expand the profit and loss statement of foreign investors, but hollow-out our nation.”
“Our Party’s never going to agree with that. Ever.”
Director of forestry consulting company DANA, Dennis Neilson, said that we had 60 sawmills and three of them would be able to meet the entirety of our country’s current sawn-timber requirements.
That was not the evidence that we needed more domestic wood processing, but that we already had enough to meet market demand, he said.
“In fact if they worked a few more shifts on Saturday morning they’d oversupply the market. Sending more logs to mills…it might increase the supply [but] it won’t increase the demand for wood in New Zealand because it’s already oversupplied,” he said.
Boost demand instead
Lifting demand is what Red Stag CEO Marty Verry believes Jones and the Government should be focusing on instead.
Their mill has not encountered problems accessing a supply of logs although he acknowledged there had been shortages in other areas like Northland.
Action needed to be taken to counter the large state subsidies put in place by China, but those would be better dealt with by duties and tariffs, he said.
A wood-first procurement policy for building projects, already green-lit by the Government, would do a better job of encouraging more wood processing onshore.
Also, China had already set itself the goal of eliminating its dependence on foreign logs by 2040, Verry said.
In other words, the Bill had been built for a problem that was beginning to solve itself.
“The big question is: is there going to be demand local for wood and what can the government do to focus its attentions on that instead of making sure that the odd sawmill that is short now gets all the logs it needs?”
Dileepa Fonseka is a Political Reporter for Newsroom based in Wellington. The above has been published under a Special Agreement.
