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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Discussion

 

Introduction

The research objective for this case study was to estimate profitability of growing E. nitens for sawn timber production using the residual value method for pricing logs.

The residual value method offers opportunities to appraise log values in the absence of market prices for the products being produced. The monetary value of sawn timber from each log is a key determinant for residual value to the grower, thus accurate pricing is required for investor confidence in the results. This study attempted to price products as willingness to pay within a progressive market sector to achieve that goal. A range of issues emerged that influenced grade recoveries and price for sawn product. Factors that could contribute to log value include log position, diameter, pruning and age and these could form the basis of predictive models for log prices.

Best practice processing methods are required to determine a credible output efficiency benchmark. Sawn timber value and production efficiency both directly influence log residual value to the grower.

Factors Influencing Grade Recoveries from Logs

1. Sawmill efficiency

Percentage sawn timber recoveries from the log along with sawmill costs per log and sawn cubic metre were optimised within a diameter range for the equipment used in this case study. Diameters both above and below this optimum produced decreasing sawn recoveries and at a higher cost per sawn cubic metre of production. Polynomial regressions provided the best fit because costs and efficiencies were not linear. However, number of sample logs was insufficient at each end of the range sampled, leading to less certainty in the trends predicted from the top and bottom end of the diameter range.

When cutting large log quarters, rather than cutting two of these simultaneously as per case study standard method for smaller diameters, the quarters were cut individually. This appeared to slow production, and in results production efficiency drops off at the top end of the diameter range. Unfortunately there were only two sample logs above 43cm diameter, thus there were insufficient data points to corroborate this result. It is also notable that in larger logs wastage can result from slabs that are too wide for production of 150 mm boards. Because the target nominal width was a maximum of 150 mm for flooring product to maintain adequate stability in service, the edger operator must choose to saw either one 150 mm board from the wide slab, or two narrower-width boards with less wastage. This was observed to be an issue with slabs from logs at the large end of the diameter range that either slowed throughput or reduced sawn recoveries.

The case study sawmill equipment efficiency could potentially be optimised for larger logs, but in the configuration applied in this case study operated optimally at approximately 33 cm - 43 cm SEDs in terms of sawmill costs per sawn cubic metre. The tree stocking of 480 stems per hectare was possibly higher than optimum for this equipment with average plot sawlog diameters of 32.94 cm. Growers should target a log diameter range that matches production efficiency of the sawmill equipment for highest profitability.

Improved methods for sawing logs produce improved sawn recoveries and potentially more consistent recoveries. Potential improvements to sawmill efficiency were most evident with the twin blade edging equipment. Precision edging would likely improve both the quality and quantity of recovered sawn timber. Because the slab is presented to the rollers freestyle with no fence for guidance, operator error is inevitable. This can result in either skip or sawn recovery forgone. Laser guidance would offer visual cues for exact positioning slabs on the edger infeed and would likely improve sawmill efficiency.

At times the bandsaw was observed to deviate from a straight face cut, leading to slabs with varying thickness. The operator should change bands at regular intervals to ensure that bands are sufficiently sharp for straight cuts before this happens (J. Fairweather, pers. comm.).

The first cut should be exactly through the pith to ensure sawn recoveries are optimised. In practice this doesn’t always happen. Methods could be developed to facilitate fast and accurate placement of logs for receiving the first cut.

In terms of overall processing efficiency, levels of defect (sawn timber that did not meet product quality standards) were not high. Application of specific measures mitigated avoidable defect in most cases. However, Skip caused by collapse in profiled boards from buttlogs remained a relatively serious value-limiting defect at 28 mm green sawn thickness with no steam reconditioning. Checking levels were higher than desireable.

2. Log position

Logs from higher positions in the tree produced increasingly lower levels of drying degrade in boards than logs from lower positions.

Some buttlogs performed very poorly with high levels of drying degrade. This could be a tree (phenotype) effect as observed in other studies of E. nitens wood properties. In this study one tree in eight performed very poorly in terms of collapse and checking defect in the first two logs, while two trees performed moderately poorly and five trees performed relatively well. Only one log out of thirty-two performed very poorly and five logs out of thirty-two performed moderately poorly. Importantly, a larger dataset would be required to more accurately quantify this 'ratio of performance' between trees in terms of performance and profitability. This could lead to more accurately predicting economic impact of drying degrade on log residual value per hectare and according to log position.

