marketing plan for the eden hardwood forest resource · 9 december 2013 . prepared for forestry...

Report Marketing Plan for the Eden Hardwood Forest Resource

9 DECEMBER 2013

Prepared for

Forestry Corporation of New South Wales PO Box 100 Beecroft, NSW 2119

42807580

Eden Marketing Plan

\\ursapac.local\dfs-jobs\mel\42807580\6 deliv\5_final report\42807580-forestry corp eden marketing plan-final-redacted version (12 may 2014).docx

Project Manager:

………………………… Duncan MacLeod Senior Associate

URS Australia Pty Ltd

Level 6, 1 Southbank Boulevard Southbank VIC 3006 Australia T: 61 3 8699 7500 F: 61 3 8699 7550

Principal-In-Charge:

…………………………… David Paul Principal Consultant

Reviewer:

…………………………… Andrew Morton Vice-President

Date: Reference: Status:

9 December 2013 42807580/06/05 Final report

Document copyright of URS Australia Pty Limited.

No use of the contents, concepts, designs, drawings, specifications, plans etc. included in this report is permitted unless and until they are the subject of a written contract between URS Australia and the addressee of this report. URS Australia accepts no liability of any kind for any unauthorised use of the contents of this report and URS reserves the right to seek compensation for any such unauthorised use.

Document delivery

URS Australia provides this document in either printed format, electronic format or both. URS considers the printed version to be binding. The electronic format is provided for the client’s convenience and URS requests that the client ensures the integrity of this electronic information is maintained. Storage of this electronic information should at a minimum comply with the requirements of the Commonwealth Electronic Transactions Act (ETA) 2000.

Where an electronic only version is provided to the client, a signed hard copy of this document is held on file by URS and a copy will be provided if requested.

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Table of Contents

Executive Summary ................................................................................................. xi

1 Introduction ............................................................................................................. 1

2 Forest Resource Availability ................................................................................. 2

2.1 Resource overview ........................................................................................... 2

2.1.1 Eden FMA.......................................................................................................................... 4

2.1.2 Adjacent FMAs ................................................................................................................. 5

2.2 Planning systems overview ............................................................................. 8

2.3 Regional wood flow model development ........................................................ 9

2.4 Regional wood flows ...................................................................................... 12

2.4.1 Eden FMA........................................................................................................................12

2.4.2 South Coast FMA ...........................................................................................................18

2.4.3 Tumbarumba FMA .........................................................................................................19

2.4.4 East Gippsland ...............................................................................................................20

2.4.5 Summary .........................................................................................................................22

3 Existing Processing Industry .............................................................................. 25

4 Wood Supply Characteristics .............................................................................. 27

4.1 Key timber species characteristics ............................................................... 27

4.2 Summary of species suitability ..................................................................... 29

5 Processing Opportunities .................................................................................... 32

5.1 Sawn timber .................................................................................................... 32

5.1.1 Processing technology .................................................................................................32

5.1.2 Market trends .................................................................................................................34

5.1.3 Mill capacity to pay analysis .........................................................................................43

5.2 Veneer, plywood and LVL .............................................................................. 48


5.2.2 Market trends .................................................................................................................49

5.2.3 Mill capacity to pay analysis .........................................................................................52

5.3 Log exports ..................................................................................................... 52

5.3.1 Market trends .................................................................................................................52

5.3.2 Log export capacity to pay analysis ............................................................................55

5.4 Particleboard .................................................................................................. 56

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5.4.2 Market trends .................................................................................................................57

5.4.3 Summary of particleboard potential ............................................................................57

5.5 MDF ................................................................................................................. 58


5.5.2 Market trends .................................................................................................................58

5.5.3 Summary of MDF potential ...........................................................................................59

5.6 Engineered and oriented strand lumber ....................................................... 60


5.6.2 Market trends .................................................................................................................60

5.6.3 Summary of ESL/OSL potential ....................................................................................61

5.7 Bioenergy and biofuels .................................................................................. 61

5.7.1 Renewable energy policy ..............................................................................................61

5.7.2 Bioenergy .......................................................................................................................62

5.7.3 Biofuels ...........................................................................................................................66

5.7.4 Summary of bioenergy and biofuel potential..............................................................67

5.8 Woodchip exports .......................................................................................... 68

5.8.1 Market trends .................................................................................................................68

5.8.2 Woodchip export capacity to pay analysis .................................................................70

6 Evaluation of Marketing Options ......................................................................... 71

6.1 Market position of southern forest resources .............................................. 71

6.2 Log marketing opportunities ......................................................................... 73

6.2.1 Shortlist of sawlog marketing options ........................................................................76

6.2.2 Shortlist of pulpwood marketing options ....................................................................82

7 Development of a Marketing Plan ....................................................................... 86

7.1 Refining resource data ................................................................................... 86

7.2 Identifying interested parties ......................................................................... 87

7.3 Development pathway .................................................................................... 89

7.3.1 Marketing plan (2013 – 2030) ........................................................................................91

7.3.2 Marketing beyond 2030 .................................................................................................93

7.4 Marketing plan format .................................................................................... 93

7.5 Framework for preferred contract terms ...................................................... 95

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7.6 Evaluation process ........................................................................................ 96

8 References .......................................................................................................... 100

9 Limitations .......................................................................................................... 103

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Tables Table 1 Summary of sawlog marketing opportunities ................................................................... xv

Table 2 Summary of pulp log marketing opportunities ................................................................ xvi

Table 2-1 Summary of model log specifications ............................................................................... 9

Table 2-2 Summary of aggregated species classifications ............................................................. 10

Table 2-3 Summary of wood flow model assumptions and constraints .......................................... 11

Table 2-4 Comparison of Eden wood flow model scenario constraints .......................................... 15

Table 2-5 Comparison of sawlog grade specifications between Forestry Corporation and VicForests ....................................................................................................................... 20

Table 3-1 Summary of hardwood mills supplied from the Eden, South Coast and Tumbarumba Regions ........................................................................................................................... 25

Table 3-2 Summary of hardwood mills in the East Gippsland region ............................................. 26

Table 4-1 Timber properties of the key regional species ................................................................ 30

Table 4-2 Key to timber durability rankings ..................................................................................... 30

Table 4-3 Summary of potential product applications for common species of southeast NSW ..... 31

Table 5-1 Timber properties of plantation and regrowth hardwood processing ............................. 44

Table 5-2 Finished timber properties – quarter-sawn and back-sawn systems ............................. 45

Table 5-3 Timber grade recovery and price assumptions .............................................................. 45

Table 5-4 Indicative processing costs and capacity to pay for sawmilling configurations .............. 46

Table 5-5 Results of gross margin scenarios for sawmilling configurations ................................... 47

Table 5-6 Results of gross margin scenarios for sawmilling configurations ................................... 48

Table 5-7 Residual log export price analysis, ex-Port of Eden ....................................................... 55

Table 5-8 Sensitivity of log export prices to changes in key assumptions ...................................... 56

Table 5-9 Examples of wood fuelled energy systems in Australia .................................................. 64

Table 5-10 Typical cost structures of bioenergy plants by production scale .................................... 65

Table 5-11 Residual hardwood chip price analysis, ex-Port of Eden ............................................... 70

Table 5-12 Sensitivity of export chip prices to changes in key assumptions .................................... 70

Table 6-1 Summary of sawlog marketing opportunities .................................................................. 74

Table 6-2 Summary of pulp log marketing opportunities ................................................................ 75

Table 7-1 Structure of potential proponents for Eden marketing process ...................................... 87

Table 7-2 Typical preferred industry contract terms for domestic processors ................................ 95

Table 7-3 Example criteria for FC evaluation process .................................................................... 97

Table 7-4 Outline of information requirements ................................................................................ 98

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Figures Figure 1 Regional log outturn by grade .......................................................................................... xii

Figure 2 Sawn timber production – sawlog capacity to pay estimates by subregion .................. xvii

Figure 3 Log export – sawlog capacity to pay estimates by subregion ...................................... xviii

Figure 4 Export wood chip – pulp log capacity to pay estimates by subregion ............................ xix

Figure 5 Pathway showing key steps for the development of a marketing plan ........................... xxi

Figure 2-1 Distribution of public native forests available for timber production in south east NSW... 3

Figure 2-2 Distribution and composition of native forests available for timber production in the Eden FMA and the historic harvest volumes by species .................................................. 5

Figure 2-3 South Coast large high quality standing sawlog volume by sub-region ........................... 6

Figure 2-4 South Coast sawlog volume harvested by species (1979 – 2012) ................................... 6

Figure 2-5 Tumbarumba large high quality standing sawlog volume by sub-region .......................... 7

Figure 2-6 Tumbarumba sawlog species distribution post WSA ....................................................... 7

Figure 2-7 Projected log outturn by grade and supply zone from Eden FMA .................................. 13

Figure 2-8 Log outturn by species from the Eden FMA ................................................................... 13

Figure 2-9 Log outturn for alternative wood flow scenarios for the Eden FMA ................................ 16

Figure 2-10 Comparison of sawlog and pulpwood volumes achieved under each wood flow scenario ........................................................................................................................................ 17

Figure 2-11 Projected log outturn from the South Coast FMA ........................................................... 18

Figure 2-12 Log outturn by species from the South Coast FMA ........................................................ 18

Figure 2-13 Projected log outturn by grade and supply zone from the Tumbarumba FMA ............... 19

Figure 2-14 Log outturn by species from the Tumbarumba FMA ...................................................... 19

Figure 2-15 Projected log outturn grade from the East Gippsland region .......................................... 21

Figure 2-16 Log outturn by species from the East Gippsland Region ............................................... 21

Figure 2-17 Projected log outturn from the overall study area by grade and region .......................... 22

Figure 2-18 Projected log outturn from the overall study area by grade and region for each scenario ........................................................................................................................................ 23

Figure 5-1 Apparent consumption of timber and housing commencements in Australia ................. 34

Figure 5-2 Apparent consumption of hardwood timber in Australia ................................................. 34

Figure 5-3 Product out-turn from NSW native forests ...................................................................... 35

Figure 5-4 Value of Australian alterations and additions.................................................................. 36

Figure 5-5 Australian structural timber price trends, nominal values .............................................. 37

Figure 5-6 Hardwood flooring timber price trends, nominal values .................................................. 39

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Figure 5-7 Australian imports of wooden furniture ........................................................................... 42

Figure 5-8 Australian imports of wooden mouldings by value ......................................................... 42

Figure 5-9 Apparent consumption of plywood in Australia ............................................................... 50

Figure 5-10 Australian plywood nominal price index, softwood, C/D grade....................................... 50

Figure 5-11 Apparent consumption of LVL in Australia ...................................................................... 51

Figure 5-12 China's hardwood log imports by source country ........................................................... 53

Figure 5-13 China's imports of Australian hardwood logs .................................................................. 55

Figure 5-14 CFR A and K grade prices for New Zealand softwood logs ........................................... 55

Figure 5-15 Apparent consumption of particleboard in Australia ....................................................... 57

Figure 5-16 Australian particleboard nominal price index .................................................................. 57

Figure 5-17 Apparent consumption of MDF in Australia ................................................................... 59

Figure 5-18 Australian electricity production ...................................................................................... 63

Figure 5-19 Chinese paper & paperboard production by type ........................................................... 68

Figure 5-20 Chinese hardwood chip imports by source country ........................................................ 68

Figure 5-21 Quarterly CIF price of hardwood chip exports to China (US dollars) ............................. 69

Figure 6-1 Southern FMA production compared to native hardwood removals in Australia ............ 71

Figure 6-2 High quality sawlog capacity to pay estimates by subregion .......................................... 77

Figure 6-3 Veneer log capacity to pay estimates by subregion ....................................................... 80

Figure 6-4 Log export capacity to pay estimates by subregion ........................................................ 81

Figure 6-5 Delivered pulp log cost and volume by subregion .......................................................... 84

Figure 7-1 Pathway showing key steps for the development of a marketing plan ........................... 90

Figure 7-2 Marketing plan process ................................................................................................... 94

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Appendices Appendix A Terms of Reference

Appendix B Review of FC resource modelling

Appendix C Wood flow model comparison of scenario outputs

Appendix D Processor interviews

Appendix E Sawmill capacity to pay modelled outputs

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Abbreviations

Abbreviation Description Abbreviation Description

ABARES Australian Bureau of Agricultural and Resource Economics and Sciences

LiDAR Light Detection And Ranging

ABS Australian Bureau of Statistics LQ Low Quality sawlog

AG Auditor General of NSW LRET Large Scale Renewable Energy Target

AUD Australian dollar LSL Laminated Strand Lumber

AS Australian Standard LVL Laminated Veneer Lumber

ASH Australian Sustainable Hardwoods m3 Cubic metres

AWG At Wharf Gate MAF Multi Aged Forest

BA Basal area MDF Medium Density Fibreboard

BAL Bushfire Attack Level MDP Mill Door Price

BDMT Bone Dry Metric Tonnes MEM La Mecanique et L’engrenage Modernes

BRH Blue Ridge Hardwoods MGP Machine Graded Pine

BtL Biomass to Liquid ML Megalitre

CDUB Centre diameter under bark MW Mega Watt

CEC Clean Energy Council MWh Mega Watt Hour

CFR Cost and Freight N/A Not Applicable

CIF Cost Insurance Freight NB Note Bene

CLT Cross Laminated Timber NHAM Net Harvest Area Modifier

CRA Comprehensive Regional Assessment

NSW State of New South Wales

CSIRO Commonwealth Science and Industrial Research Organisation

NZ New Zealand

E1 Pulp log with a large end diameter < 40cm

OSB Oriented Strand Board

E2 Pulp log with a large end diameter 40 – 80 cm

OSL Oriented Strand Lumber

EOI Expression of Interest PA Per annum

EPA Environment Protection Authority PFP Pacific Forest Products

ESL Engineered Strand Lumber PGP Permanent Growth Plot

etc. etcetera PNG Papua New Guinea

EU European Union QLD State of Queensland

EWP Engineered Wood Product R&D Research and Development

FAOSTAT Food and Agriculture Organisation Statistical Databases

REC Renewable Energy Certificates

FC Forestry Corporation of NSW RET Renewable Energy Target

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Abbreviation Description Abbreviation Description

FMA Forest Management Area RFA Regional Forest Agreement

FNSW Forests NSW (now Forestry Corporation of NSW)

RHS Right Hand Side

FOB Free On Board SC South Coast

FRAMES Forest Resource and Management Evaluation System

SED Small End Diameter

FT Forestry Tasmania SEDUB Small End Diameter Under Bark

GFC Global Financial Crisis SEFE South East Fibre Exports

GIS Geographic Information System STD Standard

GJ Gigajoule T1 First thinning

GMT Green Metric Tonnes T2 Second thinning

GWh Giga Watt Hours TAS State of Tasmania

HQ High Quality sawlog T&G Tongue and Groove

HQL High Quality Large sawlog URS United Research Services

HQS High Quality Small sawlog US United States of America

IEA International Energy Agency USD United States Dollar

IFOA Integrated Forestry Operations Approval

VAT Value Added Tax

IM Information Memorandum VIC State of Victoria

IRR Internal Rate of Return VF VicForests

JAS Japanese Agricultural Standard WA State of Western Australia

KD Kiln Dried WPV Wood Products Victoria

kN Kilo Newtons WSA Wood Supply Agreement

kt Kilo tonnes WTO World Trade Organisation

LED Large End Diameter YE Year Ending

LHS Left Hand Side YTGen A yield simulation software programme

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Executive Summary

Introduction Forestry Corporation of New South Wales (FC) is responsible for the management of public native forests in New South Wales (NSW) that are available for timber production. The forests in the southern region of NSW are a valuable source of wood products and vary from diverse multi-aged, mixed species forests to even-aged regrowth forests dominated by a small number of species. For management purposes native forests in the southern region are divided into three forest management areas (FMA):

• Eden –located in the south east corner of NSW. The forests are predominantly located along the coast near the township of Eden with small areas inland on the Southern Tablelands;

• South Coast – located north of the Eden FMA from Narooma in the south to Kiama in the north and is bounded by Canberra in the west; and

• Tumbarumba – located west of the Eden and South Coast FMA’s.

FC currently has long-term wood supply agreements (WSA) in place for the bulk of the sawlog harvest volume from these regions. These agreements expire between 2018 and 2020. FC has engaged URS Australia Pty Ltd (URS) to assist with the development of a marketing plan for its hardwood regrowth log products beyond the WSA period, with particular emphasis on the Eden FMA. In assessing the resource potentially available, consideration has also been given to supply from the East Gippsland region of Victoria. These forests are managed by VicForests and have a species composition similar to the Eden FMA.

The key steps of this study included:

1. Resource review – in particular, reviewing available data on wood flow, log specifications and the changing log supply available for wood product markets into the future;

2. Review of wood supply characteristics – reviewing the species available and their properties as wood products;

3. Assessment of marketing opportunities – including available technologies, market opportunities and providing capacity to pay estimates where possible; and

4. Development of a marketing plan – taking into account the availability and type of wood flow available over time, matching likely markets and investors and outlining a plan for accessing these markets in the future.

Forest resource availability URS developed a consolidated estate level wood flow model for the three southern NSW FMA’s and utilised VicForests’ 2013 Resource Outlook to incorporate the wood flows from the East Gippsland region. The wood flows comprises of five key log grades: large sawlog (centre diameter under bark (cdub) > 40cm), small sawlog (small end diameter under bark (sedub) 25 – 40cm), salvage log (a lower quality sawlog with a sedub >30cm), E1 pulp (large end diameter (led) < 40cm) and E2 pulp (led 40 – 80cm)).

The expected outturn by log grade for each of the four regions over an extended 100 year time horizon is presented in Figure 1. It shows that while Eden has the greatest annual harvest volume of around 300,000 m3 per annum (pa), its sawlog outturn remains at around 20,000 m3 pa until 2037 when the regrowth forests reach maturity and sawlog volumes increase. However the limitations of the Eden wood flow could be potentially be assisted by available resource from the adjacent regions.

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Figure 1 Regional log outturn by grade

Eden South Coast

Tumbarumba East Gippsland

Source: FC, VicForests

URS also investigated the impact of three potential scenarios on the wood flows from the Eden region beyond the expiry of the existing WSA’s:

• Reducing the minimum sedub for sawlogs from 25cm to 18cm. This log grade is classified as an ultra small sawlog;

• Reducing the harvest age from 50-60 years to 40-50 years; and • The effect that no further thinning would have on the wood flows from the Eden regrowth forests.

The results of the revised wood flow show:

• A reduction in the minimum sawlog diameter to 18cm results in an increase of 7,000 m3 pa from 2022-2031 progressively increasing to 19,000 m3 pa beyond 2032 as harvest levels in the regrowth forest reach a steady state. In percentage terms ultra small sawlogs have the capacity to increase sawlog volume by approximately 24%. The capacity of the market to utilise this volume will depend on the technology available to manage these small diameter logs.

• A reduction in rotation age allows the Eden resource to reach a steady state by 2022 compared to around 2042 under the base case analysis. As Figure 2 shows, the long-term steady state sawlog volume reduces to around 46,000 m3 pa compared to 75,000 m3 pa under the base case. The inclusion of ultra small sawlogs would provide an additional 15,000 m3 pa over the long-term. There is also a shift in the sawlog size class distribution, with the proportion of large sawlogs available

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from the 40 year rotation scenario significantly lower than the base case. The change in pulpwood availability under this scenario is negligible.

• Adjusting the silvicultural regime to remove thinning significantly reduces the overall volume harvested. Sawlog volumes decline to approximately 12,000 m3 pa between 2019 and 2035 but recover to a long term supply of 48,000 m3 pa around 2042. Figure 2 shows that pulpwood volumes decline significantly with the exclusion of thinning to less than one third of the base case volumes until 2037. As the regrowth forests approach maturity beyond pulpwood volumes increase to about two thirds of the base case.

Figure 2 Log outturn for alternative wood flow scenarios for the Eden FMA

Reduced rotation age – total volume No additional thinning – total volume

Reduced rotation age – sawlog volume No additional thinning – sawlog volume


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Assessment of marketing options The sawlog resource available from the Eden region beyond 2018 will initially be based on ongoing thinning of post-1970 regrowth forest. Consequently, the sawlog resource will contain a large proportion of small sawlogs. As wood supply transitions towards a smaller and younger resource, existing sawmills in the region will be faced with operational and efficiency challenges.

Table 1 provides an assessment of various sawlog marketing opportunities including market prospects as well as perceived investment risks based on resource, technology and market factors. It also summarises the overall attractiveness of that market to FC based on its suitability and likelihood of being available as a marketing option. Table 2 reviews pulp log marketing opportunities based on the same criteria. The assessment considers the resource available from 2018 through to 2041. This is the timeframe an investor would consider before making a capital investment and aligns with the maturing profile of the regrowth resource.

The attractiveness is ranked according to whether the marketing opportunity is a Low, Medium or High opportunity. A High opportunity is considered to either be available or could be supplied (or developed then supplied) with relative ease. A Low opportunity is considered to have little to no likelihood of occurring based on significant resource, technological or market challenges. A Medium opportunity is an opportunity that should be explored further and could be supplied subject to further assessment and the availability of investors willing to develop a processing asset.

The analysis shows that for the sawlog resource the two most prospective markets were considered to be sawn timber and log exports. For sawn timber producers the most prospective markets for mixed species timber were in appearance flooring, durable outdoor timber and in high strength structural timber. Three sawmill types were considered as part of the review: a 30-40,000 m3 pa reciprocating multi-saw mill, a 40-60,000 m3 pa reciprocating twin bandsaw sawmill and a 280,000 m3 pa linear sawmill. Our assessment indicates a linear mill is unlikely to be a feasible market opportunity given larger scale volume requirements and the feedback from processors on the suitability of this technology for the Eden resource.

A log export operation would be based on salvage and small diameter sawlogs that are currently classified as pulpwood. The most likely market would be China where small diameter hardwoods are currently used primarily for the production of plywood but also in high strength packaging markets. Further inventory assessments are required to confirm the proportion of export quality log potentially available from within the FC resource as this log type is not currently identified.

Woodchip exports are likely to remain an important market for pulpwood produced as a by-product of native forest harvesting in NSW in the absence of other credible markets developing such as engineered wood products or bioenergy. The Chinese hardwood chip market currently presents the most prospective opportunities for the marketing of pulpwood in the future. Although the Chinese woodchip market currently pays significantly lower prices than the Japanese market, there is a growing depth of demand and future developments in the Chinese pulp industry may present greater price differentiation for woodchips of a relatively high international quality such as that produced in Eden and the South Coast.

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Table 1 Summary of sawlog marketing opportunities

Product Resource

needs (000 m3 pa)

Market prospects Perceived investor risks Estimate of

potential feasibility

Comments

Sawn timber – <40cm sed log line

100 – 150 • Potential opportunities to supply flooring, decking and landscaping markets

• Lower grade structural timber products present ongoing stable opportunities

• Potential for supplying packaging timber markets

• Log quality and volume • Processing technology risks • Haulage distances and cost

Medium for new sawmill

Would need to consolidate the southern region and East Gippsland resource and gain more certainty around log size and quality. Scale would assist capacity to pay and product marketing opportunities

Sawn timber – 25-70cm sed

30-60 • Higher recovery of appearance grade for flooring and decking.

• Opportunities to specialise in higher value products and promote mixed species features

• Quality and volume stability of large sawlogs

• Haulage distances and cost

High for new or existing

sawmill

Species mix presents significant and diverse product opportunities when combined with the right marketing plan

Plywood and veneer

150-200 for veneer, 200 for plywood

• Opportunities to supply veneer to Asia for further manufacturing

• Limited opportunities in plywood due to highly competitive softwood market and high costs of production

• Need further analysis of lower quality resource to determine suitability.


Low for veneer Low for plywood

Resource availability and quality is likely to be a limiting factor for veneer

EWP 150-200 • Growing market but exclusively based on softwood product

• Potential prospects for hardwood product based on recent research

• Processing technology risks • Log quality and volume • Builder acceptance of

hardwood product

Low-Medium Prospects depend on competitiveness of veneer production. Secondary LVL processing may not be cost competitive despite potential niche applications

Log exports 100 • Ongoing growth and demand in Asian markets

• Need to compete with low cost domestic supply and imports from sub-tropical countries and Russia

• Existing infrastructure. Would require only minimal investment to export logs from Eden

High Opportunities to test the log export market at minimal cost.

Without domestic value adding and with relatively low regional economic benefits may not fit value objectives of FC

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Table 2 Summary of pulp log marketing opportunities

Product Resource

needs (000 m3 pa)

Market prospects Perceived investor risks Prospects for investment Comments

Particleboard and MDF

200 - 500 • Domestic market opportunities are limited for hardwood particleboard and MDF.

• Processing technology risks

• Limited domestic demand • Resource scale

Low Unlikely to be cost-competitive on an international scale and domestic demand is well supplied

LSL and OSL 80-150 • Potential to compete in domestic market against LVL.

• Australian market currently limited and needs further development, however market penetration evident overseas.


• Builder acceptance of product

• Haulage distances

Low Strong market opportunity if product is accepted as an equivalent of US produced product

R&D investment required to ensure competitive process

Bioenergy 10-250 for bioenergy plant

• Highly niche market opportunities due to lack of competitiveness and policy support

• Cost competitiveness of stand-alone plant

• Pellet markets may be difficult to secure and technology remains unproven in Australia.

Medium Stand-alone opportunities for bioenergy are extremely limited in current competitive environment. Regulatory changes would enhance project viability

Co-firing and pellet production is likely to be more viable

Woodchip exports

180 - 500 • Established market for woodchip export out of Eden

• Japanese market has potential to continue to decline for native forest supplies

• Opportunities in Chinese market, but at lower prices than Japan

• Market risk Medium-High Opportunity to continue with current woodchip export operations, but requires improved AUD FOB prices to be viable

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The chart on the left side of Figure 3 shows estimates of the average delivered log cost from each sub-region to a single destination (LHS) compared to the estimated capacity to pay. The delivered cost is based on a harvest and haulage estimate for each sub-region and is overlaid against an estimate of the capacity to pay range for a reciprocating sawmill (derived in Section 5.1) which is presented as a mill door price (MDP). The dashed line shows the cumulative delivered cost and the solid line the cumulative volume. Prices are presented as a range, reflecting the variability and uncertainty associated with these markets. The upper bound of the MDP only appears when sufficient volume is available to allow a processor to realise the efficiency gains associated with economies of scale.

The right hand side of Figure 3 shows the log volume (comprising large and small sawlogs) for each sub-region in five year lustrums. The Eden resource is split between the coastal and tableland forests and the South Coast volumes are split between Narooma with the other South Coast regions combined. The South Coast split reflects the relative proximity of the Narooma resource to the Eden region. The other sub-regions are shown as a single value. Wood flows are presented over a 20 year post WSA timeframe to reflect the payback period for any additional capital investment required.

Figure 3 Sawn timber production – sawlog capacity to pay estimates by subregion

Delivered log cost vs capacity to pay - Eden High quality sawlog volume - Eden facility

Achieving a viable resource scale for a sawmill in the Eden region will be challenging. The forecast available sawlog resource would likely need to be supplemented by either better quality pulp logs or from other regions.

An alternative approach to increase sawlog supply from the Eden region would be to reduce the rotation age for harvesting post-1970 regrowth forests. As demonstrated in Figure 2, a reduction in rotation age to around 40 years could progressively increase sawlog volumes from current levels at the expiry of the WSA’s to around 46,000 m3 pa by 2022. A steady state supply at this is level is consistent with the feedstock required for a modern reciprocating sawmill. However, given research to date has been based on small scale trials, further assessment of the potential sawn timber outturn from small and ultra-small sawlogs from a reciprocating sawmill would be warranted to understand the economics of processing these logs.

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The analysis indicates that to supply an average of 46,000 m3 pa FC would need to achieve an average mill door price of around $53/m3 to cover its harvesting and delivery costs. At the upper bound of the capacity to pay analysis ($82/m3), FC would receive a net sawlog stumpage of $29/m3.

Existing mills in the region are likely to need to invest over the next five years to allow them to process an increasing proportion of smaller diameter sawlogs and this may precipitate further consolidation of the sawmilling sector within the South Coast/ Eden FMA’s. While additional sawlog is potentially available from the East Gippsland region, there will be strong competition for this resource from Victorian sawmills.

With respect to log exports, softwood log exports already occur from Eden and minimal investment would be required to export hardwood logs provided access to the port and log handling infrastructure can be negotiated. Figure 4 suggests log exports from Eden are viable but there is a risk of negative stumpage at the low end of the price range. The large price range highlights the high degree of variability inherent in a commodity exposed to currency fluctuations and shipping costs. Supply from East Gippsland would also require a policy change as log exports from Victoria are currently prohibited.

A target volume of 100,000 m3 pa allows for a reasonable turnover of log stocks. A lower volume is still possible, but this would extend the timeframe between shipments which can lead to log aging and quality issues such as end splitting.

Figure 4 Log export – sawlog capacity to pay estimates by subregion

Delivered log cost vs capacity to pay – Eden Salvage/ export log volume - Eden facility

Figure 5 shows the delivery log costs to the port at Eden compared to the wharf gate price range for hardwood chip based on a China supply scenario. The 800,000 green metric tonnes (gmt) pa target volume is based on the historic operating levels of the Eden chip mill. The mill door price range highlights that a China chip supply scenario has a profound impact on the profitability of a woodchip export operation. The data also shows that NSW supply from outside of the Eden region is difficult to justify unless market conditions are favourable.

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Figure 5 Export woodchip – pulp log capacity to pay estimates by subregion

Delivered log cost vs capacity to pay Pulp log volume - Eden facility

Development of a Marketing Plan Given the changing nature of the harvest profile for the Eden resource, a marketing plan requires a flexible approach that recognises the changes occurring in the resource between 2013 and 2041 and its flow-on impact on potential investment opportunities.

Resource information and industry consultation Information on the status of the forest resource is currently limited. Therefore, the collection of log quality data is an important first step to assist with an active marketing programme. URS recommends a phased approach to the data collection process with a focus on key production areas.

URS consulted with domestic sawmills to gauge the level of interest in supply beyond the WSA and received a mixed response. Auswest (Orbost & WA) and Blue Ridge Hardwoods (Eden) both process mixed hardwoods and expressed a strong interest in processing beyond 2018 and would consider additional investment in a small log line.

Boral (Narooma and Batemans Bay) also process mixed species but had a clear preference for spotted gum and blackbutt and would prefer not to process other mixed species. Australian Sustainable Hardwoods had no interest in mixed species but would be interested in processing a tightly defined quota of silvertop ash logs if this were available in the right quality. URS also discussed the prospect of utilising a linear mill with Dongwha who operate a softwood linear operation at Bombala. Based on existing technology, Dongwha considers the time required to dry hardwood sawn timber would make the efficient operation of a linear mill processing hardwood logs difficult.

The two log exporters contacted by URS (Pentarch and PFP) considered hardwood log exports out of Eden to be a viable prospect. Both companies currently supply hardwood logs to the Chinese market and have existing networks that could be utilised for conducting log export trials. There currently

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appears to be less potential for semi-processed material as the cost associated with sawing logs in Australia would not make supply competitive with sawn timber produced in China.

The woodchip export market currently represents the only major pulpwood market available in the Eden region. The current market conditions are challenging for SEFE and the company is seeking to re-establish itself as a viable long-term business.

Marketing Plan (2013-2030) Figure 6 provides an illustration of how the changing nature of the resource influences the timeframes for engaging with potential investors as part of a longer term plan to market the Eden resource. Based on the market review and consultation with prospective investors, the options available from the end of WSA through to 2037 appear to be limited by resource constraints.

However, a scenario analysis indicates that the rotation age could potentially be bought forward to provide sufficient sawlog volume to provide the scale necessary for a reciprocating mill suited to processing small diameter sawlogs. The availability and quality of this volume would need to be verified through the collection of inventory data to confirm species mix and sawlog size class distributions.

As such, it is likely to be in the interests of FC to pursue a less intensive and more targeted marketing campaign in the short term focusing resources on areas that show the greatest potential. Existing sawmilling operations provide a valuable customer base and is likely to be the most engaged when considering sawlog supply beyond the existing WSA. To provide as much competitive tension to the process the marketing of the resource should include as broader group as possible. Consideration of a wider supply catchment may also potentially provide the scale required for a processor (not necessarily an incumbent) to be more confident to invest in small log line.

