As students across the world strike for climate action, NZ is putting most of its climate change mitigation eggs in the forestry basket. However, the industry and its workers are hurting on the back of falling demand from China. Can more active Government procurement policy be used to help sustain the industry?
A 20% drop in demand for NZ logs caused log prices to collapse between June and July, plummeting by around $36 per cubic metre to around $165 per m3, on the back of slowing demand from China. Two months on, those prices are proving slow to rise. New rail links between China and Europe have reduced transit time from a 45-day turnaround to a 12-day one, threatening to reduce long-term demand for NZ softwood.
Forest owners are putting some harvesting on hold, and the Forest Industry Contractors Association (FICA) has said that many contractors are either letting staff go or putting them on reduced hours. While the large contractors may be able to endure a longer period of lower prices and demand, smaller contractors have been hit hardest, as well as smaller logging truck contractors.
Historical demand growth
Several buoyant years of $200+ prices have left the sector unprepared for such a rapid slow-down. Chinese demand for NZ softwood been the key factor, with a sevenfold increased in the past decade. By 2017 NZ had become the biggest supplier of softwood to China (37%), accounting for ~70% of of NZ’s log exports and making NZ log prices the highest in the world.
By contrast, NZ accounted for only 1.7% of Chinese sawn timber (i.e. processed wood) imports. This explosive one-sided growth created enormous commercial incentives to harvest timber, skip the mill and move it straight to market.
As business flourished, workers bore the brunt of this expanding export frontier; on the forest floor commercial pressure translates into a faster worker load and higher safety risks. In 2013 the industry accounted for 1 in 7 NZ fatalities despite employing only 3000 workers nationwide (roughly one percent of the national labour force). Supply chain pressure also creates risks for logging truck drivers and port workers.
Equally troubling is the fact that little has been done to improve wages and other working conditions. Starting wages aren’t much above the minimum wage, and a 2017 NZ Institute of Forestry salary survey indicated that qualified workers in the sector earn around $65-75,000 annually, for what is – despite advances in mechanisation – still physically and mentally demanding work that entails serious risks, particularly for young workers.
Forestry workers have never recovered from the corporatisation and privatisation of the industry in the 1980s that broke union power, and wages have stagnated since. The sector is notoriously difficult for unions to organise in, with small contracting crews dotted around remote parts of the country competing against each other on price efficiency.
Government procurement as a policy tool
This all seems to spell bad news for the Government’s plan to use the forestry industry to offset transport and industrial emissions. Pinus radiata may be a sequestration wunderkind, but if the industry can’t create decent work then there is little future for its sustainable development.
The present industry strategy of exporting more than half of the timber harvested as raw logs fails to capture value within New Zealand. While high prices are good for exporters, they have hammered domestic wood processors; throughout the past two decades NZ’s wood processing industry – that employed almost 50,000 people in the early 80s – has been whittled down to a husk, with timber mill closures continuing this year.
High log prices are the biggest impediment to revitalising NZ’s sawmilling industry. In a paper authored for MBIE by Forest Economic Advisors earlier this, they concluded that on current market prices (set then at US$153 or NZ$243) NZ processing of sawn timber could *just* be competitive in the Chinese market, however competitiveness was highly dependent on prices. On current log prices, NZ production is looking much more competitive.
So far the Government has taken a hands-off approach to this simmering crisis, presuming the market will ‘correct itself’ over time. It could, however, be taking advantage of low timber prices by engaging in large-scale log purchasing, stimulating demand off its own bat.
Government procurement can be a powerful tool for flattening out market fluctuations and setting other key conditions. A large buyer like Government can lock in demand over longer time periods, so that smaller contract crews can ensure more predictable production levels, making financial planning easier and security of tenure for workers more consistent.
Spending in a few key industries around the timber supply chain during tough times like this would sustain returns to contractors and keeping crews in work while keeping rural communities afloat. In return, Government should seek to secure a commitment for safe work and union access from forestry contractors across the country to progressively improve working conditions within the sector.
A steadier supply of timber would not only help to keep timber mills stocked with wood to support processing job. Securing relatively cheaper access to a key construction materials could be used to address the most fundamental social problem of our economy, the housing affordability crisis.
Housing affordability is a multi-faceted issue, with market speculation and tax loopholes alike playing the largest role. Nonetheless, when Housing Minister Megan Woods announced the Kiwibuild reset, she noted that she had written to Commerce Minister Kris Faafoi about the price of building materials.
Funding state intervention
NZ has a relatively small tax base to work with, but there are still options available to use Government procurement to stimulate demand in key sectors. NZ has some of the lowest levels of public debt in the OECD, and record low interest rates across much of the world means there has scarcely been a better time to use Government procurement for our benefit.
Even the Governor of the Reserve Bank has told the Government it needs to be spending more so we can stay within its legislative inflation target. Considering that sky-high rents and household debt are driving up the day-to-day cost of living for most working people, the Government itself is in a better position to shoulder that burden.
The Labour-led Government has, however, locked itself into strict austerity commitments to bring down public debt, intended to shake off the idea that centre-left Governments are poor economic managers. Reneging on these rules just out from an election could undermine credibility from both the Left (demanding more spending on benefits and income support) and the Right, who are keen for any opening to criticise this Government’s economic credentials.
Alternatively, central banks still retain the ability to stimulate demand themselves by printing money and directly injecting it into the economy. The US Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of China have all engaged in these activities extensively since the Global Financial Crisis, and economists in NZ like Bernard Hickey and Bryan Gould have become increasingly outspoken about the importance of state-led capital creation to stimulate demand avoid future economic crises.
Concerns about inflation by expanding the money supply don’t hold up in this instance; consumption, especially in rural communities, is stagnating and economy-wide inflation is currently negligible.
Conditions of employment for forestry workers seem to be lurching from one crisis to another. And yet these are the workers we are relying on most to ward off environmental catastrophe, with the resulting risk that the NZ economy’s largest project for climate change mitigation may stall. Active procurement and fiscal stimulus policies are tools available to soften these blows; now would be a good time for Government to start considering how they might best be used.
Edward Miller is a unionist and human rights advocate.