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Friday Offcuts – 26 February 2010

This week a couple of the larger players in Australia announced their six monthly results. Not surprisingly, they weren't that flash. For PaperlinX Limited, the company's Group revenue for the period of AU$2.74 billion was down 28% on the previous corresponding period, while the volume of 1.5 million tonnes was down 24%. Both results were due mainly to one-off costs associated with the exit from the Tasmanian manufacturing operations by the company and the impact of weak markets.

Gunns were also blaming difficult trading conditions for their six monthly result. A downturn in Asian demand for its woodchips and a rising Australian dollar led to a 24 per cent revenue slump and a 98 per cent plunge in their half-yearly profit. The result was an immediate drop in the company's share price. It dropped 19.5c, or 22.2 per cent following the announcement, to finish at 68.5c and had fallen to below 63 cents mid afternoon yesterday. This is the lowest it's been since the financial crisis, and some way off the highs in 2005 of $4.75. Asked to explain to the ASX about the massive profit drop Gunns said it had informed the market of its financial difficulties over the last six months but wasn't aware of the scale of the losses until just last weekend. Both stories are covered in this week's issue.

On a much more favourable note, our Agrifax NZ log price report in this weeks issue paints a much better picture. In addition to China, increased activity from key markets like Korea, India and to a lesser extent Japan, has all been good news for New Zealand log exporters in February. In-market prices to China and Korea are now the highest seen since NZX Agrifax records began back in 2003.

Finally, thanks to all of our readers who participated in last week's on-line quiz. The question posed was, "In 2009, which South American country had attracted the most foreign investment into plantation forestry?". Brazil was rightly selected by participating readers (43% of the votes cast) as the country with the greatest degree of plantation forest ownership, a significant 44% in 2009. Interestingly, Chile (33% of the votes) was identified as the second largest. In fact last year, there was only 7.6% in foreign ownership, a distant third behind Uruguay with 37.9% foreign ownership.

This along with a number of other key issues impacting on forestry investment about the globe - with a particular emphasis on Australasia since the financial crisis - will be discussed as part of the Future Forestry Finance (www.forestryfinanceevents.com) series that runs in Sydney and Auckland next week. We are looking forward to meeting up with many of you over the next few days.

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Top bidding for Forestry Plantations Queensland

Bloomberg reported last week that U.S.-based Hancock Natural Resource Group Inc., Global Forest Partners LP and Rayonier Inc. are among the top international contenders submitting bids for a 99-year lease to manage 210,000 hectares of plantations from Forestry Plantations Queensland. The state plans to retain ownership of the underlying land to protect access rights for the public, and a condition of any sale was to be that recreation in state plantation forests would continue.

Citing a report in The Australian Financial Review, Bloomberg said bids were being submitted 19 February for the asset, the first to be sold under a privatization program for several state assets announced in June 2009 by Queensland Premier Anna Bligh.

The price tag the government put on the forestry asset last June was around AU$500 million which Bligh said at the time was to help keep the State's massive building program going. According to the Australian Financial Review, the sale is expected to complete by June, Bloomberg noted. Source: www.forestweb.com


Matariki completes NZ$167 million forest investment

Matariki Forests announced on 19 February that it has completed the investment by Phaunos Timber Fund Limited in the Matariki Forestry Group. The aggregate investment is NZ$167 million. Matariki Forests is owned by a consortium and managed by Rayonier New Zealand, a subsidiary of Rayonier Inc. Phaunos Timber Fund Limited as reported in earlier issues of Offcuts is a global timberland and timber related assets investor listed on the Main Market of the London Stock Exchange and managed by FourWinds Capital Management based in Boston.


Canadian wood pellet plant country's largest

Pacific Bioenergy and Belgian utility company Electrabel have formed a partnership to make Pacific Bioenergy's Prince George pellet plant the largest in Canada.

The C$24 million expansion will increase production from 180,000 tonnes per year to 350,000 tonnes per year, making it the second-largest wood pellet plant in North America. Pacific Bioenergy vice president Brad Bennett said the agreement will give Electrabel, a subsidiary of French utility giant GDF Suez, minority control of the pellet company.

