Why Australia Needs a Hardboard Industry

1. Executive Summary and Conclusion

Improved resource security arising from RFA's means that it is now possible to contemplate investments which use hardwood fibre as inputs in export oriented capital intensive manufacturing industry.

Investment in such industry, of which high density hardboards is example, is seen as a logical step in economic development which fills out an integrated structure between the manufacture of hardwood woodchips in chipmills on one hand and the production of sawn timber in sawmills on the other.

Improved conversion of the hardwood resource to end-product with commercial value will itself enhance economic values in publicly owned native forest assets.

With overcapacity, on a world basis, having been installed in the manufacture of medium density fibreboard, a product directly competitive with hardboard in many end uses, the timing of a new Australian investment in hardboard is not propitious right now.

2. Background and Context of the Study

The Wood and Paper Industry Strategy is a joint initiative of the Department of Industry, Science and Tourism and the Department of Primary Industries and Energy. It is one element in the package of measures the Commonwealth Government is using to implement the National Forest Policy Statement.

The Wood and Paper Industry Strategy aims to encourage the development of a stronger, more diverse wood and paper industry. One specific goal is to help the development of the wood and paper industry so that it can take advantage of new investment opportunities especially in value adding and downstream processing.

The Department of Industry, Science and Tourism offered Midway Pty. Ltd. within this strategy a grant for the purpose of undertaking a study of the hardboard industry.

The funds were to be used:

• to employ a consultant to undertake a confidential study of the investment feasibility of Midway purchasing the hardboard assets of CSR Ltd.

• to produce a report to be released publicly which will demonstrate the value of integrated businesses in the native processing hardwood sector and the benefits to be gained from better use of residues and waste.

The consultants employed to undertake the confidential study are Pitcher Partners, Level 6, 161 Collins St., Melbourne.

Pitcher Partners were requested to analyse the hardboards industry in Australia towards conclusions which address:

• an integrated model for hardwood processing in regions of Australia arising from and made possible by the improved resource security delivered by the RFA's.
• a formula by which to estimate the enhancement in value of government-owned native forestry assets through development of a hardboard industry based around RFA's.
• the present value of the existing hardboard industry and an assessment of the risk and returns which attach to its future

This report reflects the first group of conclusions being made generally available to the forest industry through the website of NAFI. The report is also indebted to a study by Margules Poyry Pty. Ltd. Pty. Ltd., entitled Commercial-in-Confidence The Australian Hardboard Market: Preliminary Assessment of Business Opportunity, November 1997. The Margules Poyry study was commission and funded by Midway Pty. Ltd.

The purpose behind the study was to identify and scope what is believed to be an industrial opportunity for Australia.

At the present time Australian woodchips are being sold to Japanese pulp and paper manufacturers. It is recognised that at present the Japanese pulp and paper industry is no longer the lowest cost least protected pulp and paper industry in the world. Questions exist therefore as to the trend of its future course of development.

In this circumstance it is rational for Australia, through development of its own industry, to position itself to be able to absorb locally some proportion of its woodchips output.

Towards this end development of a revitalised hardboard industry has been considered. And beyond that a new hardboard industry in an appropriate location might lead in to identification of an opportunity towards a new pulp and paper industry in Australia.

Midway Pty. Ltd. was presented to the Wood, Paper and Furniture Group within the Department as a suitable proponent for such ideas. Midway, being engaged in export woodchips, is placed four square in the hardwood residues' market. Its shareholders are all hardwood sawmillers, who are involved in domestic timber markets and who participate in export initiatives in regard to hardwood products. Midway thus claims to be well placed to develop a corporate plan towards integration of some or all of its shareholders' sawmills with hardboard manufacture.

Midway acknowledges the contribution to the draft of this report made by Mr. Richard Stanton, Director of Economic and Resource Programme of NAFI and National Plantations Coordinator, Plantations 2020.

Midway also acknowledges with gratitude access to confidential information relating to its hardboard businesses permitted to Pitcher Partners by CSR Ltd. Midway has respected CSR's confidentiality in this report.

3. Changing Nature of Australia's Industrial Hardwood Supplies

Regional Forest Agreements

There has been significant controversy and debate over the use and management of Australia's publicly owned native forests since at least the late 1960s.

The National Forest Policy Statement (Commonwealth of Australia, 1992) offers a consultative process whereby State and Commonwealth governments can agree on the long term management and use of forests in particular regions for the next twenty years. Such process leads to Regional Forest Agreements (RFA's). Underpinning the RFA's is the comprehensive regional assessment which provides an evaluation of the environmental, heritage, social and economic uses of forest areas.

The key objective in each RFA is to establish a comprehensive, adequate and representative (CAR) conservation reserve system which meets the JANIS criteria for preserving forest biodiversity.

The reciprocal objective is to provide the forest products industries with security of supply through legislated access to specified native forest areas for the twenty year duration of the agreement.

It is hoped and expected that legislated access of sufficient term will facilitate investment in those industries.

The first RFA covering the East Gippsland Region in Victoria was signed in February 1997. By the end of 1999 it is anticipated that some twelve RFA's will have been completed, these covering nationally the major regions in which timber is harvested from publicly owned native forest.