In addition to engaging with its sawmilling customers, FC should also take further steps to assess the feasibility of undertaking a log export programme. With softwood log exports well established through Eden, minimal investment is likely to be required to include hardwood logs. The focus for any log export operation should be directed toward non-quota logs such as salvage logs or small diameter sawlogs that are currently not preferred by existing processors. The feasibility analysis should include the collection of new inventory data to confirm the potential volume available.

The benefits to FC include diversification away from chip exports, the potential for higher returns and the opportunity to investigate a broader range of end uses (such as plywood – which may end up being a viable option in the longer term). There is a risk with this strategy that any shortfall in quota sawlog volume may be perceived by FC’s customers and the community as being caused by the decision to undertake log exports.

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Figure 6 Pathway showing key steps for the development of a marketing plan

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From a marketing perspective an Expression of Interest (EOI) process would be the most effective method to identify the level of interest in developing the sawlog market following the expiry of the WSA’s and potentially sooner for establishing a log export operation. An EOI process provides an approach that allows for the application of competitive tension among existing processors as well as a mechanism for new entrants to consider the investment opportunity.

A formal marketing process should informed by FC’s preferred range of processing options and industry structure. These options form the basis for a marketing process that is targeted toward particular companies. The marketing process comprises of three key stages:

• Information provision – the preparation and provision of information to interested parties, typically through provision of an Information Memorandum;

• Proposal preparation and evaluation – review of indicative and final proposals by proponents for through a robust multi-criteria analysis of their individual and collective merits; and

• Agreement and contracting – coordinating the negotiation and agreement of supply agreements between proponents and FC.

A detailed description of key factors requiring consideration during each stage of the marketing process is presented in Section 7 of the report.

There is a greater degree of uncertainty around the volume and quality of logs available from native forests in following the expiry of the WSA. Contract volumes offered to the market need to reflect these uncertainties and should incorporate a buffer that provides FC with the capacity to amend its harvest profile as market conditions develop over time.

At present there are no obvious alternative markets for pulpwood other than diverting some volume toward log exports. Therefore there is no immediate rationale for marketing pulpwood resources from the region. However, should SEFE seek to exit the market then they are likely to sell their chip processing and loading facilities in Eden and this may present an opportunity to market the wood and attract a new entrant.

Whilst the current market conditions are challenging there is an expectation that China’s demand for wood fibre will continue to expand and their future wood fibre needs will help maintain and may potentially improve prices if supply from key south east Asian countries remain at current levels. At present there are no obvious alternative markets for pulpwood other than diverting some volume toward log exports.

Given the risks currently associated with the sale of pulpwood FC should actively monitor developments in markets that may provide alternatives to the wood chip market. Key alternatives potentially include bioenergy and the development of composite products such as Lignor’s proposed engineered strand lumber using pulpwood.

Marketing beyond 2030 Beyond 2030, FC will have a more substantial resource on which to base investment. With this in mind, 5-7 years before the resource matures a more formal comprehensive marketing plan can be undertaken to engage with potential processors. The marketing plan should be focussed on generating awareness of the changed resource profile and the ongoing stability at that point in volume and grade outturn. Through this process greenfield investment can be targeted as the forest resource will provide a strong basis for investment.

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1

1Introduction

The following report, commissioned by Forestry Corporation of New South Wales (FC) is titled “Marketing Plan for the Eden Hardwood Forest Resource”. This report investigates the availability of the wood supply from the Eden native forest hardwood resource as well as from adjacent forest regions and examines future opportunities for supplying the resource into a range of wood product markets.

FC commissioned this report with the key purpose of considering “what mix of log processing options may best match the oncoming species, size, location and market characteristics of the future uncommitted resource in the broader region and deliver the highest optimal value return for all parties”.

URS Australia Pty Ltd (URS) was engaged by FC in February 2013 to complete this task. Uncommitted forest resources are expected to become available from 2018 to 2020 when FC’s existing long-term contract supply agreements expire.

The study was undertaken as a desktop review utilising resource data provided by FC and market data and technical research largely available in the public domain. The report is split into eight chapters that are briefly outlined below.

Chapter 2 reviews the available resource, firstly remodelling FC data to provide a breakdown of wood flows for the Eden region. FC data for the South Coast and Tumbarumba regions are reviewed, and potential supply from the adjacent East Gippsland region is also considered.

Chapter 3 reviews the existing processing industry in Eden and the surrounding forestry areas. It also reviews latest industry research on hardwood processing technologies to ascertain the products that can be feasibly processed from a technical perspective.

Chapter 4 summarises the characteristics of the hardwood resource that is available across the Eden and surrounding forestry regions. It considers the physical characteristics of the species and which product applications they may be suitable for. The section ends with a commentary on the market position of the Eden resource in relation to Australia’s total commercially-available hardwood resource.

Chapter 5 reviews market opportunities across a range of key sawlog and pulp log markets.

Chapter 6 provides an evaluation matrix of marketing options for the Eden resource, taking into account resource scale, processing technologies market opportunities and risk considerations. Finally, the section shortlists the most prospective marketing options for the sawlog and pulp log resource.

Lastly, Chapter 7 provides a framework for a marketing plan, to guide FC in presenting the log supply opportunity to potential investors. Whilst broad to allow FC flexibility, the chapter discusses the form of information that could be provided to interested parties and discusses principles and processes for ensuring the process is run successfully to achieve the best possible result.

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2

2Forest Resource Availability

This section presents wood flows for the Eden Forest Management Area (FMA) as well as FC’s adjacent supply zones in NSW and the East Gippsland region of Victoria which is managed by VicForests. URS reviewed FC’s inventory data and resource modelling process as part of the analysis. The results of our analysis and recommendations for potential improvements are presented in Appendix B.

The presentation of expected future wood flows is an important aspect of any marketing process. This section outlines the data used by URS to prepare a multi-region wood flow model and includes the type of information that would typically be included as part of an Information Memorandum (IM) provided to potential customers as part of the marketing process.

2.1 Resource overview The public forests of south east NSW vary from diverse multi-aged, mixed species Eucalyptus forests to even-aged regrowth forests dominated by a small number of species. The forests in this region have a long history of timber production and have been a valuable source of wood products for a number of generations.

For management purposes, FC divides the southern region for timber production into three FMA’s:

• Eden – is located in south east corner of NSW. The region abuts the East Gippsland region of Victoria which is also included as part of this study;

• South Coast – located north of the Eden FMA from Narooma in the south to Kiama in the north and is bounded by Canberra in the west; and

• Tumbarumba – is located west of the Eden and South Coast FMA’s. It has a higher elevation and a cooler climate than the bulk of the forests in the Eden or South Coast regions.

A key part of the development of the marketing plan is to give consideration to the costs associated with harvesting and delivery of the logs. To assist with the estimation of delivery costs each of the three FMA’s were divided into a series of sub-regional supply zones based on logical geographic boundaries. This enabled FC to calculate the haulage distance to a series of sites that may potentially suit a processing facility.

The geographic distribution of the native forests within each of the FMA’s and its corresponding supply zone is presented in Figure 2-1. The forests within each FMA are influenced by a range of factors which is discussed in more detail in the following sections.

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Figure 2-1 Distribution of public native forests available for timber production in south east NSW

Source: FC

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2.1.1 Eden FMA The forests of the Eden FMA are predominantly located along the coast and are concentrated to the south of the township of Eden. Small areas of forest are located inland on the Southern Tablelands.

Fire has played a major role in shaping the forests in the Eden FMA. As a consequence of large fires in 1952 and 1980 and 1983, the native forests of the region are a mosaic of multi-aged forests (MAF) which are largely undisturbed by fire and even-aged regrowth forests of varying ages.

The hardwood sawmilling sector currently utilises 20-34,000 m3 of sawlogs per annum (pa). Virtually all of this volume is sourced from MAF. These forests account for 11.5% of total annual wood production from the region. Primary sawlog species harvested over the past eight years include E. sieberi (silvertop ash - 23%), E. muelleriana (yellow stringybark – 17%) and E. fastigata (brown barrel – 23%). These forests are expected to supply the bulk of the sawlogs for the remainder of FC’s wood supply agreements (WSA) which expire at the end of 2018.

Regrowth forests are the predominant forest type in the region and develop following disturbance from fire or a harvesting operation. The regrowth forests are classified as either pre-1970 (as a consequence of a large fire in 1952) or post-1970 (regrowth from large fires in 1980 and 1983 or from post-harvest regeneration). Figure 2-2 shows the geographic distribution of each forest type as well as the species distribution. It shows that 85% of the Eden forest resources is classified as post-1970 regrowth.

Silvertop ash and various stringybark species are the dominant regrowth species and rapidly occupy the site following a disturbance event. These forests are at various stages of growth and are being managed for the production sawlogs on a rotation of around 50-60 years. This means the bulk of the current harvesting operations are focused on commercial thinning in the regrowth stands to improve stand quality. Thinned post-1970 regrowth stands account for 11% of the total forest resource.

With the relatively young age of the regrowth forests, commercial thinning operations produce predominantly pulpwood which is exported through the port at Eden. This type of operation is expected to continue to underpin harvest volumes for the foreseeable future. Small areas of pre-1970s regrowth have been harvested, which yielded small volumes of sawlogs.

http://en.wikipedia.org/wiki/Eucalyptus_muelleriana

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Figure 2-2 Distribution and composition of native forests available for timber production in the Eden FMA and the historic harvest volumes by species

Source: FC

2.1.2 Adjacent FMAs

South Coast The forests of the South Coast FMA are predominantly located along the coast in three discrete zones. The southern forest zone is concentrated inland from the township of Narooma with the northern forests zone situated between Batemans Bay and Ulladulla. The region also has a band of forests at higher elevations on the Southern Tablelands, east of Queanbeyan.

The South Coast contains a mosaic of forest types with most being a mixture of eucalypt species. These forest types give rise to either wet or dry sclerophyll forests. Corymbia maculata (spotted gum) is the most important commercial species of the South Coast with stands occurring as either as a pure spotted gum stand or as mixed stands with a variety of eucalypt species. Major associates of spotted gum include E. saligna (Sydney blue gum), ironbarks (various Eucalyptus species), stringybarks (various Eucalyptus species) and E. pilularis (blackbutt). Stands of spotted gum are found along the coastal areas with the bulk of the resource north of Batemans Bay.

Stringybarks dominate the southern part of the region and throughout the foothills forests of the coastal escarpment with associate species in variable mixes across the landscape. Major associates include silvertop ash, ironbarks, peppermints (various Eucalyptus species), and E. cypellocarpa (monkey gum, also known as mountain grey gum).

MAF12%

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Silvertop Ash30%

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Messmate10%

Brown Barrel18%

Monkey Gum10%

Other4%

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The higher elevations of the coastal escarpment and tableland forests are generally wet sclerophyll and are dominated by brown barrel, silvertop ash, E. radiata (narrow leaved peppermint), E. dalrympleana (mountain gum) and E. viminalis (manna gum).

Figure 2-3 shows the regional distribution of the standing volume of large high quality sawlogs. It shows over half of the resource is located in the Batemans Bay area, with the remaining volume split between the Narooma and Queanbeyan supply zones. The dominance of the Batemans Bay supply zone declines when other log grades are considered. For example the Narooma supply zone contains a significant proportion of forest that contains a higher proportion of lower quality logs than the Batemans Bay supply zone.

Harvest volumes from the region from 2005 to 2012 were stable, averaging 168,000 m3 per year. High quality sawlogs accounted for 28% of total production, low quality and other sawlogs 25% and the remaining 47% were pulp logs.

Figure 2-4 shows the diversity of species utilised for sawlog production. Spotted gum is the predominant sawlog species in the region accounting for 34% of total sawlog volume. Brown barrel is the next most common species accounting for further 16% of sawlog production. The remaining 54% is a mixture of various eucalypt species. Species data is not captured for harvesting of pulpwood.

Figure 2-3 South Coast large high quality standing sawlog volume by sub-

region

Figure 2-4 South Coast sawlog volume harvested

by species (1979 – 2012)

Source: FC

Tumbarumba The native forests of the Tumbarumba FMA that are available for timber production are predominantly located either north east of the township of Tumbarumba in the Bago and Maragle State forests or east of the township of Tumut.

Batemans Bay56%

Narooma25%

Queanbeyan19%

Silvertop Ash7% Yellow

Stringybark10% Other

Stringybarks4%

Messmate2%

Brown Barrel16%

Monkey Gum3%

Ironbark6%

Blackbutt6%

Peppermint7%

Red spp5%

Spotted Gum34%

Minor spp0%

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On favourable sites, E. delegatensis (alpine ash) is the predominant species in wet sclerophyll forests either as pure stands or in association with mountain gum. On drier, less favourable sites, alpine ash is still present in mixed alpine forest dominated by mountain gum, narrow leaved peppermint and E. pauciflora (snow gum).

As a result of local mill closures, harvesting activity in the region has declined from 54,000 m3 in 2005 to around 3-4,000 m3 in 2011 and 2012. Sawlog production was 65% of total volume with the balance being pulpwood. Alpine ash accounted for around 80% of sawlog volume with mountain gum accounting for a further 17%. Small volumes of manna gum and peppermint made the balance.

Figure 2-5 shows 70% of the high quality sawlog is located in the Bago and Maragle State forests. Figure 2-6 illustrates the dominance of alpine ash as the key forest species in the region.

Figure 2-5 Tumbarumba large high quality standing sawlog volume by sub-region

Figure 2-6 Tumbarumba sawlog species

distribution post WSA

Source: FC

East Gippsland The East Gippsland region of Victoria extends from Mallacoota in the east to Lakes Entrance in the west to the Alpine National Park in the north. The region supplies approximately one-third of Victoria’s annual mixed species hardwood sawlog production. Harvesting of the forests is managed by VicForests, a Victorian State owned corporation.

The 2013 resource outlook for the East Gippsland region indicates a high quality sawlog supply from ash forests dominated by alpine ash and E. regnans (mountain ash) to be around 23,500 m3 over the next 20 years. This is a reduction from the 33,000 m3 indicated in the 2012 outlook. Supply of high quality sawlog from mixed species forests is estimated to be around 48,000 m3 pa, which is comparable to the 2012 outlook. The mixed species comprise of brown barrel (28%), E. obliqua (messmate - 24%), silvertop ash (20%), monkey gum (12%) plus a range of stringybark and other eucalypt species.

Bago Maragle

Ash24%

Bago Maragle

HW46%

Tumut30%

Alpine Ash73%

Peppermint27%

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The region currently has a surplus of residual logs which are either too small or defective to meet current sawlog specifications. Residual logs are produced as a by-product of harvesting for quota grade sawlog production, or from silvicultural activities such as thinning or over wood removal which are designed to enhance future sawlog production.

In 2012 VicForests undertook a tender to supply up to 553,000 tonnes pa of mature and regrowth residue logs, offering a sales agreement of up to 20 years. Supply of pulp and residue logs from East Gippsland was estimated to be approximately 289,000 tonnes pa. The 2013 resource outlook indicates sawlog supply should be similar to the 2012 outlook and therefore the pulp and residue volumes are likely to remain at this level from 2013.

Despite a number of efforts over the past six years to increase sales of low quality logs, URS understands a number of parties expressed an interest in this resource but no firm commitment has been reached to date. Therefore, it is reasonable to assume that this surplus East Gippsland volume could potentially supplement supply from native forests in southern NSW.

2.2 Planning systems overview FC NSW operates two strategic planning systems in the southern region:

• Reden; and • Forest Resource and Management Evaluation System (FRAMES).

The Reden planning system was developed in 1997 specifically for regrowth forests in the Eden FMA. A series of Eden-specific projects were developed as part of the Comprehensive Regional Assessment (CRA) process with the expectation that a revised and externally validated wood resources database, plus improved associated models, would provide a reasonable foundation for estimates of harvestable log volumes and sustained yield. Yield estimates for the mature, multi-age forests are not represented by the Reden system and a review of these estimates are outside the scope of work.

System support for Reden has declined over the years and FC is planning to transfer Eden’s resource information from Reden system into FRAMES.

FRAMES is a collection of applications developed both by FC and external providers and enable users to model harvest volumes and changes to standing volume over time based on a range of forest management assumptions. The system is designed to be flexible and has undergone a process of continual improvement since it was developed. These improvements have arisen out of internal and external reviews as well as technological advances and the availability of new information on resource management.

A more detailed overview of these systems and their functionality is presented in Appendix B. This includes an assessment of steps that could be taken to improve FC’s inventory processes. The outputs from these systems were used by URS to prepare a consolidated wood flow model for the Eden and adjacent FMA’s.

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2.3 Regional wood flow model development As part of the development of a marketing plan URS prepared a wood flow model that allows the user to determine volume availability from different supply zones. The model did not seek to reconfigure FC’s modelling systems, but rather align wood flows across each of the regions using the available data to produce a consistent view on volume availability. The preparation of the model required a number of critical assumptions which are noted in the report.

Log specifications The log specification used in the wood flow modelling operates at a high level with three classes of sawlog (large sawlogs, small sawlogs and low quality (salvage) sawlogs) and two pulp categories (E1 and E2).

Log specifications under the current WSA’s are not consistent between FMA’s. The main differences between the log specification in Eden and the neighbouring Regional Forest Agreement (RFA) areas are:

• Small end diameter under bark of 30 centimetres (cm) for Eden and 25 cm for the South Coast and Tumbarumba; and

• Lower threshold in Eden for pipe quantity and the proportion of defect allowed by log size. However, this is not modelled specifically by either Reden or FRAMES as it is an internal defect.

FC applies a slightly different terminology for classifying sawlogs in Eden compared to its other FMA’s. Large sawlogs in the Eden region are equivalent to high quality large (HQL) sawlogs in the South Coast and Tumbarumba FMA’s while small sawlogs at Eden are equivalent to high quality small (HQS) sawlogs in the South Coast and Tumbarumba. Low quality (LQ) sawlogs are considered to be the same as salvage logs in Eden. Table 2-1 shows the various log grades used in the wood flow model as well as their associated specifications.

Table 2-1 Summary of model log specifications

Model log grade Diameter Length Branch/ defect

Large sawlog >40cm cdub >2.4m 20% at 25 cm sedub to 65% at 180 cm sedub

Small sawlog 25cm sedub – 40cm cdub

>2.4m 20% at 25 cm sedub to 65% at 180 cm sedub

Salvage log >30cm sedub >2.4m 25% at 24 cm sedub to 81% at 100 cm sedub

E1 Pulp log <40cm led All rot removed, defect <50% of diameter

E2 Pulp log 40cm – 80cm led 2.0 – 12.0 m All rot removed

cdub – centre diameter under bark, sed – small end diameter, led – large end diameter

Source: URS interpretation of FC log specifications

Species groupings Table 2-2 shows the main species groups used in the wood flow model. These are based on the main species groups used by FC in its wood supply modelling. Based on FC advice, URS separated silvertop ash from the stringybark group and brown barrel, messmate and monkey gum were also separated from FC’s brown barrel group. These were separated to come up with a more refined view on the types of products that might be able to be realised from the forest resource.

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Table 2-2 Summary of aggregated species classifications

Model classification Major species Model

classification Major species

IBK Ironbarks, coastal grey box FAS Brown barrel SPG Spotted gum MMT Messmate BBT Blackbutt MKG Monkey gum

YSB Yellow stringybark PEP Manna gum, mountain gum, white ash, peppermints

REDS Forest red gum, woollybutt, Sydney blue gum, Red bloodwood

ALA Alpine ash

STA Silvertop ash ASH Victorian ash

STR White stringybark, blue-leaved stringybark Minor Red stringybark, yertchuk

Source: FC

Summary of data limitations The data used to underpin the wood flows is based on a series of assumptions that are subject to a range of limitations. However, we note this data represents the best information currently available. Some of the key limitations associated with the data include:

• The outturn by species from regrowth forests is based on the average species composition from the past 30 years of harvesting. An implicit assumption is that the species distribution for future wood flows will be the same as what has been harvested to date;

• The capacity to analyse log product differentiation based on the data provided was limited. The scope of the project did not allow for an in-depth analysis of alternative log specifications;

• Minimal data exists to determine the proportion of internal defects in the regrowth forests; • There is no differentiation of species for pulpwood arriving at SEFE. This makes it impossible to

determine the species mix arising from thinning operations in regrowth forests. Therefore the species composition at thinning is assumed to be the same as what would occur from harvesting mature forests; and

• There is no additional adjustment to the yield estimates to account for unforseen events such as wildfire.

Key wood flow model assumptions FC NSW maintains individual wood flow models for each FMA. The Eden wood flow model contains outputs from the Reden system and operates on an annual volume basis. Both the South Coast and Tumbarumba models are part of FRAMES and model resource wood flows in 5 year increments.

URS aligned the outputs for both species groups and log products for the three FMA models (Eden, South Coast and Tumbarumba) to produce a single combined regional wood flow. A standard commencement year of 2012 was used for the combined model. The area of productive forest was assumed to remain the same in each of the wood flows.

The key assumptions and constraints used to produce the wood flow models are outlined in Table 2-3.

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Table 2-3 Summary of wood flow model assumptions and constraints

Region Assumption / constraint Time period

Eden Total sawlog (>25cm sedub) equals 23,000 m3 2012 – 2018

Non declining sawlog yield 2012 – 2110

Pulpwood to be within ±20% range of initial harvest volume 2012 – 2110

Defect % remains the same across all HQ) sawlog size classes 2012 – 2110

South Coast HQL volume to be within ±20% range of initial harvest volume 2012 – 2110

Low quality (LQ) > 21,000m3 2012 – 2058

HQL spotted gum between 30 and 33% of total HQL 2012 – 2110

HQL brown barrel > 17% of total HQL 2012 – 2110

Tumbarumba HQL >= 23,000 m3 2012 – 2073

HQL <= 26,000 m3 2024 – 2083

HQL alpine ash = 20,000 m3 2012 – 2023

HQL alpine ash >= 16,000 m3 2024 – 2110

HQL alpine ash volume to be within ±20% range of 2024 harvest volume 2024 – 2110

HQL peppermints to be within ±30% range of initial harvest volume 2012 – 2058 Source: FC

The wood flows only consider harvest volumes removed from the forests. No constraints were applied to ensure the residual growing stock was maintained. However URS did assess the impact of the harvest profile on the growing stock of the remaining forest. This is particularly relevant for the scenario analysis described below.

Scenario Analysis For the Eden FMA URS also assessed the impact of alternative sawlog specifications and silvicultural strategies on future wood flows. The structure of the FRAMES system and the nature of the data available for supply from native forests in eastern Victoria meant the impact of alternative silvicultural regimes on wood flows from these other regions could not be assessed. The REDEN model was assessed to determine the impact of:

• Reducing the minimum small end diameter for sawlogs from 25cm to 18cm; • Reducing the harvest age from 50-60 years to 40-50 years. This allows sawlog volumes to be

increased more rapidly, albeit with the logs being of a smaller diameter; and • A lack of pulpwood markets resulting in a restriction in the capacity to continue thinning the forests.

The potential impact of these changes on the expected log outturn from the Eden region is presented in the next section.

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2.4 Regional wood flows This section presents the regional wood flows by FMA. For ease of presentation the long-term wood flows are presented in five year lustrums. The data is presented over a 100 year horizon to illustrate any long-term changes that may occur over time. For the purposes of preparing a marketing plan, consideration of a shorter time horizon of around 20 years is more appropriate.

No additional adjustments have specifically been incorporated into the wood flow model. However this uncertainty needs to be recognised in the context of the risks associated with long-term wood supply availability. The issue of adjusting the wood flows for risk is discussed further in Section 6 which combines resource availability over a 20 year investment timeframe with an assessment of potential processing opportunities.

2.4.1 Eden FMA Figure 2-7 shows that pulpwood is the predominant log grade produced throughout the modelling horizon. The bulk of this volume is sourced from the post-1970 regrowth forests. Commercial thinning through to 2036 produces a significant amount of pulpwood. The objective of thinning over this period is to increase the outturn of large diameter sawlogs which, based on FC’s growth and yield forecasts, are expected to become available from 2037 onward when the earliest regrowth stands are about 50-60 years of age.

The supply of sawlogs from the Eden FMA is expected to go through a period of transition at the time the marketing plan would be implemented. For the existing WSA term, sawlog supply of around 20-25,000 m3 pa will be sourced from MAF. From 2022 onward, all sawlog supply is expected to be sourced from post-1970 regrowth.

As thinning is a more expensive harvesting operation than harvesting mature regeneration due to the smaller piece size and lower sawlog outturn, costs associated with sawlog extraction are likely to increase over time as MAF areas are progressively harvested and sawlog volumes are increasingly sourced from regrowth forests. This trend should be reversed from 2037 when the mature post-1970 regrowth stands start to be harvested.

In terms of the geographic location of the harvest volume, Figure 2-7 shows the eastern, south eastern and southern supply zones account for approximately two thirds of the harvest volume produced over time. These zones are relatively contiguous and will support several integrated harvesting operations. The south west and north west zones are Tableland forests and FC’s yield estimates indicate a total annual volume of approximately 50-75,000 m3 can be sustained from these two zones.

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Figure 2-7 Projected log outturn by grade and supply zone from Eden FMA

Log outturn by grade Log outturn by supply zone

Source: FC

Figure 2-8 shows the projected sawlog outturn by species. It indicates that silvertop ash and stringybarks, particularly yellow stringybark, are expected to continue being the key sawlog species from the estate. The bulk of the remaining sawlog volume is likely to be a combination of messmate, brown barrel and monkey gum.

The REDEN system does not currently capture pulp outturn by species, however, it is likely to be consistent with the species distribution for sawlogs. Total pulp volumes shown in Figure 2-8 decrease over time as the proportion of area thinned progressively declines and the harvesting activity in mature stands increase.

Figure 2-8 Log outturn by species from the Eden FMA

Sawlog outturn by species Pulp log outturn by species

Source: FC

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Alternative wood flow scenarios The wood flow analysis also considers the potential impact associated with alternative management approaches. Based on discussions with FC the following scenarios have been investigated:

• Reduced sawlog small end diameter: This analysis estimates how much additional sawlog volume may potentially be available if the sawlog sedub is reduced from 25cm to 18cm. A reduction in the minimum sawlog diameter potentially increases sawlog supply from the existing resource;

• Reduced rotation age: The impact of reducing age of final harvest for post 1970 regrowth forests from 50-60 years to 40 years. FC has no prescribed rotation length objectives and is seeking to understand the impact of a reduction in rotation age on available sawlog outturn. This also incorporated sawlogs to a minimum sedub of 18cm; and

• No additional thinning: Removing the option of any further thinning within the estate. This scenario illustrates the potential impact reduced pulpwood demand may have on future log supply from the region. Minimum sawlogs in this scenario were consistent with the 25cm sedub used in the base modelling.

Scenario 1 – reduced sawlog small end diameter

FC’s current specifications classify all logs with a sedub of less than 25cm as pulp wood. In international log export markets the minimum sed for hardwood logs can be as small as 16cm. Technologies such as spindle-less lathes mean logs of very small diameter can be utilised for the production of veneer material. This type of machinery is widely used in southern China and Vietnam where the feedstock is sourced from local eucalypt plantations. URS understands small diameter, plantation grown hardwood logs are also being sawn to supply high strength packaging markets.

The inventory data collected to date by FC does not contain an assessment of stem form which means it cannot be reprocessed using a modified log specification. Despite this limitation it is possible to estimate the volume of pulpwood that could potentially be incorporated into a sawlog with a sedub of 18cm by applying the taper function to a sample of inventory plot data.

The taper function does not account for stem straightness or the presence of defects therefore a further adjustment is required to account for these factors. Following discussions with FC, an adjustment factor reducing the total sawlog volume by 50% was applied to the data to account for downgrading from sawlog to pulpwood. Whilst this is a very simplistic approach it provides some guidance on the potential to diversify supply away from woodchip markets. Additional inventory is required to confirm whether these logs are actually present in the resource and can be recovered from a harvesting operation.

A reduction in the sedub for sawlogs from 25cm to 18cm results in an annual increase of approximately 7-19,000 m3 pa of sawlog from the Eden FMA. This range is temporal with the 7,000 m3 pa being the estimated volume available from 2022-2031 while the 19,000 m3 pa follows the increase in sawlog available once the harvest reaches a steady state. In percentage terms ultra small sawlogs from the Eden region have the capacity to increase sawlog volume by approximately 24%.

The capacity of the market to utilise this volume depends on the technology available to manage these small logs. A summary of the technology potentially available to process this material is described in Section 5.

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Scenario 2 & 3 – impact of revised forest management assumptions on Eden wood flows

Both Scenario 2 (reduced rotation age) and Scenario 3 (no additional thinning) maintain a wood flow until 2018 that is consistent with FC’s existing WSA commitments (23,000 m3). They also result in a wood flow that does not reduce the standing sawlog growing stock in the Eden forest estate below current levels. A comparison of the modelling constraints is shown in Table 2-4 with the scenario results presented in Figure 2-9.

Table 2-4 Comparison of Eden wood flow model scenario constraints

Constraint Reduced rotation age No additional thinning

Sawlog sedub 18cm 18cm

All sawlog 23,000 m3 up to 2022 23,000 m3 up to 2022

All sawlog non-declining yield non-declining yield

Pulp log even supply +- 20% Unconstrained

Sawlog growing stock >350,000m3 2032-2112 >350,000m3 2032-2112

Regrowth harvest age >40 years >60 years

Thinning Yes No

Source: URS

The yield table adjustments applied to estimate sawlog volume down to 18cm sedub were calculated by FC and have been accepted as provided. Sawlog volume between 18cm sedub and 25cm sedub has been classified as an ultra small sawlog and is assumed to subject to the same branch size and defect specifications as the larger sawlog classes.

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Figure 2-9 Log outturn for alternative wood flow scenarios for the Eden FMA

Reduced rotation age – total volume No additional thinning – total volume

Reduced rotation age – sawlog volume No additional thinning – sawlog volume

Source: FC

The wood flow model indicates that a reduction in harvest age to around 40 years has the following effects on sawlog supply:

• A steady state supply of sawlogs could be achieved by 2022 compared to around 2042 under the base case;

• Once harvest volumes reach a steady state, the sawlog availability reduces from 75,000 m3 pa under the base case to around 46,000 m3 pa;

• The inclusion of ultra-small sawlogs provides an estimated additional 15,000 m3 pa (33%) over the long-term as harvesting at an earlier age provides a greater proportion of ultra small sawlogs;

• The outturn of small sawlogs compared to large sawlogs is higher, reflecting the smaller tree size; • Pulpwood volume increases marginally from 2017 to 2026; and • The total volume arising from the South and South East supply zones becomes more uneven.

Adjusting the silvicultural regime to remove thinning significantly reduces overall harvest volumes. Sawlog volumes decline to approximately 12,000 m3 pa between 2019 and 2035 before increasing to a long term supply of 48,000 m3 pa around 2042. An additional estimated 12,000 m3 pa is gained by reducing the sedub to 18cm. The proportion of large sawlogs is slightly lower than for the base case, reflecting the fact that for a greater proportion of the forests the only thinning to occur will be through

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natural selection. The source of the volume is also affected with the South East supply zone the main contributor of volume between 2017 and 2037.

Pulpwood supply becomes variable supply ranging between 70,000 m3 pa and 200,000 m3 pa. The pulpwood volume displayed depends on the mix of site quality used to achieve the modelling objectives. Smoothing the pulpwood volume under the no thinning scenario reduces sawlog volumes further to 38,000 m3 pa and provides 87,000 m3 pa of pulp.

Figure 2-10 provides a comparison of sawlog and pulp log outturn between Scenarios 2 and 3 relative to the base case. Reducing the rotation age produces a lower sawlog volume with a greater proportion of small sawlogs but allows for an increase in sawlog supply following the expiry of the WSA. Operating with no additional thinning provides a similar outcome, however sawlog volumes are limited until 2040 when the bulk of the post-1970 resource matures.

Figure 2-10 Comparison of sawlog and pulpwood volumes achieved under each wood flow scenario

Sawlog (>25cm sedub) Pulpwood

Source: FC

Scenario 3 (no further thinning) highlights the importance the pulpwood market for the Eden region. This is particularly the case over the next 10-20 years as the post-1970 regrowth resource is progressively thinned to promote sawlog growth. This scenario also illustrates that the long-term supply of sawlogs from the region could potentially be materially disrupted should demand for pulpwood decline.

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2.4.2 South Coast FMA Figure 2-11 shows the outturn by log grade and supply zone from the South Coast FMA is expected to remain relatively stable over time. The reason for the declining yield from the Queanbeyan supply zone requires further investigation but it is unlikely to impact over the time horizon considered for the marketing plan.

