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Jim Sutton speech to forestry seminar

12 October 2004

Jim Sutton speech to forestry seminar

NZ Forestry Industry Council-NZ Forest Owners Association annual meeting, Auckland

Ladies and Gentlemen, thank you for the invitation to speak today.

My brief was to provide my views on the role of the forest industry in the economy, its potential growth, both as a driver of regional development and export earnings, and my comments on issues facing the industry. Quite a wide brief.

Primary industries are at the heart of the New Zealand economy. In addition to primary production, processing and marketing, the primary industries underpin sectors like engineering, manufacturing, technology development, research, training, education, and consultancy services to name a few.

Forestry is one of New Zealand's key primary industries. Last year it earned New Zealand $3.7 billion in exports or 13% of our total merchandise export receipts. 26,500 New Zealanders earned their living in forestry. In 1995 forestry exports were $2.6 billion. 40% growth in exports in eight years is an impressive figure for such a large sector.

But ? it is worth digging a little deeper. Over the same period harvest volumes increased 47 percent, meaning the average value of our export products fell over the period in nominal terms. In real terms values fell even further.

Exports of unprocessed logs rose dramatically from 4.8 million cubic metres in 1995 to 8.2 million in 2003. But there is another way to look at this. In 1995 11.8 million cubic metres of logs were processed in New Zealand. Last year the equivalent figure was 15.2 million cubic metres ?a 30% increase.

So what do these numbers tell us? Well, forestry is a big sector and it's growing. We are exporting a growing number of logs, but we are also processing more a lot more onshore.

Perhaps most telling of all; harvest volumes have increased significantly, but average product prices have actually fallen.

What it means is that businesses such as yours must constantly improve efficiency and innovation ? just to stand still. Some might suggest this is a bleak outlook. But,historically, this has been seen in many commodity sectors.

Worldwide, technology development has allowed commodity producers to become more efficient, and consumers are reaping the benefit of this in the form of lower prices. It is happening in many products from milk powder to computers. It includes products we have traditionally considered undifferentiated commodities as well as highly transformed products. For example, in the forest products area, China is putting huge pressure on American furniture makers. And New Zealand furniture makers, for that matter.

The fact that it happens is not necessarily an indication of a sector in trouble ?far from it.

I want to show you four graphs of four commodity prices - then pose a question. All the prices are in US dollars, all are nominal values, and all are 1995 to 2005.

??

The first two graphs were A-grade radiata pine logs and sawn timber (all grades). The third and fourth were butter and whole-milk powder.

The trend lines are the same. Yet the confidence and near-term growth prospects of the sectors are very different. MAF's May 04 forecasts project around a 6% fall in forestry exports to 2006, while dairy exports are projected to increase 13% over the same period.

The question to you is why the difference?

Some might suggest it's the Government's ratification of the Kyoto Protocol. I suggest this is nonsense. Dairy processing uses a lot of energy ? much of which is coal. Dairy production systems are relatively high emitters of greenhouses gases. Yet the dairy industry has not talked itself into investment paralysis by boxing at shadows over climate change policy. The fact is that the Government's climate change policy package has relatively minor impact on either sectors' financial outlook.

The difference can't be exchange rates ? both sectors are heavily export oriented. It can't be tariff barriers since these are higher in dairy than almost any traded product in the world, though I do note processed forest products do face escalating tariffs in a number of markets. And, labour laws, corporate tax rates and the RMA are the same for both.

I put it to you that one key reason for the difference in the outlook and confidence of these sectors is the willingness of the dairy sector to invest heavily in wide range of activities that drive innovation.

For example - dairy farmers voted for a commodity levy of $45 million a year, with scope for that to be increased to around $57 million. Fonterra has invested heavily in supply chain management and has put together world-scale deals to be the ingredient supplier of choice to some of the world's largest food manufacturers.

Long term declining commodity prices make constant innovation essential.

