Introduction
3.1
The World Bank has projected that the global demand for wood fibre will quadruple by 2050. Timber and other forms of wood fibre are now commodities and Australian producers are competing in global markets to supply the growing demand for wood products.
3.2
This chapter will focus on the dynamics of the Australian timber products market, in particular the relationship between growers and processors. Australian timber processors are facing constrained supply of the plantation timber they use to manufacture wood products. This chapter will look at the potential reasons for these supply limitations as well as how they might be addressed.
Review of the Evidence
Timber Supply and Demand Forecast
Timber Demand
3.3
Australia is currently a net importer of timber. In 2018-19, the value of imports ($5.9 billion) exceeded exports ($3.9 billion) by $2 billion. Demand for sawn softwood is expected to continue to grow by 30 per cent to 2050, primarily due to housing commencements and GDP growth.
3.4
ABARES forecast that, due to the increasing demand, the market will be increasingly reliant on imported sawnwood. ABARES added that this ‘represents a missed opportunity for the Australian forestry sector unless there are new policies or drivers to expand the current softwood plantation estate to meet growing demand’.
3.5
The Housing Industry Association (HIA) elaborated on the role of construction in stimulating demand for timber as well as the risks involved in a reliance on imported products. HIA forecast that between 95,000 and 115,000 detached dwellings will be built each year in Australia and around 75 per cent of these will use timber framing for load bearing elements.
3.6
Further, HIA stated that having a secure timber supply chain is essential for prices remaining competitive and not subject to fluctuations that could affect the viability of construction projects. HIA added that it was concerned that greater imports of timber could result in a risk of sub-standard or non‑conforming timber making its way into the building supply chain and being used for structural construction components.
3.7
Capital Battens suggested that shortened plantation rotations are also contributing to the need to import construction timbers as trees are being harvested before maturity resulting in a reduction in the older, stronger timber suitable for strength bearing applications.
Outline of the Processing Sector
3.8
The Australian sawmill processing sector is made up of softwood and hardwood sawmills. Hardwood processors source timber from public native forests and commercial forests, while timber supplied to softwood processors is drawn solely from commercial plantations. Figures from 2016‑17 reported by the Australian Forest Products Association (AFPA) showed that while there were less softwood sawmills (58) than hardwood mills (182); softwood mills accounted for 82 per cent of the total volume of sawlogs processed with hardwood mills responsible for the remaining 18 per cent.
3.9
Since 2007, the number of hardwood mills had reduced by 64 per cent and the number of softwood and pine mills by 31 per cent. AFPA added that reductions in the hardwood sector were due to government decisions on resource availability and economies of scale whereas in the softwood sector factors included international competition and changes to markets and technology.
Availability of Supply for Sawmills
3.10
While demand for timber is strong and Australia is currently exporting significant quantities of fibre, this does not mean that domestic processors necessarily have access to the timber they need. The outlook for softwood processors is challenging. ABARES have forecast that existing softwood supply shortfalls are likely to increase and persist for the long-term. If recent export levels are maintained, ABARES projects that by 2050 softwood sawlog supply will fall short of demand by 3.4 million cubic metres. This will result in ‘imports of softwood sawnwood needing to double between 2020 and 2050 to satisfy growing demand’.
3.11
In contrast, the Department of Agriculture, Water and the Environment (DAWE) reported that supply forecasts were positive for hardwood sawmills, stating the ‘future availability of hardwood sawlogs from plantations and native forests will likely be sufficient’ to meet the demands of the domestic hardwood sawmilling sector.
3.12
Both processors and growers highlighted the difficulties domestic processors can encounter in accessing sufficient timber supplies. For example, HVP Plantations (HVP) noted that there was already more demand for logs from its plantations then it is able to supply and that all its sawlog customers and some of its pulpwood customers are seeking additional supply.
3.13
In 2016-17, ABARES undertook a survey of timber processors which found that the most commonly raised issue of concern for mills was uncertainty around access to timber supplies, which was raised by 43 per cent of mills. ABARES noted that the reasons processors gave for these concerns often related to government contracts and access to public forests, a relatively minor number also mentioned concerns around the impact of log exports.
3.14
This concern surrounding the availability of secure timber supplies was shared by most of the processors who participated in the inquiry.
