Summary of financial risks of Gunns' proposed pulp mill

Report prepared by TAP, 2007.

Gunns Ltd and the Tasmanian Government both trumpet the economic benefits of an anticipated $6.7 billion boost to the state economy with 1617 new jobs from construction and 292 jobs long term.

However, by counting only benefits and ignoring costs, the economic studies of the proposed pulp mill by Gunns and the Tasmanian Government fail basic due diligence tests. The economic report prepared for Gunns by Allens Consulting Group failed to meet Australian Treasury guidelines for economic appraisal N. Edwards 2006, ‘Too much risk for the reward – an analysis of the pulp mill returns to the people of Tasmania’. In addition, the Tasmanian Treasury Department has not investigated the risks of the mill to the State and the economic viability of the pulp mill has not been tested in public.

This web page draws together the more significant financial risks arising from Gunns’ proposed pulp mill. As one of the largest proposal of its kind in the southern hemisphere, there are significant risks to the financiers of the project, Gunns Ltd itself, the community, existing businesses and the government, which have not been fully identified and explored. Estimates of the size of the potential economic downside vary from $3 billion to $74 billion. Go to ANZ finance campaigns to find out how the Australian public can influence funding of the pulp mill.

Risks include:

Risks to Gunns, its financiers and shareholders

1. Gunns’ lack of experience in building and running a pulp mill

2. High costs relative to international competitors

3. New low cost competitors to supply the global pulp market

4. Highly volatile and down trending international pulp prices

5. Potential negative returns to plantation investors

6. Disruption to wood supplies from climate change, drought and fire

7. Changes to national policy - carbon trading costs


Risks to businesses and community

8. Cost impacts on existing businesses

9. Takeover by trees at the expense of food producers

10. Impacts on tourism operators

11. Lost opportunities for alternative wood-dependent industries

12. Falling housing and property values

13. Additional deaths, accidents and respiratory disease


Risks to taxpayers and government

14. Costs to taxpayers

15. Low to negative returns from public ownership of Tasmanian forests

16. Government subsidies


Risks to Gunns, its financiers and shareholders

To date, it appears that Gunns have identified their major stakeholders in the project as two construction companies and the ANZ bank. Apart from these matters and the submission of the Draft Integrated Impact Statement at an approximate cost of $11 million there appears to be no major financial commitment to the pulp mill project disclosed to their shareholders or to the Australian Securities Exchange.


1. Gunns’ lack of experience in building and running a pulp mill

Gunns lack experience in building and operating a pulp mill and the project is bigger than the company's total market capitalisation of $1.2 billion. Big capital projects invariably face cost increases and the cost of debt is increasing. Deutsche Bank paper and packaging analyst Mark Wilson estimated at the end of August 2007 that project costs were rising at a rate of $60 million every six months, so time lost has been money lost for Gunns.

  • The cost of the project as designed in 2003 has increased from $1.3 billion to $1.7 billion in 2007.
  • Gunns’ net debt of around $728 million will increase to around $2.2 billion by 2010.
  • Interest payments of $42.6 million last year will increase by another $140 million.
  • Earnings before interest and tax was $163.9 million last year.
  • Cash flow from operations last year was negative $23.3 million The Australian

The pulp mill project relies on its plantation assets to support the anticipated debt. Gunns’ regional manager Brian Hayes said that Gunns’ predicted yields were 250 tonnes/ha/year but actual yields were only 200 tonnes/ha/year or 25% less (The Mercury newspaper 5/8/2006).

