NZ wood processors want their carbon, not your debt

Last week incoming Minister of Forestry Peeni Henare announced a NZ$57 million fund to invest in New Zealand’s wood processing capacity. Officials probably told him this is what the industry wants. It is not!

Unwritten in the Beehive press release and media articles was the fact that the local fund is just Debt. Well technically ‘equity investment’ is an option, but who in their right mind wants the hassle of a government minority shareholder. So, for all intents and purposes, NZ$45 million of the fund is just debt.

MPI developed the fund on the erroneous pretext that wood processors lack access to capital. They do not. Debt from banks, the Provincial Growth Fund and MPI’s SFFF fund have all been plentiful during the last decade. Very few took up the option. Now that the market is moving from boom to bust, why would a wood processor suddenly think this is the time to put their head in the debt noose?

No, we don’t need debt. Capital will flow easily to projects with ‘internationally cost-competitive margin and feasibility across the economic cycle’. Remember that phrase, because it is the test against which all ITP initiatives should be assessed.

MPI officials knew funding was not the issue in 2019, with their advice to Ministers noting: “Scion research indicates that access to capital is not necessarily the main barrier to investment in higher value processing, rather it is investor nervousness around the profitability of producing new products and entering new markets.”

So, if debt is not the answer, the question the government should be asking industry is; “What levers can government pull to level the playing field for wood processors so they can achieve this long-term feasibility?”

A very unlevel playing field

Enter the Australian announcement to support wood processing investment that happened to come out on the same day last week. Their government has given grant funding of up to AU$5 million each to wood processors, with the total fund exceeding AU$112 million.

It is important to understand what these grants mean in practice in the marketplace for New Zealand companies competing to supply Australia and competing with supply from Australia.

Firstly, I’ll lay out what is already a very unlevel playing field. New Zealand wood processors must compete using the highest cost logs in the world. Next, we have an expensive Tasman Sea crossing to fund, not helped by an overvalued NZ-AU exchange rate and onerous timber grading standards meaning we get less higher value timber per log than Australians. All this results in a higher cost structure than our Australian competitors.

Next, having got past all that, we need to compete with Australian mills and engineered wood product factories that are heavily grant funded.

Take for example the Australian Hyne sawmill – Xlam CLT supply chain, owned by the Hyne family, which has benefitted from AU$16m of grants over recent years. The grants mean the group does not need to factor this re-payment and interest cost into its product pricing in the marketplace. Effectively they can reduce CLT pricing by AU$4 million per year and be no worse off.

This equates to a 10% price drop on their A/NZ volume, or 20% should they focus their funding windfall on just their New Zealand volume. This is what actually happened in their CLT supply into New Zealand and explains why it is dangerous to invest in New Zealand by comparison.

Is it any wonder wood processing in New Zealand has flat-lined for the last three decades.

Carbon value of ‘Harvested Wood Products’ the answer

Okay, so what can New Zealand do about it? What levers can we pull?

Read more.
Source: NZH