But is the pulp mill economic

Judith Ajani

The silent sleeper in the Gunns pulp mill debate is its commercial viability …
PERHAPS Malcolm Turnbull with his business blood cannot imagine a company advancing a $1.5 billion investment without having done its sums, carefully. Turnbull is not alone here: most people would think it incredible too. But Gunns is no ordinary company. It has never experienced a conflict–free business day since its mid 1980s beginnings. Its business battles are as much battles against greenies as they are for market share. Gunns is a company lifted by a cheer squad rooted in four decades of battles over hydro-electric dams, mining, woodchipping and pulpmills in an island state of just 500 000 people. Whilst its cheer squad bears little commercial responsibility for Tasmania’s largest ever investment, financial prudence requires that the Gunns board somehow keeps its feet firmly on the ground.

Gunns is reserving its final judgment on the financial viability of the mill until the approvals are in. But, because the environmental and political debate precedes the economic judgment, the mill’s commercial viability has slipped under the radar. It is quite possible that it will fail the test.

In Tasmania, a grudge factor has simmered since the late 1980s when Canadian paper maker Noranda pulled out of the Wesley Vale joint venture pulpmill proposal with North Broken Hill. The public understands the pullout as industry’s response to federal environment minister Graham Richardson’s tightened environmental requirements. This is just half the story. Since Noranda’s decision, globally traded chemical pulp prices have halved in real terms: a scenario they had not planned for and an economic reality of little interest to grudge bearers. In the shadow of Wesley Vale, Gunns’ proposed pulp mill is so emotional and so politically complex that neither Turnbull nor his shadow, Peter Garrett, should assume economic rationalism drives the show.

Despite the mill’s commercial viability remaining untested publicly, both Gunns and the Tasmanian government promote its wider economic benefits. If the pulp mill’s financials do not stack-up, neither does the $6.7 billion boost to Tasmania’s economy and the 1 617 new jobs calculated by the Allen Consulting Group as input to Gunns’ Integrated Impact Statement. Allens did not investigate the financial viability of the mill before calculating these figures. The study’s project director later argued that ‘it is difficult to see why this [the mill’s commercial viability] is anything other than a matter for Gunns and the company financiers’ and questioned the legitimacy of government or the public interest in the commercial viability of major industrial projects. Allens, however, ignores the Tasmanian public’s business interest through Forestry Tasmania who will supply most of the wood from public native forests. It also ignores the risk of more federal government hand-outs if Tasmania’s public purse is used to keep an uneconomic mill alive. ITS Global, the consultants engaged by the Tasmanian government to review the social and economic benefits of the pulp mill, also started with the premise of the mill’s commercial viability. CommSec, using information Gunns presented in its Integrated Impact Statement and its own market analysis, concluded the mill would be marginally positive for Gunns but emphasised that the project was highly risky, strongly leveraged to the price of a volatile commodity and subject to both approval and construction risk. CommSec’s financial analysis was hamstrung by data constraints, especially on native forest log prices that remain confidential to Gunns and the Tasmanian Government. Other broker reports agree with CommSec’s risk assessment but give a more positive assessment of the mill.

Five years ago Visy Industries broke through the pulp mill barrier in Australia with the commissioning of its softwood plantation mill near Tumut. Environmentalists gave it a tick having passed the first hurdle–no native forest logging–and the second concerning emissions. Visy also engaged in real public consultation. On environmental and consultation matters, the two pulp mills are fundamentally different. They are also fundamentally different in their market orientation, and herein lies the high economic risk CommSec associated with the Gunns pulp mill. Visy processes its softwood pulp into paper to supply its domestic box making plants. It enjoys the transport and familiarity advantages of a domestic market. Visy’s strategy replicates the Australian and global corporate structure of integrated pulp and paper production. Gunns cannot follow suit with its hardwood pulp geared for printing and writing paper. This is because PaperlinX, Australia’s monopoly producer of printing and writing paper, has the domestic market effectively stitched up through its own production or the imports of its subsidiaries. Gunns must therefore compete in the global pulp market. This market is both a dumping ground in economic downturns for old players and the target of new, extraordinarily low cost producers in South America: CommSec considers that Gunns cannot match their low costs. For many decades now, real (inflation adjusted) pulp prices have followed a roller coaster down in this gruesome market. Gunns’ forceful lobbying to keep costs down is no surprise: the problem lies in the Tasmanian government who leads the cheer squad.

Under intense political pressure, Malcolm Turnbull brings in scientists to help fix the spreading political problem. An economic evaluation would be equally valuable. It would help shape how the federal government might best bring Australia’s native forest pulpmill saga to a close. For Rudd, this task includes managing the forestry union and Labor politicians who will not forget Wesley Vale days.

Judith Ajani is an economist at the Australian National University and author of the recently released The Forest Wars (MUP, 2007).