Monday, 16 August 2010

Forest industry nonsense

Banks, shareholders and grower/investors have all been traumatised by their recent dealings with forest companies and they’re all reconsidering their position.

The only other major source of much needed capital for the industry are Governments, so it was not a complete surprise to see industry lobbyist Dr Amos launch such a spirited, if at times venomous response ( On TT: Beware of Academics Bearing Arithmetic, HERE ) to attention being drawn to the level of Government assistance already enjoyed by his industry.

If the arguments advanced by Dr Amos on this occasion are the same ones being presented to the Roundtable, it’s little wonder that progress is slow.

Talking about MISs Dr Amos said “the benefit of these schemes was provided to investors, as distinct from industry. Plantations were indeed promoted and planted under these schemes, but to argue that they are there by way of subsidy is a bit rich.”

That is a silly statement. It’s like saying the First Home Owners Grant is purely designed to help people pursue The Great Australian Dream and to suggest that it is de facto assistance to the housing industry is “a bit rich”.

Economics 101 will differentiate between legal incidence and economic incidence. Just because a subsidy is received by Person A the economic benefits might nevertheless accrue to Person B.

Aside from an occasional economist in the employ of industry at the time, there is no support for the view that MISs aren’t a form of assistance to the forestry industry. Why else do they lobby so hard for their retention? A benevolent concern for investors?


Dr Amos also trots out the sophist argument that whatever is the level of subsidy, as long as it’s less than the level of dole it makes economic sense. That is an even sillier statement than his MIS claim. This would mean every industry would be justified in seeking assistance up to the level of dole for each person employed. What about capital intensive industries? What a patently puerile proposition.

When resources stop flowing into industry A, they instead find somewhere else to go, say Industry B. To suggest that the economy is static and the only alternative to Industry A is the dole is just plain nonsense.

The simple fact of the matter is that the amount of assistance that a Government can afford is finite (although this election campaign may suggest otherwise), and accordingly it is incumbent for Governments to allocate resources where the return may be highest. The forest industry is yet to demonstrate that its returns fit this category. The need to prevent “social and economic misery to individuals, families and businesses around the State” applies to all industries not just forestry and to use it on this occasion is just emotive rubbish. He must be under pressure and is resorting to whatever arguments he can muster. Not surprising I guess, after all it looks as if he has ignored all warning signs and has driven his industry to the edge of a precipice.

It’s scary to read claims from Dr Amos that ”around $65 million a year to support an industry that provides an annualized return to Gross State product of around $1.4 billion…...... would appear to me to be a reasonably sound investment”. Since when is turnover a proxy measure of economic return? Do ASX Companies trade on a multiple of their turnover? Should we consider poker machine turnover to be a reliable measure of that industry’s value? It’s just another unsubstantiated claim. But it seems to follow the pattern of claims by the industry. Make sure it’s a BIG NUMBER. Don’t worry if it makes little sense. The reader won’t understand anyway. But they will remember a BIG NUMBER. And the BIGGER the better.

While on the subject of big numbers and Dr Amos’ slur that academic sceptics like Graeme Wells aren’t earning their keep, it may be worth revisiting what lobbyists like Dr Amos have been doing to earn their keep.

The FFIC, of which FIAT is the most prominent member, released The New Forest Industry Plan in February 2010. It is presumably being discussed at the Roundtable. I hope all participants have read it as they decide our future. It is largely a cut and paste from an August 2009 report by URS Forestry, a firm of forest consultants, titled Economic Impacts of Potential Forest Industry Developments in Tasmania.

The FFIC report is subtitled A Fresh Approach. Indeed it is. Pioneering in some respects as we shall see.

A table in the Report sets out an industry wish list of suitable processing plants for the New Forest Industry. These include a pulp mill, listed to cost only $1.45 billion. Capital investment, turnover and jobs created are listed. I have extracted the most relevant numbers in the following table. I’ve added the last 3 lines, the total final output, the total of the intermediate services and the resultant net earnings.


 ($ m)

($m pa)


New projects




Harvesting /cartage*




Support services*
















Final output




less intermediate services*








Project earnings net




The full FFIC report can be accessed here:

The new projects will require a capital investment of $2,130 million but will produce direct income of $1,260 million employing 885 persons.

So there can be no doubt about the income figure, the URS report says the “estimates of gross income presented in this report represent the value of output of each of the mills” (a pulp mill, hardwood and softwood sawmills etc).

The new projects will require harvesting and cartage contractors, 650 workers producing income of $240 million. This latter amount will be an expense of the various mills.