Figure 2-11 Projected log outturn from the South Coast FMA


Source: FC

Figure 2-12 shows log outturn by species. Because FRAMES determines harvest yields at a species level for all log grades, it is possible to identify the species composition for both sawlogs and pulpwood. The results highlight the diverse nature of the South Coast resource and show that while spotted gum is the dominant species, a range of other species make a significant contribution to the overall wood flow.

Figure 2-12 Log outturn by species from the South Coast FMA


Source: FC

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2.4.3 Tumbarumba FMA Figure 2-13 shows there is an ongoing sawlog supply of around 30,000 m3 available from the region with the vast majority of supply originating from the Bago and Maragle State forests.

Figure 2-13 Projected log outturn by grade and supply zone from the Tumbarumba FMA


Source: FC

Figure 2-14 shows ash species account for over 50% of the sawlog supply in the short-term with the proportion increasing over time. The peppermint species produce some sawlog but generally have a higher outturn of pulp, reflecting the lower productivity of these sites. The reasons for the declining yield of peppermints species beyond 2052 could not be easily determined and requires further investigation. FC model the Tumbarumba estate over a 200 year horizon and wood flows over this extended period improve gradually from 2111 onwards. The timescale is such that there is little benefit in smoothing these wood flows to provide a more even distribution.

Figure 2-14 Log outturn by species from the Tumbarumba FMA


Source: FC

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2.4.4 East Gippsland VicForests is the State agency responsible for harvesting in Victoria’s native forests. Sawlog classifications applied in Victoria are different to those used in NSW. VicForests apply specific specifications for D+ grade sawlogs from the East Gippsland resource. D+ grade sawlogs are similar to logs currently classified as sawlogs in Eden with both using a minimum sedub of 30cm and having the same allowance for sweep and spiral grain. This analysis assumes sawlog specifications for Eden will lower the minimum sedub to 25cm to align with the remainder of the South Coast FMA’s at the end of the current WSA. This results in a slight misalignment between the sawlog specifications for Victoria compared to the NSW resource. The implication of this is that some additional sawlog volume may be available from Victoria if the sedub was reduced to 25cm. Table 2-5 provides a comparison of the sawlog specifications based on a consistent minimum sedub of 25cm for NSW.

Table 2-5 Comparison of sawlog grade specifications between Forestry Corporation and VicForests

Size / Defect FC HQ sawlog VF D+ sawlog FC salvage VF E sawlog

Minimum log length 2.4 m 2.7 m 2.4 m 2.7 m

Minimum sedub 25 cm 30 cm 30 cm 30 cm

Spiral grain (slope grain for VF)

1 in 8 1 in 8 Unlimited 1 in 7

Sweep 20% 20% 20% 20%

Pipe • Variable

• 10cm at 34cm dub • 34cm at 60cm dub

• Variable

• 5cm at 35cm dub • 27cm at 60cm dub

• Variable • 16cm at

34cm dub • 40cm at

60cm dub

• Variable • 10cm at

35cm dub • 34cm at

60cm dub


Downgrading either D+ or HQ sawlog to a salvage grade is carried out using a similar method based on timber defect, however some differences remain regarding allowance of pipe and other defects. Pulpwood specifications for FC and VF are also similar.

It should also be noted that any FC volume supplied to Victoria may be graded using the Victorian specifications.

Supply forecasts for the East Gippsland region are sourced from VicForests 2013 Resource Outlook. Figure 2-15 shows total volume produced from the region is expected to remain static at approximately 350,000 m3 pa with a high quality sawlog (D+ grade) volume of approximately 71,500 m3 pa.

As this grade has a minimum small end diameter of 30cm but no maximum small end diameter these volumes are therefore inclusive of logs that would otherwise be classified as large sawlogs (HQL) by FC. No additional data is available to identify the proportion of large sawlog potentially available from the East Gippsland region. The volume of low quality salvage log is estimated to be around 90,000 m3 for all species.

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Figure 2-15 Projected log outturn grade from the East Gippsland region

Source: VicForests

No information is publicly available on distribution of supply at a sub-regional level. Figure 2-16 shows the bulk of the log supply from the region is sourced from mixed species forests. However, sawlog volumes include 23,500 m3 pa of ash species with the remaining 48,000 m3 pa sourced from mixed species. URS understands much of the ash sawlogs supplied to East Gippsland mills is sourced from the Central Highlands region of Victoria. The mixed species coastal forests in the East Gippsland region are similar in composition to the forests in the Eden FMA. Therefore it is likely the log outturn at a species level should be similar.

Figure 2-16 Log outturn by species from the East Gippsland Region

Large and small sawlog outturn by species* Pulp log outturn by species

*Salvage log volumes not shown

Source: VicForests

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2062

2067

2072

2077

2082

2087

2092

2097

2102

2107

Annu

al v

olum

e ('0

00 m

3 )

Year commencing

Mixed spp Vic Ash

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2.4.5 Summary Figure 2-17 provides a summary of log supply potentially available from each region. This data is presented to show the relative contribution from each region considered as part of this study. It shows the Eden and South Coast FMA’s provide the bulk of the supply from south east NSW with potential total annual harvest volumes of between 500-600,000 m3 pa. The East Gippsland region of Victoria has the capacity to produce around 350,000 m3 pa.

Pulpwood is the dominant log grade accounting for over 550-630,000 m3 pa. High quality sawlogs have the potential to supply around 200-220,000 m3 pa, with the balance being lower quality salvage sawlogs.

Figure 2-17 Projected log outturn from the overall study area by grade and region

Total log outturn by grade Total volume by region


Section 6 includes a more detailed analysis of regional supply taking into account the costs associated with the delivery of logs to end markets. Wood flows are considered over a 20 year investment horizon beginning from the end of the various WSA’s. It also includes discussion on the treatment of risk and uncertainty in the wood flow estimates. This is particularly relevant for the Eden region which has a history of periodic loss through catastrophic fire events.

Scenario analysis URS investigated the impact of variations to the base case through a scenario analysis. The analysis focused solely on the Eden resource and was undertaken at a desktop level. It showed that by reducing the minimum sawlog sedub from 25cm to 18cm could potentially increase sawlog availability by 24%. The availability of these logs increases over time as the post-1970 regrowth forests mature.

Reducing the rotation length to around 40 years leads to an increase in sawlog availability from 2017 and can achieve a steady state of supply from 2022. By comparison the base case maintains sawlog volumes at current levels until 2037 at which time sawlog availability increases significantly. Beyond 2037 the reduction in rotation age results in a steady state volume of 46,000 m3 pa compared to 76,000 m3 pa for the base case. The wood flow indicates there would be a minor increase in the production of pulpwood until 2022 with pulpwood volumes comparable to the base case over the long-term. At a FMA level, the reduction in rotation age results in a slight increase in total sawlog availability.

Removing thinning from the silvicultural regime reduces both the sawlog and pulpwood volume, particularly in the short term. While the reduction in sawlog volume in Eden is significant, the combined regional sawlog volume is only affected to a limited extent due to the relatively small volumes arising from the Eden FMA.

0100200300400500600700800900

1,000

2012

2017

2022

2027

2032

2037

2042

2047

Annu

al v

olum

e ('0

00 m

3 )

Year commencing


0100200300400500600700800900

1,000

2012

2017

2022

2027

2032

2037

2042

2047

Annu

al V

olum

e ('0

00 m

3 )

Year commencing

Eden South Coast Tumbarumba East Gippsland

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Figure 2-18 Projected log outturn from the overall study area by grade and region for each scenario

Reduced rotation - total log outturn by region No thinning - total log outturn by region

Reduced rotation - total log outturn by grade No thinning - total log outturn by grade

Reduced rotation - sawlog (>25cm sedub*)outturn by region

No thinning - sawlog (>25cm sedub*) outturn by region

* Eden region includes sawlog volumes >18cm sedub

The alignment of potential processing options with these wood flows is considered in more detail in Section 6.

0100200300400500600700800900

1,000

2012

2017

2022

2027

2032

2037

2042

2047

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al v

olum

e ('0

00 m

3 )

Year commencing


0100200300400500600700800900

1,000

2012

2017

2022

2027

2032

2037

2042

2047

Annu

al v

olum

e ('0

00 m

3 )

Year commencing


0100200300400500600700800900

1,000

2012

2017

2022

2027

2032

2037

2042

2047

Annu

al v

olum

e ('0

00 m

3 )

Year commencing



0100200300400500600700800900

1,00020

12

2017

2022

2027

2032

2037

2042

2047

Annu

al v

olum

e ('0

00 m

3 )

Year commencing



0

50

100

150

200

250

2012

2017

2022

2027

2032

2037

2042

2047

Annu

al v

olum

e ('0

00 m

3 )

Year commencing


0

50

100

150

200

250

2012

2017

2022

2027

2032

2037

2042

2047

Volu

me

('000

m3 )

Year commencing


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3

3Existing Processing Industry

Historically, significant volumes of large diameter sawlogs were sourced from southern NSW and the processing sector has developed in alignment with resource availability. As wood supply has declined and transitioned towards a smaller size resource, many mills have been unable to operate with the same efficiency today, resulting in many he hardwood sawmills in southern NSW tend to be smaller capacity mills utilising older technology.

Table 3-1 provides a breakdown of the known processors in the Eden, South Coast and Tumbarumba FMA’s. The two hardwood mills in Eden region are supplied by FC and VicForests. South East Fibre Exports (SEFE) operates an export woodchip facility that provides the sole market for pulpwood and sawmill residues from the Eden region. It is the largest processor in the region exporting up to one million tonnes of hardwood and softwood woodchip per annum. The operation is based primarily on supply from native forests but it also processes some pulpwood from its own plantations. The SEFE mill is equipped with current technology facilities and has also invested in a pilot pellet plant. This facility produces compressed bio-fuel pellets made from wood residue and agricultural waste for use in heat and electricity production. Blue Ridge Hardwood is a medium sized mill which upgraded its processing equipment including green/dry mills and kilns as of 2000. This has significantly increased its efficiency in the handling of a smaller log resource.

The sawmills based in the South Coast region are generally small in size and capacity, the exception being the Boral mill based at Narooma. All mills supplied from the South Coast region produce graded sawn timber from mixed species eucalypt with the exception of Big River Timbers which produces a small amount of veneer product. The timber producing mills in this region all have WSA’s ending in 2020.

There are no hardwood sawmills in the Tumbarumba region, although the region supplies two mills in Victoria (Benalla and Corryong) and one in NSW. These mills are similar to the small capacity mills found in the South Coast region, processing ash and mixed species.

Table 3-1 Summary of hardwood mills supplied from the Eden, South Coast and Tumbarumba Regions

Mill name Location Volume (‘000 m3)

Suppliers WSA end year

South East Fibre Exports Eden 330 pulp1 FC/VF 2018

Blue Ridge Hardwoods Eden 24 FC/VF 2018

TE Davis Wandandian 1.3 FC 2020

Boral (Davis & Herbert) Narooma 17 FC 2020

Boral (Davis & Herbert) Nowra 30 FC 2020

Romney Park Milton 6 FC 2020

Buckwood Braidwood 3 FC 2020

Big River Timbers Grafton 0.5 FC 2023

Ryan & McNulty Benalla 4.5 VF/FC 2020

Walker Corryong 2 VF 2020

Source: FC

1 This figure represents the Forestry Corporation supply only

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Sawmills in the East Gippsland region are not supplied by FC although there is a substantial established hardwood processing capacity based on a similar resource to the Eden region. As in NSW, the supply of mixed species sawlogs in East Gippsland has declined over time and is expected to continue to do so. VicForests is currently supplementing wood supply to these mills from Victoria’s Central Highlands region to meet its existing sales commitments.

The majority of processors in East Gippsland are small mills processing mixed species. There is one large mill in the region (Auswest) that has a log input capacity of more than 50,000 m3 pa (Table 3-2). Most of the small mills have a greater focus on structural timber. The medium to large sized sawmills produce a combination of structural and appearance grade products.

Table 3-2 Summary of hardwood mills in the East Gippsland region

Mill Name Location Volume (‘000 m3)

Type Supplier Supply end date

P R Adams Nowa Nowa 10-25 MS/Ash VF Unknown

Kinglake Timber Industries Nowa Nowa 10-50 MS/Ash VF Unknown

W& C Sawmilling Buchan 5-10 MS VF Unknown

Mectec Newmerella 10-20 MS VF Unknown

Auswest Orbost 50-60 MS VF Unknown

Hallmark Oaks Cann River 10-25 MS VF Unknown

Jamiesons Bendoc 5-10 MS VF Unknown

Source: VicForests

The processing and log supply balance in East Gippsland and Eden regions are comparable with the supply of high quality large diameter sawlogs balanced or slightly undersupplied, whereas there is a surplus of industrial and pulp grade logs available in both regions.

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4

4Wood Supply Characteristics

Australia’s unique native hardwood forests produce a range of durable and attractive timbers. The natural durability of native hardwoods makes them suitable for a range of external applications both above and in-ground. The attractive grain and timber strength also allows these timbers to be used for internal, appearance products such as flooring and decorative furniture.

This section provides an overview of the key commercial timber species in the Eden and adjacent FMA’s.

4.1 Key timber species characteristics

Silvertop ash Silvertop ash is one of the dominant commercial species present in the Eden regrowth forests and is expected to account for ~31% of the expected supply from the Eden FMA. It is also present in southern parts of the South Coast FMA accounting for ~19% of expected supply from the Narooma area (or 10% across the entire South Coast region) and is also found extensively in East Gippsland.

Silvertop ash produces a hard and moderately durable timber which is easily workable and is suited to steam bending. However, it is prone to surface checking on the tangential surface and splits easily when being worked (Bootle, 2005). Above-ground durability is around 15 – 40 years which makes it suitable to most exterior applications. In-ground durability is 5-15 years making it a less hard wearing product for landscaping applications.

Current uses for silvertop ash include: flooring, high-end joinery, framing, furniture, cabinetry, handles and structural and timber poles. As one of the seven species complying with AS 3959 (the Australian Standard for the construction of homes in bushfire prone areas), it is well suited as an external cladding and window framing product in regional Australia (Wood Solutions, 2013).

Although silvertop ash is already produced as a high value flooring product, Wood Products Victoria (WPV) identifies the potential to better position the species in the ‘Medium’ and ‘High’ feature flooring grade which commands a premium to where it is currently marketed (WPV, 2012). Silvertop ash is also durable enough for use as external privacy screens in medium to high density residential environments. This market has been expanded in recent times by the increase in higher density living (WPV, 2012).

Stringybarks This group comprises a range of species including yellow stringybark, E. globoidea (white stringybark) and E. agglomerata (blue-leaved stringybark) and commonly found in the Eden FMA. The supply of stringybarks is expected to account for ~38% from the Eden FMA and ~20% from the South Coast FMA (with 39% of supply from the Narooma supply zone).

The sawn timber from this group is comparable to other key light coloured native hardwood species such as Victorian ash (alpine ash and mountain ash), Tasmanian oak and brushbox (Lophostemon confertus). Yellow stringybark produces the highest quality timber within the group. The group’s durability ratings range from 7 to 40 years for external above ground applications. The timber is extremely versatile and is used across a broad range of applications. Common uses for stringybarks include: flooring; decking; furniture; structural timber (yellow stringybark); landscaping; wharf and bridge construction; linings and joinery; fencing; boat building; structural plywood; railway sleepers; poles; mining timber and heritage restoration (Wood Solutions, 2013).

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These timbers machine well and are quite workable while still being high in density and are especially well suited to internal flooring applications. The colours, grain textures and feature ranges vary between species, making these flooring products, in some ways, a good hedge against changeable consumer preferences.

Brown barrel Brown barrel (also known as cut-tail) is a common hardwood species that grows throughout north east Victoria and southern NSW. It is the third most common commercial species in the Eden forest management areas after silvertop ash and stringybark, representing 18% of the typical harvest volume.

Brown barrel timber has a pale brown colour that makes it quite distinctive when compared alongside other commercial species in the Eden forest management area. It is more similar in appearance to messmate which is also found in the region.

Commercially, brown barrel is a less popular species than silvertop ash or yellow stringybark as it has lower durability, is considered to be less attractive and is not as easy to process (brown barrel is slow to dry and surface and internal checking is common).

It is used mainly for general construction, although this is limited to applications protected from weather exposure due to brown barrel's lower durability rating (Wood Solutions, 2013). However it may be used internally for flooring and paneling.

Messmate Messmate is a minor but important species. FC’s wood supply forecasts indicate that messmate is expected to account for ~6% from the Eden FMA and ~2% from the South Coast FMA.

Messmate produces a timber of moderate hardness but has a lower durability than most of the other key commercial timbers in the region. Above ground durability is approximately 7-15 years and it is not generally used for external applications such as decking. However, it is an attractive species for flooring and commonly features gum veins. It is easily workable although susceptible to splitting (Bootle, 2005). It also has potential for treating if full penetration of preservatives can be achieved. Messmate is most commonly used in general construction/manufacture products and pulp production. It is also used for panelling, plywood, above ground framing (when protected), internal joinery and furniture as well as other protected external uses (Wood Solutions, 2013). In Victoria, messmate ‘Glulam products2’ are being used to produce structural beams and staircase components. Messmate was also shown by the CSIRO to have potential for use as a laminated veneer lumber (LVL) and medium density fibreboard (MDF) product (see Section 5), however this would be subject to further research and commercial quantities being available.

Spotted gum Spotted gum is a premium native hardwood species with high strength and durability characteristics. It is a key commercial species for the South Coast region accounting for ~21% of the region’s total supply. The South Coast represents the primary southern boundary of its natural geographic

2 Glulam products are manufactured by resin bonding short clear lengths of seasoned timber to form load bearing beams. The Glulam beams are then finger-joined to produce the final product.

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distribution with few spotted gum forests south of Batemans Bay. Minimal supply of spotted gum is expected from the Eden FMA.

Spotted gum is valued by architects and designers for its back-sawn grain structure, feature markings and colour variations. Wavy grain within the timber often creates an attractive fiddle back feature (Bootle, 2005). It is also one of the most durable timbers presented in these regions. It has an above ground durability of over 40 years and an in ground durability of 15 -25 years. This species is well suited to engineering applications and its common uses are wide ranging. These include; infrastructure construction, building applications, cross arms and mining timber, veneer and plywood, boatbuilding, decking, cladding, high impact tool handles, polo sticks, diving boards and as a heritage restoration timber. While being the hardest and most durable timber in the region, it is still workable and is also suited for woodturning and carving. The comparatively low tannin content of spotted gum makes it less susceptible to staining caused by leaching of tannins (Wood Solutions, 2013).

Further product markets for the species may include privacy screens, external window framing and cladding. These products could make use of the natural fire resistance of the species.

Other species The mixed species forests of the southern NSW region also produce commercial timber from a range of species including but not limited to; alpine ash; blackbutt and monkey gum. These species are harvested in lower volumes and are often grouped together with other species when processed. The hardness, strength and durability characteristics within these species vary but are typical of Australian hardwoods and are comparable to the timbers described in this section. Current uses are therefore similar to those of the individual species mentioned earlier.

4.2 Summary of species suitability Table 4-1 shows some of the timber properties of the major regional hardwood species. Featured species have durability, density and hardness ratings which allow for products ranging from structural timber to fine furniture manufacture.

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Table 4-1 Timber properties of the key regional species

Basic density

Hardness (Janka) (kN)

Durability Strength group

Species

(kg/

m3 )

Un-

seas

oned

Sea

sone

d

In g

roun

d

Abo

ve g

roun

d

Sea

sone

d

Un-

seas

oned

Key primary species

Silvertop ash 670 7.2 9.5 3 2 SD3 S3

Spotted gum 740 8.0 11.0 2 1 SD2 S2

Brown barrel 570 5.7 6.4 4 3 SD4 S4

Messmate 630 5.3 7.1 3 3 SD3 S3

Stringybark

-Yellow stringybark 690 6.3 8.5 3 2 SD3 S3

-White stringybark 680 6.8 8.8 3 2 SD3 S3

-Blue-leaved stringybark 690 5.0 7.5 3 3 SD3 S2

Key secondary species

Monkey gum 560 5.1 5.7 4 3 SD5 S4

Alpine ash 490 4.0 4.9 4 3 SD4 S4

Source: Bootle (2005)

Table 4-2 provides a key for durability class rankings in terms of timber life expectancy for above and in ground uses.

Table 4-2 Key to timber durability rankings

Class In-ground expectancy (years) Above-ground expectancy (years)

1 >25 >40

2 15 - 25 15 - 40

3 5 - 15 7 - 15

4 0 - 5 0 - 7

Source: Bootle (2005)

Table 4-3 summarises key findings in relation to the possible product applications for the main commercial forest species of south east NSW. The summary shows that most species are suitable for structural and flooring applications as high durability and hardness is of less importance for these applications. Particular species such as spotted gum, yellow stringybark and silvertop ash have strengths in this product category due to their grain and colourings which have more striking appearance qualities than the other timbers. A smaller subset of species including spotted gum and several stringybark species also fit well into the decking and screening markets as they have superior

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durability for outdoor uses. With preservative treatment, a greater number of the species could be included as potential decking and screening species and this applies also to species used for landscaping and outdoor applications.

Spotted gum also has potential for use in speciality applications such as for use as bridge timbers and wharf piles as a result of its exceptionally high durability and hardness. All species reviewed are understood to be suitable for the production of pulp for paper. However, there is a clear market preference for silvertop ash over any of the other mixed species within the Eden region.

Silvertop ash and spotted gum were identified in the AS3959 (the Australian Standard building code for bushfire prone areas) as being inherently fire retardant and permitted for use in all levels of bushfire prone areas. This standard permits the use of other timbers (depending on the bushfire hazard level however many of these timbers require treatment with a flame retardant chemical before they can be used.

Table 4-3 Summary of potential product applications for common species of southeast NSW

Species

Stru

ctur

al

Floo

ring

Dec

king

/ sc

reen

ing

Out

door

/ la

ndsc

ape

Fire

re

tard

ant*

Spe

cial

ty

Furn

iture

/ jo

iner

y

Pul

p

Primary species

Silvertop ash

Stringybark

Yellow stringybark

White stringybark

Other stringybarks

Brown barrel

Messmate

Spotted gum

Secondary species

Monkey gum

Alpine ash

— Source: URS estimates; SEFE 2012 *- species marked as not suitable are not considered fire retardant under AS3959 but may be suitable with chemical treatment

- highly suitable

- may be suitable under some circumstances

- not suitable

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5

5Processing Opportunities

The following sections review the latest market trends and opportunities for products identified earlier in this report as holding the highest prospects for production in the Eden region.

5.1 Sawn timber The wood properties of younger and faster grown regrowth logs have not been extensively researched and research to date has only been based on relatively small scale field trials. This section provides a summary of the available literature on processing small diameter eucalypt logs with particular emphasis on trials involving regrowth forests in Australia.

5.1.1 Processing technology Sawn timber processing technology has developed in step with resource availability. The sawing configuration employed to process the highly variable size and quality of native forest logs uses a two-stage process. Traditional mills are usually equipped with a single-saw log break down system coupled with a re-sawing line (Washusen & Harwood, 2011). However, this system may not be the most efficient way to process an increasingly regrowth based resource which typically has a smaller log diameter than traditional log supply sourced from native forests.

One of the greatest challenges in processing smaller diameter hardwood logs is considered to be the effective handling of growth stresses inherent in younger regrowth logs. The tensioning of fibres is more evident in regrowth forests due to faster growth rates and shorter rotation lengths. Although it is not as severe as in hardwood plantation timber, growth stress release during processing has implications for regrowth sawn timber production, particularly for high grade products. Growth stress related processing issues generally relate to sawing accuracy, board distortion and end-splitting (de Fégely, 2004).

An encouraging result for processing regrowth forest was achieved from a processing trial conducted by Blue Ridge Hardwoods which compared thinned and un-thinned brown barrel of similar grade and diameter. Despite maintaining a fast growth rate over a 12 year period since commercial thinning, the difference in green sawntimber recovery between thinned and unthinned logs was not statistically significant and measured at around 36% for both forest types. However the recovery of select grade boards was higher in logs from thinned forests with 8.8% recovery compared to 3.6% recovery in logs from unthinned forests. This was due to the severity of kino veins and insect damage in the unthinned logs. The overall recovered product value from the thinned stand was also higher than for the unthinned stand (Washusen et al., 2008).

Sawing systems Currently, most advances in processing small diameter hardwood logs is focused on the plantation industry with limited research given to the native hardwood industry.

Multi-saw technology has been shown to be an effective approach for improving efficiency with smaller log diameter and lengths in plantation hardwoods. These systems allow cutting patterns to release growth stresses more evenly resulting in increased throughput and sawing accuracy (Washusen & Innes, 2008).

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The most modern sawing systems available to the industry currently are linear flow, multi-saw systems that saw the log in a single pass, breaking the log down and resawing along a single line. This eliminates the backwards and forwards movement of a reciprocating sawing system. Experience with the trialling of a linear system on small plantation logs in Australia has shown its potential to eliminate many growth stress-related issues by simultaneously removing the outer wood from around a log to produce a profiled cant (Washusen, 2011). The log breakdown occurs just before the log is resawn by a series of small-diameter circular saws. This sawing approach allows the high tension wood to be ‘released’ through the initial log breakdown allowing the remaining cant to be resawn without the tension impacting on the sawn products produced.

One of the limitations of such a highly efficient sawing line is that the specifications and variability of the logs processed are much stricter than a more flexible sawing reciprocating configuration with log size to around 35-40cm SED (Washusen, 2011).

Provided several pre-conditions of the log resource can be met, linear mills are potentially a modern, cost-effective method for reducing the historically high costs of processing hardwood logs. The pre-conditions likely to be necessary are:

• Log diameter can be maintained below approximately 40cm SED (32 cm SED for the HewSaw R250; 40cm SED for the HewSaw SL250 Plus Trio);

• End-splitting and bowing of the timber product can be minimised; and • Defects can be minimised.

Because the efficiency of linear mills relies on a high throughput with relatively consistent sawing patterns and limited variability, the hardwood log resource must be of a relatively consistent quality and size.

Although generally not as efficient as linear sawmills, advances in reciprocating systems are also resulting in more cost effective production processes. For example, a computerised, multi-saw system is employed by Whittakers Timber Products in Greenbushes WA3 for processing native hardwood logs. This mill is understood to be the newest, dedicated hardwood sawmill in the country and works by scanning the dimensions of a log before selecting a sawing strategy. The mill also uses a turn down device that does not require releasing the log whilst being processed. The disadvantages of this system is that maximum log size is limited to 45cm sed and log throughput is restricted to 35-45,000 m3 pa, although a new system could be significantly up-scaled and be constructed with the ability to saw logs up to 75cm diameter according to the MEM company website4.

Other more flexible systems exist such as the configuration used by Auswest in Pemberton WA, with a twin saw and chipper breakdown system and twin bandsaw resaw. This system can handle logs up to 70cm sed and has a potential throughput of 40-60,000 m3 pa. Both the reciprocating systems described have twin saw breakdown which helps to release growth stresses in smaller diameter logs.

Modern multi-saw resawing systems generally cut a high proportion of back-sawn timber compared to reciprocating systems which generally have greater flexibility to produce quarter-sawn timber. Quarter sawn timber is generally more stable under drying and in some cases has a preferable grain pattern to back sawn timber.

3 Whittakers Sawmill has recently announced it will close after log supply negotiations with the WA state government failed to result in the mill receiving a satisfactory resource volume to continue operating; http://www.watoday.com.au/wa-news/whittakers-mill-faces-imminent-closure-20130619-2oizr.html 4 http://memwood.com/gb/teletwin.html

http://www.watoday.com.au/wa-news/whittakers-mill-faces-imminent-closure-20130619-2oizr.html

http://www.watoday.com.au/wa-news/whittakers-mill-faces-imminent-closure-20130619-2oizr.html

http://memwood.com/gb/teletwin.html

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In modern milling configurations, it is generally much faster to cut back-sawn timber. However, back-sawn timber is generally less stable and sawn boards can contain a component of the pith, producing problems in drying. Back-sawn wood also generally produces a higher incidence of surface checking which can impact the quality of the finished timber product. Sawmilling experimentation using plantation grown E. globulus (blue gum) suggests some linear sawmills could be adapted to produce quarter-sawn boards by cutting flitches for further sawing using a bandsaw (Washusen et al., 2004).

5.1.2 Market trends Sawn timber production has been the mainstay of the NSW hardwood industry. Timber has been used for a large number of important applications from building construction, flooring, furniture and joinery, packaging, and a range of other end uses. The residential construction industry has been a critical driver of the industry over time.

Long term total sawn timber consumption in Australia has fluctuated between 5-7 million m3 p.a. and tracked largely in line with changes in housing construction. Figure 5-1 shows trends in the apparent consumption of timber in Australia. The figure also shows a steady increase in softwood sawn timber consumption, and a decrease in hardwood sawn timber consumption resulting from both declining resource availability and increasing competition from softwood producers. Apparent consumption of hardwood sawn timber in Australia has declined by an average of 3.8% pa since 1984/85 (Figure 5-2).

Hardwood imports play a relatively small role in the markets for hardwood products, accounting for 10% of Australia’s hardwood sawn timber consumption. A substantial portion of the imported volume is tropical timber used for decking. Malaysia and Indonesia are the largest sources of hardwood sawn timber imports into Australia accounting for approximately two thirds of total hardwood imports. Figure 5-1 Apparent consumption of timber and

housing commencements in Australia Figure 5-2 Apparent consumption of

hardwood timber in Australia

Source: ABARES (2013b); ABS (2013a) Source: ABARES (2013b) NB: The above graphs represent the latest production data available from ABARES

0

20

40

60

80

100

120

140

0

1

2

3

4

5

6

7

8

1974

/75

1976

/77

1978

/79

1980

/81

1982

/83

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/85

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/87

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/89

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/91

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/93

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/97

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/99

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/01

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/03

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/05

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/07

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/09

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/11

'000

com

men

cem

ents

Mill

ion

m3

Total timber Softwood timber

Hardwood timber Housing commencements (RHS)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1984

/85

1986

/87

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/89

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/91

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/93

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/95

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/97

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/99

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/01

2002

/03

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/05

2006

/07

2008

/09

2010

/11

Mill

ion

m3

Production ImportsExports Apparent Consumption

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As competition from softwood timber has increased, hardwood timber production has increasingly focused on higher value, appearance and durability based markets such as flooring, decking and furniture. Structural hardwood products are also facing increasing competition from engineered wood products, such as LVL and consequently it is expected that hardwood products will continue to focus on higher value markets.The change in the relevant proportion of timber products produced from NSW native forests between 1995/96 and 2008/09 (the latest available year for which this data is available) is shown in Figure 5-3.

Figure 5-3 Product out-turn from NSW native forests

1995/96 2008/09

Source: FNSW annual report 2010/11

As hardwood timber production moves towards higher value appearance grades, the residential alterations and additions market has become an important driver of domestic demand for hardwood sawn timber. Figure 5-4 shows the value of alterations and additions in Australia. Spending on alterations and additions has historically been more stable than spending on the construction of new houses.

Dry structural

21%

Flooring23%Joinery/

Furniture1%

Decking/ Panelling

4%

Framing31%

Pallets10%

High strength

structural2%

Fencing/ Landscape

8%Dry

structural7%

Flooring48%

Joinery/ Furniture

6%

Decking/ Panelling

6%

Framing14%

Pallets9%

High strength

structural2%

Fencing/ Landscape

8%

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Figure 5-4 Value of Australian alterations and additions

Source: ABS (2013)

Trade regulations has the potential to influence timber imports, due to the Federal Government passing the Illegal Logging Prohibition Act in 2012. Box 1 outlines the federal government’s 2012 legislation which regulates against timber imports where the legality of the product cannot be verified. These regulatory requirements will make importation of hardwood timber more onerous and may present an opportunity for local processors to substitute native hardwood timber into the outdoor decking market.

0.0

0.5

1.0

1.5

2.0

2.5

0

100

200

300

400

500

600

700

800

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Billi

on $

A

Mill

ion

A$

NSW Victoria

Queensland Australia (RHS)

Box 1: Changing trade regulations – verification of timber legality

Broader changes in forestry and environmental policy are expected to have an impact on the availability and cost of wood

production in the future. Forest certification and legality is a significant policy issue currently having an effect on resource

availability and wood product markets.

