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Carter Holt Harvey running fast just to stand still


Friday 25th October 2002

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Is Carter Holt Harvey boss Chris Liddell deserting a stranded ship?

While not on the rocks, New Zealand's premier forestry company looks more likely to remain marooned than sail into clear water.

Mr Liddell, promoted to finance vice-president at CHH's parent, International Paper, is universally admired for how he has led and transformed the company.

From a sluggard rooted in the domestic market, he has turned it into an export-orientated company with mostly competitive cost structures.

Last week, the company reported a third quarter net profit of $57 million, nearly four times the year ago figure.

The problem is, that despite all this, during Mr Liddell's 3-1/2 year tenure, CHH's share price has shed around 40 percent of its value. It is languishing at $1.63, down from $2.16 in June and $2.60 when Mr Liddell took the helm.

Mr Liddell, 44, admits there is unfinished business in transforming CHH to a position where shareholders obtain an acceptable return on capital.

"It's still very much work in progress. It's a tough industry -- that's the reality and we can't hide from that."

Around half CHH's assets are locked up in trees and logs. For the past five years logs have been getting less than acceptable returns.

For five years CHH tried going down the value chain by not pruning trees, going for low cost, but it has reverted to pruning and trying to add more value.

Mr Liddell has marched up and down the country preaching the need for CHH and New Zealand to become "internationally competitive" cost-wise if it wants to attract the billions of dollars needed to process the "wall of wood" coming on stream in a few years.

His company has followed that advice by slashing around a third of the 790 employees at its giant Kinleith mill in Tokoroa, which Mr Liddell describes as a key to the industry's future here.

Although that painful restructuring is nearing completion, Mr Liddell is still not confident of the investment coming to New Zealand.

"I think we still have a big challenge when you consider the industry is not earning its cost of capital, and that's not just a Carter Holt phenomena.

"We don't have that world class infrastructure at the moment and we need to find a way of getting it."

Analysts cite CHH's failure to get acceptable returns out of Kinleith as one reason for CHH's languishing share price.

Forsyth Barr Frater Williams head of research Rob Mercer said CHH had been too slow winning cost cuts at Kinleith given it invested hundreds of millions upgrading capacity at the pulp and paper mill.

"Kinleith has been a disappointing story. They have spent the capital and it's taken a long time to wind down to the current reorganisation," he said.

Such large scale changes were always difficult to implement and he said the risk of industrial problems bedding down the changes were high.

Mr Mercer said it has been an extremely difficult five years for logs and despite several large investments in Australia and New Zealand in engineered wood products processing, the company could not escape its exposure to logs and pulp.

The investment in engineered product plants, such as the recently completed $130 million laminated veneer lumber (LVL) plant in Whangarei and this month's $58 million purchase of a medium density fibreboard (MDF) plant in Tasmania, were useful.

But to cope with the massive increase in logs coming on-stream New Zealand needed to build one, two or three more pulp and paper mills of Kinleith's size, said Mr Mercer.

Mr Liddell says that that was a possibility if the cost structures are right.

One of his main gripes is that New Zealand has not got a world class infrastructure, and that was inhibiting exports.

Although not pessimistic about New Zealand's prospects, Mr Liddell believes the country is just treading water in its goal to regain a living standard in the top half of the OECD.

"We need to do a lot more than we are currently doing. I'm not sure we have put in place the fundamentals to really change the economy over the long term."

He cites the need for free trade agreements, world class infrastructure, reviewing labour laws and tax structures.

"A number of these are more aspirational than where we are heading," he said.

Mr Liddell and partner Bridget Wickham, chief executive of Auckland University Developments, have been active in attempting to bridge the gaps between business and government. However, when he talks of major tax and labour reform, there is a strong suspicion his views are not in synch with the current Labour-led Government.

Chief executive-designate Peter Springford, a 48-year-old Kiwi who has been spearheading IP's push into China, will bring expertise in wood product operations and marketing in Asia.

"You will see a continuation of the current strategies, but the emphasis I will be bringing is in the area of market development, particularly in forest products for Asia," he said.

He places particular emphasis on developing the Chinese pine tree market which is growing so fast it is set to overtake Japan as CHH's second biggest market for logs after South Korea.

"The thing that I am interested in is finding the right sequence in Asia so that we can get a better margin for radiata pine," he said. "So it's about putting people on the ground, doing market development and research."

New Zealand has had difficulties getting its fast growing pine accepted as structurally strong enough and Japan has been cutting its intake of New Zealand product.

The great hope is China with its vast market and booming economy.

"China is a growth market for our products, and it's currently wood-short so that represents an opportunity for us," said Mr Springford, adding he is confident about the company's prospects.

Overall, there is the rather depressing impression that for all its running, CHH is not getting much go-forward.

"We've got a subdued outlook," said Mr Mercer. "We are not factoring a strong recovery in logs and pulp at this stage although we are positive on the domestic wood products area."

Asked if he expected any large investments in the forest industry, he said: "There's no evidence of it out there at the moment."

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