Modelling of effluent in Bass Strait will take up to 18 months according to chief scientist Dr Jim Peacock. If the marine effluent studies show Gunns can't meet the conditions set down in Peacock’s report, the company will have to modify its mill. ABC report  

2. High costs relative to international competitors

a) High cost per tonne of pulp produced

At the initial cost of $1.4 billion (2006) to build the pulp mill, the ‘installed cost per tonne’ is AUD$1700 per tonne (ie. $1.4 billion divided by 820 000 tonnes of pulp). In US dollars, this is a cost of $1280 per tonne. The accepted benchmark in 2006 for installed cost per tonne for pulp mills was less than US$1000 per tonne N. Edwards . Tightening of the credit market and rises in projected costs mean that the pulp mill will be carrying a significant additional cost per tonne of pulp before it begins.

b) Relatively high cost of wood supply

Wood as the raw material accounts for about half of the total cost of producing bleached hardwood kraft pulp. Other costs include chemicals, energy, labour, freight and marketing. It takes about 3.8 - 4.0 tonnes of green logs to make one tonne of pulp depending on the quality of chips (old growth has more lignin and less fibre). The cost of wood fibre at the Long Reach mill in US$ will be 3.8 tonnes x $50/tonne x 0.82 = US$156 per tonne of fibre at mill door at an exchange rate of US$0.82. Growing political pressure on the State Government to produce a significant return on management of forest assets could further increase costs.

The price of wood (mill door price $A/tonne wood) delivered to the mill is: $12 stumpage (payment to Forestry Tasmania); $6 road toll (payment to Forestry Tasmania for the roads into coupes); $19 harvest costs; $13 haulage costs; Total = $50 per tonne of logs.

Note: Gunns is currently paying about $53 for chips delivered to its Long Reach woodchip mill, Tamar valley (Tasmanian Department Primary Industries and Water). Taxpayers could forego the stumpage and road toll charges.

Gunns’ competitors in the global pulp market have access to a much cheaper wood supply. Whereas the wood supply will cost Gunns around US$156/tonne of pulp produced, wood costs for other large scale producing countries are much cheaper eg. Indonesia US$96, Brazil US$100, and Chile US$124. . CommSec believes Gunns’ pulp mill cannot match the costs of new low-cost producers in South America that can produce pulp at almost half the price it costs Gunns. ABC

Gunns have indicated that the pulp mill wood supply will shift from native forests to plantations but this will triple the mill's wood costs. Gunns' commercial interest lies in retaining access to as much cheap native forest wood as is possible, for as long as possible. Economist Judith Ajani

c) Exchange rate risks

The mill is highly sensitive to exchange rate risks. Pulp prices are specified in US$ and every cent that the Australian dollar appreciates against the US dollar lowers the anticipated profitability of Gunns pulp mill. Tasmanian Round Table for Sustainable Industries Project . Changes in the exchange rate have so far been offset by rises in pulp prices.  

3. New low cost competitors to supply the global pulp market

A total of 41 new pulp mills (excluding Gunns in Tasmania and Protavia in South Australia) are due to come on line in the next 8 years and produce 22 million tonnes of pulp. The increase is approximately five times the world's projected increase in consumption. The projected over-supply and subsequent fall in price per tonne of pulp will force many mills to cut production or close unless rescued by massive government subsidies. Gunns cannot avoid this situation and is doomed to make a loss unless subsidised by government. (Urgewald report "Banks, Pulp and People"

Projected expansion of world wide pulp mill capacity 2007 to 2015 by company, country and mill capacity (tonnes), ("Banks, Pulp and People").