The amount of production forest to be transferred to the conservation reserve system through the RFA's, and the consequent changes to log supply to industry will vary from region to region due to differences in forest type distribution and the history of forest clearance and land use. The JANIS reserve criteria focus on the preservation of biodiversity, old growth forest and wilderness. While the impact on log supply will vary from region to region, some general outcomes are likely.

The reservation of additional areas of old growth forest which had previously been available for timber production will force the harvesting of areas producing lower quality logs and regrowth logs earlier than previously planned. In most instances this will significantly reduce log size and quality even where regrowth forests have been silviculturally treated (e.g. by thinning and fertilising). In many (but not all) instances the forest types requiring additional reservation in order to meet the JANIS biodiversity objectives will be those which yield a higher proportion of larger and higher quality logs. Withdrawal of higher quality log inputs under this joint Commonwealth/State process is compounding the reductions in quality due to earlier State reservations of public forest land into non commercial or industrial uses.

Thus the proportion of harvested wood which is lower quality than sawlog, and is thereby pulpwood destined to become woodchips, is rising in dramatic fashion.

Beyond that it is an inevitable consequence that more harvesting of regrowth forests, earlier, will result in higher volumes of small logs within the yield of sawlogs. Compromised quality and smaller log specifications will generate proportionately larger amounts of residual material in most harvesting operations. Therefore markets for small logs and harvesting and mill residues will become even more vital to the economic viability of the entire forestry operation through planting or regeneration and log harvesting to final timber, pulp or paper products.

Plantation Developments

The National Plantation Inventory records to the end of 1994 an Australian plantation area of 1.042 million hectares. This is composed of 884,000 hectares of softwood and 159,000 hectares of hardwood. The area of new plantations established in 1994/95 (the latest year for which complete data are available) is estimated to have been 27,000 hectares. About half, 13,000 ha., is native species hardwood.

Since 1995 there has been a dramatic increase in plantation establishment. Unofficial estimates for planting in 1998 place the subsequent figure at around 60,000 - 70,000 hectares for the country. A large proportion of these plantations are eucalypts (particularly Eucalyptus globulus and E. nitens) which are being managed at the present time on short rotations (8 - 12 years) with the aim of producing pulpwood.

This too will go to woodchips, the market for such overwhelmingly being in few narrow export markets.

The Commonwealth and State Governments and the plantation growing and wood processing industries have together developed a plantation development strategy, Plantations for Australia - the 2020 Vision. This contains the target of trebling Australia's plantation area by 2020.

Achievement of this target depends upon creation of a commercial, regulatory and cultural environment which is conducive to plantation expansion. Few, if any organisations have firm plantation establishment targets for the next twenty years. However, some State government agencies and larger industrial growers do have plantation expansion plans generally for the next five to ten years. An unofficial tally would suggest that the national plantation area could increase to 1.8 million hectares within the next ten years or so based on current plans.

Hardwood Pulpwood

It can be seen that the product of these developments will be burgeoning supplies of hardwood pulpwood. The Australian Bureau of Agriculture and Resource Economics (Love, 1998) predicts the volume of hardwood pulpwood produced in Australian plantations will increase from around 0.7 million cubic metres per annum in the 1995-99 period to over 10 million cubic metres per annum in the period 2035-39.

These figures may be adjusted as RFA's are completed for all regions. However, with one consequence of RFA's being the review of States' land designation, with the result that pulpwood yields increase as a proportion of the total volume of timber produced, these estimates might well be under statements.

However that may be, the size of Australia's future pulpwood resource will without doubt sustainably support world scale processing operations in pulp and reconstituted products.

It is to be hoped that the supply security being provided by RFA's, if backed by the necessary supporting legislation, currently being developed and enacted in several States and the Commonwealth, will encourage investors to consider opportunities to "add value" by processing. Australia has a supply side need to market throughout the world products to be made from the significant volumes of pulp quality material becoming available.

4. Patterns of Timber Demand

International Perspective

Apsey and Reed (1998) present a broad analysis of the outlook for world wood fibre availability and identify a significant gap between demand and supply projections to 2020.

In Australia's core timber trading zone, supplies of timber from the major production areas of the U.S. Pacific North West, Canada and the Asia Pacific are decreasing due to environmental constraints. Supplies from major plantation growing nations such as New Zealand, Chile, Brazil and Australia are projected to increase, though not sufficiently to offset reductions from other areas. At the same time demand for timber in Asia is projected to increase due to increasing populations. These will enjoy improving circumstances all of which depend on or correlate with wood consumption - public health (sanitation), ever more pervasive literacy, and better shelter with higher standards in housing.

The closing of this gap will bring many consequences of significant change to Australia's forest economy.

Pine and Hardwood

The first consequence of significant change will be the substitution of solid timber products by reconstituted wood products made from pulpwood quality material. This will build upon the rapid substitution which is already taking place, in which locally grown plantation softwood sawn-timber is replacing imported softwood, and locally produced and imported hardwood, in many uses, particularly house framing and other building applications plus in lower quality furniture.

