Market Pulp

Summary of submissions

Three submissions were received from Carter Holt Harvey (Pulp and Paper) (CHH), Winstone Pulp International Limited (WPI), and Pan Pac Forest Products Limited (Pan Pac).

The market pulp industry in New Zealand is different to Australia.  New Zealand produces a substantially greater volume of market pulp (principally for export) and also produces a larger range of different pulp types.  The Australian activity definition for Dry Pulp is relevant to only one type of pulp (a moderately intensive chemical pulp).  If New Zealand was to adopt the proposed Australian definition there would be implications for some New Zealand producers.  It is therefore considered necessary to change the definition to accommodate the shape of the New Zealand industry. 

Three different categories of pulp have been identified in the New Zealand market: low yield pulp, high yield pulp with low freeness and high yield pulp with high freeness.  These products require different amounts of energy to produce, with low yield pulp (a chemical pulp) being the least energy intensive and high yield pulps being in the high intensity category.  The products have distinct characteristics but can be substituted to a significant, so there is a danger of distorting the New Zealand market if the proposed Australian definition was adopted.

There are three options available to accommodate the New Zealand industry:

  1. Maintain the activity definition as presented in the proposed Australian CPRS, with one activity definition and associated allocative baseline.
  2. Alter the activity definition as presented in the proposed Australian CPRS to have three allocative baselines (one for each type of pulp) under the one pulp activity definition.
  3. Prepare three activity definitions, each with their own allocative baseline.

Carter Holt Harvey (the low yield producer) prefers the single activity approach, while the two high yield producers (WPI and Pan Pac) prefer separate activities.  However, following discussions with officials there all accepted that a single definition with multiple allocative baselines (option 2) as the best reflection of the nature of the products produced in New Zealand.  Officials recommend option 2 as an approach that reflects the nature of pulp production in New Zealand, and aims to provide each type of pulp with an allocation that reflects their emissions intensity, without significantly disadvantaging any type of New Zealand pulp producer relative to the proposed position in Australia.  Officials consider option 3 would be the next best alternative to option 2.

WPI and Pan Pac expressed concerns about risks caused by a plant closure, which could lower the average intensity for market pulp from high to moderate, and this could result in unfair allocation for the high yield pulp producers if a future review was to factor this average into allocation calculations.  Officials advise that this risk is confined to one scenario only (the largest high yield pulp producer closing). Furthermore, any reduction in the level of assistance would be subject to a five year warning.  Option 3 would avoid the risk for WPI and Pan Pac if it was a concern, but officials advise that even if there was a large risk for these producers, it is not an appropriate reason for changing the activity definition.

[Withheld]

All three companies proposed extending the moisture content range of market pulp. CHH proposed increasing this level from 4-14% to 4-20%, while WPI and Pan Pac suggested it be extended to 4-17%.  CHH proposed that the market pulp definition should be included fibre cement products, and to include log billets as an input.

Summary of analysis

Matter Analysis
The requirement to define each activity by reference to a physical, chemical or biological transformation of inputs into outputs. Activity description is consistent with this principle and essentially the same as the Australian definition.
The undesirability of activities being defined by reference to the technology employed, the fuel used, the age of the plant, or the quality of the types of feedstock used when the activity is carried out. The proposed activity definition does not reference technology, fuel used, age of plant, or types of feedstock.  Pulp outputs can be defined by three different product categories as determined by the industry.
The desirability of defining activities:
  • consistently and equitably across industries.
  • in a way that takes into account the impact that definitions may have on business investment, geographical location, and the structure of activities.
  • in a way that takes into account the potential for intermediate inputs produced when the activity is carried out to be substituted for bought-in inputs.
 The proposed activity definition is consistent with this matter.
The exclusion of upstream products (producing wood chips) and transportation has been applied consistently across activities. 
Given the differences in the type of product produced, there are three options available to define the activity. These are:
  • Maintain the activity definition as presented in the proposed Australian CPRS, with one activity definition and associated allocative baseline.
  • Alter the activity definition as presented in the proposed Australian CPRS to have three allocative baselines (one for each type of pulp) under the one pulp activity definition.
  • To have three activity definitions, each with their own allocative baseline.
All three options appear to be broadly consistent with these principles.  However each option presents different implications for the industry.  Officials’ analysis suggests option 2 is the best fit with the principles.
The desirability of there being no overlap between activity definitions. The proposed activity definition overlaps to a degree with the four paper activity definitions but this is unavoidable.  Double counting is avoided by having separate allocative baselines for integrated pulp production in the paper sector.
Any other matters the Minister considers relevant, including activity definitions proposed to be used in Australia. The proposed activity definition is as close as possible to the activity definition for production of dry pulp in Australia but modified to accommodate the different shape of the New Zealand industry.

Recommendation

Officials recommend the Australian activity definition for dry pulp be modified to accommodate three different categories of pulp products to reflect the products produced in New Zealand.  This will produce a single activity definition with multiple allocative baselines.  In recommending this approach, officials also note that [Withheld] the risks associated with plant changes raised by the high yield producers would be confined to one scenario).

Last updated: 10 May 2010