Carbon accounting & FT profitability

As FT contemplates its future, a future free of government subsidies, its rolling 3 year production plan for native forest harvesting has been posted on line.

Almost all the planned coupes are small in size and disparate in location inevitably increasing the extraction costs of timber, thereby making a return to profitability even less likely.

Notably included in the current 3 year plan is the clear felling of a 51 hectare coupe FD 053A at Lapoinya in NW Tasmania.

FT privately suggests harvesting the coupe will be a profitable operation. This is a rare occurrence for FT which, on average loses $20 for every tonne of timber harvested or $250k in cash terms for a coupe this size.

It is therefore a little surprising FT bypassed the opportunity to showcase its profitability and sustainability bona fides and release a little more info about a alleged profitable operation, one that needs to be replicated across many coupes if FT is to survive the current insolvency period currently overseen by the head of Treasury as a newly appointed director of FT.

The Friends of Lapoinya Action Group (FLAG) has engaged with FT with a view to fully understand what is planned. However the perfunctory community consultations have raised more questions than answers.

As part an overall economic assessment of the coupe FLAG undertook a carbon audit to ascertain likely carbon losses from a clear fell operation.

Carbon audit

All above ground biomass was measured in 8 sample plots comprising 4 ½ % of the coupe.

The carbon content of the coupe was estimated to be 267 tonnes per hectare.

FT indicated the proposed harvest would remove 12,500 tonne of timber. This will leave 206 tonne of carbon per hectare after harvest.

The most recent Direct Action auction established a price that the government is prepared to pay for carbon abatement.

That price was $14 per tonne. Many of the successful projects at the auction were already underway, others would have been undertaken regardless, so there is a feeling the price at the first auction will rise as the government finds itself required to pay more in the future to achieve the same result.

Nevertheless we will use the figure of $14 per tonne, the amount the government is currently prepared to pay for carbon abatement, as the extra environmental/social costs of logging the coupe.

It is sometimes claimed, quite legitimately, that a lot of the carbon that leaves via harvested timber, will end up in the atmosphere. Very little will be preserved as furniture, say.

Also considerable below ground carbon may be lost when coupe clearing and burning occurs.

Hence the carbon loss of 206 tonnes per hectare and the carbon price of $14 per tonne are arguably conservative estimates. These estimates imply carbon costs of clear felling of $3k per hectare.

Coupe revenue

FT expects to harvest 12,500 tonnes of logs, 14% sawlogs, 34% peelers and 52 % chips.

FT has a brief opportunity to add a little value to chipping logs as it is now an exporter in its own right. The Resources Minister has flagged a cessation of this area of activity for FT, with FT withdrawing to become purely a log producer

Applying averages obtain from FT reports suggest the net revenue from this coupe after harvest, carting and chipping to be $5k per hectare.

Coupe expenses

The costs of roads and bridges, described as maintenance when FT applied to National Parks for permission to upgrade the access road to the coupe located on reserve land, was suggested by FT to be only $90k. Others with experience in this field are highly sceptical of this low figure.

Burning and regeneration, FT has indicated, can be done for $51k. Because of the myriad assortment of streamside reserves and buffer zones simply unleashing an Enola Gay assault won’t be possible and a higher cost is likely according to old hands.

Nevertheless we will use the lower estimates.

FT does not operate on the margin, supplying timber when and where it’s demanded and maximising prices where possible.  Its hands are tied by virtue of the statutory need to supply 137k tonnes sawlogs often with long term contracts and the contractual requirement to supply 157k tonnes of peeler billets to Ta Ann. FT’s about a nimble as a hippo on stilts.

It’s not unreasonable therefore to apply wage costs for the proposed coupe on an average rather than marginal basis.

FT produces roughly 1.5 million tonnes of timber pa. One of its goals for 2014/15 was timber production per employee of about 6,600 tonnes. Given the proposed coupe is 12,500 tonnes and wage costs per employee (FTE) are $90k, the wage cost of the coupe is estimated to be $170k.

FT also has miscellaneous overheads but these are roughly offset by sundry income amounts and ignored for the purpose of this exercise.

Coupe costs will therefore be at least $311k or $6k per hectare.

Cash profit

With net revenue and costs of $5k and $6k per hectare respectively, the cash loss is $1k per hectare.

As already noted  the expected loss for a coupe of this size obtained by applying the average across all FT coupes, is $250k or $5k per hectares

The coupe might be better than most but it still appears to be a cash drain. Even worse if the costs of roads, bridges and regeneration are more than expected.

Accounting profit

The value of standing timber is an asset of FT. If it is chopped down and sold the write down in the value of asset in an expense.

For an insolvent entity like FT even if makes a cash profit, which it can’t do currently and is unlikely to do for a few years at least, almost certainly it will make an accounting loss after including the fall in value of clearfelled coupes, in this case from $200k say, or $4k per hectare, to zero.

It is important to understand FT's dilemma. Even if cash profits can be restored, the accounting loss from the write down of clearfelled assets will lead to a shrinking balance sheet.

Imagine FT as an operation that has been bequeathed a shed full of Queen Anne furniture. Selling items each year may lead to a few pesos in the bank but the writedown in the value of inventory each year will ensure it makes an accounting loss. Especially if it continues to log slow growing juvenile forests like the Lapoinya coupe.

A writedown of $4k per hectare will convert the $1k cash loss to a $5 k per hectare accounting loss.

Social loss

Adding the carbon cost from clear felling as calculated above of $3k per hectare to the accounting loss gives a social loss of $8k per hectare

Summary

Leaving the coupe standing has a carbon value of $4k per hectare.

Clear felling the coupe will lead to

·       a cash loss of $1k per hectare

·       an accounting loss of $5k per hectare

·       a social loss of $8k per hectare

Regardless of whether one believes in climate changes the fact that a market price for carbon exists as a result of Direct Action means areas of native forest must be reassessed as potentially having a much greater value than that reaped by FT as it currently operates.