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Strong Partners to Help Small Forest Owners Maximise Returns

Embargoed: Not for broadcast or publication before 5 p.m. on Thursday, August 21, 2014

NZ Company Pulls in Strong Partners to Help Small Forest Owners Maximise Returns From Their $30 Billion ‘Wall of Wood’

In a major initiative to help New Zealand investors in 14,000 small plantation forests to meet the challenge of marketing a looming “wall of wood” against stiff competition, a new forestry company with major international backing has been launched in Wellington today. (Eds: Thursday, August 21).

United Forestry Group brings major resources, expertise and a new strategic approach to maximise the value of output from these small forests, potentially worth $30 billion in today’s dollars over the next two decades.

However, the high harvesting and transport costs faced by the owners of single small forests, and their weak negotiating position with buyers, means the potential value of these forests may not be achieved and the final return to their owners and to New Zealand may be disappointing.

United Forestry Group’s approach is to consolidate the output of a number of forests in an area to effectively create one large, competitive forest which can be harvested sustainably over time. Such consolidation provides advantages for the supply of logs to local mills and enables longer term contracts for harvesting, transport and marketing. The new company will use the strength and expertise of its international shareholders to help New Zealand small forest owners maximise the profits from their investments, and will also offer them the opportunity to become shareholders.

The company says it is essential for New Zealand that small forest owners achieve a worthwhile return on their investment, or there will be no incentive to replant these forests and New Zealand’s future forestry output and earnings will not be sustainable

MAJOR PARTNERS JOIN NEW COMPANY

United Forestry Group shareholders bring local forestry management expertise and contacts together with considerable financial resources, long established contacts in the Asian and local markets, and shipping and supply chain expertise.

A cornerstone investor in the new company is Superpen, a joint venture between leading international timber marketer Pentarch of Australia and major Chinese conglomerate Xiangyu Group. Their combined global resources, international netwoks and expertise in forestry, transport and shipping, logistics and operations provide significant backing for the new entity.

Three New Zealand shareholders from Wellington are also Directors of UFG - forestry industry lawyer and former senior political figure Geoff Thompson and two well regarded forest industry experts - Hamish Levack and Kelly Coghlan. The New Zealand shareholding in the company is expected to grow as small forest owners and others are given the opportunity to invest.

‘WALL OF WOOD” FACES STIFF COMPETITION

Small scale forestry (under 1,000 hectares and mainly in radiata pine) has been a popular investment for farmers, syndicates, iwi, family trusts and individuals over recent decades, particularly in the 1990’s, and it is these forests which are reaching maturity with ever-increasing volumes of wood available.

United Forestry Group says the growing impact of this is already being felt, but dramatic increases in available volumes lie ahead with half a million hectares of land devoted to small scale forestry expected to produce 12 million cubic metres of wood annually.

After meeting the needs of local processors, the bulk of the timber coming to maturity in these small forests will need to be exported as logs to the competitive and volatile Asian markets, where New Zealand competes with suppliers from vast softwood forest resources in Russia, Chile, Brazil and North America.

New Zealand is already the largest exporter of softwood, accounting for about 20% of world trade. Large plantation forests in New Zealand -- mainly owned by overseas investors -- will also be offering significant quantities of timber to the local and overseas markets in competition with New Zealand’s small forest owners in coming decades.

United Forestry Group Director Malcolm McComb told a function in Wellington this evening (eds: Thursday, August 21) that it would be a very daunting task for an inexperienced owner with a maturing forest, generally of less than 50 hectares, to try to go it alone against such formidable competition in a volatile offshore market.

“New Zealand’s situation is unique, with an estimated 40% of forestry exports about to be generated from 14,000 individually owned forests . 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.

“Our dairy farmers, sheep and beef farmers and horticulturists generally don’t export individually, apart from a few specialist producers, because they know that union is strength.

“Unless there is a co-operative approach to consolidating the output from as many of our 14, 000 small forests as possible, controlling costs and achieving a stronger position in the market place, there is a real risk that export earnings from forestry and the return to investors will be very disappointing.

”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 have planted as an act of faith several decades earlier.

”They may attempt to organise a contractor to do the felling, arrange transport to a port or 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 a huge adverse impact on the hoped-for return. Small export agents competing against each other in the very competitive Asian markets can actually drive prices down for disappointed New Zealand forest owners.

