Newsletter - June 2003


Here's a Newsletter on some forest related matters sent to our investors recently, which may interest you.

Fletchers See The Light. Will Carters?
At last we may have some intelligent decisions coming out of the big corporate forestry companies, so poorly bereft of them for so long. Fletcher Forests are going to sell their forests and concentrate their capital and debt on wood processing industries. It is likely that foreign pension funds and specialist forest investors will buy the forests. This is the way it should be, and largely is abroad.
I apologise if this is a recurring theme for me but it is a real battle getting this message across when journalists and financial commentators in this country are so poorly informed.
I hope Carter Holt Harvey will be next to realise successful wood processors and manufacturers do not need to own forests. The only problem is that when they make losses in future, they will not be able to fudge the reasons for them by blaming perfectly acceptable log prices. They need to decide whether they are forest owners or fibre processors and then concentrate on maximising the value of one or other activity. The two are in conflict. A wood processor wants cheap good quality logs whereas a grower wants to grow high priced ones. CHH have deliberately tried to grow low quality logs for low cost processing but also for sale. That's like farming sheep for dags!
Plantations are almost inevitably profitable because a tree's almost exponential biological growth provides capital growth. This remains true for even very low log prices. And growing forests is deliberately all our partnerships are designed do. No debt, no factory, no staff, no board of directors, no market speculation. But no income until sale or harvest. Clearly a listed public company is going to find that hard to live with. So why do they bother, they should leave it to specialist growers.

Builders Blame Their Tools
Well not their tools exactly, nor most builders even. In fact this headline is misleading! It should be 'Building Regulators Blame Wood for Incompetence'.
Like many others I have watched without much surprise as some in the building industry try to move the blame for the leaky building debacle to someone or something else. They'll blame the weather next! Really it's a very simple issue eh? Poor building design and techniques and poor regulation of poor builders. The materials used are of no relevance at all. Yet now we hear of a proposal to make it compulsory to treat all framing timber, whatever the type and however it's used. Presumably the idea is when lousy building work is done now, it will take a few more years for the wood to rot so the builders or inspectors will have more time to avoid liability.
I wish the powers that be would bang a few heads together and tell them old truths remain unchanged: New buildings that leak are badly made.

Exporters Demolish Wall of Wood
As in 2001, harvest volumes have increased considerably again and so have exports of forest products. Forest products totalling NZ$3.71 billion were exported last year, an increase of 2.4% despite the rise in our dollar and increased costs. This was 12.5% of NZ's total export receipts.
A majority of the harvest is still being processed here before export. There is no general over-supply. Some grades are more sought after than others at any particular time so prices change accordingly all the time. The 'composite' log price changes only slowly so returns to growers are more stable.
Things are less stable for some processors. The power price rises in the last year have actually suited some processors but not others. Those efficient mills with the capacity to generate their own power (and surpluses) from residues have benefited greatly. Modern mills are being built which are fully energy self-sufficient and old ones are closing down. Some new mills can consume huge volumes of logs when run at full capacity so a concern for them is whether growers can supply them with enough.

I have heard credible speculation that a key reason CHH did not mind having its paper mill closed for so long until recently was a serious shortage of the low grade logs it needs for that plant.

Environmental Facts Favour Plantations Not ENGOs
Greenpeace does not like plantations. They are not sure we should be allowed to call them forests. They say they are even-aged monocultures and clearfelling is unnatural. Of course worse still, some are owned by multi-nationals! Forest and Bird is in two minds about them. On the one hand they like them because they substitute for wood from 'natural' forests here and abroad, but they agree with Greenpeace about nasty big companies and monocultures etc. The Ecologic Society is more balanced. They regard them as good so long as they are economically, socially and environmentally sustainable, which almost all in NZ are of course.
Personally I think many ENGOs are unsustainable and bad for the environment. Dinosaurs were similar, they made a lot of noise, were quite destructive and eventually died out, thank God.
Nature actually favours monocultures and whenever a species can, it tries to create one. A majority of the earth's natural forest area is virtually monoculture. Mixed rain forest is not predominant. Think of Beech forests or tussock country. Are they criticised for lacking species diversity? Good plantations are thinned and contain many species until late in the rotation. As for periodic clearfelling, think of the effect of a major wind storm, land slide, forest fire or volcanic eruption on natural forests. And what happens next? The forest returns, usually as an even-aged monoculture.
Anyway we are not covering this country in plantations, it is a relatively minor land use. The largest forests by far in NZ are conservation estate and reserves, and they are growing in area all the time. Unfortunately they are riddled with destructive pests, which so-called environmentalists should be devoting most of their attention to.

'Pestimists' Worry while Optimists Grow
We like to worry eh? It's in our nature and nature would have extinguished us by now if it weren't. Think of SARS and WOMD for example. A few months ago quite a lot of news would have had us believe if the world does not end in an orgy of nerve gas, botulism and radiation very soon then the latest form of Asian flu will get us next time we go in a lift or eat out!
It's the same with growing things. There is always some over excited scientist egged on by an under-educated journalist reporting imminent death or destruction. Bugs and killer funguses are 'out there' and they could do us some serious damage. But that is the case with life in general. Such things are largely in the realm of the unpredictable or unknown, so we cannot make calculated decisions based on them. All we can do is get on with it and grow the best crop we can. This is as it's always been and although of course we need to be aware of actual biological hazards and do what we can to avoid them, I reckon the end is not nigh. But if I am wrong, we're all doomed so it won't matter!

Long Term Financial Trends Favour Forests
I have been reading quite a lot of doom and gloom about economics myself actually. The National Business Review and Economist tell us that the real long-term returns from the whole basket of financial assets are low and going to stay that way. Equities, bonds, cash, insurance, you name it. Even property very shortly will fall. Inflation is gone and deflation threatens. Private debt has mushroomed and because of demographics, governments will not be able to pay future pensions without 'unelectable' tax rises. We may not be able to retire at all!
But this may be good news really because they tell us working keeps the mind and body healthier when older. Those of us who have diverted some of our savings into forests at least have the comfort of knowing all our eggs are not in the same basket of financial assets.

Charles Etherington
The views expressed above are mine, not necessarily those of Warren Forestry Ltd. All feedback or requests for sources will be most welcome.

Warren Forestry Ltd, New Zealand forestry investment provider
Warren Forestry Ltd, New Zealand forestry investment providerWarren Forestry Ltd, New Zealand forestry investment providerWarren Forestry Ltd, New Zealand forestry investment provider