3.15
The Softwoods Working Group (SWG) stated that, prior to the Black Summer fires, the processing sector of the South West Slopes region had ‘identified resource security as a major impediment to growth in the industry’. At that time, SWG estimated that 30,000 new hectares of plantation in the region were required to support existing activity and jobs in the processing industry. Since the fires, this situation has clearly worsened and now SWG estimates that current supply will drop by 44 per cent by 2023 and not return to current levels until the 2040s.
3.16
Visy Pulp and Paper (Visy), a major processor in the South West Slopes region, stated that it sources approximately 900,000 tonnes of timber from areas more than 100km from its processing plant in Tumut. This figure is likely to rise due to the devastating impacts of the January 2020 bushfires on the Southwest Slopes region plantations. Visy explained that sourcing this timber from beyond its local region had sustainability implications and also was affecting ‘Visy Tumut’s international competitiveness and financial feasibility.’
3.17
Plantation Treated Timbers (PTT) is a softwood mill in the Green Triangle producing treated timber products from small logs with diameters between 8cm and 20cm. PTT explained that it had knocked back a ‘considerable amount of orders … over the preceding 3 years’ due to its inability to access logs. PTT noted that its experience was likely mirrored by the other post manufacturing processors as its customers were not moving to other mills.
3.18
PTT is particularly concerned with what it sees as wasteful harvesting practices, as it stated that smaller diameter logs, which it and a number of other processors specialise in, are being left behind during harvesting. PTT stated that several plantation owners were refusing to provide short length logs on the basis that harvesting these logs is unsafe. As this type of material has previously been available, PTT sought clarification on the safety concerns but have not received any response. Overall, PTT questioned why smaller logs could not be provided stating ‘achieving full product recovery from harvesting operations is a relatively straightforward way of increasing the availability of logs.’
3.19
Capital Battens, which also uses lower grade logs in its production of battens, was likewise concerned about the security of log supply and noted that what is currently being exported as pulplog is ‘eminently suitable’ for processors like itself and PTT.
3.20
Beyond its own operations, PTT drew attention to the situation of a Chinese company named Shield Resources, which had attempted to setup an industrial plywood manufacturing plant in the Green Triangle but had been unable to source fibre. Shield then put forward a proposal for a $50 million sawmill focussed on small diameter logs and again was unable to reach a supply agreement with plantation owners. Ultimately, Shield set up an export yard and commenced shipping whole logs to China.
Impacts of supply constraints
3.21
AFPA stated that processors need long-terms security of supply in order to make the investments needed to grow their businesses. This point was elaborated by Mr Alan Cummine, who stated:
…processing and value-adding in the plantation products and paper manufacturing industries involves investment of tens or hundreds of millions of dollars, which is not made unless the processor is confident of having access to the necessary plantation resource. The processors seek secure supplies of harvested wood of the nominated quality and specifications, delivered in sufficiently large volumes, consistently and continuously over a long period at competitive prices.
3.22
As an example of how increased supply could drive investment, PTT stated that it wished to increase its current log intake of 18,000 tonnes per year to as much as 35,000 tonnes, which would open up a range of value-adding opportunities. If this could occur, it would be in a ‘position to invest a further $3 million in capital expenditure’.
3.23
HVP emphasized the need for processors to grow and to achieve the economies of scale to compete in international markets, stating:
Sawn softwood is a commodity; international processors can already compete with Australian processors, as evidenced by the quantity of sawn softwood imports. Hence, Australian sawn softwood processors need to be able to grow to an internationally competitive scale to remain viable.
3.24
HVP drew attention, however, to how challenging it can be for the growers to provide, and processors to access, long-term secure supplies, stating:
To be able to produce a regular supply of pulpwood grade logs or sawlogs to sustain a mill, the combination of thinning and final harvest of logs needs to be replicated year after year. For example, if a mill requires 500,000 cubic metres of sawlogs every year, there must be sufficient areas that are subject to final harvest (supplemented by small sawlogs from areas that are second thinned) to supply that volume of sawlogs every year. This means that, if it takes 27 years until final harvest, then on average there needs to be 28 age classes (ranging from age 0 to age 27), each large enough to supply close to 500,000 cubic metres of sawlogs from final harvest.
3.25
Further, HVP showed how a mill’s need for a consistent supply of fibre can result in timber being used in commercially sub-optimal ways. HVP explained that:
… the volume of logs required to sustain the Australian Paper mill in Gippsland means that both pulpwood grade logs and sawlogs are supplied to what should be a processor that only takes pulpwood grade logs.
