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Chinese/Australian venture launches United Forestry to become 'Fonterra of Forestry' so 14,000 smaller foresters can market NZ$30 bln 'wall of wood'

Chinese/Australian venture launches United Forestry to become 'Fonterra of Forestry' so 14,000 smaller foresters can market NZ$30 bln 'wall of wood'

By Bernard Hickey

An joint venture between an Australian forestry company and a Chinese logistics group has announced plans to launch a 'Fonterra of forestry' to buy cutting rights and land from New Zealand's 14,000 smaller plantation forest owners as they prepare to harvest a NZ$30 billion 'wall of wood' from trees planted in the early 1990s.

Superpen, a joint venture between Australia's Pentarch and Chinese local government owned logistics group Xiangyu Group, said it had formed United Forestry Group to offer shares in the group and/or cash to smaller foresters who wanted better returns and help selling their logs.

United Forestry Group Director Malcolm McComb told a media briefing in Wellington the group eventually aimed to buy the cutting rights and/or land for up to 30,000 hectares of forests that were currently in plots up to 1,000 ha each. It would be focused on smaller forests in the lower half of the North Island and the upper half of the South Island, he said.

United estimated around 40% of New Zealand's forestry exports would come from these 14,000 smaller forests, many of which were owned by inexperienced foresters with plots of less than 50ha and often lacking the contacts, expertise and experience to find contractors, log buyers, shippers and financing.

"Not one of New Zealand's competitors in the international market is sourcing their logs from thousands and thousands of small individually owned forests with resulting high costs, inefficiencies and inevitable weak negotiating position," McComb said.

He compared the plight of small foresters with those of small sheep, beef and dairy farmers, who had often banded together into cooperatives to gain those efficiencies and negotiating power. About half a million hectares of land in New Zealand is expected to produce 12 million cubic metres of wood per year within a decade as the forests planted during a forestry boom in the early 1990s grow to maturity.

United aimed to give the benefits experienced by big forest owners to a consolidated group of smaller forest owners.

"There is no certainty at all that individual forest owners will achieve worthwhile profits through their own efforts if they have no experience about how to harvest and market an asset which they planted as an act of faith several decades earlier," McComb said.

"They may attempt to organise a contractor to do the felling, arrange transport to a port of a sawmill themselves, and try to negotiate a price through an agent. However, failure to manage the significant costs that go with felling a forest and getting it on board a ship, coupled with a weak negotiating position with purchasers, can have an adverse impact on the hoped-for return," he said.

Pentarch is an Australian company formed in the mid 1980s and is the largest exporter of logs from Australia with A$200 million a year in turnover. Xiangyu is a local government owned logistics group with connections to buyers, ports and shipping interests.

McComb said Xiangyu's ability to coordinate the logistics and finance at the Chinese end of the supply chain added synergy to the venture. He cited the risks of demurrage, where a ship carrying New Zealand logs could be held up outside a busy port, costing thousands of dollars a day in 'demurrage'. Xiangu was able to help avoid those costs, he said. Logs exported to China were often used for concrete boxing in construction, packaging and some high end furniture.

'Local processing and listing'

United Forestry was not however focused on only exporting raw logs to China and wanted to maximise the value of forests if that meant selling to local processors.

United would offer forest owners a range of options, including just buying the timber or offering shares in United. McComb said it would produce any necessary prospectuses for these share issues as a private company, and may eventually list on the stock market.

The Pentarch/Xiangyu venture owned 60% of United Forestry, while a further three stakes of 10% each were owned by New Zealand investors, with the rest from smaller directors.

The directors are McComb, who represents Pentarch, Li Xiongwen from Xiangyu, New Zealand forestry lawyer and former National Party President Geoff Thompson, forestry consultant and forest owner Hamish Levack and former Fletcher Challenge Forests executive Kelly Coghlan.

McComb declined to say how much the investors had invested in the company.

Green Party criticises plan

Green Forestry spokesman Steffan Browning welcomed the idea of a New Zealand forest products cooperative, but not if it was foreign controlled.

“The bulk of forests are already foreign owned, and this initiative is intent on wrapping up the rats and mice of New Zealand’s remaining 14,000 small forests,” Browning said.