Acarus, Brazil, 1.1 m

Suzano, Brazil, 1.3 m

Suzano 2, Brazil, 1.25 m

VCP, Brazil, 1.1 m

Sateri Int., Brazil, 250 000

Veracel, Brazil, 900 000

Stora Enso, Brazil, 1 m

Cenibra, Brazil, 800 000

APP China, China, 780 000

APP, China, 250 000

APP, China, 300 000

April, China, 1 m

Oji Paper, China, 700 000

Shandong, China, 700 000

Stora Enso, China, 1 m

Lee & Man, China, 125 000

West Coast, India, 250 000

ITC, India, 120 000

Seshasyee, India, 170 000

April, Indonesia, 600 000

APP, Indonesia, 800 000

Kaltim PPP, Indonesia, 1.2 m

UFS, Indonesia, 600 000

PT Garuda, Indonesia, 1.2m

Aditya , Laos, 200 000

BILT, Malaysia, 125 000

Larvic Cell, Russia, 600 000

Baikal PP, Russia, 200 000

Mondi, S Africa, 1 m

Sappi, S Africa, 200 000

Sappi, S Africa, 225 000

NCT Forest, S Africa, 140 000

Forscot, Scotland, 550 000

Botnia, Uruguay, 1 m

ENCE, Uruguay, 1 m

Stora Enso, Uruguay, 1 m

Tracodi, Vietnam, 100 000

Lee & Man, Vietnam, 150 000

Incomex, Vietnam, 115 000

BILT, Vietnam, 130 000

Vinapimex, Vietnam, 250 000

Protavia, S Australia, 700 000

Gunns, Tasmania, 1 m

TOTAL, world, 23 780 000  

4. Highly volatile and down trending international pulp prices

Figure 1 shows the real price for internationally traded pulp since 1970.

Real price of global pulp

Figure 1. The real price (ie. inflation adjusted by US CPI, with 1982-84 = 100) for internationally traded pulp since 1970. Current spot pulp prices are about 45% above 2002 lows.

The price of pulp is falling (by an average 2.4% per annum in real terms over the last 20 years, economist Judith Ajani ) but extremely volatile, with an average annual standard deviation (a measure of the price volatility) of $121. Current pulp prices are high ($700) but if the price falls to $400, as occurred in 2002 and 2003, or even if pulp prices continue their current fall in real terms, the share price of Gunns could halve. N. Edwards .

Share broking analyst CommSec says the project is highly risky, strongly leveraged to a volatile commodity price in the global pulp market and subject to approval and construction risk. ABC .  

5. Potential negative returns to plantation investors

Gunns, the only large buyer of plantation timber in Tasmania, appears to be able to pay a maximum of only $20 per tonne. Since yields in Tasmania are about 150-200 tonnes/ha after 15 years, the return is $3000 - $4000/ha. But investors are paying between $6800 and $10000/ha to operate a plantation woodlot and depending on personal circumstances may face negative returns.  

6. Disruption to wood supplies from climate change, drought and fire

Gunns have not factored in significant risks posed by climate change and the impacts this will have upon the timber supply used to feed the mill. A recent study by the Bureau of Meteorology and the Bushfire CRC indicates climate change will usher in a new age of mega-fires in south-east Australia. With a vast majority of plantation timber located in Tasmania’s fire prone east, the disruption of timber supply to such a large mill could have major economic ramifications. Dr Chris Lucas

Gunns have not examined the impact on wood supply yields of more frequent drought and an expected 8% decline in rainfall over the north and east of Tasmania from climate change over the next three decades (Tasmanian Government Draft Climate Change Strategy 2006). The size of the mill and its wood supply is too big relative to the available water in Tasmania (Dr David Leaman, Geohydrologist, ABC Radio 5 Oct 07).  

7. Changes to national policy - carbon trading costs

There is a strong case that native forests which make up 80% of the feedstock will be more valuable as carbon offsets than pulp wood. Carbon credits are valued at $23/ tonne in NSW, in New Zealand at $15/tonne in NZ, and $11/tonne in Europe.

Contrary to Gunns’ claims, the use of wet native forest for pulp production is a net CO2 emitter. The forests alone are estimated to hold 400 million tonnes of carbon.

Conservative estimates show the proposed mill will generate 10 million tonnes of CO2 per annum. The application of a cost on carbon places this mill at great risk of decreasing profits as the costs of carbon are internalised. At a conservative $20 cost on carbon, the mill’s earnings before interest, tax and depreciation could be wiped out by the $200m cost of carbon. D. Ecuyer      

Risks to businesses and community

8. Cost impacts on existing businesses

Independent business analyst Executive Planning Pty Ltd has estimated business impacts of the pulp mill to other industries in Tasmania for a 20 year period as:

* Farming $10–60 billion;

* Tourism $2–6 billion;

* Property losses $1–5 billion;

* Fishing $2–4 billion.

Other industries not quantified include wineries, recreation, health, water and losses arising from damage to Tasmania’s pristine clean green brand. None of the above costs have been precisely quantified nor their consequences explored by the Tasmanian Government’s pulp mill fast track process.  