3.26
Capital Battens added that due to the shortage of timber, Australian processors may be ‘forced to import timber, much of which comes from questionable sources that use practices that are not environmentally sound and are far less socially responsible.’
Export of Australian Timber
3.27
ABARES reported that there was a significant increase in roundwood exports in the decade from 2010-11 to 2019-20. For softwood exports rose from 1.64 million cubic metres in 2010-11 to 3.85 million cubic metres in 2016-17 before stabilising. In 2019-20, softwood exports were 3.53 million cubic metres.
3.28
Hardwood exports grew from 230,000 cubic metres in 2010-11 to a peak of 727,000 cubic metres in 2018-19, before dropping to 580,000 cubic metres in 2019-20. Pentarch Forest Products (Pentarch) highlighted that, in addition to logs, hardwood plantations produce approximately 7 million tonnes of woodchips which are exported per year. Pentarch added that there is a relationship between the export woodchip and log markets, so ‘when the export woodchip market undergoes a market downturn then the export log market volumes are also reduced’.
3.29
PTT stated that information from industry sources suggested that in the period of 2013-18 approximately 1.7 million tonnes per year were exported from Portland, which accounts for approximately 50 per cent of the sustainable annual harvest of the Green Triangle. PTT added that prior to 2013 log exports were not above 300,000 tonnes per year.
3.30
Figures supplied by DAWE broadly correlated with the figures suggested by PTT. Exports of sawlogs from Victorian ports (of which Portland is likely to be the major contributor) more than doubled between 2016-17 and 2017-18 (560,000 tonnes to 1.309 million tonnes) before falling in 2019-20 (699,000 tonnes). For non-sawlog pine, the greatest volume of exports were in 2019-20 (1.04 million tonnes) having more than doubled from the previous year (437,000 tonnes).
3.31
New Forest Asset Management (New Forests) commented that the export of softwood logs from the Port of Portland indicates that ‘the supply of softwood logs in the Green Triangle region exceeds domestic processing capacity for certain log grades, which are exported’.
Role of the Export Market
3.32
AFPA described the export market as a ‘pressure valve’ for situations where there is insufficient domestic demand. These situations include following natural disasters such as cyclones and bushfires where timber must be salvaged quickly and also longer-term market changes.
3.33
A longer-term issue, highlighted by AFPA, was the closure of the Kimberley‑Clark pulpmill which until 2013 processed the ‘majority of pulplogs in the Green Triangle’. Following the closure of the mill, Green Triangle growers were forced to find new markets and ‘without an export market much of this material would have to be burnt or left to rot on the forest floor’.
3.34
The impact of a lack of a pulpmill in the Green Triangle was also referred to by growers such as HVP and OneFortyOne (OFO). OFO added that an association of six Green Triangle growers had conducted a pre‑feasibility study in an attempt to attract an investor willing to establish a pulpmill in the region but that this proved unsuccessful.
3.35
Growers also highlighted the outlet the export market creates for low grade material and smaller timber from thinnings and the potential risks of not removing this material. OFO suggested not removing forest residues would increase fire risks as well as attract damaging insects such as borers. New Forests, meanwhile, suggested the export of small logs and woodchips produced from thinnings provided growers with important early cash flow. HVP linked the export market to the ability to conduct thinning operations, stating that without this export market ‘the capacity to thin the plantations to promote growth of sufficient sawlogs for its customers, both now and in the future, would be at risk.’
3.36
PTT, however, questioned the need for growers to export smaller diameter logs, stating that could be sold to processors such as PTT and that ‘it is plantation thinning that is essential, not that the product is exported’.
3.37
HVP summarised the reasons that it undertakes export operations by stating that export markets:
frequently provide a good return from HVP’s investment in plantations
provide sales opportunities where domestic markets either don’t exist or are not large enough – the market for lower grade logs in the [Green Triangle] is a good example
can accommodate sales that are of variable size duration and specification – this creates much needed flexibility in managing a softwood estates, particularly around thinning for future sawlogs
provide opportunities to sell logs salvaged from fire and storm damage that are unable to be utilised by domestic processors.
Impact of Exports on Domestic Supplies
3.38
Several domestic processors are of the view that the export of softwood logs is constraining log supply in the Australian market.