As a result of the emergence to maturity of large areas of softwood plantation established in the 1960s and 1970s large volumes of consistent quality material is now being processed in large, efficient mills. Softwood is ideal for a wide range of uses because it is easy to work within standards now established which identify its capability in end use whether it be strength, appearance or durability. Indeed, increasingly it can be treated in various ways to improve these characteristics. As a result of competition from softwood in its traditional markets Australian hardwood timber is increasingly being applied in ways that make greater use of its inherent qualities in appearance and strength. Flooring, panelling and furniture are typical examples of the markets being developed.

Composite Materials and Engineered Wood Products As pulpwood increasingly dominates supplies and technology improves various engineered products in both lineal and panel form continue to replace sawn-timber in many of its traditional uses. These products include laminated veneer lumber, plywood, medium density fibreboard, particleboard and oriented strand board.

Hardboard

Supported by rigour in design, wood panel and engineered wood products are having precise applications defined for them in plans of buildings and structures. With applications such as these being adopted traditional sawn timber will forthwith play a lesser role. But there is no reason why, within these trends, hardboard and hardboard derived products, perhaps in a new generation marketing context, cannot be playing its role. High density board made from superior fibres is capable of bringing enhanced stability, water resistance and durability into the designed systems of the modern building, joinery, furniture markets.

Woodchips

Nearly half (by value) of the forest products exported from Australia are hardwood woodchips. Australia exported 6.7 million green tonnes of woodchips in 1996-97 compared to the record volume of 7.5 million tonnes in 1994-95. The majority of this material is used by the Japanese paper industry. Since Australia began exporting woodchips to Japan in the late 1960s there have been significant changes in the industry. Increasing volumes of woodchips have been purchased from Australia. However with uncertainty created by Australian governments over the security of their supplies, Japanese companies have diversified their sources to the point that Australia has slipped from being the dominant world supplier to one with a market share of less than 30%.

The world woodchip trade is likely to continue changing under the influence of a number of forces. The importance of plantation grown eucalypt fibre is likely to increase because of the higher levels of quality and consistency which can be achieved compared with fibre produced from residues and pulpwood harvesting in mixed species forests. Significant hardwood plantation resources have been established, particularly in other countries in the Southern Hemisphere, and these will be coming into production in the near future, thereby increasing competition.

Australia's customer, the Japanese pulp and paper industry, is by no means the lowest cost producer in the world. Capacity to pay satisfactory prices will soon be under question as world woodchip prices decline in the context of the Asian economic crisis. There is now over capacity in the world pulp and paper industry resulting from recent major expansion in paper production facilities throughout Asia.

However, despite these trends Japanese paper companies continue to invest in expanding their off-shore plantation resources (Stafford, 1998). American investment houses move in the same direction.

Environmental Factors

In addition to the economic trends outlined above, the outlook for timber supply and demand is influenced significantly by environmental factors.

Concern about the environmental impact of timber harvesting has reduced output from North America and the Asia Pacific region. In some European markets environmental pressures are leading to demand for timber which is certified and labelled as having been produced from sustainably managed forests. The use of timber with its wide range of environmental benefits when compared to alternative products such as steel, aluminium and plastic has yet to be recognised in consumer markets.

When these virtues do become recognised established fact there will be favourable shifts in the demand curves for forest-originated products. The fact that timber is a renewable, recyclable and greenhouse positive product will confer significant marketing advantage in some markets. The fact that hardboard, within this context, has the additional advantage of being chemical free - with no formaldehyde emissions - will give its product range an extra dimension of marketing virtue.

5. Integration Possibilities in the Hardwood Industry

Integration

Integration in the forest industries involves utilising as much as possible of every tree. It involves in manufacture maximising recovery of wood fibre into salable product, wood fibre which has been obtained from a broad spectrum of tree characteristics.

Integration is therefore a technique of utilising forest resources to the maximum. It involves of necessity multiple product outputs, for within every process which delivers one output of particular value there is always some residue or waste of lower value. Product diversification is the key to realising the advantages which come with integration.

Product diversification brings with it recognition of the close interdependence of different sectors within the forest products industry. This was acknowledged by FAFPIC in 1980. The FAFPIC Report of that date pointed out that: The industries are most economically operated in integrated structures. This enables the use of as much of each tree as is practicable, including residues, and ensuring the use of each part of the tree for the most economically suitable purposes.

The advent of a market for lower grade wood has enabled pulpwood logging to be integrated with sawlog logging. Integrated logging has been conducted in indigenous forests for sufficient time now for silvicultural, environmental and industrial advantages to be well recognised.

Rationalisation

Integration has not so far been much developed in the hardwood industry. The numbers of operating sawmills have declined in dramatic fashion. In the aftermath of RFA's these numbers can be expected to decline further. Such decline, however, is the product, not of integration, but of rationalisation.

Rationalisation simply involves scale. It is a process of cost reduction by increasing throughput within a given or rationalised capital structure. Doing more of the same is the line of least resistance towards improving profit returns.

It does however involve conflict with forestry returns; it may be sub-optimal in returns to the entire forest process - from small seedling to satisfied consumer.

