Westpac's Paul Clark assesses the prospects for the important, complex forestry sector, finds China demand likely to wane, local processing lacking advantages, and issues with both sustainability and carbon emission timing

This is the executive summary of a Westpac Industry Insight report on forestry and wood processing. It is here with permission.


By Paul Clark*

This report focuses on New Zealand’s forestry sector which is concerned with the sustainable management of commercially grown softwood forests, the harvesting of these forests at maturity and the processing of harvested logs into primary products, ranging from sawn timber and wood panels (veneers, particleboard and fibreboard) to pulp and paper.

The sector is important to New Zealand – logs are our 3rd biggest export earner. It’s a big employer, especially in deprived rural areas, where commercial plantation forests are typically found and employment prospects are often limited. Direct contributions to New Zealand GDP are, however, less impressive, with a steady decline being evident when expressed in percentage terms.

The sector is complex. The days of having a vertically integrated industry where forest owners manage their own forests, harvest them and process them, are long gone. A growing realisation that plantation forests are an attractive asset class for investment has helped to drive this change globally, as well as in New Zealand.

The forestry sector is characterised by a large number of investors who directly and/or indirectly acquire the rights to manage forests, either by owning the land on which forests sit or by leasing it from others, such as Māori, who have become significant owners of forestry land following the successful conclusion of Treaty of Waitangi settlements. Those that acquire the rights to manage land typically appoint a forestry manager to plan and coordinate forestry and logging operations using a range of contractors to undertake the work and transport logs, either to domestic mills for further processing, or to ports for export.

The number of logs produced in New Zealand has accelerated in recent years, while production of sawn timber has grown at a more measured pace. The production of particleboard, veneers, plywood, pulp and paper have all trended downwards, while fibreboard has seen marginal gains.

Most of the logs harvested in New Zealand are exported, with the vast majority going to China. The rapid pace of urbanisation and growth in disposable income levels in that country have been key drivers. So too, reduced import tariffs on logs and subsidies given to Chinese sawmillers by their Government.

It’s a slightly different story for sawn timber. Although exports to China are significant, most of the sawn timber produced in New Zealand is destined for the local market. In recent years, demand has been driven by the rebuild in Christchurch and increased residential building activity in Auckland.

The decline in local production of wood pulp and paper mainly reflects the impact of technology, which has reduced demand for some types of paper such as newsprint and a selected range of writing papers. However, it’s also increased demand for other types of paper. An acceleration in online shopping, for example, has driven demand for more packaging paper. Increases in population have also supported domestic demand for hygiene paper products, such as tissue paper.

A key feature of the New Zealand forestry sector is that it exports a large chunk of what it produces. This is particularly true for low value products such as logs, but less so for higher value processed wood products, such as sawn timber, wood panels and paper products. The opposite tends to be true for the world’s largest forestry product producers. These countries, which produce far larger volumes than New Zealand, tend to have a higher export propensity for value added products.

The domestic wood processing industry argues that New Zealand should follow suit, and successive governments, mindful of the development and job creation possibilities in deprived rural regions, are publicly at least, sympathetic to this argument. However, this doesn't take into account the fact that New Zealand is a very small economy, it is geographically distant from key exports markets, and would have to compete against wellentrenched competitors if it were to shift its focus from logs to processed wood products. Given this, the most profitable segment for the industry to operate in is probably forestry rather than wood processing.

So for now, the focus is on logs. Chinese demand has driven up prices and global supply has tried to keep up by harvesting more trees. In New Zealand, this has been good news for forestry owners, forestry managers and contractors, but not so for sawmillers and downstream processors, who find themselves competing for logs against heavily subsidised counterparts in China. Having been unfairly priced out of the market, local sawmillers argue that they are unable to secure the volumes required to reduce their unit costs of production, which means higher costs and a lack of overall competitiveness. This is despite the fact that some larger forest owners/managers are known to divert logs that would have been sent offshore to local sawmills at slightly below market price.

Furthermore, not all domestically harvested logs are suitable for sawmilling in New Zealand. Industry sources suggest that they are often too small, or do not fulfil stringent quality specifications and grading requirements that apply in New Zealand. By contrast, Chinese sawmillers are less fussy.

Skyrocketing prices for logs can have some negative consequences – not least of which is the temptation to harvest trees before they reach maturity. The industry hosts many small forestry owners who can be vulnerable to pressure from fly-by-night forestry managers looking to harvest forests before maturity when prices are high. This is particularly true in places like Northland, where overharvesting has reached a point where the region is likely to experience a significant drop in harvest volumes over the course of the next decade.