3.39
Capital Battens, for example, stated that it was constantly competing with exporters for access to softwood, and that:
…in the past decade, state owned forests have exported significant volumes of logs to Asia. Australia is not well endowed with plantation resources and this practice makes no sense – when the catastrophic bushfires are factored in it is even more implausible.
3.40
Similarly, Visy stated that the ‘continued export of non-value added softwood forest products undermines regional domestic manufacturing and associated socio-economic benefits’.
3.41
PTT stated that, in its view, ‘log exports from Portland are jeopardising investment in domestic processing in the Green Triangle and the flow-on socio-economic benefits’.
3.42
PTT highlighted the need of processors for solutions beyond the expansion of the plantation estate, stating that expanding the estate will not solve the problems ‘if export prices spike and the forest managers decide to just put it all on boats again, it doesn’t matter how big the estate is if the market operates as it does now.’
3.43
Given the shortfall in timber available to domestic processors, Visy called for a ‘domestic manufacturing first policy’. A similar idea was proposed by Capital Battens, which suggested that domestic processors should have ‘first right of refusal to purchase logs/fibre from state owned forests before logs go to export’.
3.44
Growers largely considered exports in a more positive light than processors. OFO noted that it undertakes export operations to sell pulp and log quality logs, and stated that this provides continuity to employees and contractors during domestic market downturns. OFO added that its export operations create 102 local jobs in harvesting, haulage, and export operations.
3.45
HVP reported that it exports mixed grade logs to China and that it regularly offered parcels of logs to domestic processors, but the prices offered almost always produce a lower return even accounting for the risks involved in exporting. HVP added that ‘as a private commercial entity it does not accept that it should subsidise any domestic processors’.
3.46
OFO reported that while previously it had exported sawlogs, since 2018 it has sold 100 per cent of its sawlogs to domestic processors. OFO added that it increased its sales of sawlogs to domestic processors from 850,000 tonnes per year in 2012 to 1.43 million tonnes per year in 2019-20.
3.47
Further, OFO reported that it had recently put out an expression of interest for domestic processors to take non-sawlog fibre that is currently being exported and that it was working with companies who had responded to the EOI on terms for future contracts.
3.48
Pentarch noted that many of the countries in Southeast Asia have ‘raw material deficits but advanced production systems’ and that some centres were using plantation hardwood as a replacement for ‘light mixed tropical hardwoods as substrates for such things as plywood’. Pentarch suggested that trade delegations to Southeast Asia should aim to help develop the export market for Australian timber and identify wood processing centres near ports in Southeast Asia.
Non-commercial export operations
3.49
A potentially concerning type of export operation was raised by AKD Softwoods (AKD). AKD, which is a vertically integrated grower and processor with a good understanding of the export market, believed export operations that could not be commercially viable were occurring in the Green Triangle and in Victoria. AKD suggested that ‘pocketbook traders’ were undertaking export operations based on agreements with foreign powers to supply fibre. AKD provided an example, stating there was an juvenile planation of a thousand hectares that was harvested and:
… trucked to Orbost [where there was a change of trucks], then it’s trucked to Geelong and containerised, then it went from the containers to the Melbourne port. Looking at the supply chain, knowing export log prices, it’s just physically not feasible—and especially when you’ve got the Dongwha supply mill right there, and other sawmills. And that’s not a one-off.
3.50
Similarly, Visy noted that it ‘had real concerns that some softwood log exporters receive market distorting subsidies from foreign governments’. Visy was concerned that these subsidies were inflating prices making it difficult for domestic processors to compete.
Timber Supply Contracting
3.51
New Forests noted that there is a great deal of diversity in the length of timber supply contracts, stating that ‘contracts of between one month and 60 years currently exist in the industry’. New Forests added that processors and growers may have differing preferences in regards to contract lengths, stating:
Generally, processors will prefer longer term contracts, but only where there is some form of price protection. This competes with the economics for forest owners, who also prefer the security of long term off-take agreements as part of a portfolio approach to management, but often prefer mechanisms where price certainty is either secure, or includes potential mechanisms to capture and share the benefit of broader market price rises.
