September 2016 Wood Matters Page 1

Wood Matters – September 2016

Clarkys Comment - September

Peter Clark CEO PF Olsen Ltd

The adverse operating environment for the forest growing sector over the past two decades is now becoming obvious with gaps appearing in regional wood supplies in the near term. We can do nothing about that. Trees take time to grow. What we can do is fix the ETS and land use policies that will encourage replanting of harvested forests and encourage new planting, including by pastoral farmers. More trees are needed not only to help meet our Paris Accord commitments, but also to provide the confidence for investment in internationally competitive wood processing plants. The Wood Council of New Zealand submission into the ETS review called for policy changes that would result in both more trees being planted and greater uptake of engineered wood for low-rise residential and commercial buildings. The June submission can be seen on the Woodco website. The Wood Council submitted in April on a key policy that could materially de-risk harvest liabilities for post-1989 forest owners, and in doing so encourage planting, regardless of whether agriculture is brought into the ETS or not. The policy relates to the now international recognition that when trees are felled all of the carbon does not immediately enter the atmosphere as CO2. Rather that release is deferred; for decades in some wood products. The Wood Council submission on Harvested Wood Products (HWP) can be seen on the Woodco website. Devolution of harvested wood products (HWP) benefits to post-1989 forest owners would significantly reduce the number of NZUs that foresters need to retain or buy to meet harvest liabilities. Such liabilities could instead be met by the carbon accumulated in the new crop planted post-harvest. The impact on afforestation of non-forest land would be a much improved profitability. Separately, devolving the HWP rule into the domestic ETS would remove the perverse incentive for post-1989 forest owners to defer their harvest, or not harvest at all, and thus improve the log supply for domestic saw millers. Only about half of post-1989 forest owners are registered in the ETS. A conservative portion of the value of the HWP credits that the government is retaining in respect of post-1989 forests not in the ETS should be used for the establishment of a fund. Such a fund would be annually allocated to, and administered by, the Wood Council of NZ to advance its Strategic Plan that looks to increase the contribution of the forestry and wood products sectors to $12 billion export value by 2022. Advancement on this Plan has been constrained by lack of action by both government and by industry. In summary we cannot expect to achieve $12 billion in exports simply by exporting more logs. We must have modern efficient wood processing in NZ. The review of the plan will focus on just a few constraints to achieving that and how these can be rectified jointly between government and industry. Most readers will be aware that the NZ forest industry has for some years been feeling that it has been disadvantaged relative to pastoral farming in respect of ETS and land use policies and its treatment

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under the RMA. Forestry acknowledges the economic and social importance of a strong and resilient pastoral farming sector, but differential treatment flows through to the relative land values under grass versus trees. This really matters to forestry because foresters do not treat land as an investment for capital gain but rather as a cost to generating income from growing trees. Current low productivity grassland is valued between $3,500 and $5,000 per hectare and in some regions that is rising further on the back of exuberance over the Manuka honey opportunity. At these values the cost of land whether leased, purchased or owned, represents in excess of 50% of the cost of generating income from trees. The profitability of afforestation or reforestation is constrained by high land values, even though the return from forestry on an annualised basis is superior to that from most dryland farming. The forestry sector understands that sudden changes to policies that impact negatively on pastoral land values are politically unacceptable and we do not advocate for this. However, we also detect a growing acceptance in the farming leadership circles at least that the focus of farming must move from land value capital gain to cash returns. This change in attitude combined with signals that agriculture must make an increasing contribution to our greenhouse gas emissions reduction, and the equal treatment of forestry and pastoral land when it comes to allocating freshwater Nitrogen Discharge Allowances (NDA), would go a long way to levelling the playing field. The outcome of these changes would likely result in most farmers planting a portion of their land in trees rather than face the prospect for writing a cheque to purchase NZUs. For the most intensive irrigated dairy farms in Canterbury it is acknowledged that they would need to plant a lot of trees, most likely on hill country off the dairy farm. These policy changes would serve to constrain the expectation of ever increasing rural land values. That is very important as under current policies land under trees has not inflated in value whereas land under grass has; serving as a further disincentive to plant trees. The end game here is to have forestry and pastoral farming interests aligned as those land uses are complementary. Commodity price swings for dairy, meat, wool and forestry on our hill country occur at different times. A mix of two or more of these products at the farm enterprise level will provide resilience if one product is down. Trees within part of the catchment will permit more intensive farming on the better land without undue impact on freshwater quality.

