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Latest Government ETS auction fails to clear

Just days after the newly formed Coalition Government announced that it would stop the current review of the ETS system, ‘to restore confidence and certainty to the carbon trading market’, the fourth and final ETS auction for 2023 has failed to clear, removing 15 million NZU’s (carbon credits), from circulation.

The final auction was widely regarded as a dead rubber, given the aggregation of units across all four failed auctions, and the auction rules that would eventually lead to this fourth failure. In total about 3.75 million units were bid for, the lowest bid to cover ratio yet. Because the clearing price was not met, the entire auction failed to clear. 

The full results can be found here. 

Making the fourth auction even harder to clear, was the new price controls that came into effect in December. This enforced a higher price floor, which was increased to $60, with a two-tiered cost containment price starting at $173. There were an additional 8 million units available above this price. The price floor moved to $64 for 2024 and latest projections put the price floor at $79 in 2028, paving an ascending price of carbon, all else being equal

National states the ETS market should be stable 

This is the first ETS auction since the National party has taken office, and throughout the campaign they outlined the need for a stable carbon price, not only for forestry, but for emitters who purchase NZU’s to offset carbon emissions.

The National lead coalition has also earmarked ETS auction funds for tax cut policies, rather than previously being siloed for climate emergency response funds under the previous Labour government. So it would be safe to assume National party wont wind if the price of carbon moves higher. 

One of the first National/ACT/NZF policy announcements was to stop the ETS Review, which had looked at a number of ways to promote gross emissions reductions, rather than only mass afforestation. This move had seen the price of carbon move from $70/NZU to $76/NZU in the days leading to the fourth auction, giving the market refreshed confidence for forestry moving forward in the ETS.

The National lead coalition has also earmarked ETS auction funds for tax cut policies, rather than previously being siloed for climate emergency response funds under the previous Labour government. So, it would be safe to assume the new Government has an even further incentive for carbon prices. 

What’s that mean for Forestry Investors? 

The reduction of supply of NZU’s following the removal of failed 2023 auctions, will undoubtedly drive a greater level of trade activity in the secondary market, retaining upward pressure for prices.  

Although we would have expected to see greater bid volumes at yesterday’s auction, the lower demand is likely a by-product of participants knowing that the auction was likely to fail. Despite the removal of those 15 million Units, the NZU price has eased to settle around $70.50 following the auction as some profit taking took place.

Looking further out, carbon prices look set to ride a glossy pathway. There is now only one more auction in March, ahead of the May 31st date where emitters are required to surrender NZU’s for annual emissions. This sentiment is shared by many, with some market commentators pointing to a carbon price that exceeds $100/NZU in 2024, surpassing previous highs of $88/NZU.

 

How can you take part in a journey to higher carbon prices?

Many of the Roger Dickie group of investments have exposure to carbon credits and carbon prices, whether it be through the ownership of liability-free carbon, or through new greenfield forestry investments that sequester carbon to be made available for sale, all while growing high-quality wood products.

Forestry is widely regarded as the most cost-effective sequester of carbon, with our investments typically growing carbon credits at a cost materially less than $30/NZU.

The Awatea Forest Fund is Roger Dickie’s latest investment providing significant exposure to the benefit of forestry. Awatea is a diversified forest fund focused on risk-adjusted and regular returns through the sale of carbon and harvest of forests.

Speak to the team to find out more about the carbon market, and how our forests and our investments interact.

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Awatea Forest Fund – Latest Quarterly Results

The latest Awatea Quarterly report is out now with the Fund having completed its sixth trading quarter. 

Awatea Forest Fund now holds six properties across four regions taking the total effective area to 1,687.4ha. For Investors, the positive returns have continued, delivering quarterly returns of +3.48% and taking the funds returns since inception to 20.43%.

 You can find the full report below, which provides a detailed fund activity report and an update on Carbon and Timber markets.  

Awatea is a forest and carbon investment fund, targeting the ownership of 5,000 hectares of premium diversified forest assets, generating cash and capital returns through the sale of stored carbon, harvest of trees, and natural biomass growth. 

Awatea provides its investors the opportunity to own and take part in a large-scale and professionally managed forestry fund, generating real asset exposure to forestry and the long term outlook for wood products, as well, the New Zealand’s Emissions Trading Scheme for the recognition and monetisation of carbon stored is the funds forests.

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Considering Forestry for your investment portfolio?

Considering Forestry for your investment portfolio?

