Mill competitiveness falls while government subsidies rise

Report by prepared by Naomi Edwards April 2008.

Main points:

Cost to build the Bell Bay pulp mill is too high
• Assuming a cost base of $2.0 billion, the unit cost to build Bell Bay is AUD$1,800/t or US$1,600/t at current rates.
• By contrast, Aracruz’ Guaiba Unit is estimated to cost US$1,200/t.
• The latest estimate of $2.0 billion probably excludes $200 million for pipeline costs which Gunns hope to outsource to the Tasmanian State Government.
• It is possible that the final cost to build Bell Bay will be $2.4 billion if this subsidy does not happen.

Bell Bay fibre costs will be US$227/t compared to US$103/t in Brazil
• The location of the fibre resource shown in the Bell Bay IIS (70% in North East Tasmania at start-up) is inconsistent with Forestry Tasmania’s published Wood Production Plans, which show a majority of its pulpwood in 2010 will be produced outside the North East.
• Similarly, the private native forest resource is spread across Tasmania.
• The average distance of fibre to Bell Bay mill is between 140km and 180km at start up. Veracel is 45km.
• The fibre cost to Bell Bay will be about AUD$258 per tonne of pulp, or US$227 at current exchange rates.
• The Hawkins Wright average for Brazil fibre costs in 2007 was about US$103.

Input cost forecasts from Gunns are not credible
• Gunns’ March 2008 forecast of a cash production cost of AUD$330 appears very optimistic.
• It is very dependent on REC and energy credits, which are a risky base for an investment decision.

Government continues to subsidise mill but for how long?
• The Forestry Tasmania wood supply agreement includes major subsidies that imply real falls in wood supply prices and falling returns to Forestry Tasmania.
• The native forest floor price has locked in 2001 prices until 2012.
• The National Competition Council, National Audit Office and Tasmanian public are taking more note of these subsidies. They are not sustainable.
Comparisons with the Aracruz pulp mill are flawed
• Cost to build mills US$400/t cheaper
• Fibre costs US$100/t cheaper
• Fibre one third the distance to mills
• 100% owned plantation resource
• Diverse markets with 80% of sales secured to long term contracts
• An Investment Grade company on the Dow Jones Sustainability Index

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