In late 2012, the Australian Government passed the Illegal Logging Prohibition Act to prohibit the importation and sale of

illegally sourced timber products. The Bill places restrictions on the trade of illegal timber products by requiring importers

of regulated timber products and domestic processors of logs to undertake due diligence on the provenance of their

resource. The development of regulations will prescribe these due diligence requirements.

The Australian Government has stated that it will establish a monitoring system and develop capacity to undertake

investigations to enforce the requirements of the Act. This legislation is expected to place requirements on future import

volumes of hardwood timber from countries notably Indonesia, Malaysia and PNG, and in wooden products such as

furniture from countries such as China. The extent to which this occurs will be dependent on the stringency and usability

of due diligence regulations that are developed by government over the next few years.

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Structural and outdoor timber Over the last decade hardwood sawmills have faced increasing competition in the structural market from softwood timber and engineered wood products such as LVL. Increases in LVL imports has been reported by sawmill operators as having a negative effect on their businesses through increased competition on price up to F17 structural grade. Apart from price, LVL has several favourable characteristics from a consumer’s point of view including: its consistent strength, lower weight and availability in long lengths. However hardwood still occupies key niche markets in structural applications, particularly those requiring higher strength and/or natural durability ratings (i.e. exterior or in-ground use).

Imports of LVL have been predominately from the US and New Zealand where excess supply has led to cheaper imports into Australia, particularly since the global financial crisis (GFC) and the strengthening of the Australian dollar. Figure 5-5 shows the relative decline of LVL prices in contrast to the price of F17 and F27 structural timber grades. It also presents the price trends for F11 grade structural timber compared to its comparable softwood grade, MGP 12. F11 is an important by-product produced by most hardwood mills processing predominantly ash species.

Figure 5-5 Australian structural timber price trends, nominal values

Source: URS (2013)

Despite a decline in demand, hardwood structural timber continues to represent an important portion of production volume from hardwood sawmills.

F27 has maintained steady nominal price growth since mid-2006 whereas F17 has not been able to maintain a similar price growth trajectory as softwood LVL has become increasingly competitive.

80

85

90

95

100

105

110

115

120

125

130

Jun-

04

Dec

-04

Jun-

05

Dec

-05

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Inde

x (D

ec-0

3 =

100)

F17 (KD) F27 (KD)LVL F11 (Green; NSW)MGP10 MGP12

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Treated softwood timber is also dominant in outdoor, landscaping and infrastructure markets, comprising around 70-76% of the market by volume (Dunn, 2011). Softwood is popular because of its cost effectiveness for jobs with large volume requirements. Hardwood structural and outdoor timbers occupy a market niche, particularly where applications require high strength and natural durability. For example F11 (a commonly produced grade from mixed species forests) is used also in outdoor applications for higher strength and appearance reasons such as for decking joists and bearers and exposed pergola battens. The price of F11 has grown steadily in nominal terms since mid-2004 reflecting similar price growth to F27. Stable expenditure on landscaping projects and home renovations through the GFC and beyond has allowed for a stable source of demand for products with F11 applications.

Replacement of existing infrastructure such as transmission poles, wharf piles and bridge girders are key markets for high durability NSW hardwood species, although the overall size of this market is small relative to key housing market segments.

Flooring and decking timber Flooring markets have been very important in the shift towards appearance markets for hardwood sawn timber. Robust national spending in residential alterations has provided steady demand for appearance grade hardwood timber for flooring and decking markets. In times of downward movement in Australian housing commencements, residential alterations and additions has shown to be a more reliable market than the house construction market. In addition to this, consumer taste for natural timber products has remained strong over time, with strong underlying demand for the ‘look and feel’ of Australian hardwood products.

Figure 5-6 shows changes in timber flooring prices. Since mid-2008 the price of NSW flooring species blackbutt and spotted gum has increased at a faster rate than the price of Victorian ash and Tasmanian oak flooring. This may reflect a combination of factors including increasing resource constraints and consumer preferences for different hardwood species and colours.

Mixed species such as those in the stringybark group provide different colours and features than mainstream flooring products, allowing these species to respond to consumer preferences and find valuable niche markets. There may also be an opportunity to improve price positioning of ‘high’ and ‘medium’ feature grade flooring timbers as the natural feature grades (low, medium and high feature) are currently not widely referred to by industry members.

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Figure 5-6 Hardwood flooring timber price trends, nominal values

Source: URS (2013) NB: Vic ash and Tas oak – Victorian market; spotted gum, blackbutt – NSW market

As discussed in Section 4.1, silvertop ash, stringybarks, brown barrel and messmate all potentially produce good quality flooring products. Marketing the unique features of these species would assist in gaining market access and maximising prices, both in domestic and international markets. A good example of how this diverse resource is currently being marketed is Auswest who are promoting a flooring product that includes 4-5 of the major mixed species groups from the East Gippsland region. The flooring product is called ‘wormy chestnut’ and is marketed for its natural feature including gum veins and insect trails which have traditionally been excluded from sale or sold at a discount as they were considered a defect. The species mix for this product includes silvertop ash, stringybark, brown barrel and messmate. Auswest currently sources logs from the East Gippsland region, but the main species composition is comparable to the Eden resource.

The market for engineered flooring products has increased in size over the past 10 years and has provided a lower cost, consistent quality product while retaining the look and feel of natural timber flooring. Engineered floors are a 3-4mm rotary peeled veneer typically glued to a plywood tongue and groove base that can be installed as an overlay to an existing floor or concrete slab. The ease of application with these products has particular relevance in today’s housing market where concrete multi-storey apartments and houses built on concrete slabs have an increased prevalence, making solid timber flooring less necessary. To reduce costs new residential developments are increasingly using engineered flooring products which retain the attractive look of hardwood without compromising product performance. For smaller volume mixed species varieties such as yellow stringybark, engineered flooring may be a good option for maximising the volume of high value species across a lower price but higher growth segment of the flooring market. However, the competitiveness of Australian engineered flooring manufacture remains under question with the announcement by Boral of the closure of its Murwillumbah engineered flooring plant.

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Some sawmills have developed small scale export markets for flooring timbers with most exports destined for the Asian market. These exporters have successfully marketed the unique features of Australian timbers, particularly mixed species. This differentiation is important as Australian exporters will find it difficult to compete on price in international markets.

Demand for decking and privacy screens is also growing as higher density living increases and people still search for outdoor living space. Both high durability hardwood species and preservation treated timber can fill these applications. Species like messmate and other species within the stringybark group that do not meet the durability requirements for these applications could be treated and supplied as a branded product.

There is no firm data available on the volume of the decking and privacy screenings market. However a report published by WPV indicated that the size of the privacy screenings market in Victoria may be 1,300 m3 pa. WPV identified this market as a potential alternative market for F17 grade product as, although it is a relatively small market, potential prices could be in the order of 60% higher for timber with the appropriate dimensions and durability.

5.1.3 Secondary processed timber products

Glulam and cross laminated timber Glulam and cross laminated timber (CLT) are both produced by bonding layers of lumber together to produce long length beams or panels for building. Glulam products are generally marketed as large dimension, high strength beams or columns. CLT is a more specialised product using similar bonding processes but oriented toward producing larger dimensioned panel or box-beam products that are custom sawn to be used as part of a prefabricated house design.

Neither product is commonly produced using hardwood however glulam is being produced successfully in Victoria by Australian Sustainable Hardwoods (ASH) using ash timber. The company’s Heyfield mill uses a finger jointing and laminating process to produce large beams to compete against LVL in the high strength market for beams, bearers and lintels.

The Heyfield mill produces both appearance grade timbers and glulam. The glulam product is manufactured using short timber lengths that are produced as a by-product of sawing standard appearance and structural grade solid timber products. Around 50-60,000 m3 pa of roundwood equivalent goes into the production of glulam. A stand-alone glulam mill may require a larger volume of roundwood input to be commercially viable.

The market for glulam can be viewed as part of the broader market for high strength timber products that includes solid hardwood timber (F17 and F27) and LVL. The product is predominantly produced for heavy structural applications in the residential market particularly as beams, bearers, lintels and for use in sub-floors. This product can also substitute for steel in industrial and residential construction. One of the key differentiations from steel is that glulam is a more visually attractive product.

The advantage of glulam in a production sense is that it can be produced more cost effectively than solid structural timber when combined as part of a broader sawmilling operation. This is because the lamination process can make use of smaller dimension pieces of timber that would normally have relatively low value, and laminate these to produce a large dimension product with equal or greater strength than alternative solid wood products.

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The supply of hardwood glulam into the Australian market is currently low volume, with ASH the only supplier. There is limited definitive market information, freely available on the competitiveness of this product. Anecdotal information suggests that the product still struggles to compete with LVL on price (and potentially also on other factors such as portability and ease of nailing). However based on ASH’s recent expansion of their Heyfield finger joining and laminating lines in February 2013, the product appears to have some potential.

CLT offers the construction industry the advantages of a very short assembly time and a high level of control of the building process within tight specifications that are driven from the production of the CLT product through to the construction of the building. CLT is currently considered most suited to the construction of buildings 5-10 storeys high. It is also considered an effective solution for ‘big box’ warehouse type buildings. The market for CLT is growing worldwide because it is able to be marketed as a highly sustainable and energy efficient material compared to concrete and steel which are both commonly used for multi-unit residential buildings.

There is currently only a fledgling market for CLT in Australia with only a handful of demonstration projects having been commissioned. CLT is not produced in Australia but is made-to-order from European manufacturers using softwood species. The finger joining and laminating process used to produce CLT would appear to be technically feasible for hardwood timber.

A potential limitation is that CLT based on hardwood would be a significantly heavier product than softwood CLT and the additional strength it would bring may not be valued unless it was used in larger, high load projects. Handling costs would also likely increase with a hardwood version of this product.

It is difficult estimate the market share CLT might capture in Australia as the CLT market is only just emerging. A CLT product made from NSW hardwoods could fulfil some of this demand however in the short term there are several limitations that would constrain investment, namely:

• The investment required to develop the Australian market for CLT, and particularly the changes in building design and construction processes, and requirements for the CLT production;

• The physical performance of a hardwood product in a market accustomed to a softwood product; • The cost competitiveness of using hardwood rather than softwood; and • The cost competitiveness of a greenfield Australian operation in comparison to established

European operations.

Both Glulam and CLT represent an opportunity to broaden the demand for hardwood sawn timber, rather than replacing existing markets. Both products provide a secondary market for processors to value add to lower grade and/or shorter length timber. By finger jointing and laminating timber to produce glulam, lower grade hardwood timber can be manufactured into larger dimension and higher strength timber. For example F17 grade shorts used to produce glulam at the ASH Heyfield mill are manufactured into a glulam product that performs and is marketed as an F27 grade product.

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Furniture, joinery and mouldings Historically, the world’s largest furniture manufacturers have been the US, Germany, Japan and Italy. However, over the last 10-15 years, China has emerged as the world’s largest producer and exporter of furniture. Figure 5-7 shows the increase in the quantity of Chinese furniture exports since 1995, which has increased from around 36 million units to 280 million units in 2012. The export volume and cost-competitiveness of China relative to other producers has had a large impact on furniture producers around the world including Australia.

The total turnover of the Australian furniture industry in 2006-07 was approximately $7.4 billion (ABS, 2008); however, the volume of production has dropped significantly since this time with the increase in overseas imports of both indoor and outdoor furniture (Figure 5-7).

Joinery (including cabinetry, windows and doors) and mouldings (including skirting boards, cornices and architraves) potentially offer high value markets for appearance grade hardwood sawn timber. However, it is a highly competitive market with intense competition from a range of domestically produced and imported products (hardwood and softwood timber, MDF and laminated wood products). The value of mouldings imports has increased dramatically over the past decade as increasing volumes of a range of products, have been imported particularly. Imports from Indonesia have grown particularly quickly increasing from $15 million in 1995 to $140 million in 2012 ( Figure 5-8).

Figure 5-7 Australian imports of wooden furniture

Figure 5-8 Australian imports of wooden mouldings by value

Source: Global Trade Atlas (2013) Source: Global Trade Atlas (2013)

The outlook for joinery and moulding products is similar to the outlook for furniture products. These products are relatively low technology, manufactured products that, due to lower manufacturing costs, can often be produced more cost effectively overseas than in Australia. Items that can be mass produced internationally by competitors are unlikely to be highly profitable based on competition on price alone. Future production in the joinery and mouldings markets may need to focus on more

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customised or higher technology products which can’t be easily replicated in lower cost manufacturing locations overseas.

For the furniture industry, the relatively high costs of Australian timber and the high cost, small size of typical operations in Australia have limited the competitiveness of this domestic industry in the larger volume market segments. While there is likely to always be a market for locally produced hardwood furniture in Australia, ongoing growth in this market is likely to face significant pressure from imports.

Opportunities may exist to supply sawn timber (typically short lengths) or timber components to overseas furniture manufacturers. However the feasibility of this type of supply opportunity requires further investigation as the cost of tropical hardwood timber in Asian countries is extremely competitive and makes Australian suppled manufacturing a less attractive prospect from a price perspective.

5.1.4 Mill capacity to pay analysis The best opportunities for hardwood sawn timber from the Eden regrowth resource are likely to be outside markets that directly compete with softwood products. These areas are likely to be oriented in the following product groupings:

• Appearance grade flooring and decking – value will be maximised where higher feature grades can also be successfully marketed as has been the case with Auswest;

• Medium strength durable and non-durable landscaping and outdoor timbers including structural (e.g. F11) and non-structural (e.g. fencing) grades; and

• High strength F17 or F27 kiln-dried timber which may be recovered in small volumes from silvertop ash and stringybark logs.

For sawn timber to be produced from Eden’s regrowth forests, new investment will be required to establish a facility capable of efficiently sawing smaller diameter sawlogs than have traditionally been supplied. Existing sawmills in the region have a good understanding of the resource and product applications however almost all processors will require a substantial level of re-investment to configure mills to more efficiently produce timber products from smaller diameter logs. This conclusion was supported during discussions with local sawmillers as part of this project. After reviewing available public information and internal research on the processing of regrowth sawlogs from native forests in Australia, URS has identified three types of sawmill for further consideration as possible future sawmill configurations for the Eden region:

• Type A – Small-medium log (<45cm sed), reciprocating twin saw breakdown and scanning multi-saw resaw system – approximately 35-45,000 m3 pa, single shift

• Type B – Medium-large log (<70cm sed), reciprocating twin saw breakdown and twin band saw resaw – approximately 40-60,000 m3 pa, single shift

• Type C – Small-medium log (<40cm sed), large linear sawmill – 250-300,000 m3 pa single shift

This section considers the potential capacity to pay that might arise from these alternative sawmill configurations, to assist assessing the potential viability of the alternatives.

Recovery and product price assumptions Green recovery of sawn timber is generally higher with linear sawmilling compared to reciprocating systems due to the higher precision of this configuration. However this is offset by tighter log diameter specifications and the sophistication of the reciprocating systems employed. Recovery from the mills would be around 27-28% for small diameter logs using a reciprocating system or 32% using a linear system. The above systems processing larger logs have the potential to recover green timber in the

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order of 32-37%. A URS review of typical industry models suggests that recovery for mixed species hardwood mills may be at the higher end of this range.

A review of sawing trials by Washusen in 2011 summarised findings on timber recovery from the processing of plantation and native forest hardwood logs (Table 5-1). The review indicates that recovery of select and standard boards from small diameter plantation or regrowth logs is likely to be in the order of 15-20% (of recovered timber) although this is highly variable. By comparison, the milling of larger dimension sawlogs generally is estimated to produce recovery of select and standard boards of between 20-45% using reciprocating, quarter sawing systems, while the recovery of structural grade timber could be in the order of 25-30% in recovered timber volume. The difference in the recovery of standard and select grade timber results in proportionally a higher volume of lower grade structural and lesser quality fencing, battens and pallet timber to produce under a linear, small log line.

In the trials reviewed, the presence of surface checking was a significant factor influencing the recovery of select and standard grade. The trials specifically review the performance of processing silvertop ash logs and found that almost no select and standard grade could be recovered using back-sawing techniques on ~50 year old logs. Back-sawing has been shown in the past to produce significantly higher levels of surface and internal checking than quarter sawing (Table 5-2). However, Washusen (2011) notes that with the appropriate drying techniques, the extent of surface and internal checking could be significantly reduced and the volume of recovered select and standard grade could be improved substantially. The difficulty of drying hardwood timber through a linear process was reinforced during discussions with Dongwha Timbers where trials backsawing and drying Victorian ash in a softwood sawmill operation produced very poor recoveries. As a result, the proportion of appearance grade timber produced in a linear operation is highly uncertain.

Table 5-1 Timber properties of plantation and regrowth hardwood processing

Species History Sawing method

Surface check

(mm/m2)

Recovery all grades (% log vol)

Recovery select & std (% log vol)

E. fastigata NSW regrowth unknown age1 Quarter 73 20.85 3.85

E. diversicolor WA regrowth unknown age1 Back 51 28.26 7.96

E. regnans Vic regrowth 19391 Quarter 41 25.86 3.76

E. regnans Tas regrowth 19341 Quarter 13 30.86 19.36

E. seiberi Vic regrowth unknown age & 19571

Back 738 31.16 0.06

E. nitens FT plantation butt logs2 Quarter 120 26.96 6.86

E. nitens FT plantation top logs2 Quarter 80 27.96 14.36

E. nitens FT plantation butt logs2 Back 1110 29.86 2.56

E. nitens FT plantation top logs2 Back 440 31.26 9.16

E. nitens FT plantation butt logs3 Back 55 NA NA

E. nitens FT plantation top logs3 Back 31 NA NA

Source Washusen (2011) reviewing: 1-Washusen et al. (2010); 2-Washusen et al. (2007); 3-Blakemore et al. (2010)

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Table 5-2 Finished timber properties – quarter-sawn and back-sawn systems

Lower logs Upper logs

% of boards with surface checks

Back-sawn 69.5 45.4

Quarter-sawn 21.9 11.8

% of boards with internal checks

Back-sawn 73.3 34.3


No. of internal checks per board

Back-sawn 7.58 1.99


Source: Washusen (2007)

For this analysis, and based on our analysis of mixed species operations, the mills are all assumed to produce appearance flooring as their primary product. Two other grades are assumed to be produced: green structural timber (e.g. F11 grade) and fencing or packaging timber. This simplified product breakdown has been assumed to make for a less complex model structure and an easier comparison of processing costs and capacity to pay across the mill types.

Table 5-3 outlines the timber grade recovery assumptions for each of the sawmill types assessed. Under the linear mill scenario, grade recovery of appearance timber was estimated to be lower than the reciprocating mills (20% compared to 30% recovery) due to all the timber being back sawn, with a higher volume of structural timber expected to be produced. These log recovery assumptions are based on a review of the results from previous sawing trials.

Product prices assumed to be the same for all three sawmills. Prices for appearance timber were assumed to be $1,320 /m3, green structural timber (F8-F11) $622/m3 and landscaping $396/m3). The flooring price was referenced from URS industry data and adjusted to today’s values using the Timber Market Survey indexes (URS, 2013). The price of appearance timber reflects low-medium feature flooring at a price point below blackbutt and Sydney blue gum but at a price point slightly higher than Victorian ash.

All appearance timber was assumed to be processed by the green mill and a kiln and dry mill facility. Structural and landscaping timber were both assumed to be green products. URS applied processing costs for each mill type based on publicly available data as well as mill specific data available to URS.

Table 5-3 Timber grade recovery and price assumptions

Grade breakdown

Appearance Green structural Fencing

Product prices ($/m3) $ 1,320 $622 $ 396

Type A – Reciprocating, multi resaw 30% 30% 40%

Type B – Reciprocating twin resaw 30% 30% 40%

Type C – Linear, multi resaw 20% 40% 40%

Source: TMS, URS estimates

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Sawmill processing assumptions and model outputs Table 5-4 shows a range of processing assumptions for the three types of sawmill and provides an estimate of the capacity to pay for logs based on a range of gross profit scenario outcomes. URS has used several industry-standard hardwood sawmill models to provide estimates of processing costs, product breakdowns and timber recovery assumptions for a range of mill types. The models consider variable costs of mill only and fixed costs such as loan repayments, depreciation and land rental have not been considered. The processing costs for the Type C linear mill have been adapted from sawmill models based on softwood processing as no comparable data was available for a hardwood based linear mill. The estimates provided in the modelling undertaken are intended to be indicative only and do not replicate the actual conditions of an individual sawmill.

Table 5-4 Indicative processing costs and capacity to pay for sawmilling configurations

Input Type A Reciprocating multi resaw

Type B Reciprocating twin bandsaw resaw

Type C Linear multi resaw

Log type (maximum sed) <45cm <70cm <40cm

Log throughput (m3 pa) 40,000 60,000 270,000

Revenue

Recovered timber (m3 pa) 14,800 (37% recov.) 22,200 (37% recov.) 86,400 (32% recov.)

% grade appear:struc:landscape 30:30:40 30:30:40 20:40:40

Average timber price ($/m3 mill gate) $741 $741 $671

Residues recovery 25% 25% 25%

Residues price ($/gmt) $54 $54 $54

Total revenue ($ million) 10.97 16.45 57.99

Cost

Unit processing cost (green mill; $/m3) $408 $329 $160

Unit processing cost (kilns/dry mill; $/m3) $436 $390 430

Average log cost ($/m3) See scenario outcomes below

Expenses 2% of total costs 30% of total costs

Total costs Calculated based on modelled log cost (see Appendix D)

Summary

Gross profit/m3 Calculated based on modelled total costs (see Appendix D)

Gross profit (% of sales) 10-20% 10-20% 10-30%

Source: URS estimates

Table 5-5 shows the outputs of adjusting delivered log cost to achieve gross profit percentage scenarios. The gross profit percentage is used as a basis for a sawmill’s consideration of how much it might realistically pay for logs. Where all other financial metrics are kept constant, changing log cost to reflect a range of gross profit assumptions provides a possible view for the range in log prices that could be considered by a mill.

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URS understands that a common industry target for gross profit for a modern, small to medium scale reciprocating mill is around 15%, however many mills are likely to be performing below this. A higher gross profit percentage than 15% would likely be required for a modern linear mill to allow for the typically higher administrative expenses associated with larger operations. As a result a fourth gross profit scenario is included for this mill type.

Table 5-5 Results of gross margin scenarios for sawmilling configurations

Estimate mill door log cost for achieving gross profit scenarios

Gross profit (% of sales) scenarios

Average delivered log cost ($/m3)

Type A Type B Type C

+10% 67 95 128

+15% (base case) 54 82 117

+20% 40 68 107

+30% N/A N/A 85

The above results indicate that for a small reciprocating mill operating its business at 10% gross profit, the maximum average delivered log price it could pay is $67 per m3 (assuming all other assumptions are kept constant). For the Type B sawmill operating at the same gross profit targets the maximum the mill could pay for logs is estimated to be $95 per m3. A linear mill operating at 20-30% profitability is estimated to have a maximum capacity to pay of $85-107 per m3. Full outputs for the modelled scenarios are contained in Appendix D.

In contrast to the log prices currently paid by FC customers, this mill modelling shows that current prices may be higher than can be afforded to achieve the above profitability targets. As discussed previously these estimates have been taken from a wide range of sources and present an abstract view of typical mill types but do not reflect individual situations and/or the situation likely to be encountered processing in the Eden region.

Sensitivity to changes in green recovery Research has shown that green recovery in hardwood sawmills can vary widely particularly for sawmills that are back sawing logs, particularly faster, higher throughput linear systems where there is a limited track record of data. Using the model developed for this study, URS has evaluated the impact of changing recovery on the profitability of sawmills. All assumptions were held constant during this sensitivity testing. The base case was set as 15% gross profit percentage for all three mill types. The calculated average delivered log price at this profit percentage was fixed whilst the recovery percentages were altered. Three scenarios were testing: +/-3% recovery and -5% as a worst case scenario,

Table 5-6 presents the outcomes of the analysis. The results show that a loss of 3% recovery has the greatest impact on the linear mill whose profit declined by 5% compared with the A and B reciprocating mills which lost 1.7 % and 2.2% in gross profit by comparison. This impact was furthered under the -5% scenario where the gross profit of the linear mill fell 9% compared to the base case where the A and B mills fell by 3.1% and 3.9% respectively. The results of the sensitivity testing show that the linear mill is much more sensitive to changes in recovery (both positive and negative).

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Table 5-6 Results of gross margin scenarios for sawmilling configurations

Base case Scenario -3% loss Scenario -5% loss Scenario +3% loss

Mill type

Average log

price (fixed*)

Green recover

y

Gross profit

Green recov

ery

Gross profit

Green recov

ery

Gross profit

Green recov

ery

Gross profit

Type A

$54 37% 15.0% 34% 13.3% 32% 11.9

% 40%

16.5%

Type B

$82 37% 15.0% 34% 12.8% 32% 11.1

% 40%

16.8%

Type C

$117 32% 15.0% 29% 10.0% 27% 6.0%

35%

19.1%

*-Average log price based on 15% gross profit for each mill type. The log and timber prices were then fixed to test sensitivity to

green recovery.

Other key variables in the production process include the performance of the drying regime in producing a reliable volume of appearance grad timber. While there is significant uncertainty in this part of the production process it is much harder to test through a modelling process than the effect of changing recovery through the green mill.

5.2 Veneer, plywood and LVL Most veneer products manufactured in Australia are produced using softwood logs. This section considers the opportunity for veneer production utilising hardwood logs sourced from regrowth native forests.

5.2.1 Processing technology Australia has a number of veneer producers focused on producing sliced, decorative veneer (generally in small volumes) or larger volumes of rotary peeled veneer for plywood production. The largest hardwood rotary veneer producer is Ta Ann, a Malaysian company with two peeling operations located in Huon and Smithton in Tasmania. Ta Ann processes around 260,000 m3 pa of regrowth sawlogs across its two operations. Mill feedstock is primarily ash species (alpine ash, messmate and mountain ash) and supply is understood to be weighted towards larger diameter logs (40-70cm sed) although the facility is capable of processing logs down to 20cm sed. Ta Ann processes a uniform, regrowth resource which is delivered to the mill as shortened round billets.

Ta Ann uses Japanese spindle-less lathe technology for the peeling of sawlogs. This allows a greater volume of the log to be peeled, leaving just a small wood core at the end of each peel. While the process has been demonstrated as technically successful by Ta Ann, anecdotally, the company has performed below profitability expectations and reported losses on their Australian entity across a number of financial years.

There is limited information available on the suitability of the species present in the Eden forest resource and their specific performance in peeled veneer production. A CSIRO study in 1996 found that several East Gippsland hardwood species (including silvertop ash and messmate) exhibited suitable mechanical properties under a production trial for LVL (McCombe et al., 1996). However, the study did not consider the commercial potential of an operation based on these species.

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Zbonaka et al. (2012) investigated whether small diameter plantation hardwood logs could be successfully peeled for veneer production. The study showed that recoveries of 50-70% could be achieved by peeling 10.5 year old E. dunnii (Dunns white gum) and spotted gum using spindle-less lathe technology. The authors commented that higher recoveries could be expected with age (as a proxy for increased diameter). Although the majority of veneer produced did not reach any higher than D grade quality, the veneer sheets were considered to be of a quality suitable for plywood and LVL production.

LVL There is currently no production of hardwood LVL in Australia. However, a review by Ozarska (1999), found that hardwood LVL had been researched extensively in a number of countries including North America, Europe and in Japan, China and Malaysia. Ozarska found several commercial examples of hardwood LVL in the US although generally they were produced with low to medium density species. This raises concerns as to the applicability of these commercial examples as research undertaken in Australia by Yazaki et al. (1993) showed that there were significant problems producing LVL from high density Australian eucalypts as a result of the high level of extractives at the gluing surface of the wood.

Production trials undertaken by McCombe (1992) and McCombe and Collins (1993) proved it was possible to make commercial grade LVL boards from eucalypt regrowth logs (using messmate and alpine ash) of 45cm average sed resulting in boards with density of 820 kg/m3. The trials did not investigate whether a hardwood LVL operation could be the commercial viability of establishing a hardwood LVL line in Australia. However, over the past two years, Forestry Tasmania has been leading the development of a commercial hardwood LVL product called Hardlam5. The product was trialled based on alpine ash, messmate and mountain ash logs. After undergoing a testing process, Forestry Tasmania announced the successful completion of its trials and its readiness to engage with potential investors to fund the production of the Hardlam product. Limited technical information has been released to the public on the outcomes from these trials.

5.2.2 Market trends

Veneer and plywood Global plywood production capacity has increased significantly over the past 10 years from approximately 50 million m3 pa in 2001 to around 80 million m3 pa in 2011. This increase is primarily due increased production capacity in China, which now accounts for 50% of total global production. China is the world’s largest plywood exporter with key markets being Japan and the US.

Hardwood plywood is preferred in appearance uses and for high strength applications such as concrete formwork and flooring. However, softwood plywood and oriented strand board (OSB) have been replacing hardwood plywood as supplies have reduced due to the declining availability of tropical native hardwoods. Short rotation hardwood plantations are also increasingly being utilised for plywood production with processing hubs located in southern China and Vietnam.

5 http://www.hardlam.com.au/

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Production and apparent consumption of plywood in Australia has fluctuated over the last ten years, but are currently around the same level as they were in 2002. Imports of plywood, particularly non-structural softwood plywood from Chile, have been particularly strong over the past two years on the back of the high Australian dollar. The main company behind this supply, Arauco, has set up operations throughout eastern Australia and appears to be equipping itself for an ongoing presence in the market. This may make it hard for Australian suppliers to regain market share in the future.

The price of plywood in Australia has fallen since the beginning of 2009, largely as a result of competition from imports, particularly from Chile (Figure 5-10) which in turn has placed pressure on domestic processors.

Figure 5-9 Apparent consumption of plywood in Australia

Figure 5-10 Australian plywood nominal price

index, softwood, C/D grade

Source: ABARES (2013), URS estimates NB: Excludes LVL production and consumption data

Source: URS (2013)

Plywood mills in Australia are generally older mills with production ranging from around 5,000-45,000 m3 pa, considerably lower than what would be considered competitive at a world scale. Big River Group’s plywood mill in Grafton, NSW is the only hardwood plywood mill in Australia. The mill is now aging and faces increasing costs of production in part due to the constrained supply of hardwood logs in the region.

The largest of the six Australian softwood plywood producers is the recently commissioned Carter Holt Harvey Myrtleford mill in Victoria. According to the producer’s website, the facility was updated as running costs and reliance on out-dated processes were no longer competitive or sustainable.

Given the high level of plywood imports, there would appear to be potential for construction of further capacity in Australia to replace this volume and satisfy domestic demand.

A new mill would need to compete with import prices which relate to a range of products, and to be able to offer competitive prices would need to operate at a relatively high scale by international standards, most likely with annual log throughput of around 200,000 m3 pa. It is unlikely that a hardwood product would be able to directly compete with an imported Chilean product as the processing system for hardwood logs would need to be significantly more flexible and the prices that could be offered would most likely be uncompetitive.

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Laminated veneer lumber The production of LVL in Australia is limited to one WA based softwood operation. Domestic LVL production has faced increasingly challenging business conditions in recent years due to the increasing competitiveness of New Zealand (NZ) and US sourced LVL imports. Domestic production is estimated to be around 80,000 m3 pa however consumption is estimated to be well in excess of this volume with the market relying increasingly heavily on imported LVL (Figure 5-11).

Figure 5-11 Apparent consumption of LVL in Australia

Source: ABARES (2013); URS estimates *-Unavailable data - estimated production and consumption volumes

The market for LVL is driven to a large extent by residential construction. Over the past two years prices for LVL have been falling with the house construction market in decline but a high Australian dollar allowing imports to be more competitive on price than normal. Long term price trends for LVL are broadly in line with softwood structural timber prices.

Hardwood LVL would not be expected to be an ideal substitute for softwood LVL in the Australian market and the market potential of this product is untested. On one hand, a hardwood based LVL product would be significantly heavier than other LVL and would be more difficult to nail meaning it would be less favoured by builders. On the other hand, hardwood LVL may be a strong contender in very-heavy weight bearing applications in residential or commercial building. It’s inherently superior appearance characteristics, although not a leading driver of demand in this segment, may be an advantage where beams are exposed, such as in public buildings, restaurants and art galleries.

The Forestry Tasmania supported product development, HardLam, appears to have been well researched and is well regarded by project stakeholders. This research may be a logical starting point for companies considering this production option. However the technical challenges identified in the previous section present concerns around the commercial potential of production.