Building a diversified investment portfolio is key to achieving long term investment success while managing the risks associated with the investment assets. So where does a forestry investment like the Awatea Forest Fund sit?

Let’s review the benefits of a forestry investment:

A long-term investment with low volatility

Recent times have displayed first hand the impact of market volatility. Take equity and bond markets as an example, these assets tend to be impacted by a different set of market drivers, such as the impact of inflation and interest rates.

Forestry offers uncorrelated returns, with biological growth underpinning your investment, meaning your investment will still grow, even if the economy does not. Forestry is naturally a long-term investment, making it the perfect long-term store of wealth, ideal for intergenerational investing.

We are most interested in the outlook for timber consumption as a key driver of investment returns. With traditional drivers such as population growth and urbanization being met with advancement in wood technologies and a drive for renewable building products, World Bank forecasts a four-fold increase in global timber consumption between 2016 and 2050. Just look at the examples of multi-story developments converting to timber structures. Awatea strives to provide the best of it all, using a diversified mix of forest and carbon assets to generate cashflow returns while retaining those long-term benefits of forestry investment. 

Financially benefit from a climate conscious investment

Since the introduction of the Emissions Trading Scheme (ETS), eligible forests can monetise carbon sequestered by our forests. Awatea targets productive forests with the benefit of carbon, providing dual revenues that blend for optimal investor distributions and capital enhancement.

Forestry is recognized by the NZ government for its part to play in achieving our net emissions targets, namely carbon neutral by 2050. To achieve this, more forestry is required, as well, a strong and stable carbon market.  

The Awatea Forest Fund is ideally positioned, with a strong weighting of toward carbon eligible investments, with long-term forecasts presenting an average annual cashflow return of ca.13%* based on the funds existing assets. Awatea also offers a distribution reinvestment plan, allowing investors who aren’t focused on cash returns, to benefit from compounding reinvestment.

A real, sustainable and renewable investment

Similar to property funds, investing in forestry means you’re invested in real assets, with tangible ownership and connection to New Zealand’s primary industry, meaning even in a downturn your investments is protected by a physical and biological asset.

Forestry investors not only benefit from timber and carbon, but also the value of the land. Asset selection is key, with high quality and fit for purpose properties producing high quality logs in perpetuity.

Investors are increasingly aware of the impacts that heavy industrial companies are having on our planet, and this is changing the investment landscape. The environmental credentials of forestry are well established, acting as the earths lungs, absorbing and storing greenhouse gases while providing a sustainable way to build for our future.

We are serious about the environmental impact of our investments, through our forest investment and management activities we aim to promote greater biodiversity, cleaner waterways, soil conservation, wildlife habitats, as well, an underlying objective to create a positive climatic change.

Ready to add forestry to your portfolio?

Building a diversified investment portfolio is a key step to achieving financial sustainability. While we may be biased, forestry provides a great cornerstone investment that can be relied upon for generations to come. RDNZ. has been managing forestry investments for more than 50 years, managing more than $1 billion of assets for more than 3,000 investors.

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Latest Carbon News

The last week has seen plenty of news for Carbon markets, with the spot price rising to $70/NZU at the time of writing. An increase of some 70% since the June quarter.

Recent news items include:

The Emissions Trading Scheme (ETS) review is ongoing, but positive ETS rhetoric emanating from the major political parties has addressed some concerns surrounding NZ’s commitment to climate change, the need for a strong and stable carbon price and forestry’s role in New Zealand’s quest for carbon neutral.  

International Monetary Fund Warns Further Action Needed

This week, the International Monetary Fund has said that New Zealand remains significantly off track in our hopes of meeting 2030 climate change targets. It has been estimated that we would miss our 2030 commitment by 17 million tonnes. The IMF has also said a real price for carbon credits of US $100 NZU (NZ $166 NZU equivalent) by 2030 would close the gap by two thirds.  Find out more here.

Carbon Price Movements

National
Party Carbon Dividend

National
announced its tax plan in the build up to the election this October. As part of its tax policy, it has outlined a potential Carbon Dividend, which would see some proceeds from future government ETS auctions redirected toward its tax bracket indexation and help alleviate the rising costs placed on consumers as emitters pass on offsetting costs. Whether or not this is a good move for decarbonization goals, the fact that this requires a strong and stable NZU price to reliably fund its ‘carbon dividend’ places a certain amount of trust and confidence in our carbon markets going forward.
Find out more here.