Tree breeding to select for lower levels of collapse and checking, or improved processing strategies are opportunities that could each lift profitability to the grower for trees destined for solid timber production.

Pruned logs had low levels of defect caused by branches and produced comparatively longer board lengths of higher grades than unpruned headlogs. Best practice pruning methods were applied to these trees to minimise the knotty core (Patrick Milne, pers. comm.) and these methods are vindicated by the results.

Pruned buttlogs were estimated to be 60% of total sawlog volume in this study, so if the problems with collapse and checking in these logs could be overcome further by improved processing methods, residual value per hectare would improve significantly. Results from this study indicate that on average, value of buttlogs is lower than headlogs per log cubic metre, despite the lack of degrade caused by knots. Minimising drying degrade from logs 1 and 2 remains a challenge for researchers to overcome.

Average sawn timber value per log cubic metre was higher from headlogs than from buttlogs, despite unpruned headlogs having significantly higher levels of box defect caused by knots than pruned buttlogs. This is explained by decreasing collapse defect, checking defect, checking degrade and end-splits with increasing height in the tree.

End-splits accounted for 3.6% of total nominal sawn timber volume despite sawmilling as soon as practicable after cross-cutting logs. Although a comparatively good result, end-splits remain an important issue impacting on profitability, especially for buttlog sawlogs.

Unpruned headlogs yielded acceptable recoveries of longer lengths of higher grades (over 50% of nominal sawn recoveries were >1.2 m length, clears/select or standard grades). The shorter-length flooring product (600 mm - 1200 mm) yielded a potentially marketable product and the shortest length clears (300 mm - 600 mm) were only 2% of the total volume of flooring product from headlogs. Taking into account that headlogs had so little degrade from checking and collapse defect, it was not surprising that despite the smaller log diameters, sawn timber revenues were not lower per cubic metre than for pruned buttlogs.

The tradeoff with improved log quality higher in the tree is inevitably smaller average log diameter. Further refining log price estimates based on both position in tree and diameter could improve the ability to predict optimum rotation length and tree stocking for greatest returns to the grower.

3. Log diameter

A price-size gradient, or relationship between SED and sawn timber value or log residual value per log cubic metre was not quite statistically significant at the 5% threshold for the range of log diameters sampled (see Results). However, because the possibility of a type 2 error is high with the small tree sample size used in this study, it is possible that these relationships could be established as statistically significant with improved methods using the same processing equipment and log diameter range.

In this case study smaller diameter logs yielded larger volumes of narrower width material per sawn cubic metre of production. Board price per sawn cubic metre is generally known to increase with board width. However, SED was not a significant predictor of sawn timber revenue in the product range selected for this study. Although wider boards would be expected to command higher prices per cubic metre, the average price discount market survey respondents gave to 100 mm boards from 150 mm boards per square metre was only 10% (see Survey analysis). Because high per cubic metre product residual values were estimated for narrow board widths as laminating stock for panels (see Results), in this study sawn timber prices did not vary significantly between board widths. These price estimates reflect the products chosen for sawing in this case study and the methods for pricing these products rather than findings that could be generalised to other operations with a different product range. A product range that produces higher prices as board widths increase might also produce a more significant price size gradient for logs.

If an industry emerged growing and processing E. nitens, once the log market reaches equilibrium, because each sawmill has an optimum log diameter range within which operation efficiency is optimised, sawmills would target their preferred diameters and potentially pay a premium for logs in highest demand. The sawmill would also need to consider their own price size gradient as determined from the products they produce and market demand for these.

4. Half-log deflection

Deflection or ‘movement off the saw’ did not explain sawn timber recovery, nor sawn timber revenue. Neither log position nor SED explained deflection, nor did end-splits. By sawing 3 m log lengths combined with edging of slabs, the effects of deflection were either mitigated to the point that they were not significant, or alternatively there was a type 2 error for the relationships. A larger dataset would be necessary to confirm which is most likely.

Level of deflection did almost explain levels of end splits in dry boards (P=0.076). This relationship deserves more attention because if growth strain could be mitigated through selective breeding, end-splits could potentially be reduced simultaneously.