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5.2.3 Mill capacity to pay analysis Production of plywood and LVL may be technically feasible however further research is required to ascertain whether a quality product could be produced based on the Eden resource and whether the variety of species harvested can be successfully glued.

Based on URS data, a veneer operation based in Eden operating at a scale of around 150,000 m3 pa throughput may have the capacity to pay around $65 per m3 delivered to the mill. This is based on a log intake of approximately 70% logs over 40cm sed and 30% logs below 40cm sed. Given average harvest and haulage costs in Eden, this would provide little residual stumpage to FC. Reducing the proportion of large diameter sawlogs would further reduce the capacity to pay significantly due to impacts on processing unit cost

Greenfield veneer, plywood and LVL operations typically require large input volumes. For example a veneer peeling mill similar to the Ta Ann mills in Tasmania would require a volume of around 150,000 m3 pa. The availability of log volume would be a significant constraint in the Eden region, particularly the requirement for the majority of the log diet to be large diameter, low defect sawlogs. A veneer operation based in Eden would face technical challenges that may present downside risk to the above price assumptions. Although the Ta Ann operations in Tasmania have been operating for over five years now, an Eden mill would present several key differences to this business:

• The Ta Ann operation is based on a more uniform and larger diameter resource than could be supplied from the Eden regrowth resource in the medium term, given the volumes involved; and

• The Ta Ann processing sites are also located closer to the forests than would be possible for the required supply volume needed from the Eden and surrounding regions.

As the regrowth resource matures additional volume may become available which would increase the potential viability of this option, particularly with the utilisation of smaller diameter logs that are not preferred by the sawmilling sector. An alternative avenue into this market outside of regional investment would be through the emergence of a log export market for small diameter logs. These markets provide an opportunity to assess the potential for producing veneer logs and may provide a pathway for determining the resource’s suitability without the requirements for major capital investment from a third party. This market potential is discussed in more detail in Section 5.3.

5.3 Log exports

5.3.1 Market trends A significant driver of China’s demand for hardwood logs is the performance of China’s plywood manufacturing industry. Since 2001, plywood has emerged as a major product for domestic use and export markets. Plywood production in China rose from around 10 million cubic metres in 2000 to around 45 million cubic metres in 2012. Around 80% of the plywood manufactured in China is utilised domestically for residential and commercial construction as well as for packaging and furniture applications. Residential and commercial construction activity has rapidly increased in China over the last ten years which has been the major driver of expansion in the plywood manufacturing industry.

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The domestic veneer and plywood manufacturing industry in China is highly fragmented (Wan, 2009). In 2009, it was estimated over 5,000 small sized plywood mills accounted for over 50% of China’s plywood processing capacity. These small plywood mills were originally processing the domestically grown poplar resource. However, increasing demand and expansion has driven diversification of supply to include Eucalyptus species. These small scale producers are able to produce veneers suitable for use in plywood using low cost, efficient, locally made rotary lathes which are readily available.

Demand for plywood manufactured in China has also increased in export markets following economic recovery from the GFC. China’s exports of plywood increased to over 10 million m3 over the 2012 calendar year, which reflects the development of a large and highly competitive timber processing industry in China. Asia has become the major destination for China’s plywood exports, accounting for around 34% of the total export volume.

As Figure 5-12 shows China imported approximately 11.3 million m3 of hardwood logs over the year to June 2012, which equates to an estimated value of around US$3.6 billion. The GFC resulted in a slowdown in this growth during 2008 and 2009. However, government economic stimulus policies improved domestic demand over 2010 and strong economic growth underpinned imports in 2011 and 2012.

Figure 5-12 China's hardwood log imports by source country

Source: Global Trade Atlas

Most imported hardwood logs (accounting for approximately one quarter of China’s total log imports) are tropical hardwood species sourced from natural forests. Papua New Guinea and the Solomon Islands are the largest suppliers accounting for approximately 40% of total supply since 2011.

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In April 2008, Russia significantly increased the tax on unprocessed logs to around 25% (depending on the species) of value and subsequently announced its intention to further increase the tax to 80% in 2009. Although the Russian government delayed increasing the tax to 80%, China’s imports of hardwood logs from Russia dropped significantly (by around 3.4 million m3) from a peak of 4.3 million m3 in 2007 to 0.9 million m3 in 2010. This has created opportunities for other countries to improve their market share.

Russia has recently gained entry into the World Trade Organisation (WTO), which requires a reduction in export and import tariffs on forest products. Russia is currently proposing to reduce tariffs by around 50% as well as introducing a quota on volumes exported, above which higher tariffs will apply. However, increased costs of Russian supply, reducing supplies in favourable locations in relation to transport infrastructure, corruption and lower availability of favoured species are believed to also have a significant impact on the economics of this supply. URS considers the reduction in Russian log export tariffs is unlikely to impact on existing log supply dynamics to China over the medium term due to the increased costs of Russian supply and the lower availability of favoured species.

URS understands that as well as utilising imported logs for veneer and plywood production, China is also sourcing significant volumes of hardwood logs from domestic Eucalyptus plantations. These plantations are predominantly located in southern China and were originally established for woodchip production. Locally grown plantation logs are typically much smaller than hardwood logs sourced from native forests in developing countries. Turnbull (2007) estimated a total area of around 1.5 million hectares of Eucalyptus plantations in China with a further 90,000 hectares planted annually.

A wide variety of species have been trialled and established in China, with E. urophylla being preferred in southern regions. Improvements in site management and tree breeding have led to higher yields and rotations as low as four to seven years. Log products are also beginning to diversify due to the higher forest grower returns for veneer logs compared to pulp logs. Mills in China are currently paying around $US105-110 per m3 for these domestic hardwood logs which have an average small end diameter of 15-20cm.

Figure 5-13 shows China’s import volume of hardwood logs from Australia and the corresponding CIF (cost, insurance and freight) log prices. URS understands China’s hardwood log imports from Australia comprise predominantly of Eucalyptus species sourced from native forests. These logs are typically of lower quality and are utilised for peeling into veneer products. Exports of plantation hardwood logs are also increasing with supply of blue gum from Portland and E. nitens from Tasmania. Chinese imports of Australian hardwood logs have been variable over the last decade but appear to have recovered following the GFC. CIF hardwood log prices show unit prices averaging around US$147 per m3 in 2012. It is not apparent the quality of log that is being supplied to achieve this price.

As Figure 5-14 shows export log prices are considerably more volatile than domestic logs, being influenced by global commodity cycles impacting demand, shipping costs, foreign exchange and supply from competing regions. Our analysis of prices for logs from native forests and hardwood plantations in Australia and other regions indicates the Pinus radiata (radiata pine) K grade price with a discount of $5-$10 per JAS m3 provides a reasonable proxy for the way the market is pricing hardwood logs. Such is the volatile nature of export log prices which, over the four years to January 2013, have traded in a range of CFR US$90 to US$160 per JAS m3 for radiata pine K grade.

Log grades and specifications for export hardwood logs are similar to softwood logs in terms of allowable sweep, small end diameter limits, branch size and length (4m and 6m logs). In some

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instances the trim allowance is increased for hardwood logs from 100mm to around 400mm to account for the risk associated with end splitting. No rot is permitted, which may impact on supply from native forests. Fumigation is also required when exporting to China, unless the logs are debarked. Figure 5-13 China's imports of Australian hardwood

logs Figure 5-14 CFR A and K grade prices for New

Zealand softwood logs

Source: GTIS Source: Agrifax, industry sources

It is expected that international markets will continue to provide opportunities for hardwood log exports in coming years. Ongoing growth in demand, particularly in Asia, together with declining supplies of high value hardwoods from tropical countries, is expected to create market opportunities for the export of hardwood logs.

5.3.2 Log export capacity to pay analysis

Table 5-7 shows the estimated ‘at wharf gate’ export hardwood log price based on the current market prices for radiata pine less a $10/JAS m3 discount (reflecting current market pricing practices).

Table 5-7 Residual log export price analysis, ex-Port of Eden

Price point Unit Log grade

KS KI

CIF US$/JAS $130 $124

Freight costs US$/JAS -$36 -$36

FOB US$/JAS $94 $88

USD:AUD 0.92

FOB AU$/JAS $102 $96

Wharf costs AU$/JAS -$26 -$26

Agent fees AU$/JAS -$4 -$4

AWG AU$/JAS $73 $66

JAS: m3 conversion 0.95 0.95

AWG AU$/m3 $76 $70

Source: Agrifax, URS analysis

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Export log prices are influenced by a range of variables. Table 5-8 shows the sensitivity of wharf gate prices to changes in these key variables. The quantum of the variations is based on market trends over the past three years. It shows the variations in CIF prices and freight costs have the greatest impact on log prices.

Table 5-8 Sensitivity of log export prices to changes in key assumptions

Variable Change Price ($/m3) (Upper/lower)

Comment

Log grade KS KI

Base 73 64

CIF prices +/- $20/JAS 99/50 93/43 CIF price range over past three years

Freight costs $30-50/JAS 80/60 73/54 Typical price range

USD:AUD 0.8:1 / 1:1 89/68 81/62 Based on recent trends/ forecasts

Wharf costs -$9/JAS 85 78 Based on low cost, efficient port operation

Source: URS

Softwood log exports are already occurring through Eden with an average volume of 200,000 tonnes pa shipped between 2006 and 2012. As a consequence the infrastructure required for storing and handling logs and bulk shipping vessels is already in place (assuming FC or its log export agent can gain port access and share these facilities). The additional hardwood log volume would assist in increasing shipping frequency from Eden which in turn would be beneficial for managing stockpile age and reducing the risk of log deterioration when delivered to end markets.

Given the developing nature of the hardwood log export market the most likely route forward would be to incorporate mixed hardwood and softwood log export shipments. If there is the capacity to supply 10,000 m3 on deck (with 20,000 m3 of softwood below deck) per six week shipment, this would equate to an annual volume of approximately 90,000 m3 pa of hardwood logs. Chinese markets currently have a preference for softwood logs and URS understands that during the current market development phase, the supply of softwood logs is sometimes necessary to facilitate the sale of the hardwood logs.

5.4 Particleboard

5.4.1 Processing technology Particleboard is a reconstituted wood product that is manufactured in Australia from radiata pine. Hardwood particleboard is not produced in Australia, although some production of this product occurs internationally.

In 2004, a CSIRO project trialled the mechanical and physical properties of a number of WA Eucalyptus species for the production of particleboard (Olsen et al., 2004). The study found none of the species had the conformability6 of radiata pine and as a result would have a greater level of surface area in the particles used. Eucalypt species also generally have a higher fines content which means a significantly higher amount of resin is required in the production process and for both

6 Conformability is defined as the ability of wood to compress into the next particle to ensure maximum bonding area

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reasons would result in a denser and heavier product (as well as being higher cost). Pre-treatment has been reported to improve the levels of bonding (Cruz et al, undated).

5.4.2 Market trends Production of particleboard in Australia is based primarily on plantation softwood resources. Production and consumption of particleboard has increased steadily from the late 1980s until around 2003, driven by substitution of solid wood in a range of markets. Since this time domestic production and consumption have been relatively stable (Figure 5-15) with little international trade in particleboard either from or to Australia.

The normal price of particleboard has increased steadily since 2004 reflecting stable demand for the product from a range of market segments (Figure 5-16). In real terms, prices have remained relatively stable despite the cyclical nature of the housing market. In contrast softwood structural timber markets show much higher levels of volatility and a strong correlation with residential house construction.

Figure 5-15 Apparent consumption of particleboard in Australia

Figure 5-16 Australian particleboard nominal

price index

Source: ABARES (2013), URS estimates NB: Excludes LVL production and consumption data

Source: URS (2013)

Most particleboard mills in Australia are relatively old and are generally considered high cost compared to international benchmarks. Particleboard production does have the advantage of being able to utilise lower quality wood, although hardwood particleboard may be less favoured due to higher density and weight as well as the cost of adhesives.

5.4.3 Summary of particleboard potential A new particleboard mill is likely to require in excess of 200-400,000 m3 of wood fibre input per annum. Cost considerations also tend to mean that wood processing residues such as sawdust and shavings are preferred for at least a component of the input (rather than roundwood or chip).

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Furthermore, the domestic market for hardwood particleboard is very small and there would need to be significant growth prospects, particularly in export market to justify a major greenfield expansion. Given the proportion of fibre a mill of this scale would require in log form and the unproven nature of hardwood particleboard, a viable greenfield mill in the Eden region is an unlikely prospect.

5.5 MDF

5.5.1 Processing technology Almost all MDF produced in Australia is made from softwood fibre. Hardwood fibre is used in the production of MDF internationally but has not been undertaken to any large extent in Australia. Like particleboard, using hardwood for MDF production produces challenges in the form of basic density, bonding ability and fines content (CSIRO, 2009).

In 1998 CSIRO carried out a limited investigation into preparing MDF from three eucalypt species sampled from the East Gippsland region including messmate, silvertop ash and white stringybark (Coutts et al., 1998). In line with studies on other composite products, CSIRO found that to produce a panel of acceptable strength, a higher board density was required, well beyond that of radiata pine based MDF. The properties of hardwood fibre, including higher absorption, surface area and fines content, mean that a much greater volume of resin is required in the production process resulting in a heavier product. The panels produced from young silvertop ash were found to have internal bond strengths 167% higher than typical MDF panels. Mature silvertop ash ranged between; -23% and 58% of the softwood internal strength.

While MDF production based on hardwood fibre is technically feasible, the production process is likely to be significantly higher cost and the product may face difficulty in the market due to its heavier weight compared to standard MDF products.

5.5.2 Market trends Like particleboard, production of MDF in Australia is based almost exclusively on softwood residues. The current annual production volume of around 600,000 m3 is based on three facilities spread across eastern Australia. New, commercially competitive facilities would generally require input volumes of around 400-500,000 m3 pa.

Domestic demand appears to be growing only moderately at present with the existing industry base being the main provider of product. Given the relatively low volume of imported product coming into Australia, there would not appear to be a large scale opportunity for import replacement at present. Exports have fallen significantly over the past decade as Australian produced product has struggled to remain competitive in the international market and internationally focussed operators have withdrawn surplus production capacity.

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Figure 5-17 Apparent consumption of MDF in Australia

Source: ABARES (2012)

Much like the price of particleboard the price of MDF in Australia has remained stable in real terms over the past decade showing minimal volatility. This is the result of the diverse nature of the product’s applications, with some demand coming from residential and commercial construction and other demand arising from joinery and other secondary manufactured products.

5.5.3 Summary of MDF potential Notwithstanding the fact there appears to be limited domestic demand for additional MDF, there are significant technological challenges in producing MDF from a hardwood resource in Australia. To date there has been few attempts due to some of the characteristics of hardwood fibre that make it difficult to produce a quality product cost effectively. Notably the Starwood MDF mill in Tasmania was originally designed and run on hardwood fibre, however this shifted to solely softwood in response to both technical and market based issues.

Companies with an interest in hardwood MDF production would require substantial upfront R&D investment prior to considering construction of a commercial scale operation. Taking into account the market, resource scale and technological challenges it is expected that MDF would be an unlikely opportunity for the Eden area.

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5.6 Engineered and oriented strand lumber Steady advancements in wood product technology have led to the development of a group of high strength engineered strand lumber products.

5.6.1 Processing technology Laminated Strand Lumber (LSL) and (Oriented Strand Lumber) OSL are manufactured by producing strands of wood fibre, typically from lower grade logs, then recombining and pressing the strands in parallel with a resin. Different stranding technologies are used depending on the manufacturer and product. Continuous presses are often used, enabling production of wood products of exceptional length. Steam injection technology also means that comparatively thick panels can be produced. The technology is similar to that employed in many OSB facilities; however, unlike OSB, LSL or OSL is normally sawn into lumber sized dimensions.

In 1998, OSB was manufactured by CSIRO using a number of East Gippsland species including silvertop ash (Coutts et al., 1998). High density panels were produced to improve the mechanical properties of the species, however the lack of particle conformability produced poor bond strength in the silvertop ash boards. The report concluded that improved resins were required to make production more feasible. These technical challenges are likely to face a producer of a strand lumber product using hardwood species.

5.6.2 Market trends LSL and OSL products are not currently produced in Australia but have been produced in the US and Canada for over a decade through a range of processing variations over time from Weyerhaeuser’s Timberstrand® and Parallam® products to Louisiana-Pacific’s SolidStart® range of LSL. In North America, LSL is often made from hardwood species including poplar, aspen and maple.

LSL is a potential substitute for house framing, particularly for higher strength and larger dimension applications. LSL could potentially compete with large dimension timber (including LVL and glulam) and steel products for heavy, weight-bearing applications. The market for LSL in Australia is currently small and would need further development if a domestic facility were being considered.

LSL and OSL type products have several advantages over traditional solid wood products in that they have a stable moisture content below 10% which makes them less prone to twisting and warping after installation. This allows producers to provide more comprehensive warranties with their products. The products are of consistent quality, and have good machining and nail holding ability. Furthermore, the chemical resin used means that the products can be highly durable and chemical additives, including fire retardants, can be combined to enhance performance.

In 2007, the Australian company Lignor developed commercial plans to produce an LSL product using plantation and indigenous eucalyptus species (which they have referred to as engineered structural lumber – ESL). Lignor had plans to build a large scale production facility in WA, Australia. The proposed plant intended to utilise continuous press technology similar to that employed in many North American LSL facilities. Lignor had commenced raising capital for the WA mill but this was delayed due to the impacts of the GFC.

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The technology for LSL production in Australia would require research and like several other products (including CLT), the potential market take-up, including customer reactions to the product’s characteristics would need intensive investigation before commercial production could be considered. LSL and OSL have strong potential for the building industry as a relatively lower cost but high performance product based on a pulpwood resource.

5.6.3 Summary of ESL/OSL potential Because LSL and OSL are not commonly used in the Australian building industry a market would most likely need to be expanded in Australia, based on imports, before production could begin. Previous URS research indicates that for a LSL/OSL plant to be competitive internationally, it would most likely require log throughput of around 80-150,000 m3 pa.

Eden has the forest resources to supply a production facility and this market may be a potential opportunity for the region. However due to the lack of existing product knowledge and limited understanding of the manufacturing process an extended period would be required to complete feasibility studies, production trials and output ramp-up. With these limitations, the development of a commercial scale plant is only seen as a distant prospect at this stage.

5.7 Bioenergy and biofuels There is growing interest in Australia to produce renewable sources of energy in response to government and stakeholder concerns regarding energy security, climate change and the effect of burning fossil fuels for energy production. Bioenergy refers to the production of renewable energy (electricity, heat and liquid fuels) based on biomass. Biomass is organic matter originally derived from plants, and biomass feedstocks include agricultural residues, urban waste, and forestry and wood processing residues.

5.7.1 Renewable energy policy The development of bioenergy in Australia is supported by the Commonwealth Renewable Energy Target (RET) legislation, which was designed to ensure that 20% of Australia’s electricity supply is obtained from renewable sources by 2020. The legislative framework comprises the Renewable Energy (Electricity) Act 2000, Renewable Energy (Electricity) Charge 2000 and the Renewable Energy (Electricity) Regulations 2001 (the regulations). The framework encourages electricity retailers and wholesale electricity buyers on liable grids in all States and Territories to contribute proportionately towards increasing Australia's renewable energy sources7.

The predominant forestry biomass sources that are eligible to generate Renewable Energy Certificates (RECs) under the RET scheme include wood processing and forest plantation residues. In November 2011, an amendment was made to the RET regulations to exclude biomass from native forests as an eligible energy source. This amendment means that the defined source of ‘wood waste’ under the regulations no longer includes products, by-products and waste associated with or produced from clearing or harvesting native forests.

7 Office of the Renewable Energy Regulator 2010 – Online: http://www.orer.gov.au/legislation/index.html

http://www.orer.gov.au/legislation/index.html

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However, the NSW Government is currently finalising amendments to the Native Vegetation Regulation 2005 which is due to come into effect on 1 September 2013. One of the main amendments to the regulations is the inclusion of the following additional biomass sources previously excluded from being considered a renewable energy source:

• Pulpwood logs, the heads and offcuts of sawlogs or other products and thinnings from forestry operations carried out on land to which an Integrated Forestry Operations Approval (IFOA) applies under Part 5B of the Forestry Act 2012, as well as debris from clearing carried out in accordance with a private native forestry property vegetation plan; and

• Invasive native species cleared under a property vegetation plan approved under the Native Vegetation Act 2003 (EPA 2013)8

Logs that meet the standard for sawlogs or other higher quality products cannot be used for electricity production. This amendment means pulpwood and residues from harvesting in native forests could potentially be included as a biomass feedstock.

However these amendments apply only to NSW state based legislation. Current Commonwealth legislation currently still prohibits the use of native derived wood residues toward the RET. URS is not aware of any policy announcements on a change to this position by the current government.

This ineligibility of native forest biomass to generate RECs will impact on the commercial viability of bioenergy ventures based on native forest feedstock and make it more difficult for such operations to compete with other sources of energy production. However, the competitive position of native forest biomass against non-renewable energy sources could be improved by future increases in the price of carbon (and the reduction of any adjustment packages currently offered to these industries) and/ or amendments to Commonwealth legislation to reclassify native forest residues as being eligible for RECs.

5.7.2 Bioenergy In 2010 the bioenergy market in Australia was estimated to be generating revenues of around $400 million, producing around 2,500 gigawatt-hours (GWh). Over the past five years, electricity generation in Australia has been relatively flat, while bioenergy has grown at an average annual rate of around 15% (Figure 5-18).

8 http://www.epa.nsw.gov.au/licensing/natforestbiofuelqa.htm

http://www.epa.nsw.gov.au/licensing/natforestbiofuelqa.htm

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Figure 5-18 Australian electricity production

Source: ABARES (2011)

The Clean Energy Council’s (CEC) Bioenergy Roadmap (2008) highlights the potential for almost 11,000 GWh of new bioenergy in Australia by 2020 and almost 73,000 GWh by 2050, of which forestry and wood residues has the potential to contribute around 25% by 2020 (approximately 3,000 GWh), and 7% in the longer term (approximately 5,000 GWh) (CEC, 2008).

Residual woody biomass from forest harvesting operations in plantations and native forests includes branches and the tops of the trees that are generally left on site. It is estimated that there is enough woody biomass from forest industry activities in Australia to supply 3,000 GWh of renewable energy per year from existing waste streams with no additional harvesting9.

At present direct combustion from smaller wood-fired plants and co-firing in existing coal-fired plants are the two main sources of bioenergy production using woody biomass. A number of sawmills and paper producers in Australia are utilising their own wood waste to generate heat and electricity on site (Table 5-9).

9Australian Forest Products Association, Common sense needed for green energy from native forest biomass, Wednesday, 12 October 2011, found at http://ausfpa.com.au/site/news.php?task=detail&id=0032

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Table 5-9 Examples of wood fuelled energy systems in Australia

Company Location Capacity (MW) Product Feedstock

Gunns* Launceston, TAS 3 Water tube boiler Dry chip / shavings

Nestle Gympie, QLD 16 Water tube boiler Coffee waste, wood waste

Gunns* Georgetown, TAS 20 Water tube boiler Wood waste

Hyne & Son Tumbarumba, NSW 15 Thermal oil heater Wood waste

Carter Holt Harvey Oberon, NSW 12 Thermal oil heater / Fibre drying

Wood waste

Carter Holt Harvey Gympie, NSW 10 Hot gas – dryer Dust, fuel oil

Carter Holt Harvey Tumut, NSW 20 Hot gas – tunnel dryer waste, dust

AKD Sawmills Colac, VIC 15 Thermal oil heater Wood waste

Hyne & Son Tuan, QLD 12.5 Thermal oil heater Wood waste

Laminex Gympie, QLD 24 Thermal oil heater Wood waste

Visy Tumut, NSW 30 Water tube boiler Wood waste Source: Stucley et al. (2012) *-Gunns recently entered into receivership and the future ownership and operation of these mills remains uncertain

The largest bioenergy plant near to the Eden area is at the Australian Paper mill in Maryvale, which uses ‘black liquor’ produced as part of the wood conversion process, to produce approximately 54 mega watts (MW) of electricity. D&R Henderson – a particleboard producer located in Benalla – recently installed gasifiers at its mill site to utilise waste wood residues and power its drying operations, significantly offsetting natural gas consumption (Regional Development Victoria, 2012). Near Eden, the Bega Cheese plant has a 12MW bioenergy boiler system used to produce heat, which is based on wood waste.

In Europe, the bioenergy industry has very quickly developed over the last 10-15 years to the point where it is now the largest form of renewable energy production in the region. The development of the industry has been assisted by substantial policy support and subsidies from the European Union. Stand-alone combined heat and power plants are common, particularly in north west European countries and some, such as the Avedore 2 plant near Copenhagen, Denmark, produce large enough quantities of energy - 570MW of heat and 570MW of electricity – to rival Australia’s largest coal-fired power stations.

Stucley et al. (2012) estimates the typical cost structure of a range of bioenergy plant scales. Table 5-10 presents the findings of this analysis.

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Table 5-10 Typical cost structures of bioenergy plants by production scale

Gross electricity output

Biomass feed requirements (‘000 gmt pa)

Capital cost ($ million)

Required sale price ($/MWh)

0.5MW 9 $4 $310

5MW 79 $27 $230

20MW 281 $63 $160

Source: Stucley et al. (2012)

The above sale price was calculated to be based on estimates of typical capital costs and operating costs and to meet an internal rate of return (IRR) of 15%. The model also assumed a fixed delivered biomass price of $50 per gmt (50% moisture content).

Indications suggest that renewable energy supplied to the National Electricity Market in Australia typically sells for around $100 per MW hour (MWh) after accounting for the contribution of a REC. This means that the modelled bioenergy plants outlined above would be well outside of being price competitive at this point in time. Currently, this competitive gap would be amplified for bioenergy based on native forest biomass which does not qualify for receiving RECs.

Potential of bioenergy production Given the limited policy support currently available in Australia for native forest based bioenergy, there is unlikely to be stand-alone bioenergy development in the Eden region. Currently bioenergy is not competitive against grid based electricity supply. Changes to the NSW Native Forest Bio-material Regulations now permit the supply of residues from native forest harvesting operations to bioenergy producers. However, capacity to pay for this resource is likely to be constrained by distance, particularly with the low bulk density associated with harvest residues.

A review in Stucley et al. (2012) of case studies assessing delivered fibre cost showed that the delivered cost of biomass to a bioenergy plant was highly project specific and depended to a large extent on the handling and transportation systems that were used. A NZ bioenergy case study illustrated that biomass could be delivered to a bioenergy plant 80km from a plantation forest for around $1.80 per gigajoule (GJ) and $4.56/GJ depending on the supply system used. This study assumed the forest owner was paid $16/green tonne for the residues.

In the bioenergy sale price estimates outlined in the previous section a delivered cost of fibre was assumed to be $50/green tonne. Based on FC’s harvesting and transport costs this would limit the sub-regions that would be able to support a bioenergy facility.

Pellets There are opportunities to supply international markets by exporting wood particles as feedstock for bioenergy production. Wood biomass used in the production of electricity can come in a variety of forms, the most common of which is wood pellets. Wood pellets are a standardised form of wood bioenergy produced by grinding wood material into small particles, then compressing the material through a perforated matrix which acts to heat and bind the wood together. Because wood pellets only require low quality wood they can be produced from forestry and wood product processing residues. Wood pellets have higher bulk density, and therefore higher energy content per unit volume than woodchips. As such, they represent a more cost effective method of transporting woody biomass over long distances.

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The European Union (EU) is currently the main market for wood pellets and the international market for wood pellets is forecast to grow significantly in the longer term. According to the International Energy Agency (IEA) Bioenergy Task 40 Wood Pellet Industry Market and Trade report, consumption of wood pellets grew by 110% between 2006 and 2010 to approximately 13.5 million tonnes pa and it is estimated consumption by 2020 could be around 50-60 million tonnes pa. The majority of the demand is expected to remain in Europe; however, Asia (particularly Japan, China, India and South Korea) and North America (although likely to be self-sufficient) are also expected to grow.

Wood pelletising technology is available for throughputs of as low as 200 kg per hour to large-scale plants of up to 40 tonnes per hour (i.e. from less than 2,000 to more than 300,000 tonnes pa). Plantation Energy Australia built and operated a 250,000 tonne pa pellet plant in Albany, WA based on supply from forest plantation residues. The plant exported pellets to overseas markets, primarily power stations in Europe. However, in late 2011, Plantation Energy announced it was closing the operation. This is understood to be due to a combination of poor market conditions in Europe, the strong Australian dollar and higher than expected production costs at the plant.

SEFE constructed a pilot wood pellet production plant to investigate alternatives to the current practice of burning its bark and chip residues. SEFE sought to develop domestic markets for this product, including domestic wood pellet burners, but issues with the production process at the plant has prevented further development of this process.

5.7.3 Biofuels Biofuel production is an emerging market for forest products. At present, there is no production of biofuels from woody biomass undertaken in Australia.

Bioethanol can be produced from lignocellulosic feedstocks through the conversion of the cellulose and hemicellulose contained within biomass into sugars which are then fermented into ethanol (IEA, 2007). Lignocellulosic ethanol has the potential to perform better in terms of energy balance, greenhouse gas emissions and land-use requirements than first generation, starch-based (e.g. corn, sugar cane) biofuels (IEA, 2007). Lignocellulosic ethanol production is currently only just moving past the pilot and demonstration stage with some examples of commercial trials, notably in the US. Ineos Bio, a petrochemicals company is currently in the stages of commissioning a lignocellulosic ethanol plant in Florida which will produce around 30 megalitre (ML) pa of ethanol and 6 MW of bioenergy. The funding costs of the project are around $130 million, contributed to by a $50 million grant from the US Department of Energy and a $75 million dollar loan from the US Department of Agriculture. The ethanol will be produced using 90,000 dry tonnes pa of vegetative yard and citrus industry waste that will be processed using a gasification and fermentation process (Stucley et al., 2012; Ineos Bio website.

Biomass to liquid (BtL) fuels are also being researched internationally as a sustainable, alternative fuel for transportation. Like lignocellulosic ethanol, BtL fuels are seen as a more sustainable alternative to first generation biofuels, particularly biodiesel, which utilises oil seed feedstocks such as. canola and palm oil. One advantage of the BtL process is its ability to use almost any type of biomass, with little pre-treatment other than moisture control.

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BtL fuels are produced using a two-step process. In the first stage biomass is gasified and converted to ‘syngas’ which is rich in both hydrogen and carbon monoxide (IEA, 2011). After cleaning, the syngas is synthesised into a broad range hydrocarbon liquids including synthetic diesel and bio-kerosene products. Unlike ethanol, BtL fuels can be used in current diesel engine technology as a stand-alone fuel (Enecon, 2007). Like lignocellulosic ethanol there is significant interest in the potential for BtL fuels to play a strong role in energy security and sustainable transportation. As such there is strong ongoing research into the production of BtL fuels and demonstration plants (albeit at sub-commercial scale) have been developed in Europe and the United States.

To enable the most cost competitive production of biofuels it is likely that any production of biofuel products based solely on woody biomass would utilise relatively low cost harvest residues and salvage grade wood. The significant impact of freight cost on this relatively low value fibre source would necessitate future production sites being located within close proximity to the source of biomass.

Potential of biofuels No commercial scale biomass to biofuels plants are currently in operation at present. This makes it challenging to assess the likely price that this future industry might pay for biomass feedstock.

A study undertaken by the National Renewable Energy Laboratory of the US Department of Energy (NREL), examined the economics of establishing a lignocellulosic ethanol production plant (NREL, 2011). The analysis found that developing a commercial scale plant using current technology for the production capacity of 230ML pa, would require investment in the order of US$420 million. At this level of output the plant and would require cellulosic biomass feedstock of 2,500 green tonnes per day or 780,000 green tonnes10pa. The delivered cost of biomass assumed was US$52.65/dry tonne allowing for a grower payment of US$20.06/tonne and US$31.59/tonne11 for collection, processing, storage and transportation costs (NREL, 2011).

The latest developments in lignocellulosic biofuels production internationally indicate that currently a stand-alone lignocellulosic ethanol plant would require substantial government support to develop. In addition proposed industrial scale BtL plants are expected to require a feedstock volume that is significantly in excess of the biomass volume potentially available from the South Coast region when transport distances to a centralised location are taken into account.

