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Management Side
Technical Side

Smoke and Mirrors

  
There is an expectation, perhaps naïve, that industry and government have a mutual interest to ensure the continuing growth and development of a manufacturing industry. Of course, government has a broader obligation to balance wider community expectations and competing interests in arriving at its policy on any given issue. Government also has to acknowledge its international obligations with regard to the various treaties or undertakings that it has signed over the years, all of them probably for very good reasons at the time.

To those looking from an industry perspective, governments seem to give more weight to international treaty obligations than to domestic expectations, and this is probably the reason that this mutual expectation sometimes diverges. But behind these observations there seems to be a more disturbing concern that maybe it is all just too difficult for both government and industry.

The facts speak for themselves. Manufacturing in Australia has declined from about 30% of gross national GDP to about 12%, and the descent continues to be precipitous. The official view seems to be that the decline is an inevitable structural adjustment and a consequence of our GATT obligations (global tariff agreements). A deeper analysis would probably reveal that it is simply easier to live off the huge resources boom that Australia enjoys. That said, there is a huge ongoing subsidy to some manufacturing sectors, such as automobile manufacture, although the share of locally made vehicles seems to mirror the general decline in local manufacturing. The pulp and paper industry sadly does not enjoy comparable support, but the situation may not entirely rest with the government.

 

 

A number of significant matters that affect the forest products industry, in respect of which it rather seems that both government and industry have put themselves between a rock and a hard place! As we have come to expect, it is sometimes difficult to relate government announcements with government action. Industry also seems to espouse lofty objectives, but often with more prosaic outcomes.

In April last year, and with great fanfare, a joint industry-government initiative announced the establishment of a Pulp and Paper Innovation Council. The objective of this council is to provide the federal government with strategic advice on priorities for innovation opportunities in water and energy efficiency, fiber production, and product development, and to recognize the importance of the pulp and paper industry to Australia’s sustainability. To date there is very little indication that anything of significance has actually been recommended to the government and no evidence that any recommendations have been implemented. Perhaps the industry has been essentially on life support and anything else is just too challenging!

Then we have the ongoing Gunns pulp mill saga. The development process for the mill involves two levels of government, which is surely a recipe to ensure that in the end no one will be happy. As a company, Gunns is struggling to stay solvent while it tries to lock in funding for its proposed pulp mill and juggle the approvals process that involves a number of dynamic elements. At a fundamental level the consequences of a strong Australian dollar puts a large question mark over the financial viability of the project. The additional challenges of the approvals process and sustained opposition from those who see the pulp mill as a satanic blot on the landscape have caused investors to vote accordingly. The company announced a disastrous result for the fiscal year ending June 30, declaring a loss of more than AUD 350 million and consequently the stock price tanked. Most of the loss was due to write-down of assets to reflect the new business model adopted by Gunns. Trading in Gunns stock has been suspended since 08 August and is likely to continue in limbo while the approvals process continues to be tested.

The federal government has granted approval for the mill to operate and discharge to the environment, but construction approval rests with the state government and the approval process has a trigger clause requiring “substantial commencement” of construction by 31 August. Gunns claims to have spent AUD 200 million to date on the mill and to have recently awarded an AUD 20 million contract for earthworks. Opposition groups have pounced on the fact that this contract has been let without the company having finalized financing. This matter is likely to end up being tested in the courts. The Tasmanian government is also the authority to issue an Environmental Protection Notice, which they have done, including approval to increase mill capacity to 1.3 million annual air-dried metric tons.

In parallel, Gunns has been in a protracted negotiation with the state and federal government for compensation for forfeiting contracts that it had to harvest native forests. Gunns rejected initial offers, but apparently has accepted a package valued at AUD 34.5 million, which includes about AUD 11.5 million owed by them to the Tasmanian Forestry Department. This agreement is part of a complex deal to restructure the Tasmanian timber industry to conserve forests with high heritage value. The EPA is still to determine whether substantial construction of the mill has in fact commenced, but it seems obvious that such approval will be implicit in acceptance of the compensation package since Gunns was reportedly arguing for AUD 100 million in compensation.

As the federal government struggles to gain traction in its intention to introduce a carbon (dioxide) tax it seems incongruent that they should simultaneously take the axe to the Cooperative Research Centre (CRC) for Forestry, and by implication the forest industry. The CRC for Forestry is an Australia-wide joint venture that builds on nearly 20 years of successful collaboration among Australia’s leading forest research organizations, companies, and government agencies. Over this time it has focused on areas that are fundamental to the future of the industry. Research priorities have included value adding to plantation resources and genetic improvement of tree species. A significant part of its research has related to improving efficiencies in timber transport and harvesting, which can only enhance the greenhouse credentials of the industry. This decision to reject an application for another five-year term of this CRC will see the loss of the equivalent of 50 full-time positions and will affect around 40 research partners, companies, and universities.

It seems patently self-evident that R&D is important in maximizing the positive role the forest industry can play in mitigating climate change. The Australian Forests Products Association described this funding cut as symptomatic of a broader vacuum relating to national forest policy. The Association noted, “The current national forest policy framework is in desperate need of renewal. The last National Forest Policy Statement [by a federal government] was made in 1992. Forestry is the only sector of the economy that is greenhouse-friendly, and if we are to reduce reliance on carbon intensive building materials and fossil fuels, then it is a sector that needs to grow.”

With the poll ratings of the federal government now at the lowest level in history it seems the government has no choice but to push ahead with its carbon tax legislation and is doing just that. Debate has commenced on the 19 separate pieces of legislation required to see this tax come into law. The opposition party describes the legislation as the longest suicide note in history and if public opinion is sustained until the next election it will indeed prove to be so.

With such high stakes, the forest products industry may be seen to be almost irrelevant to the bigger picture and may end up suffering collateral damage. The forest products industry should have the potential to be part of the overall resources boom, but because the pulp and paper sector adds value and involves manufacturing, it might be just all too difficult for both government and industry.


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