Rather than addressing how industry should use, in a comprehensive way, what the forest actually yields, an industry rationalising in the direction of scale, becomes ever more selective in regard to the raw material inputs it requires. Sawmills whose log inputs are carefully specified and absolutely controlled face more simple and thereby easier conversion and engineering challenges than those whose log inputs involve variety in species and variability in size and conformation.

Capital Returns

Higher returns on invested capital in conversion are more likely to be obtained from a specialist single product mill than from an integrated complex. This is partly due to less capital being required in a single product mill, but it is also due to the fact that single product producers buy - if they be able, or are allowed to - only the raw material needed for their particular production. A veneer mill unconstrained by the requirement to accept as input any sawlogs will produce better returns; a sawmill unconstrained by the requirement to accept logs across a variety of grades including pulpwood will likewise show better returns on the narrow activity of sawmilling.

Forestry Returns

However the framework of RFA's in which raw material supplies are now set requires a different industrial perspective. Traditional licensed supplies identified commitments by the forest owner in regard to logs of specified characteristics - as to species, size, grade, even market suitability (e.g. sawlog, veneer grade or pulpwood). Regional yields still at the present time have components described like this, which also represent commitments, but they can now, in fact should now, be thought of in a different way.

Under an RFA the sustainable yield represents, not a narrowly defined log supply identified by its commercial merit as regards species or quality. It is actually the reciprocal of the comprehensive reserve system - it is what is left over.

Thus, harvesting operations will have to become ever more integrated; and harvesting operations will yield log inputs which will not, on a regional basis, be suitable to single purpose single product solutions.

Industry Development Model - Hardwood

Gone are the days in which the pattern of the Australian hardwood timber industry is reflected by a multiplicity of little mills. These were generally in single individual or family ownership, dispersed in their location around, or scattered through, the forest resource. They were licensed for one two or three year periods by state government authorities to cut log allocations of given quantum and given quality on an annual basis. The prices paid for such logs, being through royalties set arbitrarily around such criteria as the budgetary requirements of the department and subjective notions of equity as between regions within a state, were "non economic".

Thus the structure of the hardwood industry developed around departmental control. This has determined the economic settings of each mill - in terms of products, markets, production technology and prices - within highly localised parameters; they have been largely insulated from factors set by trade, both non local trade such as interstate trade, and international trade.

Industry Development Model - Softwood

No such insulation "protected" the softwood industry. The major capital city softwood markets in Australia have long been trade exposed, with their accessibility to NZ and WCNA softwood timber production. The softwood industry grew against competition with overseas producers. This competition expressed itself in the very high coefficients in substitution elasticities which characterise these markets; and this has driven adoption of a structure and technology in the pine industry which through standardisation, high volume throughputs and integration delivers low costs.

The hardwood industry is groping its way towards a similar structure and technology, but it has a long way to go.

There has been significant rationalisation - in terms of the number of mills being reduced and so-called "value adding" being adopted. However notions of equity in government continue to constrain development. Even-handedness in resource management often precludes, or slows, particular interests gaining competitive advantage.

In Victoria gains by emergent hardwood industry players following the Timber Industry Strategy were quickly dispersed as the advantages which derive from extended resource security were extended to many - if not all - regardless of the differing commitments by different mills to development and growth. Time after time, in this way and others, competitive advantage has been eroded. Rationalisation has been slowed and the hardwood sawmilling industry has repeatedly had the experience of being reduced to the lowest common denominator outcome as it inches its way under departmental constraints towards up-to-date industrial structures.

Timber Industry Strategy

Victoria's Timber Industry Strategy included the concept of picking winners through VAUS - Value Adding Utilisation System. It involved the allocation of sawlogs by grade to sawmillers according to their potential to process timber beyond the green sawn stage. (TIS p.63) There was to be measurement of performance in sawmills, and those millers who committed to investment in kilns and value adding were to be rewarded with high quality log inputs.

In the event sawmillers, as many as were able, built kilns; and kilns were installed throughout Victoria. This occurred to the point that most of the industry was able to mount claim to log inputs of higher quality. The result occurred that distortion in log demand was triggered - towards the least available B and C Grade logs, away from the plentiful quantities in D and E Grades. This necessitated in turn the introduction of a revised log grading system which has now upgraded the former D Grade logs to seasoning status. This revised log grading system has generated higher revenues from royalties for the DNRE, but has forced higher costs into industry processes. Reduced quality wood has been introduced into seasoning grades, with which in escalating volumes, the industry faces severe marketing problems at the present time.

The TIS thus generated investment but even-handedness led to gross over-investment, much of which has been towards cost cascading rather than value adding. It has narrowed the industry's capability to absorb a sawlog production which has become ever more skewed towards scantling and pulpwood grades, grades which are increasingly difficult for the Department to sell towards the Government's licensed commitments.

New Structures

The features of changing supplies and patterns of demand lead to consideration of new structures for the hardwood industry. It goes without saying that individual processes must be highly focussed and as specialised as possible. Through specialisation and focus, engineering can address technical issues which lead to product standardisation, wood efficiency and cost minimisation.