“Right now, some mature small forests in New Zealand are not being harvested because the numbers just don’t stack up.

“We think that joining forces with us and other participating owners will be a more attractive option for many than going it alone.”

BENEFITS OF SUSTAINABLE PRODUCTION

Mr McComb said consolidating the output from a number of nearby forests will make a more sustainable approach possible. It will be desirable to harvest these forests over a longer period by cutting to meet firm, profitable orders rather than clear felling an entire forest at once, just to achieve volume.

“It is highly desirable for New Zealand that this ‘wall of wood’ is managed in a way that produces a sustainable yield over the maximum number of years.

“This approach will help create confidence for investment in domestic processing as well as reducing risk, creating better marketing opportunities, encouraging investment in more productive and safer machinery and resulting in less congested transport corridors in any particular year .

“Local processors will benefit from long term supply contracts which are made possible by consolidating the output from a number of small forests in a particular area and by getting logs of the age and size they need for their operations. Scale can also achieve better matching of log requirements for local mills over an extended period.

“Sustainable production will create more stability and value, encourage secure employment opportunities and be better for local communities and the environment,” he said.

RANGE OF SERVICES

“We are taking a whole new approach to this emerging problem, and are committing major resources to be in a position to buy forests outright, control shipping services and consolidate forest output through the country to give participating small forest owners a stronger hand to play with.”

Malcolm McComb says United Forestry Group will be very much more than a broker offering to sell forests of their owners. “We will have the financial strength, expertise and presence in the local and Asian markets to offer them a much more comprehensive range of options.”

Mr McComb said these would include:-

• Arranging to purchase a forest outright, with the owner keeping the land for future use.

• Buying the timber and the land, leaving the owner free to invest elsewhere.

• A deal that includes shares in United Forestry Group giving the owner a stake in the timber industry following the sale of his or her timber.

• Negotiating the best prices and helping to manage the forest through to maturity, harvest and sale.

• Offering advice on all aspects of harvesting and marketing maturing forests, including replanting.

• United Forestry Group will have a strong focus on consolidating the output of a number of small forests in a particular area, reducing harvesting and transport costs and enabling appropriate volumes of timber and long term supply contracts to local mills, securing better prices for forest owners.

• Having control of its own shipping services will enable the company to consolidate the felling, transport to port and shipping of the output of a number of forests in a particular area to coincide with shipping schedules controlled by the company.

COMPANY” UP AND RUNNING”

Mr McComb says United Forestry Group is already operating in the lower North Island and upper South Island and will quickly offer a truly national service.

“We will look at any forest anywhere in the country right now and assess what it can achieve for the owner.

“We are receiving a very positive response from the industry and we aim to help harvest and market the lion’s share of the coming ‘wall of wood’ from New Zealand’s small forests by making them better able to compete in the world.”

Ends

INDUSTRY SNAPSHOT:

• New Zealand has about 1.8 million hectares of land in plantation forestry, about 90% planted in radiata pine.

• About 14, 000 small forests (under 1,000) hectares make up .5 million hectares. About 12,000 of these smaller forests are less than 50 hectares and about 5,000 of these are 10 hectares or less.

• The remaining 1.3 million ha of forest estate is made up of a number of larger forests, most of them overseas owned.

• From 2015 the larger forests are expected to produce 20 million cubic metres of wood annually, the small forests are expected to produce 12 million cubic metres annually.

• Based on an average of recent values, production from New Zealand’s small forests over the next two decades could be worth $30 billion, (in today’s values) depending on market demand and the strategies employed for harvesting and marketing.

• Most of this production will be exported, most of it as logs; the rest will be processed locally.

• Forestry is New Zealand’s third largest export earner after dairy and meat.

• Last year, total forestry exports were worth $ 4.272 billion.

• The Wood Council of New Zealand hopes to more than double exports to $12 billion by 2022.

• China takes about 60% of log exports. Korea, Japan and India are also important markets.

• Major competitors for New Zealand are Russia, North America, Chile and Brazil.

• New Zealand’s main competitive advantage is that it has the management, know-how, soils and climate to grow radiata pine faster than any other country.

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