The problem here, of course relates to the sustainability of forestry. A large swathe of forests in New Zealand are set to be harvested over the next 5 years or so as they reach maturity. The fear is that by cutting down less mature trees now to cash in on higher prices offered by the Chinese, harvesting may exceed tree growth and forestry could end up adding to New Zealand’s carbon emissions in coming years potentially making it more difficult to reach New Zealand's target of being net zero carbon neutral by 2050. The current government’s “One Billion Trees” planting programme is unlikely to fully offset this given the timeframes involved.

Another issue is the volatility of log prices due to changing global demand and a tendency for supply to over- and undershoot. When prices decline, harvesting activity tends to fall and this can have a significant impact on contractors, who are often small, cash flow dependent outfits, saddled with debt after having invested heavily in capital equipment when prices were high. Left for any period of time, these contractors will leave the industry when times are bad, with no guarantee that they will return when prices start to rise.


Paul Clark is the Industry Economist at Westpac NZ. The full Report can be accessed here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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25 Comments

Is there not some prospect for NZ hardwood as opposed to softwood forestry? Silver Beech, Tawa for example are more than acceptable for exterior finishing, decking etc and flooring. Why import? Why not export? A sapling and a few square metres of vacant ground is all it takes. Then plenty of time to watch things develop from both a production and market perspective.

I assume the market would be huge and lucrative - a real niche, value add product. But the investment horizon is too long for private investors/foresters I suspect, and then there is the lack of ability to process the wood onshore. Hopefully this new department that has just been launched will be thinking about new foresting/planting of future harvestable natives. If anyone should do it, it should be the Crown on Crown land.

If they launched a government forestry bond, for example, I'd buy them for all the grandchildren - a real win-win prospect for future generations and for the environment.

Yes Kate - totally agree. And it just seems at odds we import Kwila, Purple Heart & many other exotic hardwoods from deforestation, when we could have our indigenous timber available and appreciated.

You should all study the history of processing indigenous timber on the West Coast which supplied much of the Rimu for domestic framing and plywood for many years.

Very viable - A big investment in plywood and timber mills was made by Fletcher's at multiple sites.

Just got going with all approvals when Crown did a 180º and withdrew all harvesting approvals. Yes - ended up in court and paid compensation but no investor in his right mind would invest in processing based on Crown land.

Here endeth the indigenous processing industry.

Thanks yes recall we had a house built in 1976 with exactly that timber, it was actually called, if remember correctly, red pine. Assuming the government of the day, Labour? stopped milling of existing natural forest?

And so it should, from natural, diverse forest. If we wish to have a native timber industry then we need to grow it separately from any natural forest.

Yes PA agree & so does Kate. But as JB contends a joint venture between private and government on government land could be dicey given political contingencies that might rule one day in the future. Māori enterprise and venture might be a good alternative though.

We used to have a world class Heli logged rimu industry before Labour banned it - and replaced it with Indonesian sourced clear felled Quila. Helping fund oil palm conversion. Nice work do gooders. The planet is so much better off.

To rub salt into the wound the law was enacted retrospectively doubly rooting the west coast sawmillers. What sort of despot enacts retrospective legislation?!

Any future native forest harvesting is so weighed in bureaucracy as to be impractical/loss making.

A few companies like foreverbeech/Lindsay and Dickson hang in there but hard to compete with tropical land conversion.

To be fair i seem to remember at the time Southland Rimu forest was being chipped and sent to Japan.

Yes, I recall it. That of course was the harvesting of naturally grown timbers (i.e., native forests with all the varied biodiversity attached to them).

What I am advocating for on Crown land (and in particular Crown land that has been converted to pasture) is a form of limited/monoculture new plantings, or reforestation with the intention of harvest 80-100 years in future. A very different proposal than harvesting the last remnants of our existing native forests.

Huge difference.

No. Heli based rimu logging kept all the biodiversity and pays for pest control. Trees were assessed every 15 years an around 4 taken out on a pre-empting mortality basis. Taking out 4 trees in a 15 ha block every 15 years maintains the stand and pays for pest control, jobs etc. a win-win.

A greenie could not tell the difference between a heli logged stand and a non logged stand. Trying to find four stumps in a 15ha grid is not easy for the uninitiated - especially if it was logged ten years previous.

A lot of biodiversity is in the wolf trees which for whatever reason are not suitable for harvesting and left in perpetuity.

Now compare that system to oil palm logging clear fell sourced logs - logged in jandals and shorts - which is what replaced this timber for NZ. A do gooder, fact free, disgrace for NZ. A good example of outcomes from our shallow, activist based media and political class.

Cannot quite recall but was there not claims that the system you describe was being abused. Not saying the complaints had any foundation, so was it simply that the wrong people got listened to for some political expediency?