It also goes without saying that these individual processes must each stand on their own feet in cash flow terms. By this it is meant that their product outputs must, so far as is possible, be tested in the market by a financial transaction - not transferred at a transfer price to another manufacturing stage, accumulating cost and generating waste, without due regard to economics.

The new structure proposed takes these individual processes and orders them into an integrated structure. An integrated structure has the rationale of looking at a wood supply, for example the output of an RFA, and maps the transformation of the total fibre yield represented by the logs identified by species and grade, into cash revenues generated through product marketing.

Linked Processes

This brings into play a range of processes and begs the question of what they might be and how they should be linked. Linked processes, converting hardwood fibre from log form to a range of products aimed through marketing at revenue generation which involves the market test, is the model being proposed. This contrasts in principle with the "sawlog-driven, high value-added, long term employment maximising timber industry" of Victoria's Timber Industry Strategy. It was intended that such an industry "achieve the best use of wood withdrawn from the forest" (TIS p.68); begging the question as to "best use".

The subjectivity of the undefined concept of "best use" was addressed by definition in precise terms of what was not best use. The Value Added Utilisation System (VAUS) sought to put numbers around it. VAUS was to allow for residual roundwood to be taken only as "a subsidiary to the sawlog operation". Waste utilisation was the only form of additional pulpwood harvesting that the Government was willing to countenance. "The Government explicitly and unequivocally rejects an industry dominated by woodchipping. There will be no woodchip-driven operations permitted in the native forests of Victoria."

No Concept of Waste

The model being proposed avoids value judgements being applied to wood utilisation. There is no concept of "waste", for the entire harvesting yield is regarded as resource; no prejudice applies to woodchips, for these are simply an intermediate product - outputs of an early conversion stage, inputs to subsequent transformation processes. It is of no moral consequence whether this intermediate product is traded or whether, if it is traded, its exchange occurs locally within Australia or towards an export transaction.

The integrated model for hardwood processing thus centres around the yield from an area covered by one or more RFA's. It involves the concept of log merchandising, a process which matches logs by species, grade, location and size to finished products related to end markets, these accessed through feasible conversion processes such as sawing and chipping.

Integrated Model

The physical manifestation of the concept includes an integrated harvesting and logistics operation, log dumps with merchandising capability, green sawmill, pulpwood operation (chipping), timber seasoning, dry milling and further processing, hardboard manufacture and further processing, with mulch and garden products, boiler fuel and steam generation, even power co-generation. Ultimately, given plantation-grown wood being sufficiently mature in large enough volumes, one or more new pulp mills might again become feasible investments for Australia to contemplate.

There is nothing new involved in this integrated model for hardwood processing. One only has to consider the major pine producing centres to provide examples.

However the transition between the old pattern and this integrated concept is a dynamic which is already happening. It is a dynamic which has not been much recognised in the thinking which surrounds Australian industrial development; and it is presented to the Wood and Paper Industry Group for further consideration.

6. Hardboard Manufacture

Component within Integration

Hardboard as a reconstituted fibreboard panel is defined as having high density, i.e. 800-1,100 kg/m3. It can be manufactured in either wet or dry process. The existing Australian industry uses wet process to manufacture hardboard, but the trend world wide is towards dry process hardboard manufacture.

A new world scale hardboard plant would have output of around 100,000 m3 p.a. In terms of residues' utilisation this is not a large volume of wood, easily able to be supplied in most forest regions. Thus from the point of raw material supply there is scope for the development of new hardboard manufacturing in many locations around Australia.

Orientation to Export

However one world scale hardboard plant produces more hardboard than can at present be absorbed by the Australian market, approximately 70,000 m3 p.a. Thus the location of new investment in the hardboard industry will be more sensitive to considerations which affect export shipping than it will be to considerations of raw material supply.

Other Residues' Products

Hardboard is not the only product line which can be developed to provide a market towards absorption of surplus pulpwood supplies. Reference is made elsewhere in this Report to LVL, OSB etc.

Domestic Market

Hardboard has however the inherent advantage that it is an industry in Australia which already exists. It has a market. Its products are known and recognised. The point of advocacy in this paper is that Australia needs to save its hardboard industry. The continuing demise of hardboard, identified in the work herewith, is the product of old dirty technology giving an unyielding cost structure, leading to hardboard products becoming uncompetitive in the market.

Market Share

Hardboard, committed to in manufacture with fibre being processed under new technology, will be able to tailor its initial product launches into known consumption. Its marketing will be capable of being built on a product range which is accepted, taken for granted even, throughout the building supply trades, through the traditional distribution system, it is accepted within the packaging industry, in door manufacture and in motor vehicles assembly.

Hardboard - an Opportunity

However the fact that hardboard has survived as a product to this point in time in the face of such substitution indicates that there is a role to be filled in the market beside mdf for a high density panel product. High density fibreboard panels have been, in their history, made in a wet process, and some advantages attach to continuing development in this technology.

This does not preclude high density panels being manufactured in dry process technology - and this may well be the better direction for development in the immediate future.

Hardboard is inherently thin, whereas mdf is sub-optimal in both manufacture and application in the thin thickness range. Thin panels live in the markets historically occupied by hardwood plywood, an industry itself in demise, as its location in S.E.Asia would predicate, with the collapse of the regional economies and compounding uncertainties facing the resource base.

