By Bruce Marlowe
What are the real economics of Australia's woodchipping industry? Answering this apparently simple question is no simple matter, because much of the corporate data is secret, and vital government information has been declared off-limits to investigators.
La Trobe University's Dr Andrew Dragun has been trying to calculate how much financial support the timber industry gets from the Victorian Department of Conservation and Natural Resources, but has been refused access to the key source, the department's Monthly Business Reports.
Also, most of the big conglomerates with woodchipping interests — like Westfarmers Bunnings, Boral and Harris-Daishowa — don't publicly reveal how much of their profit is due to their timber operations.
High profits
Nevertheless, the overall picture is clear enough: Australia's woodchippers presently make profits well above the average business rate, and these superprofits are in large part due to public subsidy.
According to the National Association of Forest Industries' executive director, Robert Bain: "Every timber company is doing very well at the present time, and the timber divisions are making major contributions to returns". One example: North's woodchipping arm North Forest Products last financial year made a $51 million contribution to its parent company's profits, second only to the contribution from its "jewel in the crown", Robe River iron ore.
The director of the South Australian-based group SEAS Sapfor, Adrian de Bruin, says that timber "would have to be one of the most profitable agricultural pursuits at the moment".
Current returns recall the dizzy days of the late 1980s. In 1988 Harris-Daishowa recorded an after-tax profit as a percentage of average shareholders' funds of 67%.
However, as is explained in the interview with Richard Blakers below, the medium term prospect is for a sizeable expansion of world woodchipping capacity, with more productive mills coming on line in countries like Brazil. This will inevitably depress the price of woodchips.
This prospect is driving Australian woodchipping operators to mine as much old-growth forest as they can get away with in the short term.
The gold-rush mentality of the woodchippers comes through clearly in these 1990 words of the Private Forestry Council of Tasmania:
"It is imperative that as much of the remaining private old-growth pulpwood resource as is available for sale is marketed over the next 15 years whilst market acceptance of this comparatively low commercial quality wood is relatively high."
Public subsidies
The woodchipping industry's profits are underpinned by the fact that the costs of native forest "development" and upkeep are borne by the states, and have been for over a century. This subsidy is massive. According to the 1992 EPAC paper "Managing Australia's Natural Resources", subsidies to the timber industry over the past 70 years amount to $5 billion.
The present level of subsidy provided through the various state forestry bodies is a matter of fierce debate, in part aggravated by forestry department secrecy.
For example, estimates of the 1993-94 subsidy to the Victorian timber industry range from the Victorian auditor-general's figure of $13 million to the $50-$60 million calculated by Dr Dragun. A 1992 Wilderness Society report put the total state subsidy at $170 million a year.
In Victoria, according to Dragun, once the full cost of logging management is taken account of, attributable logging-related expenditure by the Department of Conservation and Natural Resources stands at $91 million, against $41 million received from the private loggers as royalties and fees.
The possibility that the real level of subsidy may prove to be even higher than this leads Dragun to speculate that Victorian hardwood forest operations may even be incurring a "deadweight loss".
Dragun comments: "Deadweight loss relates to the fact that the value of a subsidy might even be greater than the income generated by the subsidy. The existence of a deadweight loss in the hardwood operations in Victoria is a very real possibility. Under conditions of a deadweight loss it would actually benefit society to pay the subsidised industry the amount of income generated and save the balance of the subsidy — and not exploit the resource!"
Costs
At issue here is the direct Victorian government subsidy to the timber industry: the $50 million (or maybe more) in taxpayers' money that goes to sustain private logging profits. The figure doesn't include any valuation of the revenues foregone because of the loss of water due to logging, nor any estimation of the conservation value of the forests nor of the loss in recreation amenity due to forest destruction.
While there will always be argument about how to put a figure on these less tangible costs of logging, they nonetheless remain costs.
In an attempt to put a number on the total cost of the industry to society, Dr Dragun estimates a "social subsidy value", including the direct $50 million subsidy, in the order of $385 million a year.
The only social benefit deriving from the woodchipping industry is the jobs of those for whom it is a livelihood. The millions presently being spent to subsidise the companies must become part of a comprehensive forest transition strategy, which speeds up the shift to plantation timber use, further boosts paper recycling facilities, retrains displaced workers on full pay and develops alternative industries in affected timber towns.