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Anderton: The future of forestry is strong

Hon Jim Anderton: The future of forestry is strong

The government is working in partnership with the industry to unleash its potential

Jim Anderton Address to Wood Processors' Association Annual Conference,
Wellington Convention Centre

Chief Executive Peter Bodeker and distinguished guests, thank you for the invitation to talk to you about the forestry sector over the next five years.

In some ways, Peter is a symbol that the future of forestry is strong, because he is a recruit from dairying. We know the strength of dairying at the moment − but there are also real reasons to see potential in the future of forestry.

Today I want to talk a little about how I see that potential, and what the government is doing in partnership with the industry to unleash it. And I want to mention some of the near term issues that are confronting the sector, along with my take on what we need to do to seize opportunities and overcome the barriers to development.

I'm under no illusions that there are issues ahead for the sector that are difficult and even daunting. But when we look at the potential role wood can play in our future − New Zealand's future and the planet's future − there is every reason to feel confident.

I'm fond of quoting Wink Sutton's observation that wood is such a remarkable material, that if it were discovered for the very first time today, it would be hailed around the world. It would be the answer to environment problems and development problems the world over.

No other product can claim to store carbon dioxide, reduce the use of energy intensive substitute materials, and displace fossil fuel by burning waste materials.

The carbon dioxide produced from using wood is recycled back into more wood by regenerating forests within a few decades. In contrast, the carbon dioxide from fossil fuels is added to the atmosphere.

Wood is environmentally friendly because it is energy efficient. Compared to wood substitutes like steel and concrete, it needs less than a tenth of the energy.

Recent research in New Zealand shows that building in wood can be eight percent cheaper than concrete and five percent cheaper than steel over the fifty year life of a building.

Let me set out the context in which wood production and processing will take place in the coming few years. First and foremost, the environmental market place is changing. All over the world right now − and particularly in high value markets − consumers and regulators are growing more aware of environmental issues. They are demanding higher standards. And in many cases, they are setting barriers to market access based on environmental measures.

The climate is changing. You only need to glimpse the increasing frequency and severity of dramatic weather events to see the risks of climate change. This is a commercial issue for us because we can achieve a premium in global markets for products that are produced more responsibly.

It's also a commercial issue for New Zealand because our primary production is exposed to climate change. No developed economy is as dependent on primary industries as ours, so the state of our climate is a crucial issue for us.

It's not only a commercial issue. It's also a moral responsibility we have to our children to do our bit to preserve the health of our habitat. When we look around at the tools we have to mitigate the effects of climate change, forestry stands out.

Trees sequester carbon from the atmosphere. There is increasing acceptance of the benefits of using trees to off-set carbon emissions. Trees have important environmental benefits beyond their role in sequestering carbon. They help to stabilise soil on erosion-prone hillsides and enhance water quality.

And forests make an important contribution to bio-diversity, too. Not just indigenous forests − our plantation forests are home to many indigenous species, including plants, insects, bats and kiwi, and other iconic birds.

So I feel positive about the future for wood because it has to be part of the solution.

And it's for this reason that I have worked closely with the industry. I want to take the opportunity, once again, to thank the industry for the constructive way it has engaged with me and with the government.

To recap, I'd like to talk about some of the achievements we have been able to record through a strong partnership between government and the wood sector:
. The RADA centre in Rotorua was established as a centre of excellence for wood processing education and training with $6.4 million dollars of government assistance.
. The government-backed the FIDA wood processing market development projects to the tune of $1.5 million dollars.
. We've already spent another $1.5 million dollars in the NZWood campaign, with a further $3.3 million dollars to be spent.
. Another $1.2 million dollars has been spent on a special fund related to improved market access for wood products.
. The government contributed $2 million dollars towards two professorial positions to teach and research the use of timber in commercial building design.
. $2.5 million dollars is available to part-fund up to two government buildings that would ordinarily be built in other materials. They will be demonstration projects to show how multi-story buildings can be constructed with wood.
. And by late next year all government-funded project proposals for new buildings up to four storeys high will require a build-in-wood option at the initial concept stage (with sketches and price estimates). Departments will have to at least consider a build-in-wood option. That will provide a platform for the Wood Processing Association's members when decisions are being made.

That is a convincing list of examples of the government's commitment to play its part in ensuring the industry can take advantage of its own strengths. As we look to the future, however, I am certainly concerned about some of the issues ahead.

The latest statistics show that for the year to June, volumes for products exported by Association members were fairly stable, compared with the year before, to June 2006.

But prices on average were up by ten percent. That suggests members were achieving higher returns for the same product. Then if we look more closely at the quarterly figures, a different story emerges. Volumes on average went up by sixteen percent on the previous quarter, whereas average prices fell by thirteen percent.

So what might be behind those figures? Markets were still fairly buoyant in the June 2007 quarter, which might account for the rise in volumes against the March quarter.

But the average exchange rate for the June quarter was US74 cents against US70 cents for March. So the exchange rate isn't exactly helpful.

I know you've heard a bit about the exchange rate today from Dr Michael Cullen, and you are asking Bill English to talk about it, too. In that context I can observe we face some choices. I anticipate Mr English will say he strongly supports the current monetary policy framework and he will say he would take pressure off the exchange rate through a different fiscal policy.

Let's be frank, there is no voodoo answer to this. The government is already leaning against domestic demand. We are pulling more cash out of the economy than we are putting in, and the resulting surplus comes at a real political price. But it is fiscally prudent and that fiscal policy supports monetary policy. If anyone − Mr English or anyone else − says they will take more pressure off interest rates through fiscal policy than the government is already planning, then they can only be talking about reducing spending or increasing taxes.