5.7.4 Summary of bioenergy and biofuel potential In the case of the Eden resource, the bioenergy market has the greatest potential for expansion, especially if the SEFE pellet plant demonstrates it can be commercially viable. However, the capacity to supply this market would depend on a combination of a change to Commonwealth policy to include the use of native biomass as part of the RET framework and public acceptance that the utilisation of native forest residues for bioenergy has a net positive benefit to the community.

10 Tonnages have been converted from US short tons to metric tonnes using a conversion factor of 0.9 metric tonnes to short tons 11 ibid

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Given the lack of competitiveness of bioenergy in Australia currently, a zero or negative stumpage for supplying biomass to a bioenergy plant would very likely still not allow a plant to be profitable under normal commercial investment terms. If the profitability expectations of the investors were to be lowered to below a 15% IRR, this improves the bioenergy company’s capacity to pay. From a grower’s perspective, a low stumpage may be tolerated if it was able to underpin an ongoing harvest operation that improved the quality of the remaining forest resource over time.

5.8 Woodchip exports Australian woodchips have historically been traded almost exclusively in the Pacific Rim market. The Pacific Rim woodchip market is driven largely by demand from Japan and China and to a lesser extent Taiwan and South Korea

5.8.1 Market trends Japan relies predominantly on imported hardwood fibre to supply its pulp production sector and has historically relied on imports of both native forest and plantation woodchip to meet its demand. The Japanese market has a preference for plantation woodchips due to the perception amongst consumers that plantation forestry is more environmentally sustainable and supply from native forests is progressively being phased out.

In 2008, China overtook US production output to become the world’s largest producer of paper. Despite the international impact of the GFC, paper production in China has increased almost three fold since 2000 (Figure 5-19). Historically, China has relied on non-wood fibres, low quality domestic sources of pulpwood or imported wood pulp rather than importing large quantities of woodchips for pulp conversion. Since 2008 however, Chinese demand for pulp and woodchips has increased in-line with particularly fast growth in paper production (Figure 5-20).

Figure 5-19 Chinese paper & paperboard production by type

Figure 5-20 Chinese hardwood chip imports by source

country

Source: FAOSTAT (2013) Source: Global Trade Atlas (2013)

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China’s current woodchip supply means that ongoing developments in pulp production capacity will most likely result in a further increase in demand for woodchip imports. Where possible, China will continue to source low cost woodchips from Vietnam, Thailand and Indonesia. However, the available volume will be influenced by pulp industry developments in their own countries, particularly in the case of Vietnam and Indonesia where a number of greenfield developments are proposed. Constraints in supply from these countries may leave Australia in a stronger position as a key fibre supplier. This is a positive outlook for Australia, particularly for native woodchips, which will eventually be diverted from Japan into alternative markets such as China.

Chinese buyers generally pay lower prices for hardwood chips than Japanese buyers and import predominantly from other south east Asian countries. Anecdotal evidence suggests that China’s predominant concern is maintaining a low cost fibre source rather than other factors such as woodchip quality or species preferences. This is reflected in the substantially lower CIF prices that Chinese buyers pay and in the fact that Chinese buyers appear to more readily import Australian native woodchips where Japanese buyers are showing increasing hesitancy. Figure 5-21 shows the quarterly average CIF price trend in US dollars for major countries supplying China. Australia has the highest hardwood chip CIF price of all the major suppliers to China.

Figure 5-21 Quarterly CIF price of hardwood chip exports to China (US dollars)

Source: Global Trade Atlas (2013)

Native forest woodchips are currently exported through the port of Eden and woodchip exports will remain an important market for the foreseeable future. As the Japanese market for native forest woodchip continues to decline the combination of a transition to the more open Chinese market will place some pressure on native forest woodchip exports. China’s demand for wood and wood fibre products is increasing rapidly and is expected to provide expanding opportunities for competitive suppliers. While there are opportunities in the Chinese market, there is also a higher level of uncertainty and risk, with shorter term and more volatile contractual and trading arrangements. Furthermore, current prices for pulpwood in China are significantly lower than the Japanese price.

100

150

200

250

Sep-

02

Jun-

03

Mar

-04

Dec-

04

Sep

-05

Jun-

06

Mar

-07

Dec-

07

Sep-

08

Jun-

09

Mar

-10

Dec-

10

Sep-

11

Jun-

12

Mar

-13

USD/

BDM

T (C

IF)

Australia Thailand Indonesia

Vietnam World

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5.8.2 Woodchip export capacity to pay analysis The future of woodchip export in Eden is likely to be focussed on supply to China as Japanese customers increasingly source hardwood fibre from plantations.

Table 5-11 shows the estimated ‘at wharf gate’ export log price based on current in-market prices for native hardwood chip from Australia, using the current exchange rate and indicative port costs for supply from Eden. It highlights the significant price differential that currently exists between the Japanese and Chinese markets.

Based on a current world price of $160 per bone dry metric tonne (bdmt) CIF to China and applying the assumptions noted in Table 5-11, the equivalent wharf gate price ex-Eden that is required to compete with other key suppliers into the Chinese market is estimated to be around $36/gmt.

Table 5-11 Residual hardwood chip price analysis, ex-Port of Eden

Log grade Unit China Japan

FOB US$/bdmt $135 $165

USD:AUD 0.92 0.92

FOB AU$/bdmt $147 $179

Dry fibre content 50% 50%

FOB AU$/gmt $73 $90

Port & chipping costs AU$/gmt -$26 -$26

AWG AU$/gmt $47 $64

* Current price for the supply of multi-vessel shipments of plantation fibre

Source: GTIS, URS analysis

Table 5-12 shows the sensitivity of chip export prices to changes to key variables. It shows the impact of supplying the Chinese market with wharf gate prices consistently lower than the current Japanese price, even under a more optimistic pricing scenario.

Table 5-12 Sensitivity of export chip prices to changes in key assumptions

Variable Change Price ($/gmt) (Upper/lower)

Comment

Base (China) 47

FOB prices +/- 10% 55/40 Reflects recent price variations

USD:AUD 0.8:1 / 1:1 58/42 Based on recent trends/ forecasts

FOB + AUD +10%, 0.8:1 67 Upside potential if China prices increase

Source: URS

The analysis shows that exposure to the more volatile Chinese market has the potential to materially influence the stumpage received by FC.

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6

6Evaluation of Marketing Options

This section combines the results from the analysis of resource availability and the various markets to identify where potentially viable processing opportunities exist. It provides a contextual overview of the Eden region relative to other regional and national resources and where cross-border synergies or competition exist. The resource analysis considers viability of supply based on resource volumes and quality and the proximity of the forests to a number of potential processing locations. The analysis of various marketing options determines whether there is a case for satisfying the commercial requirements of the processing options.

6.1 Market position of southern forest resources In a national context, the southern region of NSW is a relatively minor producer of native hardwood timber. Figure 6-1 shows the southern FMA’s account for approximately 5% of total sawlog removals and 6% of pulpwood production from broadleaved native forests in Australia. In terms of production within NSW, the three southern regions account for 13% of total sawlog removals and 60% of pulpwood production. More substantive regions in Australia where native forests are managed for timber production include the north coast of NSW, central and eastern Victoria and Tasmania.

Figure 6-1 shows that a large part of the decline in national sawlog production since 2005 has occurred in NSW. However, supply from the southern regions has remained reasonably steady through this period and volumes have remained relatively consistent. Pulpwood production has remained relatively stable in most regions across Australia except Tasmania, where volumes have materially declined.

Figure 6-1 Southern FMA production compared to native hardwood removals in Australia

Sawlog/veneer log production Pulpwood production

Source: ABARES, FC

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2005 2006 2007 2008 2009 2010 2011

Volu

me

'000

m3

Southern NSW NSW other Victoria

Queensland Western Australia Tasmania

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2005 2006 2007 2008 2009 2010 2011

Volu

me

'000

m3

Southern NSW NSW other Victoria

Queensland Western Australia Tasmania

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In terms of its competitive position to supply appearance grade sawn timber, the Eden region has the following characteristics:

• Sawlog volumes are small compared to other major native forest supply regions; • In comparison to other regions, the forests and related sawmills are located further from key

domestic markets in metropolitan Sydney and Melbourne; • Appearance grade timber markets on the east coast of Australia are dominated by the prime ash

species found in Victoria and Tasmania and by North Coast hardwoods such as spotted gum and blackbutt. Key Eden species are less common and occupy more of a market niche; and

• With a deep water harbour and established port facilities, Eden products are able to access international markets more readily than many other forestry regions around Australia, and particularly the southeast seaboard.

The South Coast region has a comparative advantage to the Eden region by being closer to the Sydney and Canberra markets as well as having spotted gum as a key production species. Like Eden, the Tumut resource is also a substantial distance from Sydney and Melbourne. However, it comprises predominantly of ash species which align readily with products produced from forests in Victoria and Tasmania.

The suppliers of structural timber from native hardwood forests across Australia are under pressure due to:

• Weak domestic demand for new residential and commercial construction; and • Ongoing substitution by softwood lumber and engineered wood products.

In response to these pressures hardwood sawmillers are seeking to either expand the production of hardwood EWP’s, increasing the outturn of appearance products or to produce large dimension timber suited to heavy construction which is less affected by softwood substitution. These challenges are leading to consolidation in the hardwood sector as mills that can’t adapt, or are not cost competitive are forced to close.

There is currently a surplus of low quality logs available from other native forest regions such as Victoria and Tasmania and there is an opportunity to work collaboratively with these regions to develop a log export market with China the most likely destination. Small volumes are already being exported from Tasmania but there is scope to significantly increase the supply, particularly of straight small diameter logs that are currently not utilised by the domestic processing sector. Silvertop ash could potentially be combined with other ash species from these other regions to provide a critical mass for log exports.

With the exception of ash produced in Victoria and supplied to the Maryvale pulp mill, all pulpwood production from native forests in Australia is exported as hardwood woodchips to international markets. Historically, Japan has been the sole market for these exports, however the Japanese have been transitioning away from fibre sourced from native forests to supply based solely on plantation grown fibre.

Pulp and paper production in China is continuing to expand rapidly and producers are increasing imports of hardwood woodchips. The continued strength of the Australian dollar means woodchip supply from plantations and native forests in Australia are not currently competitive compared to other key suppliers such as Chile (Japan), Vietnam (China) and other south east Asian countries, and is placing pressure on Australian exporters and their marketing plans.

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This situation has led to a significant build-up of hardwood pulpwood volumes available from Australia. URS estimates there is a back log of more than 20 million gmt of mature hardwood plantation pulpwood available from key supply regions in Western Australia, the Green Triangle and Tasmania. Supply from native forests has been significantly scaled back due to a shift in market dynamics, seen most notably in Tasmania, and production could be increased in these forests if market access conditions became more favourable.

Whilst pulpwood is a key product expected to be produced from the Eden region, it has the disadvantage of being lower in quality than plantation grown hardwood and can be inferior to supply from ash dominated native forests in Victoria and Tasmania.

6.2 Log marketing opportunities The terms of reference for the project require that the marketing plan consider the wood flows available from the southern regions following the end of the WSA period. In determining what processing options may align with the resources available, our analysis focuses on the volume available from the end of the WSA period (2018-20), through to 2038-2041. This represents a 20 year period which would be the time horizon considered necessary for any investment in new processing infrastructure.

Several factors will influence the viability of log processing opportunities in the Eden region including: availability and quality of resources; log haulage distances; market demand and processing technologies. Table 6-1 provides a summary of potential processing opportunities for sawlogs and their suitability based on the range of factors that influence their feasibility and competitiveness. Further discussion on the opportunities is provided in the section below.

Table 6-2 provides a similar summary of potential marketing opportunities for pulp logs and their suitability based on a review of key market drivers.

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Table 6-1 Summary of sawlog marketing opportunities

Resource needs

(000 m3 pa)

Market prospects Perceived investor risks Estimate of potential feasibility

Comments

Sawn timber – <40cm sed log line

100 – 150 • Potential opportunities to supply flooring, decking and landscaping markets

• Lower grade structural timber products present ongoing stable opportunities

• Potential for supplying packaging timber markets

• Log quality and volume • Processing technology

risks • Haulage distances and

cost

Medium for new sawmill

Would need to consolidate the southern region and East Gippsland resource and gain more certainty around log size and quality. Scale would assist capacity to pay and product marketing opportunities.

Sawn timber – 25-70cm sed

30-60 • Higher recovery of appearance grade for flooring and decking

• Opportunities to specialise in higher value products and promote mixed species features

• Quality and volume stability of large sawlogs


High for new or existing sawmill

Species mix presents significant and diverse product opportunities when combined with the right marketing plan.

Plywood and veneer

150-200 for veneer, 200 for plywood

• Opportunities to supply veneer to Asia for further manufacturing

• Limited opportunities in plywood due to highly competitive softwood market and high costs of production

• Need further analysis of lower quality resource to determine suitability


Low for veneer

Low for plywood

Resource availability and quality is likely to be a limiting factor for veneer.

EWP 150-200 • Growing market but exclusively based on softwood product

• Potential prospects for hardwood product based on recent research


• Log quality and volume • Builder acceptance of

hardwood product

Low-Medium Prospects depend on competitiveness of veneer production. Secondary LVL processing may not be cost competitive despite potential niche applications

Log exports 100 • Ongoing growth and demand in Asian markets

• Need to compete with low cost exports from sub-tropical countries and Russia.

• Existing infrastructure would require only minimal investment to export hardwood logs from Eden

High Opportunities to test the log export market at minimal cost.

Without domestic value adding and with relatively low regional economic benefits may not fit value objectives of FC

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Table 6-2 Summary of pulp log marketing opportunities

Resource needs

(000 m3 pa)

Market prospects Perceived investor risks Prospects for investment

Comments

Particleboard and MDF

200 - 500 • Domestic market opportunities are limited for hardwood particleboard and MDF


• Limited domestic demand • Resource scale

Low Unlikely to be cost-competitive on an international scale and domestic demand is well supplied

LSL and OSL 80-150 • Potential to compete in domestic market against LVL

• Australian market currently limited and needs further development, however market penetration evident overseas


• Builder acceptance of product

• Haulage distances

Low Strong market opportunity if product is accepted as an equivalent of US produced product

R&D investment required to ensure competitive process

Bioenergy 10-250 for bioenergy plant

• Highly niche market opportunities due to lack of competitiveness and policy support

• Cost competitiveness of stand-alone plant

• Pellet markets may be difficult to secure and technology remains unproven in Australia

Medium Stand-alone opportunities for bioenergy are extremely limited in current competitive environment

Co-firing and pellet production is likely to be more viable

Woodchip exports

180 - 500 • Established market for woodchip export out of Eden

• Japanese market has potential to continue to decline for native forest supplies

• Opportunities in Chinese market, but at lower prices than Japan

• Market risk Medium-High Opportunity to continue with current woodchip export operations, but requires improved AUD FOB prices to be viable

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6.2.1 Shortlist of sawlog marketing options Sawn timber: The sawlog resource available from the Eden region beyond 2018 will be based initially on ongoing thinning of post-1970 regrowth forest. Consequently, the sawlog resource will contain a large proportion of small sawlogs. As wood supply transitions towards a smaller and younger resource, existing sawmills in the region will be faced with operational and efficiency challenges.

There appears to be several product opportunities for the Eden resource as a result of the wide range of high quality species present in the region. However, in order to process regrowth sawlogs efficiently the existing sawmill in Eden will require re-investment over the next five years to allow it to process an increasing proportion of smaller diameter sawlogs. This will most likely involve investment in a computerised, twin saw breakdown and a multi-saw resaw setup in the order of $3-5 million if a completely new saw line is pursued. The new log line would need to have the flexibility to process smaller diameter logs efficiently such as that used at Whittakers sawmill in WA.

Achieving a viable resource scale for a sawmill in the Eden region will be challenging. The forecast available sawlog resource would likely need to be supplemented by either better quality pulp logs or resource from regions outside of the Eden region. A desktop scenario analysis assessing the impact of reducing the minimum sedub for sawlogs from 25cm to 18cm indicates an additional 7-19,000 m3 pa of the Eden resource could potentially be available to supplement the existing sawlog resource over the period 2019-2041.

An alternative approach to increase sawlog supply from the Eden region would be to reduce the rotation age for harvesting post-1970 regrowth forests. Wood flow analysis of the impact associated with reducing the rotation age to around 40 years indicates sawlog volumes could progressively increase from current levels at the expiry of the WSA’s to around 46,000 m3 pa by 2022. However, further assessment of the potential sawn timber outturn from small and ultra-small sawlogs is required to understand the economics of processing these log types as much of the research to date has been based on small scale research trials.

Figure 6-2 combines the resource analysis, with the economics associated with log supply. The chart on the left hand side shows the average delivered log cost from each sub-region to a single destination. The data is presented for Eden (being the key processing hub for the Eden FMA) and Bega (being central to the broader South Coast resource). The bars show the delivered log cost for each sub-region. The two lines show the cumulative delivered cost and cumulative volume. The estimated mill door price derived in Section 5.1 is also shown, representing an inferred potential capacity to pay for logs for a competitive processing facility. Prices are presented as a range, reflecting the variability and uncertainty associated with the markets and the processing costs and efficiencies. The gap between the delivered cost and the mill door price represents the grower’s gross margin. Where delivered log costs are higher than the mill door price, this infers logs would need to be supplied at a cost to the grower, or the processor pays an additional amount with a commensurate impact on their viability.

The charts on the right hand side of Figure 6-2 show the sawlog volume (comprising large and small sawlogs) for each sub-region in five year lustrums. The volume of ultra-small sawlogs available from the Eden region is identified separately.

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Figure 6-2 High quality sawlog capacity to pay estimates by subregion

Delivered log cost vs capacity to pay - Eden High quality sawlog volume - Eden facility

Delivered log cost vs capacity to pay - Bega High quality sawlog volume - Bega facility

Source: FC

Figure 6-2 shows that in terms of sawn timber processing:

• Under the maximum capacity to pay price, supply from all subregions except Tumbarumba would provide a positive stumpage to FC;

• Delivered log costs at both Eden and Bega exceed the lower bound of the estimated mill door price range, indicating logs would be supplied at a cost to FC or the mill would not be attaining a targeted financial return;

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• Access to sawlogs from the Narooma resource may be necessary to achieve the economy of scale required for a reciprocating mill. This may require consideration of the allocation of sawlogs between the Blue Ridge Hardwoods mill and Boral’s Davis & Herbert mill; and

• To supply the upper end of the volume range for a reciprocating mill, supply is likely to be required from either East Gippsland or the other South Coast sub-regions.

Sawlog availability in the East Gippsland is estimated to be around 83,000 m3 pa from 2013/14. There will be strong competition for this resource from Victorian sawmills, as commitments already exist, and supply for a NSW facility may be difficult to secure. There is an additional 90,000 m3 pa of salvage logs available in East Gippsland from 2013/14 that is currently not committed under existing supply agreements. Much of this material is unlikely to be suitable for processing into appearance or structural timber products, but may provide opportunities in the log export market.

The extent that sawlog supply is required from outside the Eden region could potentially be decreased through a reduction to the rotation age for post-1970 regrowth forests to around 40 years. Wood flow modelling indicates sawlog volumes for the Eden region can be increased to reach a steady of state of 46,000 m3 pa by 2022 compared to a steady state of 75,000 m3 pa by 2042 based on the current wood flow modelling parameters. If supplemented with sawlogs from adjacent regions, this scenario could potentially provide sufficient volume for a single reciprocating sawmill operating at its optimal capacity.

This approach could potentially provide a number of economic benefits to FC including:

• Sawlog cash flows are bought forward by around 20 years. When the time value of money is considered, this would most likely result in a positive financial benefit to FC provided a satisfactory mill door price can be achieved for sawlogs. The analysis presented in Figure 6-2 indicates a mill door price of at least $70/m3 is required to provide a positive stumpage from the Eden and South Coast FMA’s as well as the East Gippsland region; and

• From a cash flow perspective, increasing sawlog revenue in the 20 years following the expiry of the WSA’s reduces the risk of operating at a net cash loss. Given the revenue from the large diameter sawlogs is not expected to be realised until 2042, there is an extended period where sawlog supply remain at current harvest levels. The cost associated with managing the Eden resource until 2042 has the potential to result in a negative cash flow for a sustained period.

Any decision to reduce the rotation age would require several important steps including: confirmation of log availability through the collection of field inventory data and an operational scale assessment of the sawing configuration required to efficiently process small sawlogs of the key commercial species.

Veneer: A veneer or plywood facility is likely to be technically capable of processing a fast growing, small diameter regrowth resource. However, as Figure 6-3 indicates supply to a veneer mill would potentially draw on both the sawlog and part of the pulpwood resource in the Eden and South Coast regions. Based on our understanding of the supply arrangements for this type of processing, it is estimated that up to 30% of the logs may be able to be supplied in short lengths of either 0.90m or around 1.35m which would be used to manufacture cross-band sheets. It is possible these shorter lengths may be able to be extracted from better quality pulp logs.

The remaining 70% resource input for a veneer mill would need to be supplied in longer lengths and would therefore need to be sourced from the sawlog portion of the available resource. For a veneer/plywood mill with an annual log input of 150,000 m3, equating to around 105,000 m3 of sawlog

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equivalent. As Figure 6-3 shows, resource availability would be a limiting factor to the development of a veneer mill in the region until the regrowth resource matures around 2037.

Our understanding of veneer log pricing is that a price gradient exists with significantly higher prices paid for logs longer than 5.4m with a sed in excess of 40cm. Based on the high proportion of small diameter sawlogs available from the Eden region over the period of interest, a veneer mill’s capacity to pay is affected.

Further analysis of aspects such as the impact of knots and other defects on veneer recovery, log straightness as well as log length and diameter distributions, would be required as part of a feasibility study for a veneer mill could be considered. One potential avenue to gain this insight is to utilise the log export market, where substantial operations in China already exist that specialise in peeling non-quota and very small diameter (8-12cm sed logs) hardwood logs. This may also provide the opportunity to assess how the logs perform using a range of different processing equipment.

The viability of secondary processing to produce plywood or LVL is a less likely prospect, where significantly larger volumes of resource would be required and domestic demand (particularly for a hardwood product) is less assured.

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Figure 6-3 Veneer log capacity to pay estimates by subregion

Delivered log cost vs capacity to pay - Eden Sawlog volume - Eden facility

Delivered log cost vs capacity to pay - Bega Sawlog volume - Bega facility

Source: FC

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Log exports Softwood log exports already occur from Eden and it is expected that minimal investment would be required to export hardwood logs provided access to the port and log handling infrastructure can be negotiated. Ongoing growth in demand in Asian markets combined with a reduction in resource availability from tropical markets suggests that further investigation into log export markets is timely. Hardwood log exports will still compete with exports from other Asian countries and Russia, and longer transport distances from Australia may impact on cost competitiveness. However there may be opportunities to promote the unique features of Australian hardwood timbers depending on end use applications.

Figure 6-4 shows the export log price range based on the bounds of the sensitivity analysis presented in Section 5.3. It highlights the high degree of variability inherent in a commodity exposed to currency fluctuations and shipping costs. Volume availability is based on the expected volume of salvage log. For East Gippsland this log grade is modelled explicitly. For the NSW data URS has applied a downgrade percentage of 13.75% to the large high quality sawlog volume as applied to the FC yield tables. In addition to the ultra-small sawlog volume an additional 10% of pulp log volume would need to be recovered as export sawlog to meet the target volume. These assumptions highlight the need for FC to undertake additional inventory to understand what the potential log export volume might be.

Figure 6-4 Log export capacity to pay estimates by subregion

Delivered log cost vs capacity to pay – Eden Salvage/ export log volume - Eden facility

Source: FC, URS

The data shows that log exports from Eden are viable within the mill door price range, but for Narooma and East Gippsland, there is a risk of negative stumpage at the low end of the price range. Supply from East Gippsland would require a policy change as log exports from the region are currently prohibited. The volume assumptions indicate that in order to maintain a target volume of 100,000 m3 pa (allowing ~10,000 m3 to be shipped every six weeks) additional supply would be

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required from East Gippsland. A lower volume is possible, but this would extend the timeframe between shipments which can lead to log aging and quality issues such as end splitting.

Summary It is envisaged that of the three most likely options, the Eden region would most likely support a single sawmill for processing regrowth sawlogs. This may require a more in-depth review of the resources available from the Narooma, Eden and East Gippsland regions as these areas have a similar species profile that could potentially be consolidated while remaining within an economic haulage distance of a processing facility. By reducing the rotation age sawlog availability could be bought forward but would produce on average smaller diameter sawlogs that may potentially be more difficult to process.

With most of the Eden forest resource being post-1970 regrowth, the potential to establish a log peeling operation in the region is limited as it would require the closure of the entire sawmilling sector on the South Coast and East Gippsland to meet its volume requirements. A veneer operation would have greater potential when the regrowth resource reaches a point where a steady supply of large diameter sawlogs becomes available. Based on a 50-60 year rotation this occurs around 2037.

Log exports can be viewed as an opportunity to diversify the market for unprocessed sawlog volume. It also can be implemented as part of a risk management strategy in the event that key customers leave the processing sector. Care needs to be taken in implementing a log export programme to ensure that quota grade sawlogs are provided to domestic processors. There is a risk with this strategy that any shortfall in quota sawlog volume may be perceived by FC’s customers and the community as being caused by the decision to undertake log exports.

The viability of these options depends on having a market for pulpwood arising from harvesting operations. Wood flow modelling undertaken as part of this assessment indicates the loss of pulpwood markets would materially affect sawlog availability.

6.2.2 Shortlist of pulpwood marketing options

LSL and OSL The opportunity to develop LSL/OSL is premised on better utilisation of the pulpwood resource (i.e. beyond woodchip export). The economic viability of an LSL/OSL facility will be dependent on obtaining feedstock resources at low cost. These products have not been introduced to the Australian market to any large extent thus far and the fact that there are currently limited imports of these products indicate that there may be significant marketing work required to establish demand for these products in Australia.

While these products appear to be experiencing good market penetration internationally, and provided they can compete with LVL in Australia and are accepted by the building industry as a useful product, there may be a good rationale for producing this product type.

No market data is available from which to determine capacity to pay.

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Bioenergy Bioenergy developments based on native forest biomass are currently impacted by the current policy situation. However, a recent policy announcement indicates that pulpwood and harvest residues from native forests will be reclassified as an eligible biomass source under the revised RET regulations.

As native forest based bioenergy cannot generate RECs, it would need to compete with other sources of energy production, such as coal. With more favourable policy support, the bioenergy industry could be a strong domestic alternative to exporting pulpwood as woodchips. In its absence the opportunity for local bioenergy operations in Eden remain highly niche or based on-site within timber processing operations.

The market for wood pellets is developing rapidly in Europe and North America and one Australian company has already ventured into supplying this market based on hardwood plantation resource. This operation proved unviable and wood pellet production based on forest residues remains challenging due to shipping costs and exchange rate risks. Development of domestic pellet markets may provide an alternative to export markets although there is no evidence to suggest this market will develop in the short term.

The domestic market is a more likely option supplying biomass feedstock to industrial users such as the Bega cheese factory. Capacity to pay for biomass is generally constrained by distance due to the low bulk density of harvest residues. As a consequence we would expect any bioenergy proponent would pay minimal stumpage for pulpwood. Our understanding of prices established for other bioenergy supply arrangements typically paid the grower less than $5/gmt stumpage within a specified haulage distance, for fibre where no alternative markets exist.

Woodchip exports Woodchip exports will remain an important market for pulpwood produced from the Eden region for the foreseeable future. The Chinese woodchip market is the most likely long-term market for woodchips from this resource. China currently pays significantly lower prices than Japan as buyers tend to be less concerned with fibre quality. However, as China’s pulp industry develops prices may rise as the country looks for increasing supplies of better quality fibre.

Figure 6-5 shows the delivery costs to Eden compared to the derived wharf gate price range for hardwood chip. The volume limit is based on the historic operating levels of the SEFE chip mill. The wood flow is based on a certain set of model parameters. Therefore the perceived volume shortfall is more of a market constraint than a port capacity issue. The impact of a lower volume would be an increase in unit costs for chip processing and handling as the equipment is being under-utilised.

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Figure 6-5 Delivered pulp log cost and volume by subregion

Delivered log cost vs capacity to pay Pulp log volume - Eden facility

Source: FC

The mill door price range highlights that a China chip supply scenario has a profound impact on the profitability of a woodchip export operation. The data also indicates that supply from outside the Eden region would be difficult to justify unless market conditions become more favourable.

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7

7Development of a Marketing Plan

This section presents the framework for a marketing plan for the Eden resource taking into account the information collected on the nature of the forest resources available and what processing options represent the most viable options for the region.

7.1 Refining resource data Information on the status of the forest resource is currently limited. As identified in Section 2, the forest inventory data currently does not describe the log type, quality, or size class distribution available from the regrowth forests. As such the collection of log quality data is an important first step to assist with a log marketing programme. A phased approach such as that described below provides one method of collecting key resource attributes:

1. Collect new Light Detection and Ranging (LiDAR) data and update the net harvest area available for timber production;

2. Update the classification of forest productivity using LiDAR and Geographic Information System (GIS) data to improve the resource description;

3. Undertake a pilot inventory programme using the LiDAR/ GIS productivity analysis to define the inventory strata. The stratum size should balance the need to achieve a minimum level of precision yet cover the largest possible area. Strata could be larger for early thinning operations and a single stratum may incorporate several compartments if they have similar resource characteristics (such as species mix, productivity etc);

4. Develop an inventory approach that aligns with the growth cycle/value of the forest. For younger stands sampling can be less intensive. The level of detail recorded should progressively increase as stands mature and increase in value. The list below shows the type of data that could be captured at each key stage of the growth cycle where an inventory should be undertaken: a. Pre T1 – stand stocking and basal area (BA); b. Post T1 – species, stocking, BA, height and a simple stem form/ selection code; c. Post T2 - species, stocking, BA, height and a simple stem description; and d. Late rotation/ pre harvest - species, stocking, BA, height and a detailed stem description.

5. There may also be benefits engaging with VicForests to better quantify regional resource quality and identify any opportunities for collaboration with inventory programmes to gain potential efficiencies.

Ideally these steps should be applied consistently across the whole resource. However, where resources are limited any investment in data collection should be weighted toward key production areas. The wood flows indicate that approximately 60% of the harvest volume from the Eden region will arise from the southern sub-regions. Therefore, these areas would represent a logical zone to focus the data collection process.

Inventory costs depend on the mix of sampling undertaken. Small bounded plots measuring stocking, diameter and height can cost ~$35/plot whereas large bounded pre harvest inventory plots can cost in excess of $100/plot. The cost of inventory is also sensitive to the amount of travel required with costs increasing as travel distance between plots increases.

Operations within the Eden resource are weighted toward thinning, therefore inventory costs should be at the lower end of the plot cost range. Based on a professional inventory crew cost of $850/two person crew/day (including travel) the cost would be $42/plot (based on 20 plots/day) to $85/plot (based on 10 plots/day). A 10 day programme for two crews would complete approximately

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200-400 plots. At a sampling intensity of 1 plot per 10ha or 15ha, this equates to a sample area of 2,000-6,000 ha for a cost of approximately $17,000.

The nature of the resource is also changing so FC should also consider collecting data to:

• Monitor internal defect levels, particularly from second thinning operations; and • Ongoing operational trials of alternative processing techniques for regrowth logs with a particular

emphasis on small diameter logs.

These trials would also provide FC with the opportunity to engage with industry to understand the changing nature of the forest resource.

7.2 Identifying interested parties The lead up to the initiation of the marketing plan should include investigations into those companies that may have an interest in acquiring log supply agreements. The most interest will be from those companies already established in Eden and further afield in NSW and Victoria who are existing customers. These companies have the advantage of knowing the resource and operating environment well, even though their access to capital may be more limited than other potential investors. Table 7-1 provides a summary of potential proponents according to their current role in the forest products industry and the likelihood that they would have an interest in the Eden log supply marketing process between 2018 and 2030.

Table 7-1 Structure of potential proponents for Eden marketing process

Proponent structure Example companies Likely interest in process

1. Existing customers Blue Ridge Hardwoods, SEFE High

2. Log exporters Pentarch, NZ log exporters (TPT, PFP)

High

3. Chip exporters Mitsui, Marubeni Medium-High

4. Active investors

a) Operating in the Australian hardwood industry Australian Sustainable Hardwoods, Auswest, Ta Ann

Medium

b) Operating in the broader wood products industry Dongwha, Koppers Low-Medium

5. Non-active investors

a) Operating in the Australian hardwood industry Hurford Hardwoods, Dormit Low-Medium

b) Operating in the broader wood products industry Hyne Timber, AKD, Tillings Low

c) International wood products processors not currently operating in Australia

RH Group, International Forest Products, Columbia Forest Products

Low-Medium

6. External parties* Goldman Sachs, Deutsche Bank, Rabo Bank,

Low-Medium

*-although external parties may not have a direct interest in investing in the Eden processing industry, there may be indirect benefits in engaging with these organisations which may help to play an intermediary role in introducing or assisting discussions with potential investors.