There are potential opportunities for a new range of revitalised hardboard products in world markets. Much depends on prices made possible by future cost structures. Resource opportunities, application of new technologies and marketing vision suggest that through the resource security newly available in Australia, investment in hardboard within new structures - integrated hardwood complexes - could reasonably take place.

7. Management of Residues and Value Adding

Forest Management

As discussed in Section 3, the forest area available for production within a region will be determined as part of the RFA process in conjunction with the creation of the CAR reserve system. Commitments made in the RFA and ongoing management and monitoring will aim to ensure that the production forest is managed on a sustainable basis according to the evolving principles of sustainable forest management.

Sustainable forest management involves ensuring the continued viability of the forest ecosystem and includes, among other things, the principle of sustainable or non-declining yield. The sustainable yield is the volume of wood that can be harvested from the forest in a given period (generally calculated on an annual basis) without depleting the total growing stock of the forest. The sustainable yield must be less than the growth of the forest over the period concerned and this amount can therefore be harvested in perpetuity.

Forest management also seeks to ensure the full utilisation of all material harvested. Full utilisation is important for a range of reasons including efficiency of production, reduced fire hazard, ease of future operations, ensuring maximum regeneration and/or optimum growth and health of retained trees. It is therefore vital to the forest manager that there are markets for the full range of material produced in a harvesting operation. Smaller and lower quality logs and residue material may be less valuable but having a market for such material may be vital to the economic and environmental sustainability of the entire forest management operation.

Hardboard and Pulp

There are two gaps in the array of existing industrial processes within the existing hardwood industry; one is a new hardwood based reconstituted product, the other is a pulp mill.

One such new hardwood based reconstituted product is hardboard. It is true that Australia already has a hardboards industry, (and we already have an mdf industry which has installed capacity well beyond the scope of demand for the product within the confines of the local domestic market). That is not to say, however, that the existing hardboard industry cannot be used as the point of departure towards new development in hardboard. The integrated model presented here, for hardwood processing in regions of Australia arising from and to be made possible by the improved resource security delivered by the RFA's, rests upon filling this gap by consideration of hardboard manufacture.

And hardboard, in the wet process of its manufacture, leads to pulp. The front end of a pulp mill, and the front end of a hardboard plant differ, but only in regard to scale.

Forest Values

The present value of any asset is the sum over a time period of the discounted future income stream which may be attributed to the asset. The greater the future income stream, the greater the present value of the asset.

Production in most of the areas defined in RFA's is limited by the Sustained Yield in sawlogs, defined as the rate of sawlog harvesting that can be maintained indefinitely without impairing the long term productivity of the land. In Victoria analysis of sawlog availability indicates compatibility between legislated sustainable yields FMA by FMA with commitments set out in the Regional Forest Agreements. For example, under the Central Highlands RFA, commitments to a minimum of 345,000 cu. m. of licensed D+ sawlogs per annum, will be supplied from an availability of 415,000 cu m. per annum of sustainable yield of sawlogs.

Within these constraints the aim in forest management is to maintain a non-declining yield. Strategies towards this end include harvesting in such a way that a more balanced age class distribution is achieved, changing the species mix of sawlogs harvested, and regenerating sites through a reforestation program. In addition events in nature can lead to areas of forest having substantial areas of dead or damaged trees, the economic use of which involves salvage.

These activities all lead to the surplus availability of Residual Logs. Residual logs are too small or too defective to meet sawlog specifications. They are left in the forest as waste if not harvested. As waste they have nil value; or, if their presence on the forest floor impedes future management disciplines such as reforestation, one could be justified in attributing to them a negative value.

The creation of markets which opens as a possibility the sale of residual logs which otherwise have no utility opens the prospect of a future income stream, thus enhancing the value of the forestry asset.

The volumes involved in a pulp mill are illustrated in the Victorian Forests (Wood Pulp Agreement) Act 1996. Under this Agreement Australian Paper Pty. Ltd. has a legislated supply of residual logs from State Forest as under:

500,000 m3 gross from 1996/7 to 2003/04
450,000 m3 gross from 1996/7 to 2006/07
400,000 m3 gross from 1996/7 to 2009/10
350,000 m3 gross from 1996/7 to 2029/30

State Governments have seen fit to legislate according to principles similar to those in this Act to support resource supply to hardboard plants, in line with which enhancement to the government owned native forest asset is delivered.

The existence of a hardboard plant can provide an outlet for material which occurs when silvicultural treatments are conducted, the revenue from which pays for, or subsidises, the cost of the treatment. This provides a second tier of value enhancement due to the shift upwards which is implied by the treatment in the ultimate sustainable yield curve.

8. Australian Hardboard Industry

Australia's hardboard industry is owned and operated by CSR Wood Products. The manufacturing centres operated at Ipswich, Raymond Terrace, and until recently at Bacchus Marsh, have been treated as service facilities within the larger integrated wood products' business of CSR. Accordingly it has not been possible to verify directly costs, particularly material costs, which apply to the high density Masonite and Weathertex panel products within the overall range of products handled by the business.