When DOC was formed the vast majority was locked up, a few % were assigned for clear fell. Unfortunately in a misguided effort to end that clear fell early the sustainable forest management forests like the hei logged ones were thrown under the bus. All to appease people who couldn't (or wouldn't for political purposes) understand the difference between sustainable forest management and clear fell.

A much better outcome for NZ and the globes forests was the sustainable forest management system of rimu heli harvesting was maintained. You can have your forest and eat it. Giving much more money for pest control and sustainable jobs for Coasters. ... and wood for Redcows projects.

Kate, thanks for the links highlighting the shallow standards of the media and political class "Pressure by environmentalists persuaded the Fourth Labour Government..." Would have been a much better outcome to use science to decide outcomes. This was all about uninformed urban votes not the environment. Labour - champion of the worker and founded in Blackball - should have provided some leadership and analysis - not run their policy based on what sounds good in the suburbs. Boy doesn't history repeat.

I'm no fan of clear felling rimu but surely you can see sustainable forest management and heli harvesting can maintain biodiversity, maintain jobs and provide revenue for pest control?

Absolutely I can. If, as you say, what had been going on with respect to heli-harvest of fallen and diseased timber got thrown under the bus, that was dumb. But the bus itself (that being an all-out ban on clear fell and/or 'sustainable' harvest of healthy trees in Crown owned native forest) wasn't on the wrong road, in my opinion, as bringing that native forest into the conservation estate needed to happen.

I do wonder with Kauri die back whether felling the trees that are diseased would have any positive impact on preventing that from spreading.

I hate to see history rewritten. That Herald article shows how misinformed Clark was. 97% of native forests were locked up when DOC was formed so the forests were, to all intents, already "saved". Adding 130,000ha to conservation estate is negligible to the conversation estate but the jobs that the 130,000ha could have provided if it was sustainably managed is substantial - especially to the West Coast.

Done properly you can have your tourism, conservation and heli logging combined. It was sad to see it go. I would have sooner seen 5% or 10% go to the sustainable managed system and 0% to clearfell. DOC could have funded itself and the sawmills could have kept going. There are a few examples of it around but it could have been much more significant with government support on the day - and perhaps a more informed media.

Thanks Profile. Good enlightenment, pleased to learn about it.

Some years ago on the West Coast I saw that Russian logging helicopter, the bloody thing was massive, rotors at both ends, I think it was what was proposed could be used to log these big rimu. I cannot imagine how that would have been viable given the eye watering per hour cost of it, it wouldn't be long before those doing this logging would want the ante upped. Also older rimu have a tendency to go dozy from the middle while still standing, loggers would want to be sorting out the best trees obviously, leaving the dozy ones to fall over by themselves thereby increasing the amount of trees lost in the forest.
If you recall some years ago in the Haast area a big tornado ripped through a stand of rimu near the Waiatoto River. On examination much of that wood was dozy and unusable, although it probably was a shame that Sandra Lee, at the time, would not allow any recovery of that timber.

It works pockets. Viable to heli log radiata in current market. Just have to be well organised.

I hope that the investment turns out to be better than the Forestlands debacle thats going on at the moment.

The research has been done, and there were options, but of course all that was squashed and buried with the advent of the Labour government 1984.
We can grow pine to harvest in 25 years, its low value and will never be recognised as anything else overseas, so growth rate is our only advantage and commodities are our market.
The aforementioned research threw up plantation Red Beech as about the best possibility, it has a turnaround of 60 years. Dense, durable(without the need for nasty chemical treatment) and strong though it does require a from of heat processing to dry. But i guess 60 years is reeeeeally long term thinking for todays economy.
Id add that i have a bias toward native timbers as I used heaps of second hand and new Tawa, Matai, Rimu, Totara and Kahikatea to build our house a few years ago and it is so much nicer and easier to use for specific purposes than exoctics. I also made a coffee table out of a red beech log years ago, it is a beautiful timber. I really want a dinning table made out of it, next project.

Was at the Mount yesterday and couldn't believe the circumference of some of the logs on trucks and rail wagons.
They were small,.only big enough it appeared to me to be considered for poles.
Where are our big trees?

The small logs come from the top of the tree..! Also plenty of farmer stands were not thinned properly/at all so best thing for them is to knock them over at 20 and start again. The author stating immature stands are being knocked over is not quite accurate as an unthinned stand reaches peak growth much earlier than a well managed stand. When to harvest depends on a lot of factors not just stand age. Owner age is a big factor too!

We currently import posts/poles from Australia to meet local demand.

Watched Simon Reeve travelling thru the worlds largest forest in Russia on Prime last Monday.
Trees were tall but they were thin as a fence post.