Positive Reinforcement at Carbon Conference

At an industry conference this week, Climate Change Minister James Shaw has reinforced ETS reviews are much more pro-forestry than some media and social outlets have led to believe. His view is that Forestry, including plantation and longer term indigenous permanent forestry, will remain a key component of NZ’s climate change policy.

The key messages were:

  • A strong and stable NZU price is needed.
  • Investors existing investments must be protected.
  • Policies must prevent the ETS bottoming out during the 2030’s due to potential oversupply. Although many in the industry disagree that this is correct.
  • More forests were required to meet our climate change goals, along with reductions in gross emissions.

At RDNZ, we remain positive about the outlook for forestry in the ETS and its contribution toward net-zero carbon commitments.

 

Our forest managers (FMNZ) have had a tremendous planting season, establishing more than 7,000 hectares of pine, redwoods and natives,  much of which is carbon eligible and to be registered in the ETS under carbon averaging, generating the best outcome with respect to sustainable production forestry with carbon benefits.

 

Forestry is known to be the most efficient capturer of CO2, and our forest acquisitions achieve a present value cost of carbon at just a fraction of the price that carbon credits trade in the market. For those wanting sustainable forestry and carbon solutions in their portfolio, talk to the team about the Awatea Forest Fund. Awatea has reached +1,600 hectares of effective forest area, and is well placed to see the benefits of forestry’s role in the ETS.

 

To discuss Carbon, Forestry or Forestry investments, please contact the team today.

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Awatea Property Update

Why our Investors are hot on carbon forestry investment

Introducing Ngatoka, the fifth forest property of the fund

Ngatoka is a 262-hectare property (subject to survey) located to the east of Masterton in the Southern North Island and 129 from Wellington Centreport. Ngatoka is perfectly positioned between three other RDNZ forests and will benefit through those economies and enhanced access. The vendor is undertaking the subdivision and we have conveniently contracted the ability to plant the property prior to settlement. Ngatoka will be planted this month, with 184.3 hectares effective for forestry,  94% targeted for production forestry.

The option to plant this year offers exceptional value to the fund, both in terms of the time value of money, as well, prior to any potential changes following the ETS review, foreseen to offer significant value to existing investments.  

The property has received an independent land valuation 16.3% above our off-market purchase price, and the independent forest feasibility has produced a Net Pre-Tax Forecast Internal Rate of Return (IRR) of 7.4%, based on a 20-quarter log price series and a gross carbon price of $56.30 NZU.

Since agreeing to purchase, we have witnessed positive reinforcement for the New Zealand Emissions Trading Scheme and a subsequent recovery in the price of carbon credits, currently holding around $61 NZU.

We are pleased to add a new forest region to the fund, with five properties now held across four premium forest growing regions. 

The sixth property of the fund, Kinloch, currently undergoing due diligence.

RDNZ has taken the opportunity to negotiate the conditional purchase of Kinloch, a 292-hectare property in the Central Hawkes Bay, 98km from the Port of Napier with other domestic sawmills nearby. The property is mostly easy and medium contour and preliminary independent information appears favorable. Kinloch has been analysed to contain 245 hectares effective for forestry.

The negotiation of Kinloch has happened over the previous months; however, the immediate benefit of Kinloch, like Ngatoka, is our ability to plant in the 2023 planting season. We are working through satisfying our Due Diligence, and our forest managers (FMNZ) are working through those planting logistics right now.

The property neighbors another RDNZ property that is currently going through its acquisition process, the neighboring property can offer further economies and access advantages for Kinloch. Should we proceed to purchase Kinloch, the effective forest area of Awatea would climb to 1,687 hectares, already one-third of the target fund size.

We will update upon any milestones being met for Kinloch in the coming weeks.

Why now’s a great time to invest in Awatea Forest Fund.  

As recently communicated, RDNZ has been heavily engaged in the current Emissions Trading Scheme review, leading discussions with politicians, sector heads and forestry businesses. Reflecting, we are confident that forestry maintains a major role to play in New Zealand’s climate initiatives, and that investments made now are likely to continue to receive favourable treatment under the Emissions Trading Scheme going forward. Hence, RDNZ has a strong bias to acquire and establish forests such as Ngatoka and Kinloch mentioned above.

The carbon price at the completion of the June quarter (the most recent revaluation) was $41, materially down on today’s price. The price of carbon directly impacts the value of carbon credits held by the fund, if sustained it would amount to a positive adjustment for the September quarter.

Over the long term, we believe the growing demand for wood products and the increasing drive toward climate responsible investing, will continue to drive returns to the fund. Awatea is ideally positioned to benefit from these changes, offering investors the ideal forestry investment platform that diversifies across forests, species, age-classes, and revenues.