"The demand for pellets in Europe is going to quadruple in the next 10 years," Bennett said. "It's all about securing supply for (Electrabel). They invest in us, they secure that supply. (And) it puts us in a very secure position."

Electrabel has signed an agreement to purchase 250,000 tonnes of pellets per year for 10 years, he said. The deal is expected to reduce Belgian coal consumption by two million tonnes and reduce greenhouse gas emissions by four million tonnes over by 2020.


Four-shift continuous operation announced by Tenon

Specialty wood products manufacturer Tenon Ltd., which posted its first-half results for the six months to Dec. 31 on Feb. 17, says its plant in Taupo, New Zealand, is to become the only grade-sawing mill in the world operating on a 24/7 rotation in today's operating climate.

The absence of a net profit in the company's financials masks growing activity at Taupo, Scoop Business reported. The plant plans to move to continuous four-shift operation during the current quarter to meet current and future demand from China. Chairman Luke Moriarty said the move was an excellent achievement in a continuing difficult operating environment. More >>


Gunns' strategic review to reshape the company

Gunns Ltd on Monday reported a net profit after tax for the six months to 31 December 2009 year of AU$0.4 million, following the downturn in Asian markets and a rising Australian dollar. Earnings before interest and tax for the half was AU$4.8 million with operational EBIT at AU$7.8 million, an 88 per cent decline on the prior corresponding period. Group revenue for the period was $325.9 million, down 24 per cent.

Chairman John Gay said trading conditions had been extremely difficult in the company's key markets throughout the 2009 calendar year and had caused the depressed earnings for the reported period. A decline in managed investment scheme sales due to the collapse of several operators also impacted profits in the period. Recent improvement in key markets is expected to result in an improved second-half result and dividend distribution.

"The landscape for the Gunns business and the broader forest industry has changed significantly as a direct result of the global financial crisis," he said. With the changing conditions in key markets and industry opportunities which have arisen, Gunns has undertaken a comprehensive strategic review to reshape the company to realise value in the group's assets and participate in growth opportunities. Gunns intend to restructure the group to;

- Establish an investment vehicle to facilitate direct investment in our plantation forestry assets
- Provide a more compelling investment structure to assist in closing the financing arrangements for the Bell Bay Pulp Mill
- Establish a stand-alone timber processing business to build on the merged Gunns, Auspine and ITC operations and participate in future consolidation opportunities.

'Advisors have been appointed to fast track this restructure, which although complex, should deliver significant shareholder value if executed in a timely manner." For more information on the release, visit www.gunns.com.au


New Zealand Log Prices - February 2010

Fears of Chinese log demand tailing off for the New Year celebrations have proven unfounded in the past month. An increase in activity from other markets, such as Korea, India and to a lesser extent Japan, has created a favourable situation for New Zealand log exporters. In-market prices to China and Korea have leapt US$10/JASm3 to US$133/JASm3 for a KS log and US$127/JASm3 for a KI log. These are the highest in-market prices observed since NZX Agrifax records began in 2003.

China has emerged as the benchmark for pricing New Zealand export logs. In 2009, New Zealand exported over 8 million m3 of logs, up 20% in volume from 2008. China's share in 2009 was 54% compared to 30% in 2008. China is also growing in importance as a destination for New Zealand sawn timber products, climbing to a 22% share of the 2009 export total of 1.8 million m3. China's share of a similar volume in 2008 was 13%.

These changes have come as a reduction in supply from Russia continues, due to uncertainties over Russian government export legislation. Added to this is the free trade agreement between New Zealand and China gaining traction, and large amounts of excess cash available in China due to economic stimuli in the past twelve months. There is now evidence of a systemic shift in sourcing patterns from China.

The Korean market has continued to recover, importing over 600,000 m3 of logs from New Zealand in the September 2009 quarter. In Japan, finally, signs of an upturn in this market have seen A Grade log prices recover some ground.

Shipping costs and foreign exchange have both moved in favour of exporters in the past month. Spot shipping rates have softened US$2/T to US$44/T into the Chinese and Korean markets. Further downward pressure is likely in the coming weeks. The Baltic Dry Index is on the decline, tumbling below 2600, which is 27% below December 2009 levels.