5. Crook

Because straightening cuts were applied to green slabs using a twin-blade edger, crook in the green sawn boards was not measurable. However, some boards were observed to develop crook during drying. Rather than measure levels of crook in dry boards it was decided to measure the consequences of crook in dry boards in terms of overall product value. Because one key quality criterion for the flooring product was production of perfectly straight profiled boards with nil crook, a straightening edge was employed when dressing the boards. Because level of crook increases with board length, full-length boards with crook present above an arbitrary threshold were docked so that shorter lengths were presented to the machine for straightening. This ensured that excessive skip did not result from straightening boards. The consequence of this strategy was that average board length was reduced. Some skip did also result from straightening as a result of judgement calls on appropriate lengths to be straightened. Although the specific loss of value caused by crook from drying was not measured, the consequences were a loss in value of sawn timber.

6. End splits

The strategy employed in this study was designed to minimise losses to sawn timber recoveries caused by end splits. Loss of value caused by end splits in short log lengths needs to be weighed against the gain in sawn timber recoveries resulting from straightening cuts over short log lengths. In practice this tradeoff resulted in selecting 3 m log lengths for all sample log diameters. The relatively low levels of board defect caused by end splits (3.6% of nominal sawn timber volume) highlights the strength of a strategy utilising short log lengths sawn as soon as possible after cross cutting.

7. Box defect

The primary cause of box defect in case study logs was the presence of defective knots in the sawn timber. Box defect is unavoidable, but by quantifying levels of knot defect in unpruned headlogs according to log position or diameter, opportunities could emerge that offer insight into improved silvicultural practices or highest value products for the diamater or position. Consumers value appearance products free of knots and discolouration, but board length between knot defects must also be sufficient to meet the needs of the market for target products. Although the quantities of box defect were relatively low on average in headlogs and the lengths of graded pieces were adequate for flooring applications, of interest for valuing logs is the high levels of knot defect observed in the first unpruned log compared with those above it. If this finding were generalised it could become a factor influencing log value. This case study clearly justifies further work on quantifying levels of knot defect and board grades and lengths in unpruned logs according to log position and diameter.

A range of factors could be responsible for influencing levels of box defect, including silviculture, species, site and sawmilling method. Indications from this study are that further research is well justified into the economic potential of unpruned E. nitens headlogs for solid timber appearance applications, with some clues evident for developing strategies to match log properties from headlogs with products that could yield greatest residual value.

8. Drying Degrade

Methods for controlling rate of air drying are not well published in the literature. Such methods would require weighing of costs against benefits before any one solution could be offered as having commercial benefits. For example slowing the rate of drying from standard practice offers the opportunity for improved drying performance if it were evident the benefits outweighed the costs.

This study compared two methods of air drying. Air drying outdoors, provided stacks are suitably weighted, positioned and wrapped to reduce air flow, appears to be a more cost-effective method for drying E. nitens sawn timber than air-drying in a drying shed. This is because costs are lower and no significant differences in resulting sawn timber product values were evident between these methods.

Once air dried, E. nitens timber is required to be ‘finished’ in a kiln to bring the moisture content down to levels suitable for a marketable product. Costs for kiln drying are very dependent on scale. Kiln drying costs were high in this study and managing drying costs at competitive levels could be an issue for small-scale processors.

Steam reconditioning is routine practice in Australia, an indispensable part of the process of drying collapse-prone eucalypt timber. The opportunity cost of not steam reconditioning is the loss in value of the timber in excess of the savings from not subjecting the timber to the reconditioning process. Overall profitability was improved by steam reconditioning boards from all logs. However, for logs in positions higher in the tree, steam reconditioning appears to not be necessary and the price of these logs could reflect the consequential reduction in processing costs.

Product Selection and Pricing

Pricing of sawn products for this case study involved inferring product residual values along with application of direct pricing techniques as results from a market survey. These methods were necessary for estimating market prices empirically for E. nitens sawn timber products because these are not currently available in the market. The key issues identified from this study relevant to maximising value include appropriate selection of products and appropriate methods to produce products acceptable to market. These are outlined below.

Grading methods and end uses

Appearance grade rules as found in New Zealand and Australian grading standards apply generally to all appearance end uses. A shift from general appearance grades to those based on specific end-uses could lead to greater market acceptance of degrade or feature not of importance to the end-use. By allowing feature in overlay flooring that meets general rules for appearance but is not compliant with general structural rules necessary for flooring over joists, Farm Forestry Timbers grading methods improved sawn timber value from Australian standards grading methods. The challenge for market development of plantation hardwood products could indeed be in shifting the market demand from general grade expectations as held in traditional markets dominated by old growth hardwood timber, towards acceptance of products produced for specific applications that improve utilisation of plantation wood.

