Monday, 8 February 2010

Another forest industry plan

The Forest and Forestry Industry Council FFIC have recently released a 106 page report detailing their Plan for the future: The New Forest Industry Plan: HERE

Most credible plans will attempt an analysis of the past before attempting to outline a future course of action. The description of the past is skimpy and the analysis non-existent. It’s a little hard to give credence to the new Plan built on these foundations.

There is, however, one conclusion that is very revealing.

“Sawing trials have concluded that E.nitens plantation stock is unsuitable for, and uneconomical as, a source of wood for appearance grade sawn products. This is because of the considerable degrade associated with the seasoning process (in particular, surface checking and unrecovered collapse). .............. Unless these challenges (associated with processing plantation timber) are overcome, a large proportion of the current Tasmanian hardwood production industry is unlikely to be able to profitably or sustainably process plantation sourced logs into high grade products.”

Basically, FFIC has led the industry up the wrong path. Or maybe I should say the path that FFIC has been following is now known to be the wrong one.

But there’s more.

“The Plan recognises the need to establish a peak, representative industry council to take responsibility for ensuring implementation of the actions at the State level. The current Forests and Forest Industry Council provides a model for establishing such a contemporary body that reflects the current operating environment and has responsibility for working with all stakeholders to implement, monitor and report on the plan into the future.”

Trust us. Despite being a prominent cheer leader all the way up the incorrect garden path FFIC should nevertheless be given responsibility for providing future advice to Governments. That’s what FFIC are saying.

What has the Plan to say about the current state of the industry? Not much that assists a reader in trying to understand the industry’s woes. On p 3 it says

“Since the signing of the Tasmanian RFA in 1997 a total $2.34 billion has been invested by the forest industry in Tasmania, the majority in rural and regional areas. Acquisitions and
major new processing investment in the forest sector has been more than $1.4 billion. In addition around $800 million has been invested in new greenfield plantation establishment (nearly 150,000 hectares hardwood and 6,000 hectares of softwood plantation) and around $140 million in research and development.”

Wow! $2.34 billion. Was it money well spent? A little more detail would be helpful. What’s the breakup of the $1.4b in new processing facilities? How many new jobs? How many old jobs lost? What sort of investment? What facilities? What has been the subsequent turnover? Profitability? Labour productivity? What has worked and what hasn’t? What old facilities have died and need updating and replacing? Give us a better picture so we understand the rationale for the New Plan.

With regard to the funds spent on new plantations, the implication is that $5,000 per hectare was spent. Does this include land purchases? Presumably it does as it costs less than $2,000 per hectare to plant. Explain how the location and the growth rates of these plantations led to the identification of $2.5 million worth of investment opportunities. How much land? Is this to be the way forward in the future? More land purchases?

The latter fleeting reference to the plantation industry over the last 12 years is bordering on the farcical. The MIS industry has not been mentioned at all in the entire report. One would have expected a detailed analysis of MISs, what happened and what this implies for the future. But not a word. It’s a little like reading a history of the Third Reich without encountering any mention of the Holocaust.

Or maybe FFIC have accepted the sophist scribblings of Professor Felmingham who provided them with an academic rationale for distancing the forest industry from MISs by stating in his recent report for the forestry industry on p 12 that “(t)ax concessions or other forms of favourable tax treatment are not included because they are not necessarily paid to the industry directly or indirectly. In some cases (they) are not designed to facilitate the operations of an industry…… it is quite appropriate to disregard (MISs) as a subsidy paid to industry when they benefit investors only.”

The importance of MISs to growth in the forest industry over the last 12 years cannot be overstated. MISs provided extra cash flow to forest companies. They raised capital and gained access to a resource they controlled.

It was an unbelievable bonanza.

But what is life going to be like after MISs? How will the industry fund the next rotation when commissions from the first crop fall well short of expectations? Or will they? FFIC doesn’t tell us. Commercial in confidence I suppose.

We learn a little about the reduction in the number of sawmills since the introduction of the RFA, but no analysis of why and the possible future implications. Is the current structure of the industry such that it provides the best springboard for future growth? Or have the FFIC recommendations been designed to maintain the current structure? Can the industry that has had such an enormous boost from the Twin Rivers of Gold, woodchipping and MISs, and has palpably failed to build a solid sustainable base for the future, and which now has its hand extended seeking further Government assistance, be treated seriously. They should of course be part of any negotiations but it is clear that if the forest debate is to progress towards common ground there has to be a little more Truth and Reconciliation. In that order.

The glossy FFIC report disguises the fact that some of the major players are far from stable. Without wishing to trawl over each Company’s financial health some comments need to be made, as their current positions reflect the influences of the last 12 years and inevitably must be considered in framing future policy. To not do so is being a little untruthful by omission.