9. Takeover by trees at the expense of food producers

A minimum 30% or so of new plantations required to feed the pulp mill will be established on agricultural land (Class 1-5). The direct cost of lost output from conversion of farmland to additional plantation is $400m Tasmanian Round Table for Sustainable Industries Project . In recent times, 22% of Tasmanian farm titles have been lost to plantations. (Land Information Systems Tasmania, DPIW).

Each megalitre of water used for irrigation conservatively adds $500 to the value of food produced at the farm gate (DPIW). However water losses from evapo-transpiration by uncontrolled plantation expansion presents a real threat to irrigation supplies in rivers across the north of Tasmania and carries a large hidden cost for communities, businesses and the Tasmanian economy.

Annual water losses from plantations for wood pulp market in 2020 are estimated at 1100GL/year over and above that of farmland and native forests Water fact page no 7. These losses are around 460 GL pro-rata over the five driest months equivalent to 60% of total summer flows in northern and eastern rivers of Tasmania. (Table 5 ‘Water Availability in Tasmania’, DPIW 2001). The evidence suggests that river flows in 20 of 24 major northern catchments are already impacted as a result of plantation establishment.

Mill effluent of 73000 tonnes/day is expected to impact on Bass Strait fisheries. The abalone industry alone adds $240 million/year to Tasmania’s gross State product but is vulnerable because of potential damage to its pure, natural and pristine image for marketing itself overseas. One adverse test result showing organochlorine pollutants from the pulp mill will affect markets. (Abalone Industry submission to RPDC).  

10. Impacts on tourism operators

State Government’s ’Tourism 21’ Ten Year Strategic Plan set in June 2004, aims to grow the tourism sector in Tasmania to a $2.5 billion industry (annually) which employs 54,000 Tasmanian’s by 2014. However, a majority of tourist operators (58%) believe the proposed pulp mill would have a negative effect on Tasmania’s brand Tourism Industry Council Tasmania EMRS poll .

If only 10% of the holiday visitors to Launceston and George Town each year are lost because of the pulp mill, there will be a direct economic loss to Tasmania of $735 million over twenty years. These risks stem from odour, log truck traffic and loss of Tasmania’s marketing edge as a clean green destination. N. Edwards  

11. Lost opportunities for alternative wood-dependent industries

An independent study of the wood supply for the mill has not been carried out. Locking forests into supplying large amounts of wood to a pulp mill precludes opportunities to add greater value to wood, overshadows demands from the other industries that rely on the same wood supply, and prevents greater storage of carbon in longer lasting veneer and building products.

Two forest types are discussed as sources of pulp wood:

* Native forest some of which is 100 years or older have a large diversity of species;

* Planted forests or monocultures which are cut down at 15 years old.

Existing maturing plantations in Tasmania cannot supply all the of the pulp mill's intake by 2017 as claimed (C. Beadle). About 260 000ha of eucalypt plantations would be required to supply the mill, however, the plantation estate in Tasmania is only about 170 000 ha.

Therefore, the mill will heavily rely on native forests for wood supplies. 80% of the wood will come from native forest when the mill opens (projected to be 2009). However, native forests are generally slower growing than plantations and current rates of native forest harvesting exceed the long-term sustainable yield; it is a one-off resource. Dr Chris Beadle  

12. Falling housing and property values

Despite Gunns’ claims that real estate values would rise 15% (IIS), the real estate records for 2005 to 2007 show that West Tamar properties nearer the proposed pulp mill have declined compared to Legana and suburbs in Launceston that are further away. TAP real estate report .  

13. Additional deaths, accidents and respiratory disease

A medium risk scenario based on AMA projections is for an increase of 8 deaths per year from respiratory disease (AMA submission to the RPDC). Add 1 log truck death per annum over 24 years of the lifespan of the project and deaths increase from 192 to 216. See the Tasmanian Round Table for Sustainable Industries Project . Creating 292 direct jobs will cost 216 lives. The financial costs of the health impacts have not been quantified although the social implications are clear.      