A number of costs have been allocated on an arbitrary basis between facilities which share service outputs and no analytical determination has been made available which allows meaningful segregation.

Ipswich

At Ipswich the plant is operating on a 24 hour seven day per week basis, generally filling 19 to 20 out of a possible 21 shifts. It operates in one long shed in a fully integrated and automated process. It starts from the pulping operation and continues through the process of removal of water to the laying into sheets for pressing, through a multi-daylight press and into kilns for final stabilisation. The process is totally automated and no staff are directly involved in mechanical production operations. The base equipment is original, but electronic enhancements have brought the plant into the realm of computer numeric control.

Hardwood chips are accessed from nearby sawmillers, whose residues within a supply zone of 150 km. of Ipswich are used as raw material supply. There is a small chipper on site and logs from private contractors are processed from time to time.

After basic manufacture the board is moved to an automated grading, cutting, sanding and trimming operation in a different factory.

Product is graded according to defect, or lack of defect, which has arisen in the production process. The production of good, even quality, appropriate thicknessed, water reduced board requires real skill. Beyond that the operator on the grading line has a crucial role in achieving a profitable outcome for the plant for grading and cutting determine the product mix and ultimate manufacturing margin. To this point the process is automated and capital intensive.

Beyond it, however, so-called "value adding" takes place in labour intensive operations on a number of machines generating product such as peg board, pallet dividers, cut-to-size etc. Ipswich is obliged by market requirements to adjust or re-set the size of hardboard sheets in manufacture about 12 times per week. This number is determined by the economics of multiple production runs, the minimum being set by a discipline - the MRP (materials resource processing) system - which determines bills of materials required per run.

Raymond Terrace

Raymond Terrace in NSW is the location for the manufacture of Weathertex, which is the brand name for a range of hardboard house cladding products which are sold in plank and panel form. The Weathertex plant built in 1939, with secondary boilers having been installed in 1948, has been adapted, using a patented technology involving higher pressing pressures, to produce a hardboard more dense than standard hardboard with water resistant qualities which make it suitable for exterior house cladding or signage applications.

The plant at Raymond Terrace runs three days per week for 12 hours per day, with an additional day being run every 6 weeks. Non manufacturing time is used for maintenance.

The chipper/wood yard is operated by an independent contractor, for whom a minimum volume per annum is guaranteed. Chips are also produced by the contractor for export.

Chips produced for Weathertex production are fed automatically into hoppers which access the processing area. Chips are fed into high pressure barrels - Mason Guns - into which steam is injected at pressure as a shot, an impact which blasts the woodchips apart into the component fibre. This was a patented process when the Raymond Terrace plant was installed in 1939, such being, obviously, the origin of "masonite", the original brand, but subsequently generic, name for hardboard.

The fibre is layered into continuous sheet in such a way that the fines in the fibre yield a smooth finish. The continuous sheet is cut to length in conformity with the size of the press (3.66 metres in Raymond Terrace) and then subjected to the vacuum process which draws out the initial moisture (to about 60% moisture content). Sheets are fed into hot high pressure presses and then graded, de-humidified and passed through a thicknesser which brings the product back to the standard 9.5 mm. The capability exists for platens to be used in the presses which put profiles and patterns into the panels as feature surfaces.

Following production painting and cutting takes place. Panels sizes are sprayed on both sides in a flow through process of heating and drying. Boards sizes enter a line which undercoats, cuts to a width, goes through the moulders and on to final paint.

Weathertex is, as the name implies, a waterproof product. It is sold with a 25 year guarantee. The extension of such guarantee to consumers in the market has been made possible through the work conducted over the years in the Raymond Terrace research and development facility - now closed. This facility has continuously tested hardboard in natural and simulated weather conditions over long periods. These tests have established criteria for manufacturing the product to the quality standards implicitly demanded by the consumer guarantee.

Cost Factors

There are corollary issues to do with the manufacture of hardboard. These involve, for example, high levels of maintenance cost due to the age of the plants still operating in Australia and the fact that production involves a wet process. Allied to this is the land required for settling ponds for effluent water which is discoloured by tannin. Factors such as these all have their impact on costs.

The major factor which impacts on costs however is the sizes of the presses in relation to the market demand for the board. This applies not so much to Weathertex, as it does to the standard hardboard. When masonite first came on to the market the sheets were primarily used for lining internal house walls. Arising from this the standard module of manufacture has been established at 18 feet, which efficiently yields two 9 foot panels, appropriate to the end use of wallboards. Over the years the market has changed. Masonite has lost the wall panel market and held sway to a greater extent in products such as door panels, packaging and flooring underlay all of which favour a module which is a multiple of 8 feet or its metricated equivalent. Thus, in producing door panels in an 18 foot press, the mill is left with a two foot off-cut. This results in the double negative impact of higher costs and lower average selling prices - because the off-cuts are sold to clear the production at discounted prices.

Hardboard Obsolete

Considerations such as these have combined to produce a gloomy outlook for profitability in the Australian hardboard business.

