27 September 2001
Australia and New Zealand Banking Group Limited
A.C.N. 005 357 522
INDUSTRY BRIEF
Wood and Paper Products – NZ’s ballooning forest harvest
Slowing demand for logs, timber and pulp is likely to remain the dominant influence over the coming
eighteen months. While ballooning timber supplies will provide some support to export volume these will
require a considerable increase in investment expenditure (including the development of roading and port
infrastructure) if processors are to take on increased quantities.
Scope: Includes manufacture and processing of:
• Sawmilling, woodchips for export and pulping
and fabricated wood (38% total sales);
• Joinery, containers, pallets, prefabricated and precut buildings (16% total sales);
• Pulp, Paper and Paperboard (34% total sales);
• Paper/ Paperboard containers (12% total sales).
$NZ(million)
2,000
1,750
Exports
1,500
1,250
1,000
750
Major Players: Carter Holt Harvey, Fletcher
Challenge Forests, Rayonier, Weyerhauser, Juken
Nissho, Nelson Pine Industries, Tasman Pulp & Paper,
Pan Pacific, Winstone Pulp, Norske Skog (purchased
Fletcher Challenge Paper), Wilson and Horton, INL,
Amcor Packaging (NZ), Kiwi Packaging.
Industry Structure
There are around 340 sawmills in New Zealand, many
small with only 42 producing over 20,000 cubic metres
annually. Most sawmills produce primarily structural
timber products. However, there has been a trend
towards appearance grade products as a result of an
increase in availability of high quality pruned logs.
This has been reflected in strong growth in the US
market which is New Zealand’s highest value market,
importing dressed and dimension timber and
mouldings. This is a relatively young industry which
is adding further value to sawn timber through a
number of processes to produce products such as
mouldings, components and laminated products. In
contrast to US exports, sawn timber sold to Australia
tends to be primarily bulk shipments of framing
timber, while shipments to Japan are dominated by low
quality packaging material, often in flitch form. There
are fourteen major panel board mills1 producing
Quarterly Wood and Paper Products Sales
500
Domestic Sales (excluding imports)
250
0
1997
$NZ(million)
2,000
1998
1999
2000
Quarterly Real 1 Wood and Paper Products
Sales
1,750
Exports
1,500
1,250
1,000
750
500
Domestic Sales (excluding imports)
250
0
1997
1998
1999
2000
around 1 million cubic metres of particleboard and
fibreboard as well as a number of small companies
manufacturing speciality veneer, plywood, and
LVL products. Four pulp and paper companies2
produce some 1.4 million tonnes of pulp and
900,000 tonnes of paper (mainly newsprint) and
paperboard annually.
1
Juken Nissho (Kaitaia); Fletcher Wood Panels (Kumeu); Fletcher Wood
Panels (Penrose); Carter Holt Harvey Panels (Kopu); Fletcher Challenge
Forests - Plywood (Mt Maunganui); Carter Holt Harvey (Tokoroa); Fletcher
Wood Panels (Taupo); Juken Nissho (Gisborne); Juken Nissho (Masterton);
Nelson Pine Industries (Richmond); International Panel and Lumber
(Greymouth); Carter Holt Harvey Panels MDF (Rangiora); Carter Holt
Harvey Panels (Christchurch) and Rayonier New Zealand MDF (Mataura).
2001
2
Carter Holt Harvey, Tasman Pulp and Paper owned by Norske Skog
(following the sale of Fletcher Challenge Paper to Norske Skog),
Winstone Pulp International and Pan Pac Forest Products.
2001
2
(March Years, $million)
Domestic Sales
(%change)
+ Exports
(%change)
= Total Sales
(%change)
(real % change)
1997
3,908.8
1,677.2
5,586.0
1998
3,796.8
-2.9
1,711.2
2.0
5,508.0
-1.4
0.6
1999
3,546.4
-6.6
1,873.6
9.5
5,420.0
-1.6
-2.9
2000
4,405.6
24.2
2,105.4
12.4
6,511.0
20.1
17.6
2001
4,473.4
1.5
2,532.6
20.3
7,006.0
7.6
-1.3
Quarterly Manufacturing Survey: The following
sections draw on the result of the March Quarterly
Manufacturing Survey. The value of wood and paper
product manufacturing increased 7.6% in the year
ended March. However, strong price rises over this
period meant that the quantity of product being sold
actually fell 1.3%. While this appears to be a fairly
steady result, the reality of the situation in forest
product markets has been much harsher. As a result
New Zealand firms have cut back production, for
example Carter Holt Harvey has temporarily shut its
Kinleith pulp and paper plant and indefinitely
mothballed its Mataura mill.
Nevertheless, the
Quarterly Manufacturing Survey revealed the
following trends for wood and wood product
manufacturers:
• Nominal sales of pulp and paper exhibited strong
growth of 22.6% in the year ended March 2001,
despite unfavorable pulp and paper prices in the
later part of the period.
