Forests under the Gunns
20July 2001
Julie
Macken and Neil Chenoweth
'I didn't mean to kill all of them. But that's
what I was doing. We had been feeding the animals, mostly wallabies,
wombats and possums, the good carrots for two weeks. Then, on the
third week, the boss covered the carrots in 1080 and told us to make
sure everything was dead when we finished. Everything was dead, all
right."
Steve is not the face of forestry the Tasmanian industry is keen to
project. The forestry industry likes to see itself as a "dynamic
and expanding business based on world's best-practice forestry".
Both of Tasmania's major parties have conducted the state election
campaign with a tacit sub-text: don't mention the forest.
Nevertheless, this issue, based on current polling, could determine
the outcome of the election. The most recent polls show Liberal support
in Denison, Liberal leader Bob Cheek's own electorate, is down to
17 per cent, while the Greens are recording historic highs of 32 per
cent.
And behind the issue that divides Tasmania is one company: Gunns Ltd,
which dominates Tasmania's forestry industry and accounts for 85 per
cent of logging in the state. Gunns is responsible for the aggressive
use of clearfelling and logging of old-growth and rainforests, the
very activities which have generated such political heat. While the
story of the Tasmanian forests and Gunns may seem quintessentially
local, it has relevance for the mainland. Why? Because Gunns is a
stockmarket darling, its share soaring from $2 to $8 over the past
two years.
Not only is Gunns a great stockmarket success story, but it also runs
Australia's most popular tax scheme. So whatever happens to Gunns
will be of interest to many Australian investors. Should the Greens
wrest any influence at all in a new Government, Gunns is likely to
feel real political heat to rethink its entire operation. Premier
Jim Bacon has tied the state's economic future to the success of Gunns
and its tree farms. But now the company is confronted by two big negatives:
environmental concerns about the impact of plant and animal poisons
used in its plantations, and questions about its own rosy earnings
forecasts.
Locals fulminate over environmental degradation, water contamination
and poisoning of wildlife, yet the untold story for both investors
and any state Government pinning its hopes on this company, is how
uncertain its economic future really is.
The company has, according to some independent experts, very optimistic
forecasts about future performance of woodchip prices. Mainland studies,
on the contrary, report a continuing long-term decline in the wood
prices which underwrite Tasmania's billion-dollar plantation experiment.
Judy Clark, an economist with the Centre for Resource and Environmental
Studies at the Australian National University, says the plantation
industry is based on "heroic projections of global wood deficits".
"If these price expectations are unrealised...investments in
plantations could collapse," she says. The nub of the issue is
that, should Clark be right and Gunns wrong, then Tasmania will have
paid a very high price environmentally for uncertain economic returns.
And, by betting the bank on forestry, the future of Tasmania's other
big earner, tourism, could be compromised.
Many mainlanders' views of Tasmanian forests have been shaped by television
footage of anti-logging protests by The Wilderness Society and others,
and the bribery scandal that rocked the state in 1989, when Edmund
Rouse, the head of media group ENT, was jailed for attempting to bribe
a Labor politician to stop anti-logging moves which he feared would
reduce the value of his shareholding in Gunns.
Forestry has come a long way from this, and so has Gunns, which until
two years ago, was just one of a number of Tasmanian forestry companies.
Now, having recently gobbled up Boral and North Forests, it is the
only show in town. As it has grown, it has become a very visible target
for environmentalists, who are now making a lot of noise about the
state's loose, self-regulatory forestry regime.
While most other state Governments, under pressure to protect old-growth
native forests, are encouraging their forest industries to use plantation
timber in a variety of ways, Tasmania alone permits its industry to
rely almost entirely on logging native forest, both old growth, re-growth
and rainforests. And rather than diversify into a wide range of forestry
products, as is happening across the rest of the mainland, Tasmania
has restructured its industry so that, in spite of the rhetoric, it
is almost entirely dependent on the export of woodchips.
It is the only state that has made its corporatised forestry department,
Forestry Tasmania, exempt from the Environmental Protection and Biodiversity
Conservation Act, the Threatened Species Act, the Freedom of Information
Act, and the state's own Resource Management and Planning System.
And, bizarrely, Tasmania is the only state that sets out to poison
its native animals.
The Labor Government's moves to safeguard the future of the forestry
industry inevitably drew it closer to Gunns. There is some irony here,
because the Gunns board now includes two players in the Rouse bribery
scandal: former Premier Robin Gray, whose conduct was criticised in
the Royal Commission into the bribery affair, although no changes
were laid; and David McQuestin, the ENT executive who was disbarred
from serving as a director by the Australian Securities & Investments
Commission, before a Tasmanian judge overturned the order. The Rouse
issue is no longer relevant, says John Gay, who has headed Gunns for
16 years. "The Gunns board has a record of delivering extremely
good returns to investors and building a strong business with high
ethical standards. The directors mentioned have held high profile
public and community appointments subsequent to the Rouse case which
indicate they are well regarded in the broader community."