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Log Market - September

Peter Weblin Chief Marketing Officer PF Olsen Ltd

Introduction

Unpruned export log prices were flat August to September and pruned export logs fell on average $2/JAS m3. It looks as though pruned export logs have now stabilised after falling more than $50/JAS m3 in the past three months. The domestic market remained steady with stable pricing and strong demand. Pruned logs became more plentiful in the domestic market as exporters tried to reduce pruned logs being supplied into China. Quality pruned logs, however, are still keenly sought after.

Export Log Market

September saw a modest appreciation of the kiwi dollar and firming ocean freight rates which offset modest increases in US$ CFR price for export logs. China demand continues to be solid following the end of the hot season with softwood log demand up to a high level of 61,000 m3 a day in early September. This is higher than seen during 2015 and the first half of 2016. Inventory has remained steady at 2.5 m m3, representing 42 days’ supply. This makes the market well balanced. Russian wood supply is emerging as a real threat. The country has a vast resource of forest – standing timber inventory is estimated at 82.1 billion m3, 77% of which is coniferous. Furthermore, despite an official annual total allowable cut of 717 m m3, Russia is only harvesting 205 m m3 (29% of the allowable cut).

Softwood roundwood volume harvest % for 2014.

The North-West region is substantially increasing lumber exports to China. Source: Ilam Timber.

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Harvesting is constrained by high costs and limited infrastructure, but a 50% devaluation in the ruble during 2014-15 significantly lifted sales revenues. Also, greater mechanisation is boosting harvesting productivity as is modernisation of the sawmilling industry. In addition very cheap container rates are allowing lumber from timber-rich North-West provinces to economically find its way into China (this region is the source of most of the increase in lumber exports to China this year – see table below). Russian lumber supply has been at record levels of over 1 m m3 a month since April. The five year trend is for Russian lumber to peak in May and then to reduce through to the end of the year, and ideally we will now see Russian lumber supply tail off.

Source: DANA Limited

The longevity and full extent of the surge in Russian lumber exports to China will be largely influenced by the value of the ruble. Certainly, the massive devaluation has been highly stimulatory. However, modernisation of the sawn timber industry and advances in harvesting productivity will continue to allow Russia to harvest increasing amounts of its vast forest resource and sell lumber into China. Whether this has a significant adverse impact on the market for Radiata pine will depend on China’s ability to continue to increase its demand for softwood logs and lumber. The Indian market is continuing its strong run and Korea and Japan are steady. The Indian market is providing a welcome higher-price option for lower grades at selected ports. The growth in log supply to India this year is clear in the table below. We are expecting India to become an increasingly important market for NZ Radiata pine.

Source: Champion Freight

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Domestic Log Market

The rampant New Zealand housing market, spear-headed by Auckland, needs no more air-play in Wood Matters. Short-term it’s beneficial for NZ wood processors and forest owners selling logs (and those fortunate enough to own one or more of those “million dollar” homes in the City of "Sales"). Longer term, however, the bursting of a bulging housing market bubble is about the most potent mechanism to cause significant and sustained pain to an economy and its participants. For those that don’t own a home, any bubble-bursting holds some promise of delivering more affordable homes – if they don’t lose their jobs along the way. For the time being, however, domestic logs sales are buoyed by strong demand for unpruned and pruned logs and most domestic wood processors are enjoying strong demand for their products both in New Zealand and their key export markets.

Red Stag sawmill, Waipa, Rotorua, has invested in new sawmilling capacity to grow its share of the NZ structural lumber and remanufacturing market. This expansion increases lumber production to

750,000 m3 per annum, making it the biggest sawmiller in Australasia.

It’s great to see more attention to innovative wood-focussed building design emerging in New Zealand. The design approach and leadership for Nelson airports $23m redevelopment must be applauded. The use of wood as the primary building material, and in highly innovative applications, looks set to create not only a compelling aesthetic, but also a showcase for locally grown and manufactured timber. Apparently around 440 m3 of locally grown timber will go into the project which is expected to be completed late 2018.

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PF Olsen Log Price Index to September 2016

The PF Olsen log price index remained steady in September at $116. The index is $29 higher than its 6-year low of $87 in July 2014 and $11 above the two-year average and $13 above the five-year average.

Basis of Index: This Index is based on prices in the table below weighted in proportions that represent a

broad average of log grades produced from a typical pruned forest with an approximate mix of 40% domestic and 60% export supply.

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Indicative Average Current Log Prices – August 2016

Note: Actual prices will vary according to regional supply/demand balances, varying cost structures

and grade variation. These prices should be used as a guide only and specific advice sought for individual forests.

