What does the future hold for our woodchip industry
Major operators give their views
AUSTRALIA’S WOOD chipping industry has performed extremely strongly over the past five years as exports have surged with major growth from China and to a lesser extent Japan. According to ABARES March/June 2016 data the reported value of woodchip exports reached record levels in 2015–16, increasing 15% from $953 million to $1.1 billion. All well and good, but what of the future? Australian Forests & Timber News decided to ask some of the major players in the business to join our “discussion piece” to help ascertain the industry strengths and just where it is heading.
Members of our expert panel are: Tony Price Managing Director and CEO Midway Limited
Tony is currently Managing Director and CEO of Midway Ltd which is an integrated marketing and processing business with export operations in Geelong, Portland and Brisbane. Prior to joining Midway he held a number of senior management positions in the hardwood plantation sector and has also run his own consultancy business. Tony has around 30 years experience in all facets of the forest industry, but has a particular interest in harvesting, processing and marketing. Tony holds a Bachelor of Science (Forestry) from the Australian National University, a Post Graduate Diploma in Business Management and has attended the International Executive Programme at INSEAD in France.
James Neville-Smith Executive Chairman Neville Smith Forest Products Pty Ltd NSFP SmartFibre Pty Ltd
James is the Executive Chairman of both Smartfibre PTY LTD and Neville Smith Forest Products PTY LTD. He has been involved in the forest processing sector since 1995. The Neville Smith family involvement in the sector started in 1924. James has been involved in many strategic M&A transactions in the sector which has seen the family business grow to become Australia’s largest hardwood sawmill company before exiting the industry completely in 2006. James then led the family back into the Sector in 2010. James worked in the finance markets before joining the family forestry business. He is 46 years old and is married with 4 children.
Rob Scarlett Chief Operating Officer of Bunbury Fibre Exports and Bunbury Fibre Plantations
Rob started his career in forestry in 2005 with Pentarch Forest Products before moving across to Mitsui Bussan Woodchip Oceania in 2008. In that time he has held a number of operational and management roles working across areas such as project development, M&A, sales and marketing and operations. Rob has worked on projects in Australia, New Zealand, South America, North America and South East Asia, and has held expatriate positions in Japan and New Zealand. Rob is currently the Chief Operating Officer of Bunbury Fibre Exports and Bunbury Fibre Plantations (both 100% Mitsui subsidiaries) and has been in this role since 2014. He holds a Bachelor of Commerce and diplomas in Financial Markets and Chinese (Mandarin).
Question: Where do you see the future of existing markets and emerging markets?
Do you see further consolidation from these countries or are there emerging as-yet untapped markets? Given hardwood chips dominate, with softwood chips and pellets remain relatively insignificant are there untapped opportunities for these products as well?
Tony Price: I really see very little growth in the Japanese pulp market other than potentially displacing supply from other countries. The Chinese market is likely to remain strong with new Dissolving Pulp and BCTMP capacity still coming on line. The likely impact of additional BEKP market pulp supply from South America and the new OKI Mill in Sumatra may have an impact on Kraft pulp production in China, particularly as some pulp mills may shut and buy in pulp, but to what extent is unclear at this stage. On the matter of emerging yet untapped markets, India is a possibility, other markets include pellets and biomass chips. I think there is going to be increasing demand for softwood biomass chips and wood pellets for power production, given increasing pressure to close down coal fired power stations in Japan (also nuclear) and potentially China.
James Neville-Smith: My expectation is that the two core markets of Japan and China will remain unchanged as the two powerhouse markets for the foreseeable future. I suspect the current trend of Japan moving sideways or slightly down vs China maintaining modest growth will continue. There will be developments into the biomass space, however, the extent to which this product specification emulates the current woodchip spec is yet to be clear. As far as I’m aware there are no traditional woodchip vessels being loaded for biomass out of Australia. There are, however, reputable groups making general enquiry for hardwood chips for Biomass, so I suspect in the future demand for biomass fibre will begin to chip away at the lower end of the woodchip spec/ price. The India story is yet to crystallise and I can’t see this changing in any material way over the next 5 years.