Domestic log pricing has held firm in the past month in the face of building price pressure from export demand. Despite domestic pricing normally occurring quarterly, there has been evidence of a lift in prices in some parts of the country. The result has been a P1 log rising NZ$2/T to $124/T and P2 logs edging up another NZ$1/T to $NZ108/T. Lower grade domestic sawlogs have remained mostly unchanged in the past month.

Overall Log Index and Summary
The NZX Agrifax Combined Log Price Index, which measures returns from the whole forest, has jumped NZ$4/T to NZ$82/T. It was last at this level in November 2008 when pulp logs underwent a surge in value. In February 2010, the index is being fuelled by export log prices, with further rises likely in the short term.

Log price changes:
North Island:
  • Domestic: Pruned prices are stable to up $2/T. Unpruned prices are steady to up $2/T.
  • Export: Grades are up $5-$15/T. Pulp log prices are mostly stable.

    South Island:
  • Domestic: Pruned prices are steady to up $2/T. Unpruned prices are steady to up $2/T.
  • Export: Prices are up $10-$15/T. Pulp log prices are stable.

    For more detailed reports contact Agri-Fax at: www.agri-fax.co.nz/enquiries.cfm


    NZ West Coast forestry strategy released

    Forestry Minister David Carter has released the Government's future strategy for the Crown's West Coast plantation forests, which aims to keep as much production and employment on the Coast as possible. The release of the strategy follows a full review of the forests and supporting industry undertaken by the Ministry of Agriculture and Forestry's Crown Forestry unit.

    This was on the back of the transfer of the former Timberlands West Coast forests to the Crown in January 2009 after the State Owned Enterprise's Board advised the previous Government it could no longer operate profitably. "Currently 65 percent of logs from West Coast forests leave the area unprocessed. The strategy aims to improve that situation so that jobs and profit can be retained on the Coast," says Mr Carter. More >>

    As a response to the release of the Government plans, an industry representative says it has to accept that some of the 560 forestry-related jobs will be lost in the process. Forestry Minister David Carter believed Crown Forestry, which took over the West Coast operation from state-owned enterprise Timberlands last year, would lose NZ$15 million on the region's forestry operations before breaking even.

    The industry's problems stretched back to 2000, when logging native rimu ceased. Sawmills had to switch to cutting radiata pine. Timberlands had assured sawmillers there would be enough radiata pine produced to continue work but supplies never met expectations. There are now only four sawmills on the Coast and much of the wood being produced, unpruned logs, are being processed elsewhere because local sawmills are largely set up for sawing pruned logs.


    Southland forestry fire just about contained

    A blaze northwest of Dunedin in the lower South Island has engulfed over 800ha of plantation forest and cutover - as of yesterday afternoon - and had spilled smoke over much of neighbouring city of Dunedin. The fire broke out about 4pm Monday in a cut-over Wenita forestry block just above the Taieri River at Mt Allen.

    Earlier in the week it was reported that a spark caused by friction from a logging haul rope may have started the fire but the official investigation into the cause won't begin until the fire is under control. Ten helicopters were in the air attacking the flanks of the fire with monsoon buckets for two days after it broke out as the scene remained too dangerous for ground fire crews. It had been a complicated fire because of the terrain, and the forest cover. Ground crews moved in yesterday to attempt to contain and put out the fire.


    Forest Enterprises goes into trading halt

    It was reported on Wednesday that timber company Forest Enterprises Australia had gone into a trading halt, sparking speculation about the company's future. FEA has until today to refinance its bank loans of around AU$200 million.

    An Australian Securities Exchange release from the company said that the trading halt was necessary because it expected to make an announcement to the market in relation to financial covenants and finance facilities. FEA's stock had fallen by more than 30 percent in the last few days and was trading at 4.5 cents at last trade.


    75 million tons of woody biomass consumed in 2009

    The global pulp and paper industry has substantially increased its use of woody biomass for energy the past few years, which has consequently reduced dependence on fossil fuels, reports the Wood Resource Quarterly. Since 2006, energy generated from biomass has gone up over 50%, last year accounting for 18% of the total energy consumption by this industry sector.