Market Outlook

Higher log supply volumes are expected from New Zealand through the remainder of this year as we move into more favourable seasonal harvesting conditions and the large early 1990’s plantings are starting to emerge into a reasonably well-priced log market. The domestic market is expected to continue with strong demand and stable pricing for high quality unpruned domestic logs. Small downward pricing pressure is expected for domestic pruned logs in the fourth quarter (Oct-Dec 2016) on the back of large falls in the export log market. This could manifest itself in a bigger pricing differential for quality which would be a good development for the market. At current settings for the export market, the outlook is for moderate increases in unpruned log prices and a larger rise in pruned log prices (noting that export pruned logs have fallen over $50 in the past three months). If the appreciating kiwi dollar trend continues through September, however, it will have a negative impact on NZ$ at-wharf-gate log prices, unless offset by rising US$ CFR prices. Already this month the NZ$:US$ cross rate has increased from a start point of 0.724 to trade at 0.735 at the time of writing. During that period it has traded as high as 0.748. Each 0.01 appreciation in kiwi dollar shaves about NZ$ 3.30/JAS m3 off the NZ$ at-wharf-gate price. Scion’s latest log price outlook reports a consensus that both pruned and unpruned export logs will rise over the next 6 months.

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Forestry and the Emissions Trading Scheme

Erin Leahy Registered Forestry Consultant NZIF PF Olsen Ltd

Following on from last month’s Wood Matters, the USA and China have ratified the Paris Agreement, together making up around 39% of global emissions. Many other countries were likely awaiting the commitment of the world’s largest emitters before ratifying the Paris Agreement themselves. Further ratifications are expected as the year progresses, including from New Zealand. The Paris Agreement is not binding until it is ratified by 55 countries representing 55% of global greenhouse emissions. Locally, the annual New Zealand Institute of Forestry conference was held in Dunedin, with a number of PF Olsen staff attending. Of relevance to the ETS, the Ministry for the Environment presented a session to update the ETS review, the key points being:

Reductions to NZ emissions are required if we are to (have any hope of) meeting the target of 30% below 2005 levels by 2030.

Domestic forestry has an important role to play - every tonne of sequestration delivered through forestry avoids the need to purchase a reduction from overseas.

The targets set for NZ under the Paris Agreement pose a significant challenge for New Zealand and new forests will be crucial in assisting.

International units will be required, and the environmental integrity of these units will be crucial. Submissions as part of stage II of the ETS review have been analysed and the Minister is currently deciding on the next steps.

New Zealand Emissions Trading Register

The New Zealand Emissions Units Register (NZEUR) has been replaced with a new platform, the New Zealand Emissions Trading Register (NZETR) which was launched on the 29 August.

If you are the account holder or a primary representative on an existing NZEUR account, you will have received correspondence from the EPA. To gain access to the new site you will need a government RealMe login, and a migration code that will have been sent to you.

Price Update

NZUs are currently trading at around $18.80 per NZU which is a 5 year high.

The figure below shows the recent carbon credit prices for EUAs, CERs, NZUs and ERUs. Note that from 1st June 2015 only NZUs or New Zealand AAUs are valid units in the NZ ETS. EUAs are valid units for trading within the European Union.

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Figure 1: Recent Carbon Prices - NZ$/t CO2e – Real (CPI adjusted)

Why timber in tall buildings could be significant for NZ Radiata Pine

Peter Weblin Chief Marketing Officer PF Olsen Ltd

Why build tall buildings? Tall buildings are the cornerstone of high density urban living (large cities) as they make the best use of limited space. Large cities have proven economic and social benefits (albeit they are not without their disadvantages and detractors) and they are the manifestation of a nation’s development. Whilst most developed countries’ have either static or small growth of large city populations, for many Asian countries they are rapidly growing. It is forecast that the number of people living in big cities globally will double from 3.5 billion (2013) to 7.0 billion by 2050. That will require a lot of tall buildings!

The role of tall buildings in sustainability Tall buildings have traditionally been constructed almost exclusively with concrete and steel, resulting in high embodied energy and carbon footprints on a unit area (per m3 basis). This is the result of two things. Firstly, whilst tall buildings are frugal with the land they occupy, they use a lot of building material to hold themselves up. This is to support the high gravity loadings, made worse by the high mass of concrete and steel. For example, vertical columns at the lower levels of a building have to support not only the floor at that level, but all the building's weight above that floor. This extra material is sometimes called a “premium for height”. Secondly, because steel and concrete have inherently high embodied carbon footprints (per m3 and per kg), the embodied carbon footprint of tall buildings on a unit area, or m2 floor-plan basis, is high.