Rob Scarlett: Japan is a mature stable market with a slight decline bias. Certain segments of this market (coated paper, newsprint) are under pressure as a result of structural changes in paper usage, while other market segments such as sanitary paper (ageing population) and packaging (internet shopping deliveries) are seeing growth based on socio economic trends. Overall, we see Japan remaining as a significant and stable buyer for the long term. We expect to see continued growth in demand from China but with a slight slowdown in the pace of growth as new pulp projects come on line, particularly in Indonesia and South America, with the ability to export pulp to China. Global Mitsui has developed a strong HW woodchip import supply chain to the growing Indian market, supplied mainly from South Africa. Current pricing does not support imports from Australia, however, we are optimistic this market will continue to grow and present sales opportunities from Australia over the medium term, and in the short term absorb supply from South Africa that would otherwise have competed with Australian supply in North Asian markets. Korea and Taiwan are small, stable markets that generally purchase lower quality woodchips. A change in demand for FSC certified paper products may present increased opportunities, however, we are not forecasting significant growth in exports from Australia to these markets.
Question: What is your five year forecast on the value of export woodchips? Do you envisage the same level of growth over the next five years? What factors (international/ domestic) do you see that may influence the growth or reduction in exports? Are there other countries (apart from China / Japan / New Zealand) that you believe may emerge as significant contributors to the value of exports?
Tony Price: Not year on year, I think we can expect to see ongoing, but modest growth through additional demand and replacement of other suppliers over the next 5 years. While a shortage of supply is predicted in the Asiapacific region in the next 5 years unless we can achieve price increases we will see the hardwood plantation estate decrease reducing the volume available for export in 5 years. The main issue is the economics of growing plantations based on the current export price. If stronger demand results in improved prices this will stimulate interest in growing trees. The Chinese and Japanese pulp producers are our major markets at the moment and are likely to continue to be. There is some possibility that India may develop as a market, although they are more likely to buy in market pulp. There is likely to be a strong demand for biomass from Japan, Korea and potentially China which could result in further demand for our product. Whether it will increase the valueremains to be seen.
James Neville-Smith: The currency will largely drive the competitiveness of Australian woodchips which is of course difficult to predict. There are question marks over the sustainability of the South East Asian export volumes that have risen so dramatically over the past 10 years. There is also the issue of large scale pulp mill operations in Indonesia that will absorb large volumes of chips that would otherwise have been exported. The macro demand forecast looks reasonably positive due to stronger GDP growth in developing countries resulting in greater use of paper products across the board. The predicted paperless office is far from playing out and demand for paper in mature economies has declined but is plateauing at higher levels than what was previously predicted. The growth in dissolving pulping production particularly in China is bringing demand diversification into play which is also a positive story for woodchip demand globally. Development in Pulp production in South America over recent years has held the market pulp price down which has a flow on effect to woodchip prices. Putting currency aside the price of woodchips exported out of Australia has been in decline for at least a decade. The net result will see a significant reduction of plantation establishment unless the trend turns around.
Rob Scarlett: From a volume perspective we expect to see continued increases in HW chip exports from Australia over the next few years, but not at the same rate of increase we have seen in recent times. With recent growth in volumes most major
ports are now operating at or near capacity with limited opportunities to significantly increase volumes. Incremental increases may be seen from newly-developed or developing export projects (Tiwi Islands, Esperance, Kangaroo Island, Southern Tasmania). On the demand side we see no limits for the market to absorb increased output of HW woodchips from Australia assuming any increases are incremental.
Question: Where do you see the domestic opportunities for improving our international competitiveness? From the forest to the mill and loading onto the ship, where do you see the likely major changes or opportunities that may impact on the competitiveness on woodchip exports? Is being awarded Forestry Stewardship Council certification a significant benefit? Do you work with forest contractors to assist them to improve their productivity to better reflect your requirements?
Tony Price: Continually seeking to drive efficiencies throughout the supply chain. Harvest and haulage are major costs and we need to ensure we have the right scale of operations and that equipment is being fully utilised. i.e. the easiest way to reduce the unit cost of a piece of equipment is to work it harder (i.e. longer). We are also constantly looking to reduce costs through improved efficiency in our processing, chip storage and ship loading operations. FSC certification is necessary to do business with some customers. However, it does add significant cost and the market does not pay a premium for it. Wherever possible we are keen to work with our forest contractors to improve productivity, safety and quality performance and this should be to our mutual benefit.
