Associate Professor Graeme Wells Contribution to the Tasmanian Round Table for Sustainable Industries Project. Comments on the Forestry Tasmania / Gunns Limited Long Term Pulpwood Supply Agreement.
(i) Distribution of price risk: Insufficient information is available to assess the distribution of price risk between the two parties to the contract.
(ii) Floor prices: If CPI inflation averages 2.5% p.a. (the mid-point of the Reserve Bank target range) over the 20 year life of the agreement, the LTPSA provides for a fall in the real floor price of both native forest and plantation hardwood.
(iii) Average realised prices: On the basis of FT forecasts of average selling prices over the life of the contract, it is likely that achieved average selling prices of hardwood pulpwood will fall in real terms over the life of the contract. Were that performance to be mirrored by average selling prices for the remaining 1.3m tonnes of sustainable FT annual harvest (i.e. wood supply not covered by the LTPSA), it is likely that the rate of return on FT assets will fall over time.
(iv) 5-year contract renegotiation: There are two significant ambiguities in the LTPSA, relating to FT rate of return on equity and the possible alternative use of the FT estate as carbon sink forest. Resolution of these ambiguities would help reduce sovereign risk under the contract.
Download the analysis: Comments_on_Forestry_Tasmania_LTPSA.pdf