Risks to taxpayers and government

14. Costs to taxpayers

a) Failure by the Lennon government to assess economic impacts State Treasury has not investigated the risks of the mill to the State and the economic viability of the pulp mill has not been tested in public. The Economic Report prepared for Gunns by Allens Consulting Group failed to meet Australian Treasury guidelines for economic appraisal, by addressing only economic benefits but ignoring economic costs of the pulp mill N. Edwards .

The government commissioned ITS Global benefits analysis made a significant mistake by double counting the tax benefit to the Tasmanian economy. What they did was calculate the tax benefits as potentially available under the Government expenditure heading, then counted them again as an indirect benefits in the “Consumption Heading”. Tasmanian Round Table for Sustainable Industries Project .

b) Costs to taxpayers Tasmania’s economy and its work force will become even more dependent on uneconomic wood production and more exposed to a single high risk investment.

The investment market is distorted to allow MIS shareholders to make profits by tax concessions and tax-subsidised dividends. In addition, the local public bears Gunns’ external costs; road damage, pollution, loss of environmental services, loss of water supplies, loss of business and employment, increasing council rates.

The Tasmanian Round-table for Sustainable Industries Project (Lead author, Associate Professor Graeme Wells, Wells Economic Analysis) is the first cost benefit analysis conducted on the proposed mill. The Round-table concluded that the total costs to health and other industries plus the costs and subsidies could be $3.3 billion to the Tasmanian economy. The opportunity costs of hundreds of millions of dollars in taxpayer subsidies underpinning this project eg. access to publicly owned native forest, has yet to be considered in any detailed analysis. Growing public understanding and national attention is set to change these subsidies, posing a clear risk to the future profitability of the proposed mill. Tasmanian Round Table for Sustainable Industries Project .

Gunns and the government have failed to take into account economic migration effects. They have not explained that many workers will come from interstate and will take away the economic benefits from Tasmania. This is significant as it explains that much of the economic activity generated by the mill will be felt elsewhere and will provide no benefit to Tasmania (Ibid).  

15. Low to negative returns from public ownership of Tasmanian forests

Between 2005 and 2006, Forestry Tasmania's total return from all timber sales and pulp wood was negative. This means that taxpayers were paying for their forests to be destroyed and handed over to Gunns. For the past five years, the state-owned timber corporation Forestry Tasmania’s return on its assets has averaged only 1.5 per cent (Forestry Tasmania).

Forestry Tasmania and Gunns are negotiating a confidential 20-year wood supply agreement to feed 1.5 million tonnes of pulp wood from public native forests to the pulp mill wood at undisclosed ‘commercial in confidence’ rates. The 20-year wood supply agreement is written in a way that ties the fortunes of the taxpayers of Tasmania to the world pulp market. The agreement is confidential, so the public does not know what the return is from supplying native forests.

For the first 18 years of operation, native forests will make up 80% of feedstock for the pulp mill (Gunns Draft IIS). Native forest costs Gunns only $12 - $15 a tonne but plantation wood costs $30 - $35 a tonne. Gunns is going to be locked into using cheaper native forests so it can compete with low cost South American mills. N. Edwards .

Longer term, the pulp mill is going to lock the State into a low-return - high-volume model of wood production from native forests, and Tasmanians will continue to get very low returns on its state asset. ABC  

16. Government subsidies

Subsidies cannot be relied upon for the life of the project if there is public harm. Major government subsidies to the pulp mill and forestry industry have been ignored in the economic assessment, including over $200 million of one-off subsidies in the last two years and ongoing subsidies of at least $54 million each year into the future. This has an economic cost of over $700 million over 20 years and will take government attention and facilitation away from other potential forest products with less commercial risk and greater employment stability. N. Edwards .

Only subsidies(MIS, stumpage, water, one off subsidies, RFA and CFA) provided by the Australian taxpayer makes Gunns’ proposed pulp mill profitable. The net present value of subsidies to the pulp mill is $847 million. Tasmanian Round Table for Sustainable Industries Project .

The Tasmanian taxpayers subsidise Gunns because Forestry Tasmania sells pulpwood to Gunns at stumpage rates below market prices.

Severe price fluctuations in the global market expose the Tasmanian public to the risk of on-going and significant 'bailing out' subsidies for pulp and paper industry.