    Over the past few years, there has been a rapid, worldwide expansion in the consumption of renewable energy by the pulp and paper industry. Numerous pulp and paper plants have made the strategic decision to invest in the equipment needed to make the switch from fossil fuels to woody biomass fuels.

    Global consumption of biomass increased by 51% between 2006 and 2009, according to an analysis done with FisherSolve" (Fisher International). The annual consumption of biomass used for energy generation by the global pulp industry in 2009 was an estimated 75 million tons. While the biggest increases have occurred in Latin America and Asia/Oceania, mills in North America and Europe are still the largest users of biomass material.

    Not surprisingly, the leading biomass-consuming countries by volume are regions with large areas of forests, including Canada, the US, Brazil and Sweden. Perhaps somewhat unexpectedly, pulp mills in Finland, New Zealand, Australia, France and Germany have consumed fairly small volumes of biomass up until now.

    As a percentage of total energy usage, the share of energy generated from biomass has, on a global basis, increased from 16% in 2006 to 18% in 2009. Norway and Sweden took the lead in biomass usage at 42% and 38%, respectively, followed by Canada, Brazil and New Zealand. At the other end of the spectrum are China, Australia, Japan, Spain and Germany, all of which are countries where the pulp mills on average used less than 10% renewable energy at their plants last year.

    Another interesting development is that with the increased usage of bark and wood fibre for energy, pulp mills have expanded their external sourcing of the biomass. In 2006, 53% woody biomass was purchased in the open market; in 2009, this share had increased to 69%. Pulp and paper mills in Latin America and Asia/Oceania were generally less reliant on purchased biomass than plants in Europe and North America.

    Source: Wood Resources International LLC, www.woodprices.com


    PaperlinX Limited restructuring well advanced

    PaperlinX Ltd has announced results for the six months ended 31 December 2009. Results for the period were substantially impacted by one-off costs primarily associated with the exit from the Tasmanian manufacturing operations. Group revenue for the period of $2.74 billion was down 28% on the prior corresponding period, while volume of 1.5 million tonnes was down 24%, both were mainly the result of the exit from paper manufacturing operations in Australia and the impact of weak markets.

    One of the key features of the announcement was that the company's exit from paper manufacturing is progressing to plan. This result includes a number of one-off significant items relating to the exit from its remaining Tasmanian operations, which will be completed by the end of June 2010. A sale of the Burnie Mill remains a potential alternative to closure.

    Following the Tasmanian exit, PaperlinX will be solely a global merchant. "Going forward, our business will be a focussed merchanting business, with around 60% of our revenue generated in Europe and the balance split between North America, and Australia, New Zealand and Asia (ANZA) PaperlinX Chief Executive Officer," Mr Tom Park, said.


    People on the move in the NZ forestry sector

    Two long serving industry leaders in Rotorua are moving on. MAF Regional Team Leader John Vaney is retiring at the end of February 2010 after 41 years in the NZ Public Service, with most of this time based in Rotorua. Over the last 12 years John has been the Regional Team Leader for New Zealand MAF Policy's activities out of the Rotorua Office with a focus on forest industry policy advice and related projects in the North Island. Throughout his career John has had senior management and technical experience in all aspects of forestry and wood utilisation, with particular emphasis in the fields of wood processing development, timber end use, training, consultancy services, management of the Crown's Maori lease forests, quarantine and protection services, investment promotion, offshore market development and policy development.

    Another person on the move is Russell Black of Tachikawa Forest Products based in Rotorua. After 15 years at Tachikawa Forest Products including the last seven years as site manager, Russell is leaving the company on 25 February to pursue other opportunities within the industry. Russell joined the company in 1995 from the Forestry Corporation, with specific responsibilities for human resources management. His forester background quickly added range of other functions to the role including environmental compliance, process and technical development and as site manager from 2003 he took the opportunity of developing and introducing plant automation onto the Rotorua site.