“National is driving New Zealand to be a low value commodity producer with ownership in foreign hands, and this is just another step in that direction. Already the vast majority of the logs leaving New Zealand are foreign owned as are all our major wood processors,”  he said.

(Updated with Green Party criticism)

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Kate, if I remember you have a forestry block on your land?  If so, what's your take on this.You may not be near harvesting yet, but I am interested in your thoughts on it.  

Hate to admit it, CO, but we sold the block .. it was too small to productively farm and too big to just enjoy the lifestyle. In other words, all upkeep, no profit (aside from capital gains, that is - unfortunate but true). 
I had registered the forestry block (26ha) for the ETS as I determined it was too small a holding to likely ever harvest at a decent profit. Not sure about this proposal - the reality is that much of the forested small holdings are (I suspect) on steep land with difficult access (like ours was) and that suggests uneconomic - I don't see the benefit in agregation. Sounds like the "profit" might be in selling the shares to the small holders.

sorry to hear you sold it, but for what it's worth IMO you've done the right thing.   Forestry is notoriously hard to liquidate for small owners.  The timing has to be right, the plot gets older, and the market can be volatile (as many people planted about the same time, and seasons tend to even things out as the investment is such a long time.)

And at least you didn't end up finding that come harvest time, all the value you'd built up got absorbed by the management and harvesting costs, as has happened to so many remote investors.

The theory of cooperative is sound but I think they'll run into the same political and profit issues that plague the red meat sector.  Coop profits are a long term thing, and a good co-op isn't going to make major profits for the middlemen for a long time.

it's getting to be the New Zealand disease.  As the asset starts to look good, we have to sell it off cheap, as we have no capital, because we can't work out how to develop a processing industry, and apparently don't have the skills to sell the product well.

Local processing adds too much expense.  Result is a product that no-one can afford to buy and still stay competitive ... hence my harping on about need to reduce cost of living/costs/etc

The phrase 'Fonterra of forestry' implies a dominant or near-monopoly position, but 30,000 hectares represents only a small fraction of the NZ forest estate. The proposal is not too much different from what companies such as PF-Olsen already offer.

No the phrase implies "many small owner-operators" co-operating together to create scale of processing feasibility and joint marketing penetration (as most smaller operators on their own can't fulfil the demand of larger customers).

The dominant part comes later, from doing it properly.

Just a thought but are we growing the type of trees that the world wants or could we grow a different type that would be in more demand thereby keeping the value of the product up.

Updated with Green Party criticism of foreign ownership and exporting of raw logs to China

We don't have a suitable cost structure to process logs. Better to have people on the dole and get the job done in Korea. NZ processed timber would be too expensive to sell anywhere except the already over priced local market.
 The next problem is that more and more we are moving to a cloned forest, with all our trees sharing a handfull of parents. Now that we have several new diseases and viruses, just how must risk are we exposed to?
 Thats why some of the big players are now growing Eucalyptus and Crypresses where there was once Radiata.

Agree re radiata logs. But I do think we should be doing more R&D into alternate, high value timber crops.
Did you see this article on one of your neighbours?
There are a lot of good points made in there.

No point doing R&D on higher value products if the OIO is going to sell out the base product facilities (land to grow rough logs) to vertical integrators.

With them doing that for a few labour employment opportunities and quick bux, we lose far more than just the value chain, we lose the whole industry

Thats a good point Cowboy. Perhaps in the future the only trees owned by locals will be the farm forestry blocks.  I try to grow enough trees for my children to be able to build their own houses with the timber, new building codes put a kibosh on that idea.
 I'm still planting trees every year.
 China is a confusing place perhaps confusion comes from confucius.

Kate, I'm noticing more and more the huge advantage of inheriting the farm young. Steve was in his early to mid twenties when his Dad moved to Coramandel. My dad was in his early twenties when his father retired.
   There are some interesting court cases going on locally where sons got a huge advantge over the daughters, the days of one son getting the farm and paying a bit of cash to the sisters appears to be gone and now a new stage begins.  Farming won't be the same again, unless values collapse.