The sharemarket to date has certainly bought that story just as it
has bought the company's story about increasing global demand for
woodchip. The upshot has been a dramatic increase in native forests
turned into woodchip and as the native forests disappear, plantations
take their place. The great defence of the industry is that it replaces
every tree logged with a new tree. However, the effect is that 200-year-old-trees
are replaced by two-week-old seedlings and native forests disappear
under plantations.
In financial 1999, loggers cleared 10,600 hectares of native and old-growth
forest. In 2001, the figure jumped to 15,000, and is tipped to rise
further. In 2000, the Australian Bureau of Statistics says Tasmania
woodchipped 5,498,654 tonnes, the highest volume ever recorded. ABS
figures for 2001 are not available due to confidentiality demands
by Gunns.
Between 1996 and 2000, the forestry industry replaced 62,831 ha of
native forest with plantations and farm lands: 86 per cent went to
plantations.
As environmental groups rail against a policy that sees widespread
culling of native forests that cannot be replaced, there is another
twist to the story. The plantations themselves are paid for, in large
part, by the Australian Tax Office.
Since the mid-90s, a string of plantation schemes have offered rich
returns to investors, in which more than half the return comes from
tax deductions. Investors across Australia are the beneficiaries of
the combined effect of the Federal Government's tax laws and Tasmania's
liberal, self-regulatory forestry regime.
Even so, investors must be convinced wood prices will be significantly
higher in a decade. Clark is no optimist about woodchip prices but
Melbourne-based Van Diemen Forestry Consultants, sees blue skies in
its Independent Forester Reports which buttress a string of Tasmanian
plantation prospectuses.
In the Gunns Plantation Woodlot Project 2002 prospectus, which raised
$60 million last month, VDFC said that plantation timber should attract
a price premium well above current prices: "Hence, for a large
volume...offered on a contract for a consistent supply basis, it is
possible that a price of $28.10 a cubic metre could be achieved."
With Australian Forests Project 2002, VDFC reported a price of $35
a cu m was possible.
In Pinetec 2002, VDFC said it was "reasonable to forecast"
a price of $39 a cu m. Gay and Forestry Tasmania chief Evan Rolley
argue that the wide range in prices reflect different conditions.
But these prices are just the start. Gunns' scheme assumes wood prices
will rise in line with Australian CPI of 3 per cent each year, to
$42.50 a cu m in 14 years when the trees are harvested for export.
There is no discussion of foreign exchange risk. If export prices
fall as Australian harvesting costs rise, investors may be caught
in a double whammy.
In a major review of Australian Bureau of Agriculture and Resource
Economics data in 1990, the ANU's Judy Clark concluded that while
world demand for paper was rising, the gap was being filled by wood
substitutes and recycling. As a result, she says, Australian woodchip
exports have fallen on average 1.1 per cent a year from 1991 to 1998.
And she cites ABARE data for the past two years which shows real prices
have dropped another 11 per cent.
John Gay at Gunns disagrees: "Our selling prices have not moved
[in this manner] over the past two years." He says wood prices
are driven by market segments, and real prices have been constant.
Nigel Turvey of Greenfield Resource Options, the author of a study
on plantation economics, says mainland plantations have turned to
the more profitable end of the industry: sawlogs and timber veneer.
"There is clear expectation of an emerging oversupply of woodpulp,"
he says.
Independent grower Chris Mundey says two years ago he was offered
net returns of $10 a cu m for his 32 ha of 16-year-old plantation
eucalypts in north-east Tasmania, a total of $60,000. Last year, he
was told the trees were worth less than the cost of logging them.
Mundey's trees are surrounded by a plantation where VDFC advised that
investors could "probably" achieve returns of $30 a cu m
of wood.
Meanwhile, Gunns is locked into a steep growth path to pay off its
acquisitions. In early 2000, Gunns, which had net assets of $56 million,
paid $423.5 million to buy the timber assets of Boral and Norths,
giving it 85 per cent of the state's forestry industry. Gunns has
60,000 ha of forest and plantation. Its business plan is to lift this
to 200,000 ha in nine years, which will probably cost more than $500
million. But with bank debt of $367 million, Gunns is already highly
geared.
This is why the tax schemes play so vital a role. Gunns' appetite
for tax-scheme dollars saw it cut the price of Woodlot investments
from $10,010, in line with most of its rivals, to $4,345, winning
Gunns top ratings from investment consultants Van Eyck, PIR and Agribusiness
Research.
While Gay says the lower price reflects economies of scale, the biggest
gain is that it allows Gunns to clearfell another 13,000 ha of native
forest, for which Forestry Tasmania typically receives $7 to $12 a
cu m.
Meanwhile, in spite of the record volume of logging and woodchips,
jobs within the forestry industry have fallen by at least 1,240 since
1997. A number of forestry contractors say they have been forced to
lay off workers, particularly trainees, because the tendering process
has become cut-throat. "We get paid between $14 and $20 a tonne,"
said a contractor. "When Gunns took over North Forests, and we
all had to tender, the price started to go down. Now, none of us can
afford to provide on-the-job training."
