More mills will close – Op-ed

There’s a lever the government’s not pulling to support the wood processing and forestry sector. It’s also a key to reducing emissions, hitting Paris obligations and saving the taxpayer hundreds of millions.

Both parts of the broader forestry sector are now struggling. The chickens have come home to roost on forestry’s over-reliance on China’s property market. Activity there is off 30-40 percent and set to slip further. China took 80 percent of New Zealand export logs. The sector needs to replace it with a strong domestic processing base it can rely on.

However, the local construction industry is getting down to activity levels last seen following the Global Financial Crisis. There is around 40 percent excess capacity in the sawmilling sector now and prices are back 10 percent. The 28 structural timber sawmills are slogging it out in the market.

In this economic environment, mills running on part shifts with low margin is a recipe for further closures. Expect two or three more announcements in the next year or so. The South Island is particularly over-supplied, and a closing there would give margin reprieve for the rest of the mills.

What to do?

Interest rates will stop the slide sometime next year or 2026. We’re calling for a 1 percent OCR cut at the next review. There is no use doing it in 25 basis point steps if we know it needs to drop 3 percent this cycle, inflation is under control and the economy is on its knees.

The government has two key policy levers also. Each relies on recognising the role wood processing has in providing carbon-negative building materials. The world can literally build its way out of the climate crisis when it comes to the 20 percent of carbon emissions caused by construction. However, policy and regulation will be required.

Building for Climate Change – urgently needed

The first policy is to ambitiously implement the Building for Climate Change programme. It will provide the regulatory stick required to make building product suppliers de-carbonise their products.

MBIE is well-advanced in planning its implementation, and in June over 50 organisations signed an open letter calling for its roll out. They included BRANZ, CIBSE, Engineering NZ, New Zealand Institute of Architects, Sustainable Business Council, Infrastructure New Zealand, and the New Zealand Green Building Council (NZGBC).

To date, government has not prioritised it. The industry though recognises that regulation is the only effective lever. Indeed, it has made solid steps to de-carbonise with the prospects of regulation on the way. That momentum could be lost now.

Government thinks it can use encouragement and rewards, instead of regulation. “They’re dreaming” said one colleague. We’ll see. An estimated 8 percent of global emissions are caused by each of the steel and cement industries. The government is hoping they de-carbonise, but its second Emission Reductions Plan draft concedes that these types of hard-to-abate sectors will continue to emit through to 2050.

That forecast will be correct without the Building for Climate Change regulation. Its implementation will provide a major demand source for the wood processing sector. Its products are literally made from CO2. Many progressive developers and project teams are now enthusiastically embracing wood and particularly engineered mass timber.

Nothing tells staff, clients and suppliers that a company cares about sustainability than it being based in a stunning building made of mass timber.

The Fisher and Paykel Appliances global headquarters currently under construction in Auckland epitomises this. It is using LVL, glulam and Cross Laminated Timber (CLT) from Red Stag TimberLab. With regulatory support, mills will scale up investment, builders will become more familiar with wood solutions, and construction prices will converge on equivalent to traditional materials, or less.

The government needs to trust that this dynamic will unfold and to encourage it, rather than continuing to focus on what is cheapest now, even if it’s also costing the earth later.

The sector will react to the demand-signal and invest. We estimate up to $1.5 billion. Red Stag alone has $250 million of potential investments and could contribute an additional 637,000 tonnes of carbon storage to 2030. That alone would save New Zealand $38 million from its Paris commitment bill. It is weighing up whether to make these investments here or in Australia. Much comes down to policy settings that support the business case for investment.

Harvested Wood Products (HWP) – help on the way

The other policy that will save the sector is to develop a scheme to recognise the carbon storage in wood products with NZUs that wood processors can then trade on the ETS. Forests sequester carbon from the atmosphere, but wood products store it for decades or centuries.

Few people realise that around one-third of the ‘Forestry sector’s’ carbon storage is actually due to wood processors making investments to lock that carbon away. HWP value is incorporated in our Nationally Determined Contributions accounting and our Paris targets. So, it’s legit.

Yet wood processors do not yet receive any benefit for this carbon storage, despite investing in additional processing since the HWP baseline year of 2009, in the expectation that they will be treated equivalently to forestry in the ETS one day.

This week Climate Change Minister Simon Watts told conference attendees “We need to be cognitive of any removal option outside of exotic pine that is available to us. If it reduces emissions, we can measure and validate it scientifically legit; then we should be able to get some form of credit for it.”

That is Harvested Wood Products.

Both National and Act have election promises to develop a scheme to reward such wood processors for these recent investments and encourage more. Industry and officials are close to finalising a scheme under Forestry Minister Todd McClay’s leadership.

These two policies have the potential to address climate change and ensure a resilient wood processing and forestry sector. Without them, stand by for more global warming, higher Paris bills, more mill closures and decimated rural communities.

Source: Marty Verry, Group CEO, Red Stag Timber