In addition there are another 1000 jobs, described best in the URS Forestry Report as “a conservative estimate for jobs as the employment multiplier is applied only to jobs in the processing operations.” The direct income from these jobs is estimated to be $1,000 million. That’s right, $1 million per job. The 1,000 jobs is a figure derived by standard industry multipliers, so it is claimed. The source of the figure of $1 million per job is not explained. But the jobs are in, or at least related to, the processing operations; at least we can be sure of that. They’re jobs within the forest industry that can only be supported by the income from the various mills.

Hence the additional processing related jobs plus the harvesting and cartage contractors will generate direct income of $1,240 million. Which must be an expense to the various mills which produce total income of $1,260 million. Which only leaves $20 million on the bottom line. Before interest and depreciation. Not much.

This industry plan is typical of such plans which talk about turnover not profits, sustainability maybe but never profitability. Without the latter what’s the point? The only solution is more Government subsidies. They’re not business plans but rather PR documents. If a PDS statement, an offer document to investors contained the misleading info contained in The New Forest Industry Plan, ASIC would demand a rewrite. The report deliberately uses confusing terms like ‘value added’ when ‘gross income’ is what is meant. For instance even though the income of the contractors and support workers of $1,240 million is an expense to the various mills which produce income of $1,260 million the 2 figures are added together and presented as $2.5 billion in value adding opportunities. How profoundly deceptive is that? Every $ earned and spent creates $2 in value adding opportunities.

A ridiculous notion.

The problem for the forest industry is that it might be difficult to raise capital for the various new projects when the proposed combined bottom line before interest and depreciation is only $20 million.

The industry has not only run out of ideas that work, it’s run out of capital.

All the talk about the search for a social license is nonsense. It’s capital that’s needed.

Banks are wary, shareholders shy, and grower/investors extremely reluctant to advance more capital.

Banks have all suffered from the failures of Timbercorp, Great Southern and FEA.

Shareholders have been dudded. Even the Gunns’ shareholders who are still ‘alive’ have suffered big losses. Capital contributions of $500 million over the last 3 years have been devalued by over 60%.

The recent reports from FEA’s Administrator suggesting that most of their grower/investors will be lucky to secure a return of their original investment after 10 to 13 years will hardly give them sufficient confidence to line up like Oliver Twist and ask for a second helping.

But it is the nature of the industry structure that is of most concern to the industry at this stage.

In the same way that MIS schemes allowed for a lot of “hot” money (speculative money in other words) to flow into their industry, come harvest time it can just as easily flow out.

Digress for a moment.

The East Asian financial crisis of 1997-98 was exacerbated by all the “hot” foreign money that flowed into the area suddenly deciding to retrace its steps. The “hot” money flew out and caused all sorts of problems.

Similarly with MIS schemes. “Hot” money flowed in as investors were persuaded by the wisdom of their financial advisors to invest in trees.

But come harvest time it is likely to flow out. It is likely that most MIS investors will take whatever MIS proceeds fortuitously land in their laps and reinvest them outside the forest industry.

If crops were owned by forest companies, then harvest proceeds, however meagre will be used, as retained earnings, to help reinvest and maintain that forest company.

But in the case of MIS schemes the harvest proceeds could well be lost to the forest industry at harvest time if investors invest their proceeds elsewhere.

So not only will the industry have to find the $2.5 million to fund the new capital works proposed by The New Forest Industry Plan, they will have to find another $500 million if existing MIS investors ‘withdraw’ their funds.

Whilst MIS schemes were undoubtedly responsible for the rapid growth of the host industry, their inherently flawed structure contains the seeds of destruction of their host.

At this stage the mere slowdown of funds into the industry has caused major problems.

As yet we haven’t seen major outflows.

But that’s only because harvesting hasn’t occurred in most cases.

If outflows occur it will place the industry in a difficult position. How will new plantations be funded?

The FFIC Plan has convinced me of one thing, which is followers of the Doctrine of Immaculate Conception still exist. Replacement trees just happen. It is not known who will pay for them.

This is despite the numbers from say FT’s Annual Reports which show, for instance that the net proceeds from its half share, with GMO, of our publicly owned radiata pine plantations are insufficient to plant replacement crops.

What’s going to happen with say the plantations at Surrey Hills, behind Burnie, where MAIs are between 8 and 10 tonnes per hectare per year. Who’s going to replant those crops, if indeed they ever grow to harvestable size?

To expect a couple of foresters to design a business plan for the forest industry when questions of cash flow and profitability of a complex industry are well beyond their areas of expertise, suggests that FFIC is living in a world of illusion.

All grower/ investors I talk with are dissatisfied with the current structure of the industry and the returns they are receiving and many are thinking of quitting.

It’s said money speaks all languages. The only words I’m hearing as it heads for the exits are au revoir…..... auf wiedersehen…........ adios.

No comments:

Post a Comment