Executive Summary

Ministry for Primary Industries – Te Uru Rākau (MPI) is interested to understand the opportunities and limitations of transporting logs between regions, and typical catchment areas for wood processors. The outcomes of this work will provide MPI with:

• A better understanding of the logistical constraints around log supply and how this affects the effective catchment area for wood processors; and

• Identify what options are available to improve the economics of log supply (and expand the catchment area for mills), particularly in wood constrained regions such as Northland.

Forme Consulting Group Ltd (Forme) was commissioned by MPI to carry out an assessment of opportunities to increase the catchment area for mills and the efficiency of transporting logs between regions.

Log supply in Northland is expected to decline from current levels of approximately 4.4 – 4.6 million m³ pa, noticeably from 2023/2024. The decline will occur sooner if “early” harvesting continues. The trend is forecast to bottom-out around 2030, providing demand remains stable in the preceding period and current harvest patterns prevail. Availability will not commence recovery again until 2037/2038.

Forme overlaid the Northland Log Processors individual annual log demands by grade on to annual harvest availability projections which were created using Forest Owner yield information and the age class profile created with new mapping data. Individual owner age class profiles, preferred harvest ages and forest locations also affect availability of logs for sale to export or domestic users. By netting demand off availability projections an estimate of annual surplus or deficit was created. The equation is highly dynamic. The forecast outcomes are influenced by projected changes in forest yield projections by log grade over time, total recoverable volume (TRV) changes due to improved crop genetics and management, Pruned disappears from the region to be replaced by increased levels of S grade and reduced ratios of A and K grades. Some owners projected significant changes over a time.

Using the maintenance of Northland’s timber processing industry as the starting point for this analysis (requiring approximately 1.817 million m³ of logs annually), an average of 100,000 m³ of log imports will be required each year from 2021 to 2024, rising to 332,000 m³ p.a. between 2030 and 2034, to maintain employment and GDP contribution levels. Note that these figures are averages only. In some years the net supply is much lower than others hence the import need for some years reaches as high as 200,000, 300,000, 400,000 or 500,000 in individual years. Managing this variability is important to ensure a shipper’s support by providing them with adequate, regular demand.

There is inadequate alternative species volume available to provide a meaningful solution for most of the incumbents as they require scale to be successful. Import of Radiata logs from other parts of NZ is one option to fill gaps. Another alternative approach is for an entity, possibly the Crown or an equity fund, to purchase cutting rights for young crops today and lock those up to grow for later consumption whilst commencing inter-regional transport of logs into Northland immediately, thus avoiding closures. A third option is for investment in alternative markets or processing modes including engineered wood products. The latter is specialised and will not suit many of the incumbent operators. The former requires capital and market development.

Sea freight is the most logical immediate individual solution within the timeframe required, however optimising a combination of some road and mainly sea freight, appears the most viable solution.

The potential modes of operation for a sea-focused solution are as follow;

1. Log to Northport by sea predominantly from Gisborne as well as some from Tauranga, shipped on Multi-Purpose vessels (MPP) with 6,000 – 8,000 m³ uplift per voyage.

2. Log to Northport by sea from Gisborne or Tauranga, shipped on Handy size vessels (HSV) mainly with partial loads; 8,000, 12,000 or 24,000 m³ uplift per voyage. Some loads may be deck cargo, which could be exchanged/backloaded for Methyl Bromide fumigated deck cargo (if MeBr use is allowed after October 2020). Batch segregation will be important for ownership and sales.

Supporting measures could include;

1. Reduce overall costs by co-ordinating two way use of logging vehicles in Northland. For each load delivered to Northport for export, a backload of “domestic logs” is taken from the port to a log processor in Northland thus capturing backload cost benefits. The lead distance from port to processors is lower in this scenario than the current average lead distance due to the location of Northland’s forests today.

2. Some logs to be delivered to log processors in Northland by road from the CNI.

3. Attention will need to be paid to segregating un-fumigated logs from fumigated ones intended for foreign export destinations. This will include paying attention to segregation of un-fumigated bark and other log related detritus that may mix to contaminate export cargo.

A centralised organisation coordinating logistics and order requirements may be needed.

Based on cost estimates for a scenario using the recommended MPP sea freight option from East Coast and/or CNI, delivering 100,000 to 330,000 m³ pa by sea between 2020/2021 and 2035/2036 would cost processors an additional $7.5 to $24.7 million per annum. This equates to an additional $74.71/m³ over and above the “normal” average cost of delivering logs to a mill by road from Northland forests. Log Processors in Northland produce an estimated 1.20 million m³ of product per annum in a very wide variety of products from 1.817 million m³ of logs in a variety of grades. Assuming the aim is to maintain input volumes at the status quo, adding $7.5 to 24.7 million m³ per annum of cost to log purchases by using sea freight solutions would increase delivered log costs by $4.13 to $13.59/log m³ across the total log demand. The real impact on each processor would vary broadly with log mix but the impacts on net margins would be significant.

Northland log processors provide jobs for 1,860 direct, indirect and induced employees and add approximately $142 million to the annual Northland GDP in terms of direct, indirect and induced contributions. If action is not taken, it is more than likely that a minimum of 30 % of the existing Northland log processing industry will close or scale down from as early as 2024/2025 at the expense of shareholders’ investment, 558 jobs and a reduction in GDP generated in Northland of as much as $43 million per annum. Closures may occur sooner due to some operator supply losing critical mass.

Log processors in Northland, like others operate in a dynamic business environment, that has seen, and will continue to see significant business reorganisation and disruption, through market trends, automation and scale issues.  The importation of logs into Northland would assist processors to make long term investment and planning decisions (that maximise the benefits to the region), rather than having to respond to shorter term supply constraints. This longer-term perspective (and the role inter-regional log movements fit in it) is central to the findings of this review.

The key lesson learnt in this review is that coastal shipping, using smaller vessels such as MPP has significant potential to help New Zealand processors solve supply problems. Positive spin offs include the ability to take some trucks off congested roads and boosting port productivity and scale. Northport is one example. A combination of road and sea freight is most likely to work in several regions including Canterbury and Northland.

Processors will have to pay export equivalent log prices to motivate forest owners to supply domestic log processors at possibly higher levels of exposure to the domestic market.