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Forestry fortunes fall, plantings tail off

By Chris Hutching

Friday 19th September 2003

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The devaluation of the Fletcher Challenge Forests' crop by roughly one third reflects the declining fortunes of the sector where new plantings are falling due to rising land prices, lower international prices and soaring freight charges.

Brokers who put together smaller forestry offerings and syndicates are also reporting a reduction in activity. Forest Enterprises business director Steve Wilton said his company is "sitting on its hands" as far as new investment offerings are concerned and secondary market on-sales of investment units have also fallen.

"Normally we'd have 10 to 20 units for sale but at the moment we've got four. One of the biggest challenges is high land prices which affect returns and means that often new plantings are a long way from processing centres. But the biggest issue, apart from falling prices, is the cost of sea freight which has increased nearly 50% in the past 18 months," Mr Wilton said.

Investors who bought into their forestry investments many years ago and were expecting them to be harvested about now are hardest hit and the only solution is to defer or reduce logging in the meantime in the hope fortunes will pick up before the trees reach the required maturity when they should be harvested or lose value.

"We're harvesting but at a slower pace. It's extraordinary because six months ago it was impossible to get harvesting contractors but now mills are closing in some places," Mr Wilson said.

"It's not even around the country either. In the Wairarapa there's actually a local shortage at the moment because of the harvesting strategy of main players in the area. But the so-called wall of wood seems to have disappeared.

"We're supposed to be in the thick of it now but general opinion seems to be that maybe we're just past it and it will probably plateau over the next three or four years."

The forest industry harvested a record 22.6 million cubic metres of logs in the year ended December 2002, according to the Ministry of Agriculture and Forestry, compared with 15.3 million cubic metres for the 1998 calendar year, a rise of 48% in four years, mostly in Hawke's Bay and Otago.

About 10% of New Zealand Rural Property Trust's portfolio is comprised of forests at Ngaruawahia where some mature blocks are still being harvested albeit at a reduced rate. Returns have declined over the past 12 months from $51 a tonne to 38 a tonne recently.

Longer term, the bigger challenge is to maintain the plantings required under the Kyoto carbon-credit regime. According to many industry players the government may even have to subsidise new plantings if it hopes to fulfill its retain its obligations. They have formed a lobby group and intend to step up their activities in coming weeks. The government requires about 50,000ha to be planted annually but recent figures suggest this year there will be new plantings of just 10,000 to 20,000ha.

Forestry broker Roger Dickie emphasised the long-term nature of forestry investment and said there was still strong investor demand judging by the speed with which the company fulfilled its latest Onslow prospectus offering of a block in Otago to be planted in douglas fir. Higher rural land prices mean yields from rural properties have fallen to about 5% from twice that level a couple of years ago, Mr Dickie said.

Listed Evergreen Forests has also taken the full brunt of falling forestry returns, recently reporting writedowns of to $141 million. Revenue was up but the devaluations tipped Evergreen into the red to the tune of $36 million, reducing net assets from 79c a share 12 months ago to 66c a share. From a high of 61c in January the shares have eased to 45c.

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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