Forestry is unique, it is tangible and renewable, proving to be one of the most powerful intergenerational investments.

Awatea has current net assets of $19.97 million and is held across 151 unique investors.

To find out more or to join the family of Awatea investors, speak to the team today.

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News

Government Announces ETS Update

The Government has, last night, announced changes to its ETS auction unit pricing control settings following the recent ruling in the High Court in favor of Lawyers for Climate Action NZ (LCANZI). LCANZI had sought a judicial review of the government’s December 2022 decision to reject the Climate Change Commission’s (CCC) advice on the unit limit and price control settings for 2023 to 2027.

The major changes move to align the quarterly auctions with Climate Commission’s advice.

What’s Changing

       Price floor changes:

From December, the floor price will rise to $60 NZD, increasing to $64 in 2024. This is a substantial change from the existing setting of $33.06.

      Two Tier Cost Containment Reserve (CCR)

The announcement has outlined a new two-tier cost containment reserve function, designed to control potential extreme highs in carbon markets. The December auction will include two pricing levels of $173 and $216 however the full CCR availability will still sit within the first price level for the remainder of the year.

From 2024 the Cost containment pricing will move to $184/$230. The system will ultimately also reduce the number of NZU’s by splitting the total volume of the CCR over two price settings from 2024, with high price settings designed to mean the units are rarely be called upon.

The above chart shows recent carbon price movements and the relationship between price and government price control settings.

What it means for Forestry

The Secondary market in which we operate has for some time been waiting for firm signals from government and the announcement has seen spot pricing rise to $65 per NZU.

This is positive news for Forestry and Forest investors, better aligning the market with our global commitments. Our view remains that Forestry will continue to be a significant contributor to combating climate change and that the fundamental drivers of carbon markets remain positive with this announcement reaffirming our stance on the direction of NZU pricing. 

You can see the full announcement here.

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Awatea Forest Fund settles latest property

 
Roger Dickie N.Z. is proud to present  the latest property into the Awatea Forest Fund. 

“Goldstone” is a 446 hectare site in the strong forest growing area of Putorino, on a medium rolling site with steeper sidling’s, located 70km from the Port of Napier and 56km from Pan Pac Sawmill. 

It will add a total of 296.4 hectares of effective forest area to the Awatea Forest Fund, comprised of 63.9 hectares of existing plantings (mostly 2020 with ETS registration), 49 hectares in forest right, and a further 183.5 hectares to be established this year. 

The property has been acquired for $5.225 million and the dwellings, farm buildings and approximately 20 hectares will be subdivided in the coming months.

Goldstone received minor damage during Cyclone Gabrielle, with slipping in the steepest section where the 2020 plantings existed, this resulted in the successful renegotiation of purchase price. The more mature plantings have stabilised well and the areas to be planted this year require no reduction or remedial work.  

Goldstone has a forecast pre-tax IRR of 8.26%, with a current independent valuation 15.40% above purchase price, representing a material capital enhancement that will be captured by investors in the June quarter revaluation. 

This settlement takes the overall effective hectares of the Awatea Forest Fund to 1258ha and the team are working hard in the market to reach the targeted 5000ha. Early investors will continue to receive the benefit of any capital enhancement at the time the properties settle into the fund.

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Looking to Invest?

Awatea Forest Fund is continuing to grow towards it's goal of 5000ha across New Zealand and provide Investors access to Forestry, Carbon and Land assets. With a targeted 7 - 10% annualised return, greater liquidity and increased diversity across locations and species.
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Timber use growing

Timber in construction is not something new, especially here in New Zealand. However, as the world looks for more sustainable ways to meet internationally growing housing requirements, timber is quickly becoming a leading alternative to traditional materials such as concrete and steel.

Timber as construction material is a low-carbon material, Trees absorb carbon dioxide from the atmosphere as they grow and this carbon remains stored in the wood even after it’s been harvested. So, using timber products instead of materials like concrete or steel can help to reduce greenhouse gas emissions. Plus, producing timber products requires less energy than producing other building materials, which are generally produced through mining, a well-known high emissions industry.

Timber is easy to work with, making it a popular choice for builders and designers. and it’s also a versatile material, with a range of different species and grades available to suit different applications and it’s growing use cases, such as the recent article below outlines, in high rise buildings.

Take a look at the article below to see how high-rise buildings utilising Timber as a renewable resource are improving the outlook for Forestry.

Design for Living: The rise of Timber

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