This innovation must be across all parts of the sector not just production efficiency. Businesses must be highly innovative in market development, product innovation, design, supply chain and distribution management, and human capital.

I absolutely believe that New Zealand forestry businesses can be great innovators. Many have taken major steps already.

Almost all processors, for example, have made significant gains in production efficiency.

But, in areas like human capital, market development, supply chain management, product innovation and design there is a considerable way to go.

I also believe that Government agencies can play an important role in helping businesses to innovate.

It's no secret that some parts of the forestry sector have been through a rough patch recently. But despite the recent difficulties, forestry has a tremendous future in New Zealand.

And, you don't need to take just my word for it - recent forestry asset sales have drawn keen interest from investors. Billions of dollars have been invested in the New Zealand forestry sector.

Major investments have included forests in the Central North Island and East Coast, tissue manufacturing, and sawmilling. The vast majority of these investors are in forestry for the long-haul. This is a real vote of confidence in your sector and its future.

Recent sales have driven significant changes in forest ownership and in the management of some key forests. There seems to be a shift toward the long-term value of forestry assets rather than shorter term cashflow considerations.

Overall I think this will be very positive for the sector. Unfortunately, it comes at a price of significant job losses and export reductions in the short-term.

On the job losses I note that - while distressing and disruptive for the people concerned ?at least the exceptionally strong labour market has made it possible for most people to find alternative employment fairly quickly.

In January this year I was speaking to the Institute of Forestry in Wellington. There I was also asked what were the significant issues facing the sector.

Of course there are many issues and challenges: the exchange rate, trade liberalisation, market development, shipping costs, human capital, the RMA, transport infrastructure, energy issues, sustainable resource use, and climate change to name a few.

But as I said in January, the essential truth is that underlying all these issues is that the forestry sector must be profitable. Only a profitable industry will be a sustainable and growing industry.

Each of the issues noted above are important to you because they have the potential to affect the profitability of your business.

A profitable sector is one that attracts investment, be it to wood processing, forest growing or related service industries.

And I firmly believe that a profitable sector must be an innovative sector.

The Government is committed to working with the industry - individually, in small groups and collectively ? to seek out ways to improve your profitability.

At the forefront of this commitment has been the Wood Processing Strategy. New Zealand Trade and Enterprise work on a daily basis with New Zealand forestry companies to seek out and develop new business opportunities.

We also have a number of innovative proposals under development in the areas of excellence in wood design linked to Government procurement policies, and development of the Chinese market.

On the policy front, I think the Wood Processing Strategy could usefully explore regional roading development in light of the announced investment for growth package, and could also look at implementation of changes to the RMA.

In the crucial areas of market access and market development, the Government has made some $13 million available over five years. As you know this is conditional on the industry signing the FIFA, something you have asked for more time to consider.

The FIFA formalises a special relationship between the Government and the forestry industry.

Contrary to the belief of some, it does not mean that the industry must be silent on any issue of concern that it wishes to raise in any forum. It doesn't mean you have to be happy about the retention of the sink credits or the deforestation cap.

Nor does it prejudice your interests in any way. It does, however, mean you are also committed to positive relationship with the Government ? even though there may be issues over which we differ. We don't have to agree. But this is taxpayers' money, and we want to know that we are investing it in an industry which is positive, forward-looking, and confident of its own ability and willing to invest in its own future.

I trust that the industry will sign and that we can get on with the crucial work that undoubtedly needs to be done. We have a mutual interest in this.

Much of the economic growth that the world has enjoyed since the industrial revolution has been based on the unsustainable use of finite resources. Mankind is now obliged to change, not all at once but nevertheless decisively, to sustainable development. To switch steadily from non-renewable to renewable resource bases. To slow, and eventually stop, the despoliation of the environment that sustains us all.

The forestry sector is a vital component in New Zealand's efforts to address climate change and meet our international obligations under the Kyoto Protocol.

It is also a very important part of New Zealand's economy, and with a positive attitude and an ongoing commitment to innovate it is set to become more important still.

ENDS

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