James Neville-Smith There is no doubt that stability throughout the supply chain will deliver the most efficient operations and best stumpage. In recent years spot purchases and the absence of long term sales contracts has heightened the risk premiums within the supply chain resulting in inefficiencies. This is no fault of the supply chain operators, it’s simple business. If I need to invest $2-3m in equipment and are only given a 12 month rolling contract, I’m going to charge a lot more than if I’m given security for 3-5 years. Improved shipping efficiencies in terms of vessel choice and compaction gains have assisted operators in recent times, but certification costs have, without doubt, added to the cost of doing business in this sector. The cost benefit is hard to quantify, but in some markets it’s a necessity, so the supply chain has to absorb the cost. In the end the market pays for it one way or another.
Rob Scarlett: Australian suppliers have been successful in improving compaction factor levels over recent years, increasing the efficiency of shipping and our overall competitiveness. We expect to see this trend continue as suppliers improve their knowledge, infrastructure and techniques. Locally we are working with our plantation contractor base, which are principally small family run companies, to improve productivity along with safety and quality, in some cases financing the purchase of equipment to achieve these outcomes. In partnership with our transport contractor base we have improved processes and systems to come into line with the Chain of Responsibility standards, which has also assisted contractors in achieving accreditation under the Accredited Mass Management Scheme allowing them to improve efficiency. We expect FSC certification to grow in importance as a competitive edge when exporting to Japan, particularly in the run up to the 2020 Olympics which is being targeted by FSC Japan as an event at which to increase brand awareness. Unfortunately the cost and complexity of maintaining certification is increasing, and we are encouraged to see progress being made on the draft National Standard and in areas such as the Controlled Wood Risk Assessment.
Question: Would the wood chip sector benefit from a significant ‘injection’ of research and development into the industry? What areas do you feel deserve particular attention that would make the industry more productive?
Tony Price: Yes, the sector would definitely benefit from more research. Increasing the productivity of our plantation estate through improved genetics, pursuing ongoing innovation throughout the supply chain, but particularly in harvesting and transport. Exploring other end uses for our wood fibre i.e. biofuels, nanocellulose etc.
James Neville-Smith: There are always grounds for further research into fibre growth and optimization within the plantation sector. In terms of Pulp and Paper processing, until this country wakes up to the economic opportunity that is being passed by each year we export woodchips instead of pulp there is no point in investing funds in pulp production. I think the biomass space is still relatively unknown, and I’m sure there is a new industry in nanotechnology (using wood fibre) on the horizon that we should be investing in.
Rob Scarlett: The post-MIS era has seen a significant reduction in research expenditure and we are supportive of a renewed focus in this area, including the development of Forest Research Australia. We believe a more collaborative and coordinated approach to research and development will lead to increased efficiency and improved outcomes. From our perspective we feel a focus on research into second and third rotation pulpwood plantation management (growth modelling, slash makeup and retention, nutrition, multi-stem harvest methods etc) would be beneficial given the current estate profile.
Question: How have you broadcast your message to politicians to promote woodchips on both the domestic and international stage to promote acceptance and export opportunities? What areas do you feel our politicians (and their policies) could improve their efforts to promote a vibrant industry? Or, are there any politicians that are worth singling-out for their sustained and effective efforts? Do you feel there is sufficient public education to explain wood chipping and address concerns? If not, how do feel this topic should be tackled?
Tony Price: Overall we haven’t been very successful in this instance, although we actively support the work by AFPA and FWPA. They could provide assistance in promoting other forms of certification such as AFS (PEFC) with the importing countries I think they need to be more forthright in presenting the forest industry as a significant contributor to the Australian economy, particularly in regional areas, and espousing our environmental credentials, rather than responding to minority interest groups. The forest industry has the potential to be an important player in the emerging carbon economygiven wood’s ability to sequester carbon or be used as a carbon neutral energy source. We have strong support from our current Federal Minister Senator Anne Ruston and a number of other regional politicians. With all the political issues on the agenda it is difficult to attract attention, but AFPA is doing a good job. However, I think there’s little appreciation of what we do among the general public. Our industry does not have the necessary financial capacity to mount a major education program and to be honest we are probably not uppermost in the public mind at the moment. I think the carbon debate is our best chance to convince the public of the benefits of sustainable forest management. Expanding our plantation base and sustainably managing our native forest has the potential create a significant carbon sink, whereas other industries such as mining, agriculture etc., can only seek to reduce their carbon footprint.
