Pulp Mill financially unviable

The proponents of the pulp mill have claimed that the mill would bring a huge economic boon to the Tasmanian economy. However, due to global markets, the strong Australian dollar, interest rates, production costs and taxpayer subsidies, leading economists and financial analysts who have assessed the project have a different view.

The financial viability of the pulp mill is regularly assessed by institutional analysts such as CommSec, Citi and JP Morgan who all share substantial concerns. In February both Citi and JP Morgan downgraded their rating of Gunns, JP Morgan from overweight to neutral and Citi from hold/high risk to sell/high risk.

Despite this, other analysts tend to focus only on the positives of the mill, and assume that the Tasmanian pulp mill will have similar cost structures to the large South American pulp mills currently being built.  Unlike the public, some analysts see only positives in ongoing taxpayer subsidisation of the mill, which is now in the tens of millions of dollars and can be expected to continue.

In a recent article that featured comment from Gunns’ CEO and Chairman John Gay, it was revealed that 'pulp mill viability figures are based on world pulp price of $US800 a tonne, despite analysts predicting long-term pulp process of just $US550/a tonne[1].' In its mill proposal Gunns also wrongly assumed a stable Australian dollar rate of US70 cents[2]. The Australian dollar is now consistently over US90 cents, a poor situation for exporters. Both of these factors significantly diminish the financial viability of the pulp mill.

A financial report that explores the viability of the mill has been completed by Naomi Edwards, chairman of Australian Ethical Investment and retired actuary. The report looks at aspects of competitiveness of the mill in the global market. Unfortunately, while the pulp mill is expected to continue to benefit from public subsidies, its financial viability is still not assured. Gunns' pulp mill will be in direct competition with South American pulp producers who enjoy significant cost advantages when compared to the Tasmanian pulp mill. This includes access to very large, close and fast growing eucalypt plantations that mean wood fibre is significantly cheaper to produce and transport. Click here to download the Gunns April 2008 report by Naomi Edwards, (pdf).

According to the Edwards report, world pulp prices are currently at record levels, however many analysts are expecting price to drop as new pulp mills begin production and demand slows in key markets.

Gunn's Pulp Mill subsidies action, Tasmania

Despite being Gunns’ banker for 22 years, the ANZ Bank has decided not to support the pulp mill. The ANZ had been engaged by Gunns to help secure finance for the project. However, in May this year after releasing their forest policy, the ANZ decided not to finance the mill. This sets a strong precedent of environmental and social responsibility for all other banks to follow.

Gunns’ pulp mill poses a huge risk to the Tasmanian economy due to its predicted financial problems and heavy reliance on ongoing taxpayer subsidies. A report by the National Institute for Economic Research, commissioned by The Wilderness Society, revealed that the pulp mill would be likely to cost the Tasmanian economy $300 million over its life. Unlike the government assessments which only investigated the benefits of the pulp mill, this report also studied the predicted costs. A worst case scenario, the pulp mill could end up costing Tasmanian a total of $3 billion over the course of its life. Click here for the National Institute of Economic and Industry Research report, Jan2008. (pdf)

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[1] The Mercury http://www.news.com.au/mercury/story/0,22884,23311236-5016569,00.html

[2] Sydney Morning Herald http://www.smh.com.au/articles/2007/10/04/1191091276435.html