• Sales of wooden joinery, pallets and prefabricated
wood products were the only category to decline,
falling 3.3% in the year ended March.
Domestic sales broadly static: The value of domestic
sales rose 1.5% in the year to March 2001, despite
declining during the last 6 months of the period. Price
rises meant that real domestic sales declined 6.8% for
the year. The NZ wood products manufacturing
industry supplies over 80% of all NZ purchases of
wood products.
Domestic sales in all categories other than “pulp and
paper” declined. Saw-milling and wood chipping sales
had the largest decrease, falling 9.7%. “Pulp and
paper” sales rose 21.8%, partly meeting the 22.7%
increase in the domestic market size.
Export sales rise strongly on back of lower $NZ: The
value of NZ wood product exports continued to
increase strongly during the year ended March, rising
20.3%. Exports have been growing solidly for more
than three years, with all categories showing some
steady increases over this period.
• Exports of paperboard containers were in decline
until mid 1999, but have rebounded strongly and
increased 52.9% in the year ended March.
• Exports of pulp and paperboard rose 23.9% in the
year to March, following a slight decline over
the year to March 2000.
• Growth in exports of wooden joinery and
pallets was 12.1% in the year to March, a
slower rate of annual increase than that seen in
the last 18 months.
• Exports of wood-chips and sawmill products
continued the constant growth seen in the last
four years, increasing a further 18.5% in the
year to March 2001.
Strong export growth in the face of weakening
markets for logs, timber and pulp largely reflects
the impact of the fall in the $NZ on domestic
returns. Trade data indicate there was also a
modest growth in export volumes overall.
Imports (mainly pulp and paper) around 20% of
domestic sales: The percentage of domestic
purchases supplied with imported product rose
slightly to 19.2% during the year ended March.
While New Zealand production rose 7.6%, the
majority of the increased output was exported. The
net result was 4.7% growth in the domestic market
during the period:
• Imports of pulp and paper products rose 24.4%,
similar to the rate of growth of the domestic
market (+22.7%). Pulp and paper product
imports accounted for 56% of NZ pulp and
paper product sales and 68% of all wood
product imports during the year to March 2001.
• Annual domestic purchases for all other
categories declined slightly. Despite this,
imports of wooden joinery and containers rose
9.1% and saw milling and wood chip products
imports rose by 12.7%.
Lower $NZ reflected in continued improvement
in the industry’s bottom line: The industry
aggregate operating surplus continued to increase,
rising 24.3% for the year ended March 2001,
reflecting the impact of the lower $NZ on export
returns. Several years of growth have followed a
sharp fall in profits following the Asian crisis. The
industry’s operating surplus as a percentage of
sales increased to 13.4%. Significant restructuring
and consolidation in the industry has contributed
to recent results and is set to continue with the sale
of Norske Skog’s Tasman Pulp plant to Carter
Holt Harvey, owners of the Kinleith pulp plant.
This has required the Commerce Commission to
review its definition of “monopoly” for
commodity products competing in an international
market. Like the Fonterra Global dairy company
decision, this will open up further opportunities
3
for consolidation in the industry. Profitability has
been aided by:
• Continuing increases in labour productivity which
increases 11.2% for the year ended March.
• Operating cost increases have been held down.
However a 1.5% decline in costs during the March
2001 quarter (over the March 2000 quarter) was
matched by a 1.7% fall in sales.
• Fletcher Challenge’s Pulp and Paper division
signed a deal with a kiwi publishing consortium
earlier in the year to provide newsprint for a five
year period (the Pulp and Paper division has since
been sold to Norske Skog who on-sold the Tasman
kraft pulp manufacturing business at Kawerau to
Carter Holt Harvey). The deal was worth in
excess of $100 million annually and was designed
to reduce volatility in prices for both the supplier
and purchaser. The contract followed a period
when world newsprint prices at one point rose
from $US470/tonne to $US656/tonne in the space
of a year.
(March Years, $million)
Production
(%change)
- Inputs
(%change)
- Salaries and Wages
(%change)
= Operating Surplus
(%change)
Imports
(%change)
Investment
(%change)
Hours Worked (000s)
(%change)
Average wages/hour
1997
5,577.3
4,252.0
947.9
377.4
710.0
474.8
53.6
$17.68
1998
5,519.0
-1.0
4,189.2
-1.5
961.0
1.4
368.8
-2.3
1999
5,403.0
-2.1
4,020.9
-4.0
916.0
-4.7
466.1
26.4
2000
6,541.0
21.1
4,795.1
19.3
989.0
8.0
756.9
62.4
2001
7,082.0
8.3
5,126.4
6.9
1,015.0
2.6
940.6
24.3
763.2
7.5
645.6
36.0
54.7
2.0
$17.57
830.5
8.8
288.0
-55.4
49.5
-9.5
$18.51
883.0
6.3
255.5
-11.3
52.0
5.1
$19.02
1,061.7
20.2
409.0
60.1
51.5
-1.0
$19.71
Sharp rise in electricity prices will squeeze margins:
A five-fold increase in (spot) power prices prompted
by low hydro-lake levels sent a shock-wave through
the manufacturing sector over the winter. Pulp
producers’ bottom lines will be particularly hard hit as
electricity accounts for up to one-third of the cost of
production. Pacific Forest Products cut pulp
production by up to 60% after facing a two-fold
increase in its monthly power bill to nearly $5 million.
