Eucalyptus nitens, recovery and economics of processing 15 year old trees for solid timber

Report Date: May 2015

Author: Dean Satchell, Sustainable Forest Solutions, R.D. 1 Kerikeri, Northland 0294
+64 21 2357554

Appendix 1: Assumptions in Discounted Cash Flow Analysis
Appendix 2: Sawn timber price estimates
Appendix 3: Literature review - Value-based survey pricing methods
Appendix 4: Literature review - Estimating profitability of growing E. nitens for solid timber production
Appendix 5: Sawmilling method
Appendix 6: Flooring price survey instrument
Appendix 7: Survey results table
Appendix 8: Survey analysis
Appendix 9: Wood physical properties, test results
Appendix 10: Glossary of terms
Appendix 11: Case study stand plot
Appendix 12: Comparison between levels of internal and surface checking
Appendix 13: Air drying experiment
Appendix 14: Sensitivity analysis

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Executive summary

The case study

Currently in Canterbury the only market option for E. nitens logs is for firewood. Logs on average gross $50 per tonne delivered, from which harvesting and transport costs are deducted for a net return to the grower of between $0 and $20 per tonne (J. Fairweather, pers. comm). Although E. nitens is the preferred species in New Zealand for short-fibre pulpwood (Nicholas & Hall, 2011), there is no pulpwood industry in Canterbury and thus no market, despite excellent growth rates in the region.

At age 15 this stand had a stocking of approximately 470 stems per hectare, with all trees pruned to 6.5 m and an average dbh of 43 cm. The average buttlog diameter was therefore within the optimal range for sawmilling on Woodmizer bandsaw machinery (Satchell and Turner 2010).

The experience from New Zealand processors who have attempted to produce sawn timber is that the species is generally too difficult to saw and dry, primarily because of excessive degrade in drying. This has been confirmed by contemporary Australian research (Innes, Greaves, Nolan, & Washusen, 2008; Washusen et al., 2008; Washusen, 2011). Consequently there is no current demand for sawlogs and sawn timber is not available in the market, despite the productivity of the species.

Canterbury E. nitens timber is sufficiently hard for flooring (J. Fairweather, pers. comm.). It is strong even as young trees (Gaunt et al.) and like other eucalypt timber has an attractive appearance. These properties offer opportunities to develop structural, flooring and appearance markets for the timber if the processing challenges could be overcome.

In order to estimate returns to the grower, both log volumes per hectare and log prices were required. Log volumes were estimated from two plots in the case study stand, but because there was no market from which to derive price data, estimating log values was more challenging. The residual value approach offered a method commonly used for appraising log values whereby processing costs and required profits are deducted from revenue to leave an estimate of the residual log value. This price represents the maximum amount the sawmill would pay for the log (D. K. Mbugua, 2003).

Pricing of timber products

Ex 125 mm width floor laid from study boards. A light brown stain was applied.

Because market prices for E. nitens sawn timber products were not available, a market survey of merchants, retailers and floor layers was undertaken to establish wholesale price estimates for the flooring product. The market survey was designed to elicit respondents’ judgements of price for E. nitens flooring product using both graded-pairs and constant-sum allocation methods. Results were a monetised numeric estimation of maximum acceptable price relative to the given price of a reference product (Monroe, 1990, p. 122), Victorian ash. Rather than assuming that E. nitens and Victorian ash eucalypt hold equivalent economic value, by taking differences in appearance, hardness and movement in service into account, prices for E. nitens substitute products were estimated without market prices being available for these. By directly comparing quality attributes including appearance, hardness and movement in service, survey respondents were induced to use normal consumer behaviour in comparing price and levels of attributes between species or products in deciding a maximum acceptable price they would be willing to pay for the E. nitens products.

The market survey produced wholesale price estimates for each case study board based on its width, length and grade, and according to the physical and appearance characteristics of the 15-year-old case study E. nitens timber. Price estimates for boards were summed for an estimate of revenue from each log.

This case study focused on production of flooring products. It was assumed that solid timber appearance flooring was the most marketable and valuable product for sawing.

The case study sawmill was John Fairweather's small commercial operation near Balcairn in Canterbury. This operation comprised a Woodmizer LT 40 super hydraulic bandsaw and Woodmizer twin-blade edger. Other equipment included a drying shed, a Solarola solar kiln and a Logosol 4 side profiler. This equipment was specifically set up for small scale eucalypt processing.

Estimating profitability

The volumes, sizes and quantities of 3 m long sawlogs with small end diameters greater than 25 cm were estimated per hectare from two plots in the case study stand. Average sawlog small end diameter was estimated to be 33 cm, with 311 tonnes of pruned buttlogs and 208 tonnes of unpruned headlogs at age 15.