This study demonstrated the economic benefits to the grower in terms of increased log residual value by grading for products rather than to general appearance rules that apply to all products.

Product selection

Sawn products selected for this study (solid timber flooring and laminated panels) were only assumed to produce highest log residual value. Further research into selection of sawn timber products based on product residual values has the potential to improve returns to the grower from the benchmark set in this study. Log physical characteristics according to age, diameter and position in tree, such as density and movement in service, along with product properties such as board thickness, width and length, could each could influence the strategy applied by the sawmiller to maximise value from logs. An improved understanding of these could offer opportunities for categorising and pricing logs for greatest returns from them.

Products and Market Value

Market development for E. nitens sawn appearance products is yet to take place. For residual value to be relevant to growers who would invest in a plantation that may not be harvested for decades, product prices should offer a roadmap to their future market. Investigating product innovations, emerging products and trends along with market potential for products not yet tested in the market is well justified.

Flooring product pricing

The primary target product produced in this case study was solid timber tongue and groove flooring. A global transformation of the solid timber flooring industry is well underway, with approximately half of timber floors laid in New Zealand now engineered flooring product, compared with 68% globally (Robin Curtis, pers. comm. 12/02/2015). Solid timber flooring is losing market share to engineered product because of both price and quality constraints. Well-constructed engineered products can be more stable than solid timber, and installation costs are usually lower (Robin Curtis, pers. comm. 12/02/2015). Given the rotation length of timber plantations and the need for some certainty around markets for resulting products and product values, work is justified in the area of value advantage and economic value to the customer in order to estimate a pragmatic market price for solid timber flooring products based on competition with alternatives.

End matching of timber flooring product has opened up opportunities for reducing wastage and utilising shorter board lengths than in traditional random-length solid timber flooring installations. The trade-off with end matching is that although installation costs and waste are reduced, production costs increase. By deducting the cost of end matching from the graded-pairs >1200 mm price for lengths 600 mm – 1200 mm, this case study attempted to price short board lengths to a level the market would accept readily. Further work is justified on the opportunity costs involved, to further improve methods for pricing timber products new to market.

Traditionally, timber floors are sanded after installation and before coating, which is an additional cost and generates dust, an inconvenience for the customer. However, sanding may not be required if board lengths were short, edges were perfectly straight and boards were end matched. Installations of solid timber floors are taking place in New Zealand from short end-matched tongue and groove timber that is not sanded before coating (Robin Curtis, pers. comm. 12/02/2015). Such methods offer new to market solid timber products that are potentially competitive with engineered products in both price and quality.

Engineered timber flooring products are available only as shorter lengths, to a maximum of 2.1 m with piece-lengths averaging less than 1 m (Robin Curtis, pers. com 12/02/2015). Based on the increasing market share held by engineered product, the appearance of short board lengths in timber floors appears to have gained acceptance in the market. However, there remains uncertainty among merchants and other flooring specialists recently surveyed, who were reticent to the concept of stocking short length solid timber flooring product (Survey analysis). A number of merchants surveyed assumed that costs of installation are higher for shorter board lengths compared with longer board lengths and were also under the impression that their customers do not favour the appearance of a floor made from ‘shorts’. On average 9.6% of graded sawn flooring timber in this study was between 300 mm and 1200 mm in length, suggesting that accurately pricing this product is important for improving log residual value estimates.

Two pricing methods were employed in this study to estimate prices for E. nitens graded flooring lengths between 300 mm and 1200 mm. The increase in price from graded-pairs pricing to constant-sum pricing survey methods for 300-600 mm lengths of clears grade was 100%, suggesting that pricing methods require refinement. The graded pairs survey method (See Methods) discounted short lengths from their appearance as a floor. Costs of end-matching for 600 mm – 1200 mm lengths and edge-jointing for 300 mm – 600 mm lengths were deducted for product residual values. In contrast, the constant-sum approach (see Methods) priced utility and thus respondents’ comparative price for different lengths directly. Survey methods that provide the respondent with a greater level of detail on opportunity costs might offer greater accuracy in estimating price.