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As part of this project, URS contacted several companies identified as having a potential interest in investing in the Eden log supply. The companies contacted by URS include:

• Blue Ridge Hardwood – existing Eden sawlog customer; • Australian Sustainable Hardwoods (ASH) – hardwood processor based in NSW and Heyfield,

Victoria; • Auswest – mixed species processor based in Orbost, Victoria, and processing in Western

Australia; • Boral – largest hardwood processor in NSW including mixed species operations in Narooma,

southern NSW; • SEFE – existing woodchip exporter and FC customer based out of Port of Eden • Pentarch Forest Products – the incumbent softwood log export agent out of Eden who also exports

plantation eucalypt from Tasmania to China, and softwood log exports from a range of other Australian and New Zealand ports; and

• Pacific Forest Products (PFP) – A major New Zealand log exporter agent, coupled with experience in selling hardwood plantation logs to China.

The companies were contacted to ascertain whether there was preliminary interest in processing the Eden resource beyond 2018 and a desire to invest (or re-invest) in processing technologies that would suit the transitioning resource. The information sought from these companies and a summary of their responses is contained in Appendix D.

The general response from these companies was mixed. The most positive feedback was received from the two companies that currently process logs in the region. Blue Ridge Hardwoods expressed a strong desire to re-invest in the region post-2018 and to adapt its operation to the decreasing diameter of the logs harvested. Auswest also showed interest in processing the resource at their Orbost site and are currently considering investment in a small log line to process their existing East Gippsland supply which is going through a similar transition to the Eden resource.

Boral and ASH were less interested in the Eden resource. Boral had a clear preference for spotted gum and blackbutt and intend to focus on utilising this resource, ideally to the exclusion of other species. ASH commented that they would be interested in processing a tightly defined quota of silvertop ash logs if this were available in the right quality.

URS also discussed with Dongwha the prospect of utilising a linear mill to process hardwood sawlogs. The company’s new mill at Bombala is currently structured around processing relatively uniform softwood logs and Dongwha advised it does not intend to expand or supplement supply with hardwood logs. Dongwha felt it would be too disruptive to process softwood and hardwood logs at the existing site, therefore a hardwood linear mill would require a separate business case. Based on existing technology, Dongwha considered that the time required to dry hardwood sawn timber would make the efficient operation of a linear mill processing hardwood logs difficult.

In terms of log exports Pentarch and PFP expressed an interest in being involved with a potential log export programme. Both companies currently supply hardwood logs to the Chinese market and have existing networks that could be utilised for conducting log export trials. Pentarch was particularly positive about the prospect for peeling silvertop ash and felt the Meinan lathes that currently process plantation eucalypts would be well suited to peeling logs with a sed of 20-30cm. PFP was more circumspect and their experience is that with the market in its early development phase, the best prospect for getting hardwood logs to market is to supplement them with a supply of softwood logs. In terms of supplying semi-processed products, PFP considered the cost associated with sawing logs in Australia would not make supply competitive with sawn timber produced in China.

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The current market conditions are challenging for SEFE and the company is seeking to re-establish itself as a viable long-term business. We understand the company is currently working on a year-to-year basis. SEFE see the current market as being at a low point and expect market conditions to improve which would improve the viability of the business. This would require an increase in the average world CIF prices paid by the Chinese or ongoing sales into the Japanese market.

7.3 Development pathway Given the development in the harvest profile of the Eden resource, the marketing plan requires a flexible approach that recognises the changing nature of the resource between 2013 and 2042 and its flow-on changes in investment opportunities. By adding a temporal element to the marketing plan, shorter term marketing opportunities can be considered while the resource matures and transitions to a point where a more substantial investment can be considered.

While shorter term options are pursued, preparations can be made to the FC forest management and marketing systems to provide better assurances around the resource and its suitability for processing. URS has identified parts of the FC systems that should be more clearly defined for longer term marketing.

Figure 7-1 provides an illustration of how the changing nature of the resource influences the timeframes for engaging with potential investors as part of a longer term plan to market the Eden resource. Based on the market review and consultation with prospective investors, the options available from the end of WSA through to 2037 appear to be limited by resource constraints.

Discussion of the potential options available to FC are discussed in more detail in Sections 7.3.1 which encompassing the period from 2013 – 2030 and 7.3.2 which considers the marketing options available beyond 2030.

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Figure 7-1 Pathway showing key steps for the development of a marketing plan

Log type 2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

2038

2039

2040

2041

2042

2043

2044

Resource

Sawlogs

Sawmill reconfiguration

Industry rationalisation/ consolidation

Non quota sawlogs

Identify logexport vol

Pulp logs

Timeline

Existing WSA

Establish post-WSA supply contracts

Greenfields development

Greenfields implementation

Feas.study Implementation if log exports prove feasible

Transition to mature

regrowth

Ongoing review of potential expansion of domestic markets

Wood chip exports

Ongoing review of opportunities to supply domestic and export markets



Post-1970 regrowth forests - progressive growth toward maturity

Inv.data

EOI process

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7.3.1 Marketing plan (2013 – 2030) As discussed in Section 6, the sawlog volume available from 2013-2030 in the Eden region is limited under the base case scenario and will be undergoing change as the forest structure evolves under the current management regime. In the period before 2030, the limited resource may be perceived by investors as sub-optimal for immediate investment, depending on the type of activity they wish to pursue. The risks to FC of undertaking an extensive marketing plan during this interim period include not attracting sufficient investors to the opportunity and causing fatigue amongst potential investors if the marketing initiative is seen to be of only limited value.

However, a scenario analysis indicates that the rotation age could potentially be bought forward to provide sufficient sawlog volume to provide the scale necessary for a reciprocating mill suited to processing small diameter sawlogs. The availability and quality of this volume would need to be verified through the collection of inventory data to confirm species and sawlog size class distributions.

As such, it is likely to be in the interests of FC to pursue a less intensive and more targeted marketing campaign in the short term focusing resources on areas that show the greatest potential.

Sawlog marketing Existing sawmilling operations provide a valuable customer base and is likely to be the most engaged when considering sawlog supply beyond the existing WSA. Blue Ridge Hardwoods and Auswest both indicated they see a long term future in the region and are actively considering what investment could work in relation to the transitioning resource. Boral is less definitive on the future of its Narooma mill. To provide as much competitive tension to the process as possible the marketing of the resource should include as broader group as possible. Consideration of a wider supply catchment may also potentially provide the scale required for a processor (not necessarily an incumbent) to be more confident to invest in small log line.

In terms of sawlog supply beyond the WSA, there is a greater degree of uncertainty around the volume and quality of logs available from native forests in the region. As discussed in the previous section, this will require the capture of additional resource data that can be used as the basis for determining the level of interest in entering into a log supply agreement following the expiry of the WSA. Contract volumes need to reflect these uncertainties and should incorporate a buffer that provides FC with the capacity to amend its harvest profile as market conditions develop over time.

Any supply agreements will also need to take into account the additional investment that is likely to be required to process smaller diameter regrowth sawlogs. Based on similar mill upgrades the capital investment requirement for a brownfields expansion is estimated to be in the vicinity of $3-5 million. An investment by more than one mill is not out of the question as demonstrated by the fact that Auswest already processes sawn timber produced by Blue Ridge Hardwoods. A greenfields development would require a substantially higher level of capital investment.

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FC should also take further steps to assess the feasibility of undertaking a log export programme. The focus for any log export operation should be directed toward non-quota logs such as salvage logs or small diameter sawlogs that are currently not preferred by existing processors. Some of the benefits to FC of a log export operation include:

• Capacity to implement a programme immediately without having to wait for the expiry of the WSA; • Diversification away from a reliance on chip exports; • Potentially provides a higher return for lower quality logs compared to hardwood chip; • Improved stem utilisation; and • Provides the capacity to investigate a broader range of end uses (such as plywood) that would not

be possible in a domestic operation.

With softwood log exports well established through Eden, minimal investment is likely to be required to include hardwood logs. The development of a log export operation would be an incremental process with trial shipments necessary to establish end markets. The steps required to gain access to the port and ship loading facilities should also be confirmed.

There may also be scope to include salvage grade logs from East Gippsland as part of the process to provide economies of scale, which is particularly important for shipping bulk materials such as logs. However, this would require a policy change as exporting logs sourced from native forests in Victoria is currently prohibited.

Most log exporting agents undertake sales on a commission basis and generally do not seek to enter into long-term contracts. The exporter’s proposed fee structure could be part of the marketing process and allow participants to determine the most appropriate approach. Managing cash flow will also be a key consideration as FC may be required to pay for port and shipping costs if logs are sold on a commission basis.

Based on our understanding of the establishment of other greenfield hardwood log export operations, a period of 12-24 months is required to establish a regular log export operation.

From a marketing perspective an Expression of Interest (EOI) process would be the most effective method to identify the level of interest in developing the sawlog market following the expiry of the WSA’s and potentially sooner for a log export operation. An EOI process provides an approach that allows for the application of competitive tension among existing processors as well as a mechanism for new entrants to consider the investment opportunity.

An outline of the steps for undertaking a log marketing campaign or EOI process is presented in Section 7.4. The level of detail and complexity of the marketing process should be tailored to suit the type of consultation/ negotiation required.

Pulp log marketing The woodchip export market currently represents the only major pulpwood market available in the Eden region. Whilst the current market conditions are challenging there is an expectation that China’s demand for wood fibre will continue to expand and their future wood fibre needs will help maintain and may potentially improve prices if supply from key southeast Asian countries remain at current levels.

At present there are no obvious alternative markets for pulpwood other than diverting some volume toward log exports. Therefore there is no immediate rationale for marketing pulpwood resources from the region. However, should SEFE seek to exit the market then they are likely to sell their chip

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processing and loading facilities in Eden and this may present an opportunity to attract a new entrant to the market.

Given the risks currently associated with the sale of pulpwood FC should actively monitor developments in markets that may provide alternatives to the wood chip market. Key alternatives potentially include bioenergy and the development of composite products such as Lignor’s proposed engineered strand lumber using pulpwood.

7.3.2 Marketing beyond 2030 Beyond 2030, FC will most likely have a more substantial resource on which to base investment. With this in mind, 5-7 years before the time period the resource is expected to mature a more formal comprehensive marketing plan can be undertaken to engage with potential processors. The marketing plan should be focussed on generating awareness of the resource profile and the ongoing stability at that point in terms of volume and grade outturn. Through this process greenfield investment can be targeted as the forest resource should provide a strong basis for investment.

7.4 Marketing plan format A formal marketing process for the sawlog resource should informed by FC’s preferred range of processing options and industry structure. These options form the basis for a marketing process that is targeted toward particular companies. Depending on the preferences and the length of time before the marketing process is implemented, they could also be tested further by FC staff internally and possibly externally through engagement with stakeholders such as other government organisations and the NSW processing industry as appropriate.

The finalised industry profile can be used as the basis for developing a marketing strategy and a targeted approach to engaging with potential new customers. The profile can also be used at the end of the process as a reference point for the actual outcome of the marketing process against expectations.

Figure 7-2 provides an outline of a typical log supply marketing process that could be adopted by FC for engaging with the processing industry. The marketing process is presented in three stages as follows:

• Information provision – the preparation and provision to interested parties of information pertinent for considering engaging with FC in a future supply agreement and for considering associated processing and log handling investments;

• Proposal preparation and evaluation – the preparation of indicative and final proposals by proponents for engaging with FC in log supply agreements and for FC to consider these agreements and undertake a robust analysis of their individual and collective merits; and

• Agreement and contracting – coordinating the negotiation and agreement of supply agreements between proponents and FC.

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Figure 7-2 Marketing plan process

Agreement of industry profile and target audience

Final evaluation

7. Negotiations

Consideration of proposal parameters

8. Signing of HOUs

Signing of confidentiality agreements

Support to interested parties

1. Development of market information

2. Invitation for expression of interest

3. Release of market information

4. Receipt of indicative proposals

Initial evaluation and shortlisting

5. Vendor due diligence

6. Receipt of final proposals

9. Signing of Agreements

Information provision(2-3 months)

Proposal preparation and evaluation(~9 months)

Agreement and contracting(~6 months) Forestry Corporation

process

External project process

Key:

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In order for interested parties to be introduced to the Eden marketing process and to have available the information to make an informed decision on the opportunity there must be clear series of steps for structuring information on the log supply and engaging with potential proponents.

One method for formally engaging with proponents is for an EOI process is run that is targeted appropriately and captures all parties that are likely to have an interest in the resource. However, if the proponents are already familiar with the resource then an EOI process may not be necessary and FC could engage directly with the identified parties.

The formal market information that is delivered to proponents could be provided in a number of forms. An Information Memorandum (IM) is one common means of delivering investment information to interested parties.

An IM will contain explicit guidelines regarding the information that is required from proponents intending to make a final bid, such as evidence of financial creditworthiness, extent of interest in range of species offered, likelihood of pursuing a joint bid, and likelihood of developing a greenfield site.

Interested proponents will also be asked to provide details of the internal approvals and processes that they will be required to satisfy prior to making a final bid. This would include company approvals for the investment, financing approval requirements, technical studies, and environmental planning and approval requirements. The IM will also contain information about the administrative processes that will be followed, including timing of key deliverables in the initial phase of the process.

7.5 Framework for preferred contract terms As part of the marketing plan, FC has the opportunity to specify its preferred framework for structuring future log supply agreements. This will help to guide proponents in their response to the log supply opportunity. It will also ensure that each proposal is grounded within FC’s preferred terms.

Information that is prepared for potential investors should provide an indication of FC’s high level preferences for supply agreement terms and conditions. Table 7-2 outlines a range of contract terms with current industry standard preferred settings alongside.

Table 7-2 Typical preferred industry contract terms for domestic processors

Contract term Preferred setting

Pricing point and price review process

• Pricing point may be stumpage or mill door • Five yearly price review • Quarterly price indexation comprising market, inflation and cost indicators

Take or pay and performance clauses

• 80% take or pay • If the customer fails to take more than 50% in any one year, FC has the right

to re-assign the volume

Contract duration • Subject to industry development objectives, 10 yearly terms are normal, 15-20 years can be considered for special circumstances

• Longer term contracts may warrant an annual resource access fee recognising the security value that a longer term agreement provides

Level of security • A bank guarantee, debtor insurance and reduced credit periods may be requested commensurate with the size of the contract and perceived credit risk

After release and distribution of the IM, proponents should be encouraged to pursue investigations further and request any further information they might require. FC will need to agree boundaries as to the extent of information they are prepared to provide proponents, and to facilitate a process that

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ensures probity and equity amongst proponents. This may mean providing a central information storage area or data room where the results of all information requests are made available to proponents.

The determinant of the success of the log supply marketing process will be the number and significance of the proposals that are received for the resource and the conversion of the best of these proposals into stable supply agreements that can be supplied on terms that are preferred by FC. Important steps in ensuring that this type of outcome can be achieved are:

• Targeted, professional introductions to companies of interest • Ongoing, positive responses to enquiries for further information • Regular communications with strong clear marketing messages • Maintenance of a process that is perceived to be fair to all proponents and key stakeholders

As part of coordinating a log supply marketing process, it will be important for FC to demonstrate the process is highly commercial and competitive. To this end it may be worthwhile for FC to install an intermediary to coordinate the process, in order for there to be no direct communications between FC and the proponents and no perceived opportunity for companies to garner any influence through the process.

7.6 Evaluation process Once FC has invited interested parties to submit a proposal following the information provision process, it will be important for there to be a clear and effective evaluation process in place to determine the merits of each proposal individually and collectively in relation to FC’s organisational and business objectives.

Each proposal should be evaluated according to set criteria that are standardised and implemented evenly across proposals. It is recommended that these criteria are reasonably transparent to proponents. The setting of the criteria FC determining which objectives are most important for the process and what the best range of measures are for each.

At a broad level, the development of evaluation criteria should be guided by two key value objectives:

• Financial returns – focussed on returns to FC and informed by financial, market and other risks • Economic benefit – focussed on contribution of proponents to the regional economy through

employment and expenditure on direct and indirect services, informed by socio-economic risks

Other factors may also be relevant to evaluating the merits of proposals such as stakeholder perceptions of the operation, the level of innovativeness and whether existing businesses will be displaced by a new operation. shows an example of criteria that FC could consider using as the basis for evaluating proposals. The list is not exhaustive and further internal reviews should be conducted before the selection of criteria is finalised.

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Table 7-3 Example criteria for FC evaluation process

Criteria

Financial returns

• Expected stumpage price relative to other like-proposals

• Forms part of strongest scenario in independent valuation

• Supply chain synergies with other customers

• Importance of operation in FC value chain

Perceived project risk

• Payment risk – payment history, demonstrated sufficient cashflow

• Market risk – certainty of market assumptions used

• Business experience of project team

Broader economic benefit

• Level of domestic value adding relative to other proposals

• Level of employment relative to other proposals

• Contribution to local/regional economy relative to other proposals

Other non-business factors

• History of stakeholder interaction

Socio-economic risks

• Likely displacement of existing operation

• Environmental concerns

• Other community concerns

Other optional criteria

• Level of innovativeness

• Environmental risks

To ensure that the right information is provided in proposals, information requirements should be given to proponents for use in proposal preparation. Table 7-4 provides an outline of necessary information to assess the above selection criteria. Some information may only be required from companies that are not current customers, for instance where there is no pre-existing knowledge on the financial background and payment history of a company.

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Table 7-4 Outline of information requirements

Criteria Existing customers

New entrants

Proposed operations

Location

Description of operation and processing technology

Level of employment

Resource requirements

Log volume by grade and species mix

Period at which uptake commences

Identification of any volume ramp up period

Production plans

Identity of products to be produced

Location and identity of target markets

Long term production/marketing strategy

Planned relationships with other regional processors

Extent of investigations already undertaken

Company details

Company history in the forest products industry

Demonstration of financial capacity to pay

List of company assets and other operations

Identity and experience of management team

The evaluation process effectively acts as the gateway to negotiations, as proposals are shortlisted based on their merits. Depending on the volume of proposals received some proposals maybe rejected at the indicative proposal stage. The steps in the evaluation process are:

1. Receive indicative proposals; 2. Initial review of proposals to check that individual resource requests can be feasibly supplied (e.g.

total proposed volume is not in excess of FC’s available woodflow, species requested are consistent with available species etc);

3. Separate into customer and non-customer streams for evaluation; 4. Check sufficient information has been provided and if not, return to proponent for amendment; 5. Obtain creditworthiness checks; 6. Undertake evaluation of indicative proposals responding to finalised criteria; 7. Shortlist and notify proponents to prepare final proposals; 8. Undertake evaluation of final proposals responding to finalised criteria; and 9. Notify selected proponents of entry to negotiation stage.

The above process does not capture the detail of each step – ideally, a process document should be developed to inform FC staff of relevant roles and procedures and in the protocols for communicating with proponents.

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8

8References

ABARES (2011) Energy in Australia. Report prepared by the Australian Bureau of Agricultural and Resource Economics, Canberra for the Commonwealth Department of Resources, Energy and Tourism.

ABARES (2013) Australian Forest and Wood Products Statistics – September & December quarters 2012. Published by the Australian Bureau of Agricultural and Resource Economics, Canberra.

ABS (2012) 8750.0 - Dwelling Unit Commencements, Preliminary, Jun 2012. Quarterly series published by the Australian Bureau of Statistics, Canberra.

ABS (2012b) 8752.0 – Building Activity, Australia. December 2011. Monthly series published by the Australian Bureau of Statistics, Canberra.

ABS (2008) Manufacturing Industry 2006/07. Annual series published (no discontinued) by the Australian Bureau of Statistics, Canberra

Bootle, K (2005) Wood in Australia: types, properties and uses. Second edition. McGraw-Hill, Sydney.

CEC (2008) Australian Bioenergy Roadmap. Published by the Clean Energy Council of Australia.

Coutts, R. et al. (1998) Evaluation of East Gippsland Hardwoods for MDF Production. Confidential Client Report No. 350. CSIRO Forestry and Forest Products

Cruz M. (2007) Effect of surface treatment on the bondability of pine and eucalypt with UF resins. Proceedings of the 5th COST E34 international workshop. Bled, Solvakia

De Fégely, R. (2004) Sawing Regrowth and Plantation Hardwoods with Particular Reference to Plantation Hardwoods. Part A Literature Review. Forest and Wood Products Research and Development Corporation Report PN02.1308. FWPRDC, Melbourne.

Dunn (2011) Australian Outdoor Timber and Infrastructure Market. Project Number PRA213-1011, prepared for the Forest & Wood Products Australia

Enecon (2007) Bioenergy in the Avon. Study report prepared for AVONGRO. SEDO Project No. 588

FAOSTAT (2013). Online statistical database of the Food and Agricultural Organisation of the United Nations. Online - http://faostat.fao.org/default.aspx.

FNSW (2011) Forests NSW Annual Report 2010/11. NSW Department of Primary Industries

Freischmidt, G. and Blakemore, P. (2009) Potential applications of the native hardwood resource available to VicForests as wood composite products. Prepared by CSIRO Material Science and Engineering for VicForests.

Global Trade Atlas (2013) Online database provided by Global Trade Information Service. Available at: http://www.gtis.com/gta/default.cfm?msg=1

Innes, T., Armstrong, M. and Siemon, G. (2005) The impact of harvesting age/tree size on sawing, drying and solid wood properties of key regrowth eucalypt species. Project No. PN03.1316, Forest and Wood Products Research and Development Corporation, Melbourne.

International Energy Agency (IEA) (2007) IEA Energy Technology Essentials - Biofuel Production. A publication of the International Energy Agency.

http://faostat.fao.org/default.aspx

http://www.gtis.com/gta/default.cfm?msg=1

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International Energy Agency (IEA) (2011) Biofuels Roadmap. Publication of the International Energy Agency, Geneva.

McCombe, B. et al. (1996) The Production of Laminated Veneer Lumber (LVL) from Victorian Residue Logs. CSIRO Forestry and Forest Products. Client Report (No. 196).

McCombe, B. and Collins, P. (1993) Rotary veneer products from Tasmanian regrowth eucalypts. CSIRO, Forestry and Forest Products. Report No FP305.

McCombe, B. (1992) Strength tests on LVL manufactured from Tasmanian regrowth eucalypts. CSIRO, Forestry and Forest Products. Report No FP212.

NREL (2011) Process design and economics for biochemical conversion of lignocellulosic biomass to ethanol. National Renewable Energy Laboratory Technical Report NREL/TP-5100-47764

Olsen, G. et al. (2004) Search project. Western Australian Department of Conservation and Land Management.

Ozarska. B (1999) A review of the utilisation of hardwoods for LVL. Wood Science and Technology 33 pp 341-351

Regional Development Victoria (2012) Fuelled for Growth – Investing in Victoria’s biofuels and bioenergy industries.

Stucley, C. Schuck, S, Sims, R. Bland, J., Marino B. Borowitzka, M. Abadi, A. Bartle, J. Giles R. and Thomas Q. (2012) Bioenergy in Australia – Status and opportunities. Report prepared for Bioenergy Australia

URS (2013) Timber Market Survey. Quarterly report prepared by URS Forestry Group for Forest and Wood Products Australia and other clients.

VicForests (2012) VicForests’ 2012 Resource Outlook. VicForests.

Washusen, R. (2011) Processing plantation-grown Eucalyptus globulus and E. nitens for solid-wood products— Is it viable? Technical Report 209. . Cooperative Research Centre for Forestry, Tasmania

Washusen, R.,Harwood, C. (2011) Processing plantation-grown eucalypt sawlogs: modelling costs and log prices for mills optimised for the Tasmanian plantation resource. CRC for Forestry Technical Report 211. Cooperative Research Centre for Forestry, Tasmania.

Washusen, R., Innes, T. (2008) Processing Plantation Eucalypts for High-Value Timber (92-109 pp.) in Plantation Eucalypts for High-Value Timber: Enhancing investment through research and development. Rural Industries Research and Development Corporation, ACT, Australia.

Washusen, R., Morrow, A., Linehan, M,. Bojadzic, M. Ngo Dung and Tuan, D. (2007a) The effect of thinning on wood quality and solid wood product recovery of regrowth forests: 1. E. fastigata from southern New South Wales. Ensis Client report no. 1770 for Forests and Wood Products Australia PN06.3015, Melbourne

Washusen, R., Morrow, A., Wardlaw, T., Ngo, D. (2007b) The effect of thinning on wood quality and solid wood product recovery of regrowth forests: E. regnans from central highlands. Forest and Wood Products Australia Project No: PN06.3015. Melbourne

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Wahusen, R., Reeves, K., Higston, R., Davis, S., Menz, D., Morrow, A. (2004) Processing pruned and unpruned Eucalyptus globulus managed for sawlog production to produce high value products. Forest and Wood Products Research and Development Corporation Project No. PN03.1315 FWPRDC, Melbourne.

Wood Solutions (2013) Use of website www.woodsolutions.com.au

WPV (in press) Shift of Victorian Hardwood Production from Structural Products F17+ to Higher Value Appearance Grade Products. Report prepared by TPC Solutions Pty Limited for Wood Products Victoria Pty Limited.

Zbonaka, A., Bailleres, H., McGavin, R. & Harding, K. (2012) Processing small diameter logs from sub-tropical species. Paper presented to the Australian Forest Growers Conference, Gympie. Queensland Department of Agriculture, Fisheries and Forestry, Queensland

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9

9Limitations

URS Australia Pty Ltd (URS) has prepared this report in accordance with the usual care and thoroughness of the consulting profession for the use of Forestry Corporation of New South Wales and only those third parties who have been authorised in writing by URS to rely on this Report.

It is based on generally accepted practices and standards at the time it was prepared. No other warranty, expressed or implied, is made as to the professional advice included in this Report.

It is prepared in accordance with the scope of work and for the purpose outlined in the contract dated 14 March 2013.

Where this Report indicates that information has been provided to URS by third parties, URS has made no independent verification of this information except as expressly stated in the Report. URS assumes no liability for any inaccuracies in or omissions to that information.

This Report was prepared between 13 February 2013 and 9 December 2013 and is based on the conditions encountered and information reviewed at the time of preparation. URS disclaims responsibility for any changes that may have occurred after this time.

This Report should be read in full. No responsibility is accepted for use of any part of this report in any other context or for any other purpose or by third parties. This Report does not purport to give legal advice. Legal advice can only be given by qualified legal practitioners.

Except as required by law, no third party may use or rely on this Report unless otherwise agreed by URS in writing. Where such agreement is provided, URS will provide a letter of reliance to the agreed third party in the form required by URS.

To the extent permitted by law, URS expressly disclaims and excludes liability for any loss, damage, cost or expenses suffered by any third party relating to or resulting from the use of, or reliance on, any information contained in this Report. URS does not admit that any action, liability or claim may exist or be available to any third party.

Except as specifically stated in this section, URS does not authorise the use of this Report by any third party.

It is the responsibility of third parties to independently make inquiries or seek advice in relation to their particular requirements and proposed use of the site.

Any estimates of potential costs which have been provided are presented as estimates only as at the date of the Report. Any cost estimates that have been provided may therefore vary from actual costs at the time of expenditure.

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A

Appendix A Terms of Reference

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B

Appendix B Review of FC resource modelling

Reliable projections of resource wood flows are an important requirement for attracting any new processing investment. This section outlines the result from URS’s review of FC’s inventory and strategic planning systems. A review of FC operational planning and the biometric functions used to predict growth and yield was beyond the scope of this exercise.

Our analysis focuses on the rigour of the data available for the uncommitted volumes from the Eden FMA. We also consider the system used to project harvest volumes from the South Coast and Tumbarumba FMA’s based on the findings from our review of the same system used to project wood flows from the North Coast native forest resource.

B.1 Forest information system overview FC NSW has two strategic planning systems for native forests available for timber production in southern NSW:

• Reden – which is used solely for the Eden FMA; and • Forest Resource and Management Evaluation System (FRAMES) – applies to forests in the South

Coast and Tumut/ Tumbarumba FMA’s.

These systems provide the yield estimates that are used to derive regional wood flows. This section provides a brief overview of each planning system and our analysis of the rigour behind the assumptions that underpin the yield tables and subsequent wood flows derived using these systems. Our analysis was undertaken at a high level and we have not tested the underlying data for accuracy.

REDEN The Reden planning system was developed in 1997 specifically for the regrowth forests in the Eden FMA. Insufficient time was available to complete a full strategic inventory during the CRA process therefore separate Eden-specific projects were developed with the expectation that a revised and externally validated wood resources database, plus improved associated models, would provide a reasonable foundation for estimates of harvestable log volumes and sustained yield (Eden Forest Resource and Management Evaluation System Report 1998).

Yield estimates for the mature, multi-age forests (MAF) are not represented by the Reden system. Given harvesting in these forests will largely be completed by the end of the existing wood supply agreements (WSA) URS has not reviewed FC’s yield derivation process for this forest type. Regeneration following harvesting in MAF is incorporated in the regrowth yield estimates.

The regrowth forests in the Eden FMA are in a development phase with much of the post-WSA area established after 1970. As a consequence future growth and silviculture assumptions are heavily reliant on biometric models and the proposed silviculture management. Limited data is available from older forests to support the expected outcomes from FC’s proposed forest management.

Historic inventory data is based on a mixture of bounded and unbounded temporary plots and were originally established to assist with operational planning. The distribution of plots is concentrated in the south east of the region where the bulk of the post-1970 regrowth is located following major fires between 1980 and 1983. The plots were established primarily to estimate pulp volume available from first thinning operations.

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Sampling is undertaken at a coupe level with a minimum of 10 plots required per coupe. Plot location is determined either using a random plot generator or a grid system. Basic attributes such as species, tree type (regrowth, mature or unmerchantable species), diameter and height are assessed. No data is captured to assess characteristics such as stem form or the presence of defects.

Tree height data is used to calculate the site index (tree height at age 20) which in turn is used as part of the process to stratify the forests into three productivity strata. Site quality is the basis for the regrowth yield tables and is mapped across estate based on an assessment of previous harvest yield, plot data, forest type and remote sensed imagery.

Reden uses a subset of the plots deemed in 2008 to be representative of the average site quality in the three productivity strata to calculate the regrowth yield tables. The yield tables are based on a range of biometric functions. Tree volume and taper functions were developed by Dr Hiquan Bi in 1994 and revised until early 2000’s. Growth models were added into Reden in 2003 by Dr Bi with the thinning response model updated in 2005. The volume and taper functions and growth models are based on data from 149 Permanent Growth Plot (PGP). As with the inventory plots URS understands the location of PGPs was biased toward the south east of the Eden region.

The Reden calculates total sawlog and pulp log volume over time and assumed the entire volume to be available for harvest. In order to estimate merchantable volume a log loss and pulp loss factor is applied to total volume. The log loss factor takes into account losses relating to:

• Stem breakage, internal and external stem defects; • Measurement error; • Growth error where a coupe may have more than one origin date; • The regulatory requirement to retain at least 15 mature trees/ha; and • Leakage from sawlog being downgraded to pulp.

The pulp loss factor accounts for pulp volume that is lost from the system as waste.

The factors are based on results from harvesting in 1950’s regrowth stands where actual harvest volumes were compared to predicted harvest volumes at a compartment level. This was a relatively small study involving four compartments, yielding approximately 8,000 m3 of sawlogs and 20,000 t of pulp logs.

The quantity of salvage logs is not identified by Reden. Harvesting of four regrowth compartments located on the tablelands identified the quantity of salvage logs to be equivalent to 9% of the large sawlog volume. However there is likely to be a proportion of salvage logs that were redirected as pulp from these operations. FC estimates the actual proportion of salvage log volume to be equivalent to 25% of the large sawlog volume.

Harvest volumes for thinning operations are calculated using a probability of removal function which predicts the probability of a tree being removed from below during a harvest event. At the end of the rotation, all remaining regrowth (other than that required to maintain an over storey) is assumed to be harvested.

The resulting yield tables are then entered into an estate model which determines the timing of harvesting and the expected wood flows after taking into account a range of constraints.