3.52
AKD noted that it seeks long term contracts with growers to ensure ‘to be able to sustain and support our capital investment’. While noting that it is normally able to reach an agreement with growers, AKD explained why plantation owners can be reluctant to sign long-term contracts, stating:
Forest owners tend to be a bit afraid of committing to any form of long-term contract unless they can hard code in some export parity equivalents [because] they don’t want to be selling their logs in three years time at a lower price than what they could be. So they’ll actually forego security in exchange for safeguarding against this fear of missing out [on a better price].
3.53
HVP suggested that the term of log supply contracts ‘has not been a significant issue’ among its customers. HVP explained that it only offered long-term contracts (~10 years) where processors requested the contract to support capital investments. More typically it offered medium term (~5 year) contracts or when there was uncertainty relating to availability short-term contracts of 1 to 3 years.
3.54
PTT, however, stated it has not been able to negotiate any medium or long term supply deals with major plantation owners for the last 3 to 4 years.
3.55
The Department of Primary Industries and Regions South Australia (DPIRSA) noted that there were concerns among processors that growers may be over-harvesting or harvesting before maturity and that this could reduce future log supplies. DPIRSA added that ‘some of this concern could be alleviated by longer term contracts between growers and processors, as is understood to be provided in other states.’
Box 3.1: Timber Contracts in the Green Triangle
Processors in the Green Triangle expressed concern about the scale and conduct of export operations undertaken by major plantation owners. In particular, PTT highlighted the operations of OFO, although it noted that the ONOs actions were examples of a systemic problem in the Green Triangle and beyond.
In 2012, OFO took over the SA Government’s forestry estate. As part of its lease agreement with the SA Government OFO is required to conduct ‘normal arms-length commercial terms which do not disadvantage domestic customers.’ PTT suggested that shortly after the estate was transferred to OFO there was a significant increase in exports and questioned whether OFO was conducting its operations in the spirit of the lease agreement.
PTT drew attention to two tender processes which it suggested were good examples of how difficult OFO is making it for domestic processors to obtain timber supplies. In these two tenders processors were required to:
Take 80,500 tonnes over a 3 month period (equivalent to 322,000 tonnes per year) and be required to take logs of all diameters
Take a parcel of logs comprising 136,000 tonnes of sawlogs and 60,000 tonnes of pulp logs in a three month period.
These two tenders ended up being awarded to OFO’s internal export operation. PTT explained that the ‘relatively short period during which the high tonnage of tendered logs must be taken is beyond the intake capacity of domestic customers in the Green Triangle.’
It is not practical for processors to rapidly upgrade their processing capacity as this generally requires financing, research and evaluation of products, environmental approval processes, Forestry Stewardship Council or other certification processes, and staff training.
Additionally, PTT considered that the requirement to take multiple types of timbers was impractical as mills specialise in using particular logs suited to the products they manufacture.
In September 2020, OFO reported to the Committee that it had recently had its compliance with the plantation lease agreement audited by the SA Government and that it was found to be 100 per cent in compliance with its legal obligations under the lease.
Transparency in the Market
3.56
Many processors also drew attention to the lack of transparency around log prices in the export market. This information is considered particularly significant as domestic processors are expected, and indicted a willingness, to pay export parity price. Processors suggested, however, they were often unable to ascertain the level of the export parity price.
3.57
PTT added that it has had negotiations with forest growers that have lasted for three years where they have been told that they need to pay export parity price but not told what the price is; PTT believed this was a ‘delaying tactic so as to not impede their export program’. PTT added that, since 2018, export tonnages have declined somewhat but they have not seen any increased log supply, PTT reported that ‘domestic processors are of a view that plantation owners are simply waiting for high export prices to return’.
3.58
AKD also noted issues around transparency in the market, particularly in South Australia, and suggested some owners had shown a ‘lack of interest’ in divulging accurate export prices. Similarly, Dr Gordon Bradbury highlighted a lack of price transparency in the Tasmanian market, which was acting as an impediment to farm forestry.
3.59
The Department of Primary Industries and Regions SA (DPIRSA) stated that the ‘poor pricing transparency of log exports may be exacerbating the concerns of processors regarding supply.’ DPIRSA also noted that the ‘New Zealand Minister for Primary Industries publishes data on indicative prices’.
3.60
Plantall Forestry Consultants (Plantall) reported that the Australian National University used to publish market values ‘but this stopped decades ago’. Plantall suggested there was a role for State and/or Commonwealth Governments to support the Australian Forest Growers to publish pricing information.