Anything else is a fiscal impulse, which strengthens inflationary pressure and therefore leads to interest rate rises, which have been behind the high exchange rate.

To put it another way, when I read our political opponents' pledges to cut taxes and spend more, I am very clear about what I am hearing: Higher inflationary pressure, higher interest rates, a higher exchange rate for longer, and yet more pressure on exporters.

If exporters don't want a high exchange rate, it's time for them to start speaking out about the opposition's statements that the government should hand out more cash. If you don't say something about it, you're not really serious about the exchange rate.
The only alternative is to change the monetary policy framework, so that − one way or another − interest rates didn't have to rise, and the exchange rate didn't have to move as high every time there was some growth in the economy.

This might conceivably be done, for example, by widening the considerations the Reserve Bank takes into account. You could require it to maintain reasonable exchange rate stability. The exchange rate reflects the price for our money, and we maintain price stability for everything else in the economy! I'm simply pointing out that there are options. The Finance and Expenditure Select Committee is currently investigating monetary policy, and I am looking forward to seeing what useful recommendations it comes up with.

But I also want to add this: It's no secret that I was an opponent of the current monetary policy when it was introduced. When I campaigned hard on the issue in the nineties, I pointed out the effect the exchange rate has on our productive sector, and on our exporters in particular. And I was absolutely demonised by the business sector for that heresy.

Other politicians watched what happened to me and learned the lesson that there isn't much for them to gain from calling for an export friendly monetary policy.

Therefore, you will not find much political support for changing the Reserve Bank Act. It isn't going to happen, at least not without a very substantial reversal in business opinion.

Exporters have got what business representatives wished for.

I recognise this is hurting a lot of exporters. I've been in regions of New Zealand recently where tens of millions of dollars are at risk from the pressure the exchange rate is placing on export businesses.

One of the major factors in the level of the exchange rate is the weakness of the US dollar. The Canadian wood sector is facing the same problems as us. The Canadian dollar is now worth more than one US dollar. A couple of years ago, a US dollar cost $1.60 Canadian. So other countries are in the same boat as we are. I hope that makes you feel better!

The only way to cope with exchange rate fluctuations is by being in the market to sell high value, highly niched products that command a price differential. The more we are exposed to commodities markets, where we are simply price takers, then the more we are exposed to exchange rate (and freight rate) fluctuations.

And the truth is, if we are successful in lifting our standing relative to other developed countries, then it is inevitable that we will have a higher exchange rate.

The effort to shift to higher value production and more innovation is behind the government's work with your sector. From the Design Taskforce to the NZ Wood campaign, we have been supporting innovative New Zealand companies to find a way to create value from New Zealand's unique creative advantages.

Another way of achieving a premium in our markets will be by positioning New Zealand as the source of environmentally responsible production.

That's one reason why the emissions scheme is such an important issue for New Zealand. Climate change is not only a problem for us − it is also an enormous opportunity.

I know some members here have called for the government to go more slowly on implementing the Emissions Trading Scheme. There are other business interests saying, "let's get on with it - the sooner the better". Maybe we have got our approach about right by coming in the middle of the two points of view.

The government's decision in principle is that forestry will enter the Emissions Trading Scheme from 1 January next year. The government will meet the cost of 21 million tonnes of deforestation emissions from pre-1990 exotic forest from 2008 to 2012.

Owners of pre-1990 forest land will only face obligations if they remove the trees and introduce a new land use. There won't be any emission obligations if they temporarily remove trees for harvest and then replant.

Owners of all post-1989 forest land will have the choice to enter the ETS and receive all of the sink credits and future liabilities associated with this land. Owners who enter the scheme will be obliged to take responsibility for the ongoing changes in the carbon stocks of their forests.

There are some further issues beyond the decisions in principle that I think can be cleared up through the process of engagement in the coming months.
But I want to urge you to focus on making the scheme work in the best way − not on trying to get out of our climate commitments.

There are two more issues I will touch on. One is the Green Building Council's Green Star Rating for office buildings.

I want to start out by noting the Green Building Council is not a government agency and so the government cannot dictate to it. The wood industry made its own decision not to join when the council was set up. It's not for me to review that decision or wonder what difference it might have made. But we are now in a catch-up situation.

The Green Star system is currently the only building rating tool available in New Zealand. The system says you have to be certified by the Forest Stewardship Council to gain ratings points. There are other schemes, and the government has − in its procurement policy − taken the view that there should not be a monopoly by a single certification system.

I'm discussing the issue with the Minister for the Environment, and we are cooperating on steps which we can take to help resolve the situation, and I know you are talking to the Green Building Council. So we will see.

There's also an issue that ratings systems, including Green Star, don't account for life-cycle or embodied energy attributes of construction materials.

Wood can have superior 'whole of life' attributes compared to substitute products. I can tell you MAF is looking at this issue.

The other issue I want to mention is your Association's call for an inquiry into the health and environmental risks of tin-based timber treatment chemicals, in response to widespread complaints from builders.

There is an issue of the industry's reputation here, especially during times of high demand for product. The industry needs to ensure that comprehensive quality assurance programmes are in place and are being properly policed.

The alternative to self-regulation is regulation being imposed − as recently happened in the building industry − and the real estate industry!

I know you will have questions for me about further issues in the industry. So I want to first congratulate the Wood Processing Association for taking a proactive approach to issues over the last twelve months, such as the support for the pan-industry NZ Wood promotion. And I congratulate the Association also for engaging positively with me and with the government.

This is only the second annual conference of the Association, but it has quickly made its mark − not only for its members, but also on pan-industry matters.

As I have noted today, there is a lot of ground to cover, but we have some considerable opportunities ahead.

I wish you all the best for a continuing partnership across the industry and government to unlock those opportunities.


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