The Pitcher Partners Report observes that "the hardboard product range around the world is perceived as dying. Significant hardboard markets have disappeared, including walls and doors. Medium density products which are made from softwoods are entering the market at sales prices lower than hardboard prices. To survive hardboard has been directed at niche markets primarily taking advantage of its greater water resistant qualities."

Experience in sales and projections of future sales show flat or declining expectations. As outlined there are constraints with existing plant and infrastructure on cost reductions in the manufacture of hardboard which put a floor under this industry's capability to compete on price against products employing newer technology, especially those using the dry process.

The Problem of Profit

Prices in the major hardboard product lines have remained constant in nominal figures, but have fallen in real terms and this trend is projected to continue.

Five year forecasts of profit and loss in standard hardboard have therefore been based upon selling prices not increasing, with costs rising by 4% p.a. With other things being equal such assumptions can only yield a declining trend in profit out-turns with it only being a matter of time before positive turns to negative and profit turns to loss. With Weathertex there is a more robust outlook and prices and cost assumptions match at a 4% p.a. inflation rate. This yields a profit projection which fluctuates with sales, and sales have been assumed to track with national home starts forecasts. But even this shows no rosy scene.

Analysis of the combined businesses show a high level of sensitivity to changes in volumes of production and sales, sales prices and costs. One can achieve whatever outcome one desires with changes in assumptions. For example assuming 5% increases in sales volumes and 5% increase in sales prices an attractive profit outlook will be generated. In spite of this, cumulative cash flows, on the terms of acquisition which seemed available to Midway, remain in negative territory. This is largely due to the finite time horizon assumed to apply to the life of Australia's existing plants with their age, state of technology and sub-optimal press sizes. Such finite time horizon brings into consideration substantial employee entitlements, based on current award and enterprise bargaining agreements, which thereby fall due for payment within the feasibility period. Compounding on to this is clean-up costs of plants being closed.

Devalued Industry

Thus the value of Australia's existing hardboard industry is compromised.

The major threat facing the hardboard industry is competition from similar products. The world wide situation of over-supply of medium density fibreboard is maintaining downward pressure on prices in those markets which both mdf and hardboard supply. For example almost all masonite door panel production ceased last year following the necessity for mdf producers to transfer the major door panel customers to mdf based door panels. Such pressures will persist for some time.

Today mdf plants may be built which are specifically tailored to door panel production in terms of modules for sheet sizes, in terms of thickness and with moulded finish. There is no way that old hardboard plants, built originally around sheet sizes appropriate to wall panelling, can compete in the doorskin market, either costwise or in terms of product diversity and finish.

Hardboard Revived

This however is entirely to do with the technology. It says nothing about the properties or quality of the fibre; it says nothing about the density of the board; it says nothing about the potential for a panel product made from hardwood fibre, with high density. There is no reason why a hardboard, manufactured in a high technology "state of the art" mill cannot compete with the softwood based medium density product. Direct comparison of hardboard - as a manufactured product range and as an industrial process in its present form in Australia - with mdf, is similar to a comparison of a Model T Ford (and the industry which at that time produced it) with a Boeing aircraft as a means of transportation.

The CSIRO has completed in May 1998 a project, Reconstituted Hardwood Products within its Wood Processing and Products Programme. The final milestone reports address the production of Laminated Veneer Lumber (LVL), Oriented Strand Board (OSB) and mdf. Regarding mdf, the conclusion is that Australian hardwoods can be used to make a fibreboard, "but at densities which are higher than those normally associated with MDF". This conclusion supports the assertion that hardwood is especially suited to the making of hardboard, and hardboard therefore re-emerges as a prospect and with that prospect the potential for hardwood residues' utilisation again becomes apparent.

Scope exists both in the market and from the fibre supply side for a new hardboard industry to be developed. Good timing will, however, be essential to its success, and the difficulty is that the present time, at which there is world overcapacity in mdf manufacturing capability, is not propitious in this regard.

T.H. Gunnersen
29th January, 1999

References

Commonwealth of Australia 1992, National Forest Policy Statement, AGPS, Canberra.

Love, G. 1998, Outlook for Australian Forest Products. In Proc. of the National Agricultural and Resource Outlook Conference. Canberra 3 - 5 February 1998.

Apsey, T.M. & Reed, F.L.C., 1998, Outlook for World Wood Fibre Availability. In Proc. of the National Agricultural and Resource Outlook Conference. Canberra 3 - 5 February 1998.

Stafford, B, 1998, Australian Pulp & Paper Industry - Strucutral Change, Strategic Implications, Market Opportunities. Paper presented at Australia's Paper and Forestry Forum, Melbourne 18 May 1998.

CSIRO Australia Client Report No.350 CONFIDENTIAL Evaluation of East Gippsland Hardwoods for MDF Production 9 April 1998.

Forest Management Plan, Central Highlands. DNRE May 1998 pp. 46-47

BIS Shrapnel: Laminated Veneer Lumber (LVL) and other Laminated Wood Products in the Pacific Rim, 1998 - 2003

Ginnings Far East Associates Pty. Ltd.: Industries in Transition: Australian Hardwood Plan. Draft Report for the Hardwood Forum of NAFI. October 1998.