System support for Reden has declined over the years and FC is planning to transfer Eden’s resource information from Reden system into FRAMES.

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FRAMES The FRAMES strategic planning system was developed in 1996 under the guidance of the Technical Committee of the Resource and Conservation Assessment Council. FRAMES is a collection of applications that have been developed both by FC and external providers to enable the user to model harvest volumes and changes to standing volume over time based on a range of forest management assumptions. The key input parameters to the FRAMES model are summarised in Table B-1.

Table B-1 Summary of key model inputs to the FRAMES modelling system

FRAMES input Description

Net harvest area All area data is captured spatially in a GIS. Various adjustments are made to account for areas considered unlikely to be harvested because of physical, regulatory or ecological constraints.

Strategic inventory This is an ongoing estate wide programme comprising approximately 1,900 plots that captures the condition of the forest over time.

Growth and yield simulation Permanent growth plots have been established since the late 1970s (Nicholson 1999) to monitor forest growth over time. This data is combined with the inventory and other biometric data to predict standing volume and the yield of logs under a range of alternative management strategies.

Yield scheduling Integrates the net harvestable area and predicted yields under alternative management strategies to determine future wood supply forecasts. The estate model utilises linear programming algorithms to meet specified objectives within the parameters of a series of user-defined constraints.

Source: FC

The output from FRAMES are a series of yield tables that are used as an input to the estate model which calculates wood flow by key species and generic log grade which is presented in multi-year (typically four or five years) planning periods over a 100 year modelling horizon.

B.1.1 Results of the 2009 Auditor General performance audit Both resource planning systems have been reviewed internally and externally a number of times since they were originally developed. In April 2009 the Auditor General of NSW published the results from its performance audit of FC (then Forests NSW) operations. The audit covered timber production from all native forests in NSW, including the Eden, South Coast and Tumut/Tumbarumba FMA’s. Some of the key findings from the audit that relate to the derivation of wood flow forecasts include:

• While FC uses an industry accepted process to develop its yield estimates, a review of yield estimates for Eden (due 2004) and the South Coast, Tumut (due 2006) FMA’s were well overdue;

• There are an adequate number of inventory plots to estimate the expected outturn from the forests. However, more effort is required to remeasure plots more regularly to capture changes to the forest;

• FC needs to review the parameters it uses to adjust harvest areas for unknown factors such as threatened species;

• FC does not routinely compare harvesting results to its yield estimates. Despite operational difficulties in undertaking such an analysis the AG recommended this step be undertaken.

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Since the performance audit was completed FC has made a number of revisions to resource systems for Eden (REDEN) and South Coast and Tumbarumba (FRAMES). A summary of these developments is presented in Table B-2.

Table B-2 Summary of improvements to FC’s forest information systems

Input Eden South Coast / Tumbarumba

Net harvest area • Harvest exclusions managed as a standard GIS module using current up to date layers

• Harvest events now captured spatially and details recorded in a standard event record management system

• FC developed a Net Harvest Area Net Harvest Area Modifier developed resulting in a reduction of 26% across the Eden FMA*. Published 2012

• A review of the Strike Rate Modifier (2011) showed it required <1% of area. Habitat for four key endangered species managed through area based exclusions;

• Site Quality remapped using regrowth site index, harvest volumes and remote sensing imagery.

• Harvest exclusions managed as a standard GIS module using current up to date layers

• Harvest events now captured spatially and details recorded in a standard event record management system

• Net Harvest Area Modifier reviewed resulting in a 27% reduction. Published 2012

• Review of Strike Rate Modifier showed it required <1% of area.

Strategic inventory • Conversion of plot data to YTGen; • Conversion of plot data to YTGen;

Growth and yield simulation

• No system change since AG report;

• Regional yield forecasts updated in 2012

• No system change since AG report;

• Yield forecasts updated in 2008 (South Coast) and 2011 (Tumbarumba)

Yield reconciliation • Not specifically undertaken as bulk of the volume arises from thinning operations

• Completed and published in 2012;

* FC advise that area not available for timber production was previously accounted for in the yield estimates rather than as a

specific adjustment to account for area loss.

Source: FC

The following refinements were made to the Eden FMA wood flow model as part of this project:

• Species outturn incorporated as part of the model outputs. Previously log outturn was presented solely by log grade;

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• Delivery costs have been incorporated into the wood flow model to allow consideration of delivered log costs;

• Expanded log product definitions to incorporate E1 and E2 grade pulp logs as well as the salvage log grade;

• Looked at variations to the Reden yield table parameters to identify potential volumes of ultra small sawlogs (with a sedub of 18 cm).

A key limitation associated with these refinements is that they are all based on existing resource data and the results have not been verified. Some of the assumptions require field confirmation.

B.1.2 URS comments This section provides a summary of our assessment of the FC resource planning systems. Comments are generally high level observations based on discussions with FC staff and an assessment of the data provided.

URS has not specifically reviewed the FRAMES system for this exercise as we undertook an in-depth review of FRAMES for wood flows from the North Coast region. Our recommendations from that process are included in Section B1.3.

Area FC has a well-structured process to identify the area available for timber production. Exclusions for unmapped and unknown features are accounted for though the application of the Net Harvest Area Modifier (NHAM). For the Eden, South Coast and Tumut FMA’s the NHAM was recently updated through a comprehensive aerial photo interpretation process over a sample of coupes.

With regard to the identification of slope and other topographic features this process is less precise compared to tools such as LiDAR that are now available. URS understands FC is in the process of sourcing LiDAR data for the Eden FMA. Based on the results from FC’s successful implementation of LiDAR on the North Coast, URS expects a material reduction in the uncertainty associated with the application of the NHAM.

Following the Auditor General’s performance review recommendation FC reviewed the application of the strike rate modifier to account for area exclusions due to the presence of endangered species. In the Eden FMA area based exclusions were developed for four endangered mammalian species present in the region. After accounting for these exclusions, the strike rate modifier for the Eden and surrounding FMA’s was less than 1% of the net harvest area. Given the uncertainty associated with other key assumptions the strike rate modifier was not applied to the area available for timber production.

Conclusion

As the current NHAM for Eden and other adjacent FMA’s is currently based on a limited sample subject to manual interpretation, there is a greater uncertainty in the area available for timber production compared to FMA’s such as the North Coast.

Inventory Historically inventory within the Eden FMA has been collected on an ad-hoc basis using a number of different sampling methodologies. Plots are classified as active or inactive. Plots become inactive when harvesting of a coupe is completed leaving only the over-storey, or is extensively damaged by

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fire. FC provided data on the distribution of its active inventory plots. URS has relied on this data and has not investigated the underlying measurement data as this is beyond the scope of work.

The bulk of the regrowth forest the main south east production region was established following major fires between 1980 and 1983. Many of these stands had extensive regeneration with very high stocking. The purpose of the inventory at this time was twofold:

• to assist in identifying the heavily stocked regrowth stands that most urgently required thinning; and • allow the operational planners to estimate the volume of pulpwood potentially available from these

coupes and prepare a harvest schedule.

As Figure B-1 shows there was a significant inventory programme undertaken as part of the programme leading up to and immediately after the establishment of the RFA when thinning the 1980-83 regrowth was a priority. It also shows that few plots have been measured since 2004 with no new inventory undertaken since 2008 when funding from CRA/RFA process finished.

Figure B-1 Measurement year of active plots in the Reden system

Source: FC

A key limitation of the inventory data is the lack of information collected on the coupes following thinning. Since 2005 approximately 1.9 million m3 has been removed from the Eden FMA. However, only a small number of plots have been measured following thinning.

URS also investigated the potential uncertainty associated with the standing volume estimates. Typically, the uncertainty associated with inventory data is expressed as a confidence interval (typically +/- 95% confidence) around the mean. As URS has not reviewed the detailed measurement data which can be used to determine the confidence interval, we used sampling intensity as a proxy for the level of confidence.

In general terms the greater the plot frequency the lower the degree of uncertainty is in the inventory results. Table B-2 summarises the number of plots per coupe. It shows that nearly half of the coupes have less than 10 plots. This is generally insufficient to provide statistically robust results for yield modelling purposes. However, it may provide adequate data for planning purposes. Small coupe size may also have an impact on these results.

In URS’s experience, a minimum of 20 plots is required to generate statistically robust results. Approximately one third of the coupes with active plots achieve this sort of sampling intensity.

0

200

400

600

800

1000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2008

Num

ber o

f plo

ts (n

)

Year of measurement

Thinned Unthinned

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Table B-3 Distribution of inventory sampling intensity per coupe

No. plots per coupe Thinned Unthinned Total

Less than 10 18 78 96

10 - 20 plots 7 67 74

20 - 30 plots 3 37 40

More than 30 3 36 39

Total 31 218 249

Source: FC

URS has not investigated the impact of aggregating coupes with similar characteristics into larger strata. This could potentially reduce the level of uncertainty, but would limit the capacity to identify localised variations in the resource.

As part of the ongoing improvement to its yield systems FC is currently transferring its active plot measurement data to YTGen. Whilst many of the plots were unbounded basal area sweeps, stem diameter and species was collected. This will allow further analysis of stem diameter distributions and log outturn. However, the value of the data is limited as there was no assessment of stem defects which is also important to assess value recovery.

Conclusion

Inventory data provides an important foundation to any yield regulation system. A lack of inventory data means growth and yield assumptions become difficult to quantify with estimates becoming increasingly uncertain over time. Inventory data is particularly important for coupes that have been thinned because the characteristics of the coupe have been fundamentally changed.

There are a range of measures that would improve the reliability of the yield estimates. These recommendations are presented in the following section.

B.1.3 URS recommendations for system improvement URS has considered the improvements that could be made to FC’s resource data from the perspective of processor looking at options for resource. To invest in new equipment a processor requires reasonable certainty around the following:

• Quantity available by species group; • Log quality by species group which requires an understanding of log input by log length, size class

distribution, external and internal defect; • Product outturn across the process chain from log input right through to the distribution of end

product from a range of log lengths; • Delivered costs over a short term (12 month period (summer vs winter supply)) and long term (10-

20+ years);

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• Risk analysis incorporating:

— Capacity to guarantee supply, although this can be managed through the inclusion of take or pay provisions;

— Impact on outturn of changes to silviculture strategy, species outturn (e.g. thin harder or lighter, species change etc); and

— Degree of reliance on alternative markets (e.g. markets for processing residues).

Eden FMA For the Eden FMA a key objective is to identify opportunities to value add from thinning operations. To do this type of analysis more detail is required to identify small diameter logs that are currently classified as pulpwood.

Over the longer term the wood flows from the Eden region will be driven by the continuation of the thinning programme. Inventory data needs to reflect not only the quantity but also the quality of the resource on an ongoing basis.

Some steps that would assist with providing greater certainty with the resource estimates include:

• Update the net harvest area modifier for areas where LiDAR data becomes available; • The validity of any revision to the net harvest area modifier developed from LiDAR data should be

tested by comparing the predicted area to the actual area harvested; • Investigate re-stratifying the forests using LiDAR into cohorts where statistically robust inventory

data can be collected at a reasonable cost;

URS understands FC is in the process of capturing LiDAR data for the Eden FMA. From an inventory perspective priority should be given to regions expected to underpin harvesting operations over the next 20 years

• Develop a consistent inventory approach. Historic data is based on ad hoc inventory using a number of different methodologies. A different sampling approach can be used for various stages of the growth cycle:

— Use past data to study the sampling intensity required to generate statistically robust results at a coupe or multi—coupe level;

— Pre-T1 inventory can be a low intensity sample that collects simple stand characteristics with some stem description data gathered to investigate potential to recover ultra small or small sawlogs from thinning operations;

— A systematic post thinning inventory process needs to be completed in a timely fashion. Ideally this would capture stocking, diameter distribution and stem form description (including the presence of any external defects) that can be used to determine future proportion of sawlog volume. For post-first thinning operations, the codes could be very simple and capture a small number of key features. Stem description should become increasingly complex as stands mature.

• The inventory assessment needs to be processed using software that is flexible to allow multiple cutting strategies to be applied to data.

FC is in the process of transitioning its inventory data to YTGen. This software has the flexibility analyse a range of scenarios.

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• Whilst the application of the log loss and pulp loss factor is based on the best available ongoing work is required to understand the influence defects are having on log recovery. Some potential methods to review these assumptions include:

— Audits of log piles and stems laid out on the landing to identify the presence and frequency of defects; and

— Destructive trials to determine the relationship between standing and recoverable volume as well as whether any relationship exists between external and internal defects.

In addition to the inventory data process URS also suggests FC consider further work to:

• Better understand the wood properties of the resource and test the suitability of small diameter logs for key species where data is limited or non-existent;

• Review status of trials to assess impact of alternative silviculture regimes. The long term yield estimates are contingent on the outcome from the thinning regime. It is important that any existing trials that could assist in refining the most appropriate silvicultural strategy be maintained.

Ideally all of these steps should be weighted across the whole resource. However, if resources are limited any investment in improvement should be weighted toward key production areas.

South Coast/ Tumbarumba FMA Based on our analysis of the FRAMES system for the North Coast and our understanding of the South Coast/ Tumbarumba resource, URS recommends FC consider the following revisions/ improvements:

• Update the net harvest area modifier, particularly for the South Coast where LiDAR data becomes available. Priority should be given to regions expected to underpin harvesting operations over the next 20 years;

• Test the validity of any revision to the net harvest area modifier developed from LiDAR data by comparing the predicted area to the actual area harvested;

• Review the stratification of the forests using LiDAR data. Investigate methods to re-stratify the forests into cohorts where statistically robust inventory data can be collected at a reasonable cost.

• Develop an annual inventory programme to ensure that FRAMES plots in compartments that are harvested are remeasured in accordance with FC’s procedures;

• Target any additional inventory in areas where there is a high likelihood of harvesting occurring. Remeasuring plots in lower productivity areas that may already be well represented could be reduced somewhat;

• Update the YTGen cutting strategy when developing estate level wood flows to better align with the following operational limitations:

— An increase in stump height to reflect what studies suggest is more appropriate; and — Constrain short and long log lengths to what is produced operationally.

• Undertake further value recovery studies to:

— Confirm the validity of the recovery factor assumptions; — Improve the recovery factors used for spotted gum, blackbutt, alpine ash, mountain gum and

peppermint; — Investigate the benefit of applying a species level recovery factor to other key production

species, particularly on the South Coast; and

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— Improve the understanding of leakage and how this is impacts on the potential loss of sawlog volume.

• Continue to refine the harvest reconciliation process. An important first step would be to capture some post-harvest measurement of the residual tree crop. However, we note this may be difficult , particularly in areas where harvesting is predominantly a low intensity single tree selection; and

• Continue LiDAR based research with a view to replacing individual tree simulations of harvesting with actual harvest yield as a function of LiDAR and other coupe characteristics.

URS understands FC is proposing to migrate the resource data from Reden to the FRAMES system. Should this occur, then these recommended improvements should be considered as part of the implementation process.

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C

Appendix C Wood flow model comparison of scenario outputs

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Table-C-1 Scenario comparison of total sawlog volume (‘000 m3)

Scenario 2012 2017 2022 2027 2032 2037 2042 2047

SED25 - 50-60 year rotation (High harv age) 23.0 23.6 23.9 23.9 23.9 52.4 76.6 76.6

SED25 - 45 year rotation (Low harv age) 23.0 37.6 47.3 47.3 47.3 47.3 47.3 47.3



SED18 - 50-60 year rotation / no thinning 23.0 13.9 12.1 15.3 15.3 43.2 60.9 60.9

Table-C-2 Scenario comparison of HQL sawlog volume (‘000 m3)

Scenario 2012 2017 2022 2027 2032 2037 2042 2047






Table-C-3 Scenario comparison of HQS sawlog volume (‘000 m3)

Scenario 2012 2017 2022 2027 2032 2037 2042 2047






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Table-C-4 Scenario comparison of HQ ultra small sawlog volume (‘000 m3)

Scenario 2012 2017 2022 2027 2032 2037 2042 2047






Note: Ultra small sawlog volume between 2012 and 2021 would be sold as pulp under the current WSA

Table-C-5 Scenario comparison of LQ sawlog volume (‘000 m3)

Scenario 2012 2017 2022 2027 2032 2037 2042 2047






Table-C-6 Scenario comparison of total pulp log volume (‘000 m3)

Scenario 2012 2017 2022 2027 2032 2037 2042 2047






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Table-C-7 Scenario comparison of MAF pulp log volume (‘000 m3)

Scenario 2012 2017 2022 2027 2032 2037 2042 2047






Table-C-8 Scenario comparison of thinning pulp log volume (‘000 m3)

Scenario 2012 2017 2022 2027 2032 2037 2042 2047






Table-C-9 Scenario comparison of regrowth pulp log volume (‘000 m3)

Scenario 2012 2017 2022 2027 2032 2037 2042 2047






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D

Appendix D Processor interviews

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The following provides a summary of discussions with a range of potentially interested hardwood processors.

Blue Ridge Hardwoods – Allan Richards, Managing Director

Volume and quality • BRH have noticed some decrease in quality over time but the change has been manageable up to now.

• Believes that FC will not have the quantity of MAF to supply commitments to 2018 unless additional resource can be obtained from other regions.

Preparedness • Have invested in more processing gear for the mill.- Invested approximately $14-15 million over the past 5 years in the Eden mill. This has included more band saws to allow additional cuts to smaller diameter pre-70s logs. This change was driven by smaller length logs and the market moving toward smaller end section products necessitating a greater number of cuts.

Challenges and risks • Small end section (post-1980s) logs are going to be very difficult to base an entire operation on due to the economics of processing.

• BRH is actively reviewing technologies available for processing the type of resource that Eden is moving towards. At this stage the technology does not seem to be available to process small diameter springy logs. The HewSaw technology would also not be suitable for the Eden resource as European hardwoods are vastly different to Australian eucalyptus. E. fastigata is particularly springy and troublesome.

• Straightness is also an issue for processing and the problem with flared butt has not been addressed as yet.

• Cannot see sawmilling as a viable option for the whole resource as the lower quality end currently presents too many challenges.

Opportunities • If 1980s regrowth can be blended with some MAF resource it should be acceptable in the longer term for BRH. An indicative estimate of a resource blend might be 50:50, small logs to larger logs.

• BRH is committed to reviewing and potentially investing in whatever technology is available and proven at more efficient processing of this changing resource.

Australian Sustainable Hardwoods – Vince Hurley, CEO

Volume and quality • Quantities of up to 100,000 m3 pa are difficult to contemplate investing in as they’re not sufficient to reach an attractive scale of operation

• There is not really a critical mass of any one particular species. Silvertop ash and stringybark are both good species to saw but brownbarrel is often problematic.

• NSW grading rules are not ideal for the mixed species resource. They have been developed based on the Blackbutt and Spotted Gum resource and as such don’t adequately recognise the impacts on log quality of the presence of gum vein. This is a risk for processors.

Challenges and risks • The biggest concern with the Eden forest region is the stability of pulpwood markets. This would be of much more concern to ASH than the log volume/quality issue as uncertainty has the potential to undermine the whole industry and supply chain in the region.

• Another issue is the cost of marketing multiple species particularly when individual volumes are small. From this point of view market mass is critical and ASH would have concerns with how to market the significant fall down of species that do not make a premium grade.

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Australian Sustainable Hardwoods – Vince Hurley, CEO

Opportunities • Best opportunity with the volume available would be a mill of around 20,000 m3 pa that was owned and operated efficiently by a single person. This would allow for smaller scale, highly focussed marketing.

• ASH would consider processing the Eden resource at the Heyfield mill subject to a few conditions including there being an adequate volume (~10,000 m3 pa) of one species (ideally silvertop ash)

• Durable timbers are increasingly in short supply. Silvertop Ash in particular has the potential to be marketed at a significant premium in the future as it qualifies as a BEL29 grade timber according to Australian Standards.

Auswest Timbers – Garry Addison, Managing Director

Challenges and risks • Smaller log size is a big challenge in East Gippsland and Eden. Auswest is currently looking at introducing a small log line to their Orbost operations to handle the smaller resource.

• Auswest is currently buying green mixed species timber from Blue Ridge Hardwoods and Boral Narooma to supplement their supply. They re-process this product in their kilns and dry mill in Bairnsdale.

Opportunities • The opportunity is attractive as Auswest is looking for additional resource at the moment due to the declining volume of mixed species harvest in East Gippsland. Providing the quality is reasonably good they would be interested in considering a possible supply agreement.

• The resource would allow them to continue supplying ‘wormy chestnut’ to the market, which is Auswest’s mixed species flooring product that is produced using 4-5 species from East Gippsland.

• Auswest works closely with Blue Ridge Hardwoods and would anticipate the Eden mill would continue to operate. They could continue buying timber from Blue Ridge Hardwoods however if Blue Ridge were discontinuing or altering their operations, Auswest would consider taking up the supply volume at their Orbost mill.

Boral Timber - Keith Davidson, General Manager Fibre Resources

Volume and quality • Boral is currently looking to exit the processing of mixed species. Its preference is to process blackbutt and spotted gum as these are more profitable under the current processing configurations.

Challenges and risks • Boral has never cracked the marketing of the mixed species resource and at present it is a break even business for them.

• In summary Boral is not particularly interested in resource as an investment opportunity. It is a species-value issue however the declining log size over time further reinforces that this is not a good opportunity for their business at this time.

Opportunities • From what he has heard, the resource may have an advantage in that it is likely to produce quite uniform logs potentially enabling more efficient processing

• The mixed species could be marketed as a high quality flooring product although it requires a company focus more specifically on the resource and its potential products.

• A dedicated small log line would be ideal for this resource where the operator could focus on sawing the resource efficiently and running a dedicated marketing program

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Dongwha Timbers - Bart Crawley, CEO

Volume and quality • The volume is not sufficient for a greenfield mill based on this hardwood resource. • A resource like then Eden resource could not be carted for long distances and still

be a profitable investment so any operation would need to be very near the resource.

Challenges and risks • Dongwha would not consider processing the Eden resource at the Bombala mill. The resource would have to be consider for a new mill and as discussed there is not the volume for this proposition.

• There are significant challenges in terms of sawing, drying and marketing the resource. Dongwha does not have experience in these areas.

• The Bombala mill is configured for softwood logs and would not process hardwood logs.

• Dongwha has trialled hardwood processing (Victorian Ash) at their Lara mill in the past. They found that the drying regime of softwood operations is too aggressive for hardwood timber and that a completely separate drying system would be needed to maintain stability and grade recovery in the timber products. Most of the foreseeable risk for Dongwha in contemplating hardwood processing would be the processing constraints around drying the timber.

Pacific Forest Products – Ian Leslie, Operations Manager

Volume and quality • PFP currently exporting up to 4 million m3 of softwood logs, primarily to China but some sales to India. Plantation hardwood log sales primarily from Hawaii with some spot supply from NZ.

• For a log export operation quantities in excess of 250,000 m3 would be sufficient as a stand-alone operation but a volume of 100,000 m3 pa is still viable provided hardwood logs (stored above deck) could be shipped in conjunction with softwood logs (below deck).

• Plantation hardwood logs generally priced at a $US10-15 discount to comparable radiata pine grades.

• Quality of peeled plantation hardwood was acceptable, but issues with log splitting and ply sheets having a lot of trim waste. End splitting managed through increased trim allowance from 100 mm to 400mm.

• Chinese very sensitive to price and volumes could be potentially increased at a price point that was acceptable.

Challenges and risks • Imported hardwood logs are expensive relative to domestic logs which can be sourced at a mill door price of around $US105-110/m3. By contrast quality export logs cost around $135/m3 plus VAT plus handling costs.

• Much smaller market for hardwood compared to softwood logs. Best way to get to market is supplement supply to major customers with softwood logs.

• Fumigation may be a potential issue as logs to China needed to be fumigated. May not be an issue if able to fumigate at Eden. Alternative to fumigation is to debark logs at the stump.

• For plantation hardwoods, bark encased knows are proving problematic as they fall out once the log has been processed.

• PFP has sold some lumber but is not observing any trend toward semi-processed exports. Demand is all for logs as processing costs in Australia are unlikely to make a sawn product competitive compared to a Chinese manufacturer.

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Pacific Forest Products – Ian Leslie, Operations Manager

Opportunities • Domestic logs typically poor quality (in terms of log input and strength characteristics) sourced from 7-8 year old trees with average sed of 15-20cm. Potential to provide a higher quality log to improve overall quality.

• Current market niche is to use hardwood timber as packaging for steel products. Higher strength of hardwood is preferred to softwood timber.

• Hardwood log imports currently in a development phase. PFP see scope for business to expand as markets become more accustomed to the characteristics of hardwood logs and figure out what the best end uses are.

• Very easy to establish a hardwood operation with existing infrastructure at Eden.

Pentarch Forest Products – Ian Sedger, Director

Volume and quality • Have been exporting ash logs from Tasmania since 2003 – some native forest log but predominantly E.nitens plantation material now. Selling about 5,000 JAS every 6 weeks. Expecting to do 12,000 JAS in October.

• Super pulp Euc grade 15cm sed currently selling for $125/JAS • Ian thought that in the right market there is no reason E.seberi could not achieve a

comparable softwood prices. For a 20cm + log up to $140/ JAS. Shipping from Eden likely to be around $38/ JAS with port costs currently around $22-23/JAS.

Challenges and risks • Eucalypt fibre typically saturated and management of water an issue, particularly for a log export operation. This may require review of harvesting practices. Pentarch debark and skid trees to roadside leaving the head on. Process stem after two weeks which reduces level of log splitting. Improves JAS conversion to 0.9 JAS m3 per tonne.

• Likely to be limited interest for other mixed species initially. Will need to be progressively introduced as market develops.

• Felt other hardwood log exporters in Australia had been negatively affecting the market selling logs at below the market’s capacity to pay.

• Export operation would need to seek longer length logs to improve JAS conversion. • An export operation would require FC buy-in as a hardwood export programme

would be a lot more challenging than a softwood operation. Not a sell and forget model. Objective would be to target end users and assist with developing the market.

Opportunities • Commented that CSIRO study found E.seberi had good peeling potential with minimal shrinkage.

• Have been working in China market for a number of years and see opportunity for E.seberi in the 20-30cm sed range using Meinan lathe technology.

• E.seberi expected to be a good utility species. Density of around 640 kg/m3 suitable for container flooring.

• Initial development in export markets but consider potential for domestic veneer operation over time.

• Unlikely to be any fumigation issues as methyl bromide treatment of logs is a permitted activity at Eden Port.

• Ian considered there was a good alignment with Pentarch’s existing softwood log export programme out of Eden.

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Sumitomo Corporation – Hirokazu Nakanishi, General Manager Wood Resources

• URS discussed with Sumitomo the prospect of investing in Australian resource assets. Sumitomo’s response was that they are currently seeking to consolidate their New Zealand investments and are unlikely to be seeking to make any further investment in Australia for the foreseeable future.

South East Fibre Exports – Erica Hansen, Manager

Volume and quality • Volumes have reduced overtime, and SEFE are looking to export 500,000gmt in calendar year 2014.

• Staffing levels in SEFE have been reduced overtime, and mill utilisation currently below optimal operations.

• Market sales difficult due to cheaper alternative supplies to the main North Asian markets.

• Current intake is based around silvertop ash but includes a spread of species which is reflective of the species generated by native forest harvesting operations in Eden and East Gippsland.

• Supply agreements extended for 2014 with FCNSW and VicForests, however no commitments beyond this timeframe.

Challenges and risks • Long term viability of the business will depend on receiving higher AUD FOB prices and seeking to return throughput to more traditional volumes.

• Current prices are marginally profitable at best, and completing transactions is difficult, with reduced supply chain capacity and difficulties in maintaining supply chain efficiencies.

Opportunities • SEFE are positive that improved trading conditions could arise, through continued volume growth in the Chinese market, a softer Australian dollar, and increase costs in competitor suppliers.

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E

Appendix E Sawmill capacity to pay modelled outputs

Sawmill log price scenarios – fixed 10% gross margin

Reci

proc

atin

g m

ill A

Reci

proc

atin

g m

ill B

Line

ar m

ill C

Log volume input 40,000 60,000 270,000

REVENUE

Recovery of finished timber (green+dry) 37% 37% 32%Recovered finished volume 14,800 22,200 86,400

Residues recovery (25% commercial) 10,000 15,000 67,500

Product mix KD Appearance 30% 30% 20%Green structural 30% 30% 40%Green other 40% 40% 40%

Price assumptions pcm KD Appearance 1,320$ 1,320$ 1,320$ Green structural 622$ 622$ 622$ Green other 396$ 396$ 396$ Residues 54$ 54$ 54$

Production volume KD Appearance 4,440 6,660 17,280 Green structural 4,440 6,660 34,560 Green other 5,920 8,880 34,560 Residues 14,800 15,000 67,500 Total timber 14,800 22,200 86,400

Sales KD Appearance 5,860,800$ 8,791,200$ 22,809,600$ Green structural 2,761,680$ 4,142,520$ 21,496,320$ Green other 2,344,320$ 3,516,480$ 13,685,760$ Residues 799,200$ 810,000$ 3,645,000$ Total 10,966,800$ 16,450,200$ 57,991,680$

Price per cubic metre timber 741.00$ 741.00$ 671.20$

Price per cubic metre wood sold 474$ 464$ 400$

COSTS

Average delivered log cost pcm 67.38$ 95.23$ 128.09$ Total log cost 2,695,080$ 5,713,980$ 34,583,112$

COGM pcm Green mill 408$ 329$ 160$ COGM pcm Kilns+Dry mill 436$ 390$ 430$

Total COGM (Green mill; minus residues sales) 5,239,200$ 6,493,800$ 10,179,000$ Total COGM (Dry mill) 1,935,840$ 2,597,400$ 7,430,400$ Total COGM 7,175,040$ 9,091,200$ 17,609,400$ Total production costs 9,870,120$ 14,805,180$ 52,192,512$

Expenses (2% prod costs reciprocating; 30% linear) 197,402$ 296,104$ 15,657,754$

SUMMARY

Total production costs pcm 9,870,120.00$ 14,805,180.00$ 52,192,512.00$ Total sales pcm 10,966,800.00$ 16,450,200.00$ 57,991,680.00$

Gross profit pcm 1,096,680.00$ 1,645,020.00$ 5,799,168.00$ Gross profit as % sales 10.000% 10.000% 10.000%

Eden Marketing Plan

Appendix E - Sawmill capacity to pay modelled outputs

42807580/06/05


Reci

proc

atin

g m

ill A

Reci

proc

atin

g m

ill B

Line

ar m

ill C

Log volume input 40,000 60,000 270,000

REVENUE









COSTS





SUMMARY



Eden Marketing Plan


42807580/06/05


Reci

proc

atin

g m

ill A

Reci

proc

atin

g m

ill B

Line

ar m

ill C

Log volume input 40,000 60,000 270,000

REVENUE









COSTS





SUMMARY



Eden Marketing Plan


42807580/06/05


Line

ar m

ill C

Log volume input 270,000

REVENUE

Recovery of finished timber (green+dry) 32%Recovered finished volume 86,400

Residues recovery (25% commercial) 67,500

Product mix KD Appearance 20%Green structural 40%Green other 40%

Price assumptions pcm KD Appearance 1,320$ Green structural 622$ Green other 396$ Residues 54$

Production volume KD Appearance 17,280 Green structural 34,560 Green other 34,560 Residues 67,500 Total timber 86,400

Sales KD Appearance 22,809,600$ Green structural 21,496,320$ Green other 13,685,760$ Residues 3,645,000$ Total 57,991,680$

Price per cubic metre timber 671.20$

Price per cubic metre wood sold 400$

COSTS

Average delivered log cost pcm 85.13$ Total log cost 22,984,776$

COGM pcm Green mill 160$ COGM pcm Kilns+Dry mill 430$

Total COGM (Green mill; minus residues sales) 10,179,000$ Total COGM (Dry mill) 7,430,400$ Total COGM 17,609,400$ Total production costs 40,594,176$

Expenses (2% prod costs reciprocating; 30% linear) 12,178,253$

SUMMARY

Total production costs pcm 40,594,176.00$ Total sales pcm 57,991,680.00$

Gross profit pcm 17,397,504.00$ Gross profit as % sales 30.000%

URS Australia Pty Ltd Level 6, 1 Southbank Boulevard Southbank VIC 3006 Australia T: 61 3 8699 7500 F: 61 3 8699 7550

www.ap.urscorp.com

marketing plan for the eden hardwood forest resource · 9 december 2013 . prepared for forestry...

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