    The team at Friday Offcuts and FIEA would like to thank both John and Russell for their support and work within the NZ Forestry sector.


    Video tour: Richmond Olympic Oval

    The Richmond Olympic Oval in Vancouver is just one of its many green buildings being used for the 2010 Winter Olympics. The Vancouver Olympic Committee (VANOC) kept the environment in mind when planning the festivities and focused on LEED certification for its buildings, using alternative fuel vehicles, and its use of carbon offsets.

    The Richmond Olympic Oval, which has been the home to the speed skating events, is a LEED Silver certified building that has a unique roof. Forests in the area were devastated by a Mountain Pine Beetle and to help prevent the spread of these pine-beetles, many trees were prematurely cut down. Instead of going to waste, the building's designers used this wood to create the six-acre roof of the Olympic oval.

    This video gives a tour of the Richmond Olympic Oval and describes the plan for the building once the 2010 Olympic Games have finished.


    Wood chips replace grit and salt on icy roads

    Specially prepared wood chips, marketed under the name Stop Gliss Bio, are claimed by the maker to be both more efficient and more environmentally friendly than either the salt or the gravel traditionally used for de-icing. The chips were pioneered two years ago in the western Swiss town of La Chaux-de-Fonds, which, at an altitude of about 1,000 metres, is known for its cold weather. Since then more and more villages and even cities have been taking an interest.

    The CPAG firm which makes the chips was originally a manufacturer of industrial chemicals. But its markets crashed in 2005 and it faced closure. It was when they were looking around for a replacement product, that the idea of Stop Gliss Bio was born.

    It uses small, slim rectangles of wood, impregnated with magnesium chloride. They are cut to a specific size so that they can be spread by all European standard salt spreading machines. "It's like a coin: it always falls flat," company owner Bernard Konowal explained. "And it has a surface five or ten times greater than a piece of gravel".

    The trick is that the chip slowly releases the magnesium chloride trapped in its fibres, making itself a "nest"in the ice, from which it will not move. The experience of the past two years in La Chaux-de-Fonds has shown that the surface will not refreeze for five days if it does not snow again heavily. This contrasts with salt, which melts the ice faster, but at temperatures under about minus ten will not keep the surface unfrozen for more than a few hours. So salt may have to be reapplied several times a day... More >>

    Source: www.swissinfo.ch




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    ...and one to end the week on...just a weeee bit

    An extraordinarily handsome man decided he had the responsibility to marry the perfect woman so they could produce beautiful children beyond compare. With that as his mission he began to search for the perfect woman.

    Shortly there after he met a Redneck who had three stunning, gorgeous daughters that positively took his breath away. So he explained his mission to the Redneck and asked for permission to marry one of them.

    The Redneck simply replied, 'They're lookin' to get married, so you came to the right place. Look! 'em over and pick the one you want.' The man dated the first daughter. The next day the Redneck asked for the man's opinion. 'Well,' said the man, 'she's just a weeeeee bit, not that you can hardly notice...pigeon-toed.'

    The Redneck nodded and suggested the man date one of the other girls; so the man went out with the second daughter. The next day, the Redneck again asked how things went. 'Well,'the man replied, 'she's just a weeeee bit, not that you can hardly tell...cross-eyed.'

    The Redneck nodded and suggested he date the third girl to see if things might be better. So he did. The next morning the man rushed in exclaiming, 'She's perfect, just perfect, she's the one I want to marry.'

    So they were wed right away. Months later the baby was born. When the man visited the nursery he was horrified: the baby was the ugliest, most pathetic human you can imagine. He rushed to his father-in-law and asked how such a thing could happen considering the beauty of the parents.

    'Well,' explained the Redneck... 'She was just a weeeee bit, not that you could hardly tell...pregnant when you met her.'

    And on that note, have a great weekend. Cheers.

    Brent Apthorp
    PO Box 904
    Level Two, 2 Dowling Street
    Dunedin, New Zealand
    Ph: +64 3 470 1902
    Fax: +64 3 470 1904
    Web page: www.innovatek.co.nz

    This week's extended issue, along with back issues, can be viewed at www.fridayoffcuts.com

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