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Australia - the Lucky Country

Almost exactly 50 years ago, in 1964, Professor Donald Horne polarized the nation with his book "The Lucky Country," in which he unkindly argued that Australia is a "lucky country run mainly by second-rate people who share its luck". Horne wasn't actually referring to Australia's prosperity but the term has become part of Australia's lexicon and synonymous with the fact that economic circumstances always seemed to work in favor of Australia. The Australia of today is a place very different from Horne's Australia but the economic paradox has been that a country with such profligate consumption makes less and less of what it consumes. On current trends very few significantly transformed domestic products will be available to Australians in a few years, except perhaps for food--and even that prospect is starting to look a bit grim.

The salvation for Australia has been its vast resource of mineral products. It started with the discovery of gold in the 1850's, which over the next half century yielded enormous wealth for the country. Cumulatively, Australia has been the third largest gold producer after South Africa and the USA and today is still the major producer after China. As exotic and valuable as the gold resource has been, the vast reserves of iron ore, bauxite and black coal has been a bonanza for many years, but extraction has gone into hyper drive to satisfy the insatiable demand from China. Australia is the world's leading producer of iron ore and bauxite. It also has a significant position in the production of black coal, uranium and nickel.

Huge liquid natural petroleum gas facilities are now coming on line to satisfy the cleaner, greener energy needs of Asia and will be the next bonanza. Australia has three operating LNG facilities with another seven under construction, with a capital value of over $200 billion. By 2017 Australia will have an export capacity of 85 million metric tons, which will contribute an additional $45 billion to Australia's annual GDP. Australia is likely to become the world's largest exporter of LNG.

Another significant raw material resource feeding the Asian market, but in this case a renewable resource, has been wood chips. For the decade until 2011, Australia was the world's leading exporter of wood chips. The source of these wood chips was predominately native forests but as a result of environmental pressures, but also a persistently strong currency exchange rate, Australia has been losing market share.

Be it by luck or planning, the rivers of wood are again flowing as hardwood plantations in particular mature at a rapid rate and need to find a market. As I reported in a previous PaperMoney article in 2010, a program designed to encourage investment in forest plantations (Managed Investment Schemes) effectively became a Ponzi scheme as investors looking for significant tax breaks were lured into these programs. As dubious as the investments proved to be (with most collapsing and leaving investors and stock holders decidedly poorer for the experience) significant forest plantings did take place. With the spectacular implosion of the Gunns pulp mill project there are very limited domestic markets for the rapidly maturing plantations and this has caused a significant revival of the export wood chip business.

ABARES (Australian Bureau of Agricultural and Resource Economics and Sciences) has accumulated meticulous data relating to Australia's forest resources and they paint an interesting picture. In the ten years to the end of June 2013 (Australia's tax year ends on June 30) the native hardwood log harvest has plummeted from about 10 million cubic meters annually to less than 4 million. Significantly most of the decline has been from Tasmania, where Gunns was the main exporter, but also where the native forests have been most affected by conservation orders and restrictions. Tasmanian harvests have fallen from about 5.5 million cubic meters annually to about 1 million. Over the same period the harvest from hardwood plantations has increased from less than 2 million to about 5.5 million cubic meters annually, mainly from the states of Victoria and Western Australia.

This transition can be seen clearly reflected in hardwood chip exports. Exports of chips from native forests peaked at 6 million cubic meters in 2005 but fell rapidly from 2008. Currently exports of native wood chips are down to less than 1 million cubic meters annually. Over the same period plantation wood chip exports have soared from less than 1 million to more than 5 million cubic meters annually.

At first glance it would seem the lucky country has hit the jackpot once again with wood chip exports. Perhaps so, but looking ahead this may be rather short-lived. In the year 2007 nearly 80,000 hectares of hardwood plantations were established. With the demise of the MIS programs, there has there been a truncation in planting of new hardwood plantations. In fact it has all but stopped dead - less than 2000 hectares were planted in the 2013 tax year. Some plantations are even being felled and the land returned to traditional agriculture.

The transition from native to plantation chip wood has not been due only to pressure from green groups and conservationists at home, but also has been customer driven. The Japanese paper makers, once almost the exclusive customers for Australian wood chips, are also responding to pressures at home from their customers who demand impeccable environmental credentials. It is also about the competition. From almost nowhere, Vietnam has emerged from 2011 as the number one supplier of plantation hardwood and South America is also strong. Now this is where it all gets confusing in that for international comparisons we need to switch units from cubic meters to tons!

In 2002 Vietnam exported just 150,000 metric tons of chips and in 2013 this had increased spectacularly to 7.4 million oven dry metric tons. Both suppliers can produce and deliver chips more cheaply and with comparable or better yields. Another but not surprising aspect of exports is that China replaced Japan as the main export destination for the first time in 2014. According to Wood resources International (WRI) the Chinese not only bought more chips than the Japanese but paid considerably less for them - about $30 or 15% less per metric ton. In the first quarter of 2014 Australia supplied 27% of China's chip imports, which are now running at a rate approaching 10 million metric tons annually. The total global trade in wood chips is about 33 million oven dry metric tons, according to WRI.

There are also considerable estates of softwood plantations in Australia, which have been static for about the last 25 years, as has been the harvest from those plantations. Unlike hardwood the softwood resource finds a home predominately in the domestic market for sawn lumber, MDF, plywood and pulp wood. Australia's softwood plantations occupy just over 1 million hectares and there is an annual harvest of about 13.5 million cubic meters. There are some exports including 1.2 million cubic meters of softwood chips and a modest 200,000 cubic meters of rough sawn wood. Of the approximately 10 million cubic meters of sawn timber processed in Australia, more than 75% was softwood.

Australia's rivers of wood have been significant, but also in the antipodes New Zealand has its fabled "wall of wood". To put it in perspective, New Zealand has plantation estates of over 1.7 million hectares (a little less than the total estate of 2 million hectares in Australia) of which over 1.5 million hectares is Radiata Pine. However the New Zealand forests are highly productive, yielding about 27.5 million cubic meters, half of which is exported as logs, with a third of the harvest going to Chinese sawmills. A relatively small quantity of about 375,000 cubic meters is exported as chips. About 2 million cubic meters are exported as sawn timber. By 2024 WRI suggests that a realistic level of timber harvests would be between 35 and 45 million cubic meters annually and most of the additional harvest would be exported.

In an ideal world the forest resources of Australia and New Zealand would be totally transformed locally into manufactured products from basic transformation such as lumber through to complex value added products such as paper. For Australia this is perhaps less likely since the failure of the Gunns' pulp mill project. Although we should never say never, there does not seem to be the commercial appetite, and perhaps not the potential financial reward to make that happen any time soon. For New Zealand the same scenario may also be true, but with the Oji acquisition of the Carter Holt Harvey paper business having now been formally approved, there may be a more compelling case for something more substantial in the future. Whatever the direction of forest developments in Australia and New Zealand, Australasian wood will be a significant part of the Asian forest products scenario for the foreseeable future either as a raw material or as a transformed product.

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