Take FEA for example. If judged by its MIS crops, admittedly only a few paddocks, it knows how to grow trees. But it has yet to make the transition to a fully integrated forest company. MISs were FEA’s life blood. The Great Southern and Timbercorp shakeouts affected FEA with an 80% fall in MIS sales in 2009. FEA found itself in breach of its banking covenants (they owe $200m) and hence all the debt became due and payable. Which FEA was unable to do. Being unable to pay debts as and when they fall due meant FEA was insolvent. Were it not for the recent equity injection supported by Chinese interests from Hong Kong the undertakers would have been summoned. And even now the banking covenants remain temporarily suspended, until 19th February, to enable negotiations with the banks to continue. So they are not out of the woods yet.

I hope they survive, without the need for too many yuan, but their plight is indicative of the state of the industry which needs to be aired before any future plans are finalised. FEA’s major asset is land acquired during the MIS gold rush. Their current net tangible assets are about 35 cents per share but they are trading at under 6 cents per share. A big chunk of farmland trading at an 80% discount!

FEA’s difficulties prompt the question of the economics of their new sawmill that has a capacity to process 650,000 tonnes of timber, especially in view of FFIC’s recommendations that more large processing plants ( sawmilling, engineered lumber products, hardwood plywood) be built. What are the economics of these larger plants compared with smaller plants? Capital costs? Labour productivity? Where are the intended resources for these plants located? What are the ingoing freight costs? (It must be noted that FFIC’s plan still contains the Tamar Valley pulp mill.) Why did the Plan recommend certain processing plants and not others?

The Plan itself outlines $2,495 million of investments (including $1,450 million for the pulp mill) producing annual income of $2,500 million ($750 million from the pulp mill) and employing 2,400 (the now familiar number of 290 direct jobs at the pulp mill is included).

Income from both direct and indirect activities are added together to arrive at a figure of annual income of $2,500 million if all investments nominated by the Plan eventuate (see table 2 on p 23).

But there appears to be a case of double counting.

New harvesting and cartage equipment of $365 million together with additional support and services (the indirect jobs) will produce annual income of $1,240 million (of the total of $2,500 m). In my experience, this income is a cost to the plants employing their services and shouldn’t be added to the plant’s income to calculate the overall income.

Maybe the predicted annual income should only be $1,260 million. That’s what’ll be included in GDP figures.

If this is true, the profitability of the Plan looks a little shaky. Only $1,260 million of income but $1,240 million worth of harvesting, cartage and other indirect expenses. Which leaves a profit of only $20 million pa.

I stand to be corrected, but that’s the way it reads to me.

The Plan does mention the losses of existing jobs due to the industry’s need to restructure. But no attempt is made to quantify these losses. The casual reader could be left with the impression that jobs created by the Plan will cause overall job numbers to increase by the number of new jobs. But this is not the case. If past patterns are repeated the industry will continue to suffer overall job losses. The Plan suggests little to the contrary.

However an overwhelming feeling of incredulity is likely to envelop a reader when trying to find any risk analysis. The path taken since the signing of the RFA is unequivocally stated to have been ill chosen. But what are the risks associated with the New Plan? What if short rotation E Nitens is found never to be suitable for processing other than for woodchips? What if the pulp mill doesn’t eventuate? What happens if MIS’s remain on investors’ unwanted lists? What value adding is planned, if any, to specifically cater for older age native forests, even just the privately owned forests, once woodchipping is no longer an available use? What is Plan B?

FFIC’s suggestion that they become the premier source of industry advice for Governments should be declined. If we were interested in charting a future course for grocery retailing in this country it would be prudent to consult a little further afield than Coles, Woolworths, and their shareholders, employees and a few suppliers.

Why not restore the public service as the premier source of fearless independent advice on the forestry industry? What’s a better alternative? The role of FT also needs to be reviewed if we’re serious about seeking a fresh approach. Poor old FT is hopelessly conflicted. It inevitably has to spend a fair bit of time in the cot trying to please its major customer, but then it has other roles as well, providing 300,000 tonnes of sawlogs each year, attending to all its Community Service Obligations, its tourism ventures, its other joint ventures, and its research role. Arguably it’s not doing any of them very well.

The Auditor General has expressed concern about some aspects of FT, its inadequate accounting for the separate parts of its business, and the fact that some CFA funds, specifically earmarked for certain projects, has been used to cash flow its general operations. Were it not for CFA funds and also the unused line of credit with the Government, FT may well have joined FEA on the endangered list.

While on the subject of the Auditor General, in his recent report to Parliament on Private Forests Tasmania PFT he felt the need to remind our elected representatives that the objectives of PFT “are to facilitate and expand the development of the private forest resource in Tasmania for commercial purposes and to maintain a healthy and productive rural environment in a manner consistent with sound forest land management practice”.

Whether any of the intended target group bothered to read the AG’s report is another matter.

A fresh approach to forestry still needs a lot of work. The FFIC Plan didn’t help much. It’s just another glossy addition to the relentless polemical debate, and from all indications the output of the PR department, no doubt timed to coincide with the forth coming election, should the issue of the future of forestry become an issue.

It’s not a credible Plan. It doesn’t explain what has happened, it doesn’t canvas any other options than those presented, and it does that with inadequate justification.

It needs a rewrite.

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