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With massive pressure to reduce C02 emissions, this issue is getting the attention of governments, NGO’s, architects and the general public around the world and stimulating a re-think of how tall buildings are constructed. There almost seems to be a competition of who can build higher and better with wood. Tall buildings can be constructed out of wood economically and with a much lower carbon footprint There are many different construction designs emerging that wholly or substantially use wood, (see Wood Matters October 2012 and Wood Matters Log Market Report April 2016). The Timber Tower Research Project has developed a solution called the Concrete Jointed Timber Frame that relies primarily on mass timber for the main structural elements, with supplementary reinforced concrete at the connection joints. This system plays to the strengths of both materials. The result is an efficient structure that could compete with reinforced concrete and steel while reducing the carbon footprint by 60-75 percent.

The Timber Tower Research Project’s Dewitt-Chestnut Apartments, Chicago Illinois is using concrete jointed timber frame design. If the trend to taller wooden buildings gains momentum, it bodes well

for increased markets for Radiata pine, especially as large areas of new plantings come on stream in New Zealand.

This trend of tall wooden buildings taking market share from steel and concrete is likely to increase based on the high demand for tall buildings for city growth and increasing environmental awareness, especially pledges countries have made to reduce CO2 emissions to minimise climate change. NZ Radiata pine is well-suited for use as a feedstock for manufactured structural wood products (e.g. Glulam, CRT, LVL) and could be an important contributor to constructing taller wooden buildings. In contrast, the current use for Radiata pine in construction in our largest market, China, is decidedly unsophisticated – the main role being concrete boxing.

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Radiata pine is used for supporting construction of concrete apartments in China, a relatively low-value end-use.

In a related story, the last panel was recently laid on Brook Commons, an 18-storey mass timber hybrid apartment at the University of British Columbia, Canada. See video… https://youtu.be/rYwI6wHcRVc

PF Olsen and McKay & Olsen take out Erosion and Sediment Control Award PF Olsen and logging contractor, McKay & Olsen Ltd, Taupo have recently been awarded “joint winners” of the 2016 Erosion and Sediment Control Award for Forestry from Waikato Regional Council (WRC). Mike McKay and his crew were contracted by PF Olsen to cable harvest a particularly challenging Soil Conservation Area (13.1ha, 10,2000t) near Taupo. The care taken with extracting logs off the steep slope and across the Pakuri Stream and chasm in this block was commendable. Soil disturbance of a severe erosion risk ephemeral watercourse was minimised through a proactive and collaborative relationship amongst PF Olsen, the contractor and the Waikato Regional Council (WRC). Following on-site discussions, the decision was made to relocate a hauler pad to a higher site which would significantly reduce the potential for logs to be dragged down thorough the watercourse, minimising disturbance. The pad relocation involved the temporary removal of powerlines for several weeks and sourcing a generator to supply power to the pump shed for the farm water supply.

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The excellent working relationship that Josh Penn had initially established with the forest owner and his harvest planning, the professionalism and skill of Mike and his team during the harvest and the work that Kim Evison did regarding the costing for and planned re-establishment of the enlarged forest area all contribute to this outcome. These annual awards cover small, medium and large scale civil earthworks, forestry and environmental innovation. The forestry award this year is shared with Hancock Forest Management. “It’s a fantastic outcome and shows how much effort the forestry industry, working with the council, has put into lifting performance in recent years,” said WRC land development team leader Jorge Rodriguez, “Best practice in erosion and sediment control is now the norm on a large number of earthworks sites, both big and small. All award winners and nominees have made a fantastic effort to exceed compliance expectations in implementing best practice erosion and sediment controls for earthworks”.

Mike McKay (left) from McKay & Olsen Ltd, Craig Fisher (right), PF Olsen Ltd with Vince Udy from the Waikato Regional Council.

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Protecting Access to International Markets