Pricing 300 – 600 mm lengths edge-jointed as flooring timber is especially problematic because this product is new to market. The market survey graded-pairs method (See Methods) discounted short E. nitens timber lengths based on their appearance as a jointed floor. The cost of edge-jointing was then deducted from the graded-pairs survey price for 300 – 600 mm board lengths to estimate price per lineal metre as residual product values. Once the product becomes better established in the market and its price stabilises according to consumer willingness to pay, estimating residual product value would not be necessary and the accuracy with which flooring ‘shorts’ contribute to log residual value would be improved.

Approximately 65% of timber floors are installed over concrete or other solid substrates, with only 35% being laid over timber joists (Robin Curtis, pers. com 12/02/2015). Floors laid over a solid substrate require extremely straight timber to be laid ‘tightly’, without incurring the additional cost of cramping into place and weighting (Chris Lee, pers. comm. 2014). Short straight lengths, with properly prepared ends, can halve the cost of installation over a solid substrate (Chris Lee, pers. comm. 2014) compared with random length timber that requires docking on-site.

This study quantified product lengths as a straightened product in order to meet the requirements of the progressive section of the contemporary flooring market for perfectly straight boards, as a product potentially competitive with engineered flooring on both price and quality. However, pricing of shorter length flooring products from a market survey of the current population of flooring timber experts allowed for traditional merchants that exclusively deal with longer-length flooring product to negatively influence the price of shorter board lengths used in this study. This range of views illustrates the state of flux that the hardwood flooring industry is currently in.

Given the range of issues that limit the accuracy with which price of timber shorts can be estimated, further work is justified to reveal the strengths and weaknesses of competing products and their associated opportunity costs. Improved price estimates for emerging flooring products are well justified in order to increase confidence in estimated grower returns from plantation E. nitens based on the residual value approach.

Panel product pricing

After taking into account the costs of glue-laminating and sale price on residual laminated product value, panel feedstock performed well in terms of price by volume. If this product were to gain market share, logs with a smaller diameter than those milled in this study could potentially be utilised profitably for laminated appearance products. The primary constraint to milling smaller logs is increased production costs as log diameter decreases. By including sawmilling costs, the residual value approach offers the opportunity to explore utilisation of smaller logs in conjunction with market research that defines price and demand for these products.

Market premiums

Although the market potential for E. nitens appearance timber is uncertain, this survey suggested that a premium for locally grown sustainable plantation hardwood could be as much as 20% over imported hardwood extracted from natural forests, provided the quality was equivalent.

Slab firewood

Significant volumes of slabwood were produced from the case study sawmilling operation and firewood by-product was produced at low cost as part of the sawmilling operation. Predicted revenue per hectare from slabwood firewood was $17,950. Eucalyptus nitens has been extensively planted in the Canterbury plains for firewood (P. Milne pers. comm.) and is recognised as differentiated and superior to radiata pine. Producing this level of income from a by-product at little cost clearly improves the economic viability of growing E. nitens for solid timber in Canterbury, with the region’s strong demand for firewood.

Processing and Scale Efficiency

An emerging plantation forestry species is likely to be harvested initially as a small resource, but with growth expected over time. This study was intended to evaluate a small scale processing operation as a benchmark from which cost efficiencies could be improved with scale.

The small solar kiln with its high capital cost contributed significantly to high drying costs of $202.28 per nominal sawn cubic metre. This is double the cost for drying ash eucalypt in Australia (G. Pearn, pers. comm. March 2015). Total processing costs of $624 per nominal sawn cubic metre before accounting for sawmill overheads undoubtedly could be improved with increased operating scale. Lower costs would directly improve log residual value. If processing scale were increased and revenue maintained with a corresponding reduction in processing costs, log residual value and NPV to the grower would very likely be significantly improved.

Sawmill Profit

Management, marketing and sawmill profit as an overhead cost could not be measured and accurately assessed within the budget and scope of this study. An 8.5% return on investment of capital and equipment along with depreciation costs for equipment may not be sufficient to justify owning and operating an enterprise buying logs, processing these and selling the sawn products. The additional return of 10% of sawn timber revenue used in this study was arbitrary. Profit over and above return on investment that would sustain an operation is dependent on the individual proprietor’s expectations and would likely be commercially sensitive. However, a reasonable profit margin could be estimated using empirical methods and further work may be justified to predict overhead costs accurately enough for improving the residual value approach to profitability of growing E. nitens for solid timber.

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