Grade recoveries were measured for each board from each sample log. The costs incurred in producing the sawn product and the volume of sawn product recovered were also variables under study for the processing method used. Together these directly influenced profitability of the case study stand.

Sawn production

Headlogs produced 43% of sawn timber from sample trees, while buttlogs produced 57% of sawn timber. Nominal recovery of sawn timber averaged approximately 40% of log volume. Product recoveries were approximately 85% of sawn timber volume, with collapse and end splits the primary defects present in the sawn timber. End splits amounted to 3.6% of sawn timber; skip caused by excessive collapse was approximately 5% of sawn timber; defect docked because of excessive checking averaged 2.5% of sawn timber; and 3.7% of sawn timber was docked because of knots. In total, 15% of sawn timber was docked because of defect.

Products

Approximately 70% of sawn timber was flooring product. The highest quality flooring product (clears/select grade in lengths greater than 1.2 m) was 50% of sawn timber.

Boards narrower than 100 mm comprised approximately 15% of sawn timber and these were graded as panel laminating stock. 

Headlogs produced a surprisingly good quality product, however average lengths were shorter because knots were often docked for shorter clear lengths.

Production costs

Sawmill costs at $90 per hour of operation averaged $213 per nominal sawn cubic metre of production.

Drying costs per nominal sawn cubic metre were estimated to be $202 and steam-reconditioning costs were an additional $30.

Machining costs per nominal sawn cubic metre were estimated to be $201.

Processing costs averaged $722 per nominal sawn cubic metre, including an 'overhead' cost for administration and management of $98. Total processing costs were $624 per nominal sawn cubic metre before accounting for sawmill overheads.

Price estimates for boards

The wholesale price estimated for profiled flooring product averaged $3.94 for select/clears grade 125 mm width boards greater than 1.2 m length. All boards from the sample logs were docked where necessary, then allocated into grade, width and length categories. Discounts and premiums were then applied to the levels of these categories. Over 50% of sawn timber was in the highest grade category (select/clears grade >1.2 m length).

The panel laminating stock was priced as residual product value by producing two grades of laminated panel, then selling these. Panel production costs were subtracted from sale prices.

Revenues were estimated for each log by summing prices for the products derived from that log.

Revenues

Average wholesale price for sawn timber was estimated to be $985 per nominal sawn cubic metre. Predicted nominal sawn timber volume produced per hectare was 221 cubic metres and sawn timber revenues were estimated to be $217,610 per hectare, from which log harvesting and transport costs of $23,530 and processing costs of $159,658 were deducted. Other products added $24,484 to revenue, primarily firewood ($17,950) as a by-product of the sawmill operation. Pulp logs contributed only $993 per hectare from 24.1% of merchantable log volume. After accounting for costs of production, log residual value was approximately $68,320 per hectare at year 16.

Sawlog price as stumpage averaged $131 per log cubic metre. Average sawn timber value per log cubic metre was $419.

Discounted cash flows

The base scenario assumed a discount rate of 8.5%, a land price of $10,000 per hectare, with logging, loading and transport costs of $44 per tonne and grower costs of $7,507 per hectare. Under this scenario, assuming sawn timber was sold at year 16, net present value (NPV) for the grower was -$260 per hectare. Therefore rate of return for the grower was estimated to be just under 8.5% per annum.

The case study stand was situated on land not normally planted in forest. Land price is high in the area because of lifestyle values and proximity to Christchurch. Clearly if growers were to utilise equally productive land that was less expensive then profitability would improve. A sensitivity analysis compared the impact land prices had on profitability along with varying logging and transport costs. By reducing land price to $5,000 per hectare NPV increased to $3,269 per hectare. However, a corresponding increase in logging and transport costs to $77 per tonne significantly reduced NPV to -$6,494 per hectare.

Conclusions

This case study indicates that E. nitens may be an economically viable forestry plantation option for sawlog production. E. nitens is very easy to grow on the right site (cool climate with reasonable but not excessive soil moisture), produces large volumes of sawlogs on a relatively short rotation and appears to have the potential to be processed into products of sufficient quality and value to produce a profit to the grower. The production benchmark set by this case study is not high. Although attention was given to applying best-practice processing methods, there is no doubt that improvements will be made to grade recoveries as more is learnt about processing the species. Furthermore, the high costs of production associated with this small-scale operation could be investigated with a view to reducing these.

By increasing the scale of the plantation resource, processing scale efficiencies would in theory improve returns to the grower. In practice, developing a profit-generating resource of pruned and thinned E. nitens for solid timber production will no doubt have its challenges. Nevertheless, for the small grower having some degree of confidence that growing, pruning and thinning E. nitens might lead to financial reward is of value and was the primary objective of this study.

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