Russell Dale R&D Manager NZ Forest Owners Association

The results of a four year research programme designed to protect and future-proof the forest industry’s access to international log and sawn timber markets were recently presented to industry and government stakeholders. The programme focused on finding alternatives to methyl bromide fumigants which are used to treat logs and some sawn timber and horticultural products destined for overseas markets. It is particularly important for log exports to India and for top stow log exports to China. Methyl bromide is a substance that damages the earth’s ozone layer. In 2010 the New Zealand Environmental Protection Authority ruled that the release of methyl bromide to the atmosphere in relation to fumigating logs will not be permitted beyond 2020. Through the Stakeholders in Methyl Bromide Reduction (STIMBR) the industry and Government have invested in research to reduce its reliance on methyl bromide fumigation. This research has aimed at leaving “no stone unturned” in the quest to find alternatives to methyl bromide. The main thrust of the research has been to investigate reducing the use of methyl bromide with lower application rates, capture and destruction of the fumigant, finding alternative fumigants to methyl bromide – one such alternative is currently being evaluated - and finding alternatives to chemical fumigants. These alternatives include debarking to an export phytosanitary standard, identifying whether there are insect-free periods that would allow log exports during specified periods and investigating Joule heating of logs with electricity to a level that insects and pathogens are killed. To provide evidence to overseas governments that our treatments are effective the research programme has had to develop ways of rearing large numbers of bark beetles in captivity. Plant and Food Research staff have led the way in developing methods to rear two species of bark beetle in laboratory colonies. The ability to rear these insects in the laboratory is a world first. At the same time Scion scientists have undertaken a large scale insect monitoring and trapping programme over three years across New Zealand to record insect flight activity. This is believed to be one of the largest studies of its kind with the aim of identifying times when logs have a very low risk of insect infestation. This has shown that in the colder southern parts of New Zealand there are low risk periods that we may be able to utilise. In another stream of work University of Canterbury researchers have investigated Joule heating logs with electricity to kill insects. The researchers have successfully heated logs in the laboratory to the required temperatures indicating the potential of this technology. Preliminary design and costing of a prototype treatment plant that would be located at a port is the next step to establish commercial viability of this promising technology. Whilst the MBIE funding component of this programme ceases in October, STIMBR will continue to fund research in these areas for a further two years and during this time will seek alternative funding to ensure our access to world markets is not constrained.

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Logs being fumigated with methyl bromide under tarpaulins at Northport. Currently this is the only way to achieve the phytosanitary certification to allow top stow log exports to China. After 2020,

unless alternatives can be found, there will need to be recapture of the fumigant gas which is technically challenging and expensive.

Scion - Log Price Outlook This log price outlook conducted by Scion combined the opinions of NZ and overseas participants, primarily log buyers and sellers. For more information or a copy of the report please contact Carel Bezuidenhout at Scion.

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Safety Champions – Johnny Albert

Miriam Miller Health & Safety Coordinator PF Olsen Ltd

Johnny Albert is the foreman of a silviculture crew planting for PF Olsen this winter. When Ged Terry, PF Olsen’s Chief Operations Officer, visited the crew he was impressed with the safety induction he received from Johnny. A safety induction is an important first-step before visitors come onto any worksite, and it ensures a safe visit. It also tends to be a good gauge of general safety performance at that site. Johnny is with Inta-Wood Forestry Ltd and first started with them in 2007. Although Johnny has worked in other industries he says: “I keep coming back”. It’s clear that forestry is for him - it’s his work.

This is Johnny’s first year as the foreman of a crew. The responsibilities of his new role “have lifted his head to see a wider picture”, and he can see that “good health and safety relies on good planning and processes”. A visit to the site shows that Johnny has put a good deal of thought and effort into planning. Every morning he conducts the toolbox meeting and another after lunch where they discuss the morning run and the risks for the afternoon run. He works closely with the crew as well as keeping on top of reporting, inspections, safe behaviour observations and incidents. The PF Olsen supervisor who manages Johnny’s crew day-to-

day offered this comment: “Johnny is easy to communicate with. If I ask him a question he gives me an honest answer. He is on top of things, and reliable, which is great.” When asked about Health and Safety Johnny commented that he sees in the media that people still die at work in New Zealand, which is worrying. He added, “At the end of the day we all want to go home to our family. So the safety work we complete needs to be the first and last thing the boys should know, not just me. I’m happy when I see the boys picking each other up on things.” Johnny got a lot out of the PF Olsen pre-season planting workshop (see Wood Matters July 2016) which was held at the beginning of the planting season. “It worked for me,” he said. “The practical planting exercise was a big help to those new to planting. The information on the hazards and risks was good to get. As for the session with Jason Whatuira, the crew have taken away Jason’s good words on making a change and really think he speaks the truth.” The 2016 planting season also saw a system of drug and alcohol testing and incentives. As a result, the whole crew is motivated to stay drug free. They are ‘stoked’ with the vouchers that are being given to crews that return a clear monthly drug and alcohol test. Johnny adds proudly, “We have a good safety and drug free record and we intend keeping it that way.”

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We would like to wish Johnny all the best for his future in forestry, for his future study and in his current role. He is a safety champion in the making.