I think the FWPA has done a fabulous job promoting the renewability and highlighting the carbon benefits of using wood products in general. I would love to see the utilisation of a tree publicised to show the extent to which we as an industry seek to maximise the value of the entire tree. I believe the general public are more educated these days than ever when it comes to pragmatic sustainability and where forestry sits. I am optimistic about the future of the entire sector.
Rob Scarlett: We actively support the work of FIFWA in promoting the industry at a government level. At a Local Government level we support the work of the WA Forest Communities Network who have been successful in promoting “Timber First” policies to local councils. Being an election year in Western Australia now is an opportune time to push the industry agenda and garner further support from all major parties. Ideally we would like to see more focus by the Federal Government on ways to support the continued growth of the forestry industry in Australia through a dedicated ministerial portfolio. The FWPA has prepared some fantastic promotional and educational programs and we would love to see a Federal Politician dedicated to raising the public profile and promote the clean, renewable, and sustainable benefits of our industry.
Tony Price: Midway Limited was established in Geelong, Victoria and has been involved in woodchip exports for over 30 years. Midway is a major woodchip processor and marketer, handling over 3 million green metric tonnes (GMT) of hardwood and softwood woodchips annually. Midway has export operations in Victoria and Queensland and manages a number of plantation projects in Victoria.
James Neville-Smith SMARTFIBRE is situated on 2.5 ha which it owns, strategically located adjacent to the Bell Bay Port on the eastern bank of the Tamar River, approximately 45 km north of Launceston.
The mill is located within the Bell Bay Major Industrial Zone and benefits from unlimited operating restrictions and is able to operate 24 hours per day.
The SMARTFIBRE site consist of a log yard capable of storing 8000GMT(with expansion plans to double this storage capacity), of logs, a new heavy duty 96” Precision chipper run by new electrical systems including a new electric motor to replace the old diesel drive that has been in operation for 15yrs, to a concrete outside chip stockpile (OCS) which can hold 120,000gmt (with expansion plans of a further 30,000GMT capacity) of woodchips with a reclaim and a conveyor belt that can load out at 1000 GMT per hr (800tn on average) which links directly to the Bell Bay Port infrastructure owned by TasPorts.
SMARTFIBRE has operational permits, and chipping capacity to process 800,000 GMT per annum. Currently normal operations involve five shifts per week for ten (10) hours per day 10,000 per week and going forward the plant is capable of producing at least 16,000 GMT of chips per week with extended split or double shifts.
Rob Scarlett: Mitsui Bussan Woodchip Oceania (MWO) is a wholly owned subsidiary of Mitsui & Co., Ltd. MWO has been involved in Australia’s woodchip export industry for close to three decades. MWO is a major Australian woodchip exporter, shipping approximately 2.5 million green metric tonnes (GMT) of hardwood and softwood woodchips from Australia annually. MWO has investments in two plantation log processing and woodchip exporting businesses in Victoria and Western Australia, and investments in four plantation projects on the east and west coasts of Australia, totalling more than 27,000 hectares. MWO is involved in all stages of the value chain, from owning plantations, to managing harvesting and logistics, owning and operating woodchip mills, managing port facilities, chartering woodchip carriers, and marketing to customers throughout Asia.
Mitsui & Co. Ltd. (“Mitsui”) is one of the world’s most diversified trading, investment and services enterprises. In Australia Mitsui manages a diverse portfolio of businesses in industries including iron ore, coal, oil, gas, power generation, transportation, construction and mining machinery, chemicals, steel products, woodchips, salt, food, and financial services. Mitsui is a leading exporter of Australia’s key natural resources and agricultural commodities. On an equity basis Mitsui and its group companies are the fourth largest exporter in Australia with approximately A$6.5 billion in total exports annually. Mitsui has global expertise in direct investment, finance, marketing and logistics, and often works in partnership with leading Australian and international companies. In the past 10 years Mitsui group companies have invested about A$15 billion in Australia. Its Australian operations are backed by a network of 138 offices in 65 countries. This global presence allows us to gather market intelligence from around the world, identify new business opportunities and create new trade flows.