Carter Holt Harvey reportedly spent $4 million more
than budgeted on electricity between April and June,
and forecast the cost impact to continue into the
September quarter
Investment: After significant decreases in the annual
level of investment during 1998/99, expenditure on
fixed assets increased 60% in the year ended March
2001 to around $409 million dollars. This remains
below the peak of $645 million for the year ended
March 1998:
• Investment in sawmilling and wood chip plants
more than doubled, while investment in
wooden joinery, pallet and prefabricated wood
product manufacturing increased 64.7%.
Capital expenditure information for other
categories was not available.
• Investment occurring includes Carter Holt
Harvey’s recently completed laminated veneer
lumber (LVL) plant in Northland (expected to
increase export earnings by $70 million per
year) and Japanese owned Nelson Pine
industries plans to build an $80 million (LVL)
plant in Nelson.
Outlook: From mid 2000, New Zealand producers
experienced significant slowing in demand for
logs, timber and pulp and this is likely to be the
dominant influence over the coming eighteen
months. Demand from Asia has fallen particularly
sharply. On the other hand ballooning timber
supplies will provide some support to export
volumes. These offer the processing industry
significant opportunities for expansion, but will
require a considerable increase in investment
expenditure (including the development of roading
and port infrastructure) if processors are to take on
increased quantities. Remaining timber will be sold
as unprocessed logs, which despite remaining
virtually static over the past twelve months are
likely to increase as a proportion of total forestry
sales. Currently around 30% of wood harvested is
exported as logs.
Even with more late cutting of trees stock levels
are expected to rise steeply as exports struggle to
absorb the sharp rise in harvestable volumes (“wall
of wood”), given a broadly static domestic market.
However, the impact will be largely borne by
foresters, rather than manufacturers.
Margins for sawmillers are thin and profitability
will remain variable. Modest recoveries in the
New Zealand and Australian building industries
should be sustained, despite the global slowdown
and should act as a counter to weaker markets in
the US and Asia.
New Zealand’s solidwood packaging industry has a
number of competitive advantages, including the
suitability of pine for packaging uses, price (at
current exchange rates) and availability of product.
However, the key Japanese packaging sector is
expected to remain in a slump for the foreseeable
future.
4
Global overcapacity will continue to put downward
pressure on prices for particleboard and fibreboard
through 2001 and 2002.
Pulp prices have fallen sharply since peaking
in mid/late 2000, they may now have troughed
USD/tonne
1000
900
800
Bleached Kraft
Pulp
700
600
500
400
300
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Source: Datastream
Pulp and paper operators are ‘price takers’, with the
price cycle driven by cyclical demand (generally led
by demand conditions in the Europe, North America
and Asia) and volatile supply conditions determined
by the extent of world over-capacity. Newsprint and
linerboard prices tend to follow pulp, but are more
moderate in their movements.
Further pulp downtime is expected around current
prices, and indeed will be needed before prices
start a gradual recovery.
Some of the benefits of lower pulp prices have
been passed on to paper prices, although paper
prices have held up better than pulp prices. Endusers are said to be carrying low stocks in the
uncertain global environment indicating that
supply/demand fundamentals could tighten quickly
if the market turns.
Obviously the industry would be in a much poorer
state without the benefit of the falling Kiwi dollar
on domestic returns. At the time of writing the
Kiwi is languishing around $US0.40 as shocked
international investors focus on the major
currencies at the expense of “peripheral” countries
such as New Zealand. With the New Zealand
dollar likely to remain soft in the near future at
least, the currency will continue to provide some
support to export returns. Nevertheless, sales
revenue growth from here-on in will be hard to
achieve. A sharp increase electricity prices over the
winter has compounded an already difficult
environment.
Pulp prices have fallen sharply since peaking in
mid/late 2000 and demand continues to be very soft
John Bolsover
internationally. However, there are indications that
NZEconomics@anz
producers prices are now below production costs and
Ph: 64-3-496-8757
that supplies internationally will tighten, bringing
e-mail:[email protected]
supply and demand towards a better balance and
lending support to prices around current levels.
________________________________________________________________________________________
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5
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