3.61
Mr Cummine, while highlighting the particular difficulties that farm foresters face in accessing accurate information, made a similar suggestion, stating:
Regular publication of log prices related to grade would provide growers with the data essential to the sort of informed market that exists in other major forest growing countries, New Zealand being the closest example. ABS could collect raw data. ABARES could analyse that data, combined with analysis of markets, destination, end-use etc., and publish quarterly to protect confidentiality.
3.62
In addition to pricing information, PTT suggested that the publication of modelling relating to future supply would assist processors to make better investment decisions. Previously when plantations were largely in public hands this information was available but PTT suggested it is now ‘closely guarded by many of the private owners’.
Code of Conduct
3.63
PTT called for a code of practice, which should provide obligations so that:
comparative pricing between domestic supply and export is transparent and clearly understood by all parties
negotiations would be both timely, transparent and conducted in good faith.
3.64
AKD stated that it could be in favour of a code of conduct that could ‘level the playing field’ but it would be important that such a code does not impinge on the commercial rights of plantation owners. AKD would also be supportive of oversight from a body such as the Small Business and Family Enterprise Ombudsman, noting that for processors ‘there’s nobody to turn to at the moment’. AKD added that it would like to see a ‘mechanism that enables the free market to work but ensures that we look after Australia’s domestic supply chain first and foremost’.
3.65
DPIRSA reported that some industry participants were calling for a code of conduct and noted that the Australian Competition and Consumer Commission (ACCC) can make recommendations relating to market failures and ‘assist with industry codes of conduct that seek to address imbalances in power relationships across supply chains and set expectations relating to contract terms and the provision of market information’.
3.66
Plantall noted that a Voluntary Code of Practice for Timber Plantations exists in Western Australia but described third-party certifications such as that of the Forest Stewardship Council as more effective, although Plantall noted such certifications can be too expensive for small growers. The Voluntary Code in Western Australia is largely focused on workplace safety, environmental impacts, plantation management, and infrastructure and planning issues.
3.67
HVP drew attention to requirements to support local growers in certification standards such as Responsible Wood and the Forestry Stewardship Council. HVP stated any code of conduct beyond these certification schemes was ‘not justified, as the market currently works appropriately and there is no market failure’. HVP added that Government support for processors should ‘focus on mechanisms to improve the efficiency of processors, rather than imposing market distortions on growers.’
3.68
OFO agreed, stating that industry codes are ‘designed to address market failures rather than the interests of specific suppliers’. They also cited the Australian Treasury’s Industry Codes of Conduct – Policy Framework, which states codes of conduct ‘are not designed to protect smaller participants from competitive pressures that relate to bargaining power, access to markets or limited scale when purchasing.’
3.69
DAWE also referred to this policy framework and stated that the ‘Government would only prescribe code in very limited circumstances where there is a compelling case for intervention supported by robust evidence.’
Codes of Conduct in Other Sectors
3.70
Codes of conduct exist in some other agricultural industries, including the dairy industry and the horticulture industry. The Dairy Industry Code of Conduct, which came into effect on 1 January 2020, is a mandatory code which implements ‘enforceable rules about the … business relationships between farmers and processors [by] setting out the key rights and obligations of each party’. The code requires farmers and processors to act in good faith, establishes a mediation and arbitration process to address disputes, and empowers the ACCC to monitor the conduct of farmers and processors to support compliance.
3.71
The code arose from a 2018 ACCC report which found that information asymmetry and significant imbalances in bargaining power between processors and farmers had resulted in a range of market failures and inefficiencies in production. The ACCC recommended the establishment of a mandatory code of conduct.
3.72
The development of the code included three rounds of public consultation running from October 2018 to November 2019, with the final public consultation focussing on the exposure draft legislation.
3.73
The Horticulture Code of Conduct is also a mandatory code of conduct prescribed under the Competition and Consumer Act 2010. The horticulture code came into effect in March 2017 and is designed to improve the clarity and transparency of trading arrangements between growers and traders in horticulture.
Committee Comment
3.74
Australia’s timber processors tend to be key businesses in the towns in which they operate, bringing much needed revenue and employment to their regions. The Committee was therefore concerned to hear that, almost uniformly, Australia’s softwood processors are struggling to access the supply of logs needed to keep their mills operating optimally. Given the growing demand for local timber products, it is even more frustrating that many processors would be in a position to expand their operations and bring significant economic benefits to their communities if only they could secure access to a stable supply of timber.
