Mill Closures: Government Intervention Or Free Market?

John Stulen, Director, Innovatek Limited

As workers and their families wake to the news that Norske Skog is now considering closure of their long-standing Kawerau pulp and paper mill, the debate between free markets and Government intervention comes into stark contrast. Or does it?

The possible closure of the Kawerau mill comes inconveniently close to the same potential fate for the nearby Whakatane Board Mill in the Bay of Plenty. While others may consider this a minor regional issue, there is a high multiplier effect throughout the Bay of Plenty and South Waikato regions in that these mills also support numerous supplier and service industry jobs such as engineering, maintenance and substantial indirect downstream local employment.

With the news coming inconveniently on Budget Day 2021, it brings to mind the potential for two different schools of thought on what, if anything to do. Should the Government intervene to save regional jobs or do nothing as the free market is operating?

Background

The pulp and paper mill in Kawerau was originally conceived by the Government in the 1920’s. Mooted by Macintosh Ellis our original Director of Forests, the mill plan came to reality in the late 1930’s, driven by Pat Entrican, Director General of the NZ Forest Service. Since it was built in the 1950’s with a capital injection from taxpayers, it has generated considerable tax revenue. It was closely linked to the establishment of Kaingaroa Forest and many smaller forests in the region.

The establishment of the Tasman Pulp and Paper Mill, as it was originally known, was also key to the growth of one of New Zealand’s well-known corporates, started by Sir James Fletcher. While the Government of the day could see the potential for the country to profit from fast-growing forests, they were also quick to recognise the added benefits of establishing mills to process the wood into pulp, paper and timber for construction materials.

Mills, logs and free markets

During the 1990’s and 2000’s local forest production grew rapidly, and log exports grew disproportionately to local mill capacities. In fact, investment in pulp and paper and solid timber lagged, as our new foreign-owned forest owners found fast cash from another market. It was far less capital intensive to fell forests for export to countries willing to pay well for our fast-growing pine resources. Japan was a major market, then South Korea and now China.

The free market does operate, if with a slight power imbalance in favour of forest owners over more, but smaller mill owners. However, during this time sawmills have reduced in number but grown in size with Carter Hold Harvey (CHH), Red Stag Timber and Pan Pac Forests topping the producer list.

Today’s dilemma - intervention or free markets?

Fast forward to today where, through a series of non-strategic decisions, largely driven by Governments of the day, New Zealand’s forest ownership is largely in overseas equity ownership, managed locally for the interests of a range of pension funds.

Since Labour came to power again, they have started to change the conversation to encouraging industry development. Te Uru Rakau - NZ Forest Service officials are working on an industry transformation plan to process more wood locally with bioenergy and biotechnologies to balance our carbon liabilities.

The question is whether a plan can or will be put into action in time to save jobs and the prosperity of our forest-based regional communities.

Carbon solution

Luckily, for the Government potential solutions for keeping jobs and growing taxable earnings here may be eased by carbon market growth. There are several positives in place already.

Carbon markets already exist around the work and are rapidly growing. They are becoming more profitable while helping to counter climate change. The commitment to balancing carbon has bipartisan support here. So, there is a potential combined solution. Government can incentivise a new direction for wood-based processing industries and industry will be ready and willing as markets and profitability are already in sight.

Other carbon-positive market solutions are already well-developed overseas and beginning to grow here: engineered wood products (or mass timber).

Red Stag Timber is now manufacturing cross-laminated timber (CLT) for carbon-neutral building solutions. Several others including CHH have already established the sister product, laminated veneer lumber (LVL), for building tall carbon-friendly multi-residential and commercial buildings that conveniently withstand earthquakes better as well.

Perhaps the solutions to these mill closure problems will now be facilitated by carbon making for a less polarised and more rapid solution than before.

Disclosure of interest: John Stulen is a director of Innovatek Limited, a forest and wood products technology transfer company.

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