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A perfect storm

Most people I talk to are saying this is the worst log market ever seen. The immense financial pressure and constant threats to business, coupled with totally destroyed public perception from slash, can feel pretty deflating and difficult to climb back up from. It’s definitely taking its toll financially and mentally, and the overall concern is for the people, viability of our contracting businesses and long-term sustainability of our industry.

Log prices have fallen so low that they’re not sustainable for anyone. When you look at all the elements in the supply chain, from silviculture, mechanised harvesting, haulage and port operations, sustainability at these low prices simply doesn’t stack up. Generally, the response from forest owners is to introduce quotas or end contracts altogether. Why has the price dropped? It’s a combination of factors, from windthrow and other lower wood grades being exported, weak export demand particularly from China, competition with Australia who are supplying to China, and reduced domestic demand with a construction downturn. 

Costs have increased everywhere with high inflation, and margins have been squeezed or wiped out altogether. This has been experienced across the board, from established and newer contractors alike.

We’re hearing from finance contacts that many contractors have already received multiple periods of payment holidays and/or term extensions due to Covid, weather and unstable market conditions. These periods have eroded both contractors working capital reserves and equity in their financed machinery.

We’re hearing that ‘lender fatigue’ is growing with signs of increased reluctance from lenders to fund forestry equipment. We’re told this may worsen and finance costs may increase in the future.

General Manager for Commercial at UDC Finance, Morgan Strong says “UDC Finance is seeing significant distress in the forestry industry at the moment. There are a number of factors including rising costs, a reduction in export log prices and the impact of the cyclone which are contributing to the pressure on the industry.“ 

During these challenging periods, it is very important that operators keep a close eye on costs and revenue to ensure changes can be implemented as early as possible to help manage cashflow. In addition, working closely with advisors such as an accountant as well as funders to get a plan in place early and keep lines of communication open is vital for getting through this period. Over the last few months several forestry contractors have being supported with reduced loan payments or other relief. 

Morgan says “while we appreciate many operators have not experienced the economic environment we are currently in, UDC has worked with customers to help them navigate through tough periods in the past and believe there are ways for the forestry industry to get through the current challenges.”

From an accountancy perspective, we’re hearing that clients with IRD debt are proving difficult deals to get ‘across the line’ and in many cases, are more likely to be denied lending.  

While mechanisation aimed to improve the health and safety aspects of logging, the increase in costs associated with financing and operating this specialist gear is huge, as are the monthly finance repayments that must continue, regardless of income levels being realised.  Although requiring contractors to have this equipment, Forest companies have been slow in adapting rates to keep up with the associated costs. The break-even point is now a lot higher than the old manual style crews.

It’s really tough and there is no silver bullet. Professional advice can be expensive, but it can also help save you in some situations. Here are some general recommendations:  

  • Communicate with your finance company. Don’t be afraid to have upfront discussions with them as to what support they can offer.

  • Communicate with your forest principal. Ask the hard questions re forward work, timeframes, production levels and crew configurations.

  • Talk to your workers. Use up any holidays due. Negotiate a standdown rate for the next few weeks if you can. Agreement to any standdown rates must be signed off by both parties to be legally valid.

  • Check whether your personal assets are protected.

    • What guarantees (both personal and corporate) have been provided?

    • What assets are held as security?

    • If a Company structure, what are the positions of your shareholder/related party current accounts?

    • Do you have ownership of your assets separated from your operating activities (i.e. in a trust)?

    • If a Trust structure, do the assets or liabilities of the trust include amounts owed to or by you as settlor/beneficiary, which may expose the trust assets (or your personally) to risk?       

  • Try to negotiate IRD debt whether via your accountant or directly. We have heard of some contractors having success negotiating with IRD for remission of penalties and core tax debt. Each case is different but if you don’t ask you won’t know. Be prepared to provide further information to IRD to support a request for financial relief.

  • Discuss with your accountant:   

    • Your current/projected cashflow position

    • Alternative income streams and the impact on net cashflow

    • Work options to get other funds into the equation. That may involve using equipment you’ve got or going becoming an employee for a while  

    • Options when you’ve gotten over the shock of what’s happened – is it actually a case of sustainability?

  • Review your insurance. Can you reduce your premiums temporarily (i.e. do you have equipment that is (securely) parked up and not being used? Is the level of liability cover appropriate given the current circumstances?

  • ACC. Are the current level of wages that you are paying consistent with the prior year?  If significantly less, then it may well be worth a discussion with ACC to request a review of levies. We’ve heard of some contractors negotiating their ACC bills down while working reduced quotas or parked up.

  • Face it head on. The key to all of these steps is communication. Hiding from the problems just worsens the consequences. Seek help, face the tough decisions head on and be brave.

FICA continue to support members and won’t turn anyone away that is wanting to get better advice. We can put you in touch with experts and finance specialists. We are also there to offer support for your welfare, mental wellbeing and just to be a sounding board 24/7.

How are we in this perfect storm?

  • COVID interruptions and lockdowns having severe impacts on the demand for wood and the ability to supply

  • Continued (and accumulating) adverse fluctuations in log prices for the past 3 years

  • Short term (i.e. turn-on turn-off) mentality of harvesting principals

  • A flooded domestic log market

  • Significant weather events, causing access and supply chain issues across the nation

  • Significant increases in capital and operating costs being endured  by the contractor with (often) minimal adjustments to contract rates.

  • Ongoing reductions to production levels

  • High inflation and increased costs of servicing/acquiring debt

  • Diminished working capital and ability to service debt and capital commitments

END NOTE: Comments have been provided by Morgan Strong at UDC Finance and Sonya Elmiger at Blackburne Group. This column is not intended as professional advice and is provided on an information basis only. This article ran in the July 2023 issue of NZ Logger Magazine.