3.75
Australia is a net timber importer, importing timber valued at nearly $6 billion and exporting timber valued at nearly $4 billion. Timber is a global commodity, and as such, it is not necessarily a negative situation for the Australian wood products industry to be involved in global imports and exports.
3.76
Nevertheless, the size of the figures involved give an indication of the growth opportunities available to the processing sector, if they can access the supply they need to support investment and drive growth.
3.77
Australia’s plantation estate was largely planted either directly by state governments or with the assistance of state or federal incentives. Given the integral role of taxpayer funding in establishing the resource; it is not unreasonable to think that Australian industry should be given every opportunity to develop businesses based on adding value to the resource.
3.78
No inquiry participants suggested that there is no role for exports in the timber industry. Export markets provide an important ‘pressure valve’ when domestic processing is not available, as is being clearly shown by the role of exports in supporting the salvage operations taking place in bushfire damaged plantations. Additionally, the lack of a pulp mill in the Green Triangle is an example of a structural issue which results in unavoidable exports.
3.79
The Committee was pleased to hear from growers that they aim to prioritise domestic processing wherever possible. In some instances, however, it seems fibre is being exported that could be profitably processed in Australia.
3.80
One of the key difficulties facing processors is the lack of transparency in regard to export market prices. Processors indicated they are willing to pay export parity prices but they are often unable to ascertain the export price for the timber they are seeking to buy. Neither the Committee, nor processors, are suggesting that growers should subsidise the businesses of processors by providing discounted prices. Processors are willing to pay a fair price —if they can determine what a fair price is.
3.81
It appears there is a path to mutual benefit, but it may require changes to how contracts are negotiated and an improved level of transparency in the market. The log parcels available for purchase need to involve realistic quantities and timeframes and processors should have the opportunity to access logs even if they are not within the traditional definition of a sawlog. If priced appropriately, there is no reason why growers should be disadvantaged by providing products that can be realistically processed by smaller mills.
3.82
The optimal solution is for growers and processors to agree long-term log supply contracts that provide processors with the opportunity to make investments in improving the scale and technology of their mills. It would be hoped that the long-term benefits of supporting the growth of an efficient domestic processing sector and reducing the risks inherent in relying on export markets are being considered by plantation owners.
3.83
It is not the role of government, however, to become involved in business‑to-business contract negotiations unless there is clear evidence of market failure.
3.84
The Committee believes there is an argument for the development of a code of conduct for the timber industry, but it is the Committee’s preference that such a code of conduct be generated by the industry itself. The Committee asked AFPA about the development of a voluntary code of conduct for the plantation sector. AFPA indicated that developing a code would take around a year to complete and would require government support. The Committee does not have a view on the specifics of AFPA’s proposal but suggests that DAWE works with the industry to develop a voluntary code in the most efficient and cost‑effective way possible.
3.85
The Committee also suggests that after the code has been in operation for two years it should be reviewed by the ACCC to ensure it is having the effect intended.
3.86
Additionally, the Committee believes that the Government could play a beneficial role in improving the transparency of the marketplace. The Committee is recommending that DAWE work with key stakeholders to identify how an index of relevant timber prices could be established to aid negotiations between growers and processors. The indicative index of radiata pine log prices is a potentially useful model developed by the New Zealand Government.
3.87
Finally, the Committee has heard concerning reports that foreign powers are engaging in non-commercial export operations to gain access to fibre supplies and that these actions are distorting prices and making it even more difficult for domestic processors to access log supplies. The Committee has only received limited evidence relating to these issues and so is not recommending any action but it is a situation which should be monitored by state and federal governments.
3.88
The Committee recommends the Department of Agriculture, Water and Environment supports the industry, in the most cost-effective means possible, to develop a voluntary code of conduct to facilitate access to timber by Australian softwood processors.
The voluntary code would be underpinned by the relationship between plantation owners and timber processors.
The industry should aim to undertake the development and implementation of the code as quickly as possible, ideally within 12 months.
After two (2) years of operation, the code should be reviewed by the Australian Competition and Consumer Commission and any changes recommended by the ACCC should be implemented.
3.89
The Committee recommends that the Department of Agriculture, Water and Environment, in consultation with key stakeholders, develop an index of relevant softwood log prices. The Department then undertakes to publish the index and ensure its continued maintenance and currency.