Forestry
As was discussed in Annex One, large numbers of trees were planted through the late 1980s and the 1990s. These trees will be reaching maturity over the next ten to fifteen years. This will provide the raw material for growth in the earnings of the forestry sector. The “wall of wood” will arrive at a time of growing global demand for wood and wood products. A number of domestic and international factors will determine what it costs to extract and process the wood, and the prices it will fetch on the international market. These are discussed below.
Domestic Factors
Energy price increases and security of supply issues are key uncertainties for wood processing facilities, which are heavy users of energy. The price of energy is expected to continue to increase in New Zealand from what are, by world standards, low rates. Reasons include the increased demand for electricity by domestic consumers, and for energy more generally internationally (including oil), uncertainty over our gas reserves, plus the new carbon tax which applies from 2007.
Areas such as Northland and the East Coast, which have low populations and significant areas of forests planted, suffer from poor transport networks. These transport problems will be exacerbated as forests mature over the next decade. The government is investing significant funding in improving the roading infrastructure in these areas. This investment will take several years to complete.
Forestry faces labour and skills shortages at various stages in the process (silviculture, truck drivers, processing). These will become more acute as the wall of wood comes on stream.
New Zealand’s domestic climate change policies will present both threats and opportunities to the sector. Forest sinks play an important part in the Kyoto Protocol’s accounting, and the large amount of afforestation through the 1990s has aided New Zealand’s net emissions position in the First Commitment Period (2008-12, “CP1”).
Under the Kyoto Protocol, countries gain credits for afforestation. The flip side of this is that harvesting and deforestation entail liabilities. The government has decided not to devolve credits to individual forest owners. Similarly, owners of Kyoto forests (i.e. those planted from 1990 onwards) will not face any liabilities for deforestation. Owners of non-Kyoto forests will also not face any liabilities, so long as deforestation remains within a cap of 21 million tonnes of CO2 equivalent, which is equal to deforestation of 10% per annum through CP1. The government does not expect the cap to be breached – historical deforestation rates are 2-4% per annum. However, if the cap looks as if it will be breached, the government will take steps to manage deforestation within the cap. This will include determining whom to attribute liabilities to (i.e. the landowner or the leaseholder, in the case of forests grown on leasehold land).
The forest industry has been critical of the government’s policy on deforestation liabilities. It has argued that the uncertainty around whether and how liabilities will be attributed is a significant disincentive to investment in forestry, and hence a hindrance to future growth.
Domestic climate change policy settings for forestry post-2012 are unclear; these will become clearer as negotiations on future international climate change commitments proceed. If the value of forests as carbon sinks is to be included in production and investment decisions, the forest industry needs to receive appropriate signals.
Pest incursions pose serious biosecurity threats to the forest industry, with Asian gypsy moth and painted apple moth being examples of recent threats. As our international trade and transport links with other countries increase, so does the risk of an incursion. Having our forestry interests concentrated on one species – pinus radiata – increases the potential damage that an incursion may cause.
At present the industry is fragmented and lacks a cohesive structure. There are a number of representative groups covering various parts of the production process (such as the Forest Owners Association, the Farm Forestry Association and the Timber Industry Federation), but attempts to establish broad representative bodies (such as the Forest Industry Council) have only been partially successful. This has made it difficult for the industry to work together cooperatively on industry good matters, and to engage with the government on policy matters.
The forest industry also faces infrastructure challenges. There has been underinvestment in capital, particularly processing, which will need to be addressed as increased volumes of wood become ready for processing. The forest estate is dispersed throughout the country, which underscores the importance of roading and regional processing facilities.
International Factors
International market conditions play a key role in determining the prosperity of the New Zealand forestry industry. On a number of fronts, recent conditions that are outside the control of New Zealand have not been favourable: commodity prices have been generally low, the exchange rate has been particularly high, and the cost of transport has been especially high. The latter has been largely a result of China’s rapid economic growth driving up demand for shipping, but is also related to the increased price of oil. This has increased the cost of getting our forest products to market. These higher transport costs are expected to continue.
Worldwide demand for logs, lumber and panels is expected to strengthen over the next few years, though New Zealand’s ability to respond will be somewhat tempered by processing capacity constraints. The expected movements in international prices for wood vary across product categories, but over the next few years they are generally not expected to rebound from their current weakness. New Zealand may well also face stronger competition from other forestry exporters.
More work is required to address tariffs and technical barriers to trade in forestry products. Efforts are being made in bilateral and multilateral trade liberalisation, and work is being done to get radiata pine certified to building standards in various countries, including China.
Mining
On the demand side, as mining output is often an intermediate input to other production processes, demand for output is often related to demand for other products. So as demand for dairy and forestry products increases, demand for fertiliser increases; and as general economic growth increases, demand for aggregates for roading and infrastructure increases.
On the supply side, the mining sector has the potential to provide a significant increase in the country’s economic growth performance going forward. Studies by the Institute of Geological and Nuclear Sciences have estimated the value of New Zealand’s metallic mineral stocks at $86 billion (Christie and Braithwaite, 1999). Much of this cannot be accessed at present, as it is on land of high conservation value, such as national parks, where mining is effectively prohibited. Nearly 40% of the country’s metallic minerals cannot be accessed for this reason, and a further 35% is potentially subject to veto by the Minister of Conservation (NZIER, 2004).
If these metallic mineral resources could be accessed, this would allow a rapid increase in mining’s contribution to GDP growth both directly and indirectly. The NZIER (2004) has estimated that by 2010 mining could add an extra $3.8 billion, or 2%, to GDP annually, creating 25,000 more jobs and 4.1% more exports.
Such an increase in growth could come at a cost in the form of environmental impacts, which needs to be weighed against the potential benefits. To date a cost-benefit analysis of expanding mining in such a way has not been undertaken. This is an area that could be investigated further.
As was mentioned in Annex One, the bulk of the gas condensate fields at Maui and Kapuni has been extracted, with around 14% of reserves remaining at the start of 2004. Exploration activity in the sector is high at present, and high world prices for oil are expected to further fuel this activity. New fields such as Pohokura and Kupe are expected to be in production within the next few years, which will to some extent offset the reduction in output from Maui and Kapuni. The government has introduced a package of initiatives to accelerate exploration and discovery of new petroleum reserves in frontier basins. The package includes a reduction in royalties coupled with acquisition of data and a promotional plan to attract new investment.
