VicForests has been left without a market for hundreds of thousands of tonnes of residual timber.

VicForests has been left without a market for hundreds of thousands of tonnes of residual timber. Photo: Andrew Quilty

Exclusive

Victoria's low grade native timber could soon be packed into shipping containers bound for China and other cut-price countries for processing under a plan to help ailing state timber company VicForests.

VicForests has been left without a market for hundreds of thousands of tonnes of so-called "residual" timber following the loss of a key contract with Japanese-owned wood-chip company South East Fibre Exports (SEFE).

In response, a rule requiring local processing before export has now been relaxed in a bid to open up new markets for the struggling state-owned wood business.

A confidential November 2013 Department of Treasury and Finance (DTF) briefing seen by The Age confirms the industry has for months been lobbying to relax the requirement for domestic processing of timber.

"VicForests indicates the Victorian Association of Forest Industries (VAFI) now supports relaxing certain aspects of the export restrictions," the briefing to former treasurer Michael O'Brien, said. "Such a change should lead to improved outcomes for both VicForests and industry. DTF supports the reconsideration of the timber export policy."

It follows the expiry of a clause that has for the past decade effectively allowed VicForests to legally operate against Commonwealth competition laws by favouring domestic over international wood processing.

It is unclear whether the Andrews government will re-instate the clause. In a written response to Parliament, Agriculture Minister Jaala Pulford last month said the situation was "under active consideration" by her department following the "sunset" of the clause on July 1. Her spokeswoman said the clause had been introduced in 2004 to help the industry transition to a fully competitive market system.

Ms Pulford later confirmed the requirement around domestic processing had been approved in 2014.

"I have asked my department to prepare advice on the appropriate mechanisms to formally require VicForests to explore all options for domestic processing before any straight export contracts are considered," Ms Pulford said.

The industry is viewing the expiry of the competition clause as an opportunity for new international markets. "This is about finding a market for residual timber that can't be processed domestically," VicForests spokesman David Walsh said.

Under the plan, higher grade saw-logs would continue to be processed locally, but lower grade timber would be shipped to countries such as China with the technology to use it to produce veneers and other products.

VicForests was under pressure even before the loss of the SEFE contract taking waste timber from VicForests' East Gippsland logging operations, with international markets increasingly demanding higher quality plantation timber.

A December 2013 report by the Victorian auditor-general found in 2012-13 at least 250,000 cubic metres of residual wood, representing 16 per cent of the total harvest, was left on the forest floor and burnt because no one wanted to buy it.

VicForests has also considered selling its residual timber as firewood, using it for power generation, or even producing chip-board.

MyEnvironment director Sarah Rees said the move represented a "race to the bottom". "Australia cannot legitimately compete with the price of wood coming out of Indonesia and Vietnam, so this is another desperate, loss-making venture to keep logging native forests, only now VicForests are compromising Australian jobs to keep it going."

The prospect of relaxing export restrictions on Victorian timber has also concerned the union. Construction, Forestry, Mining and Energy Union national secretary Michael O'Connor warned exporting unprocessed wood represented a "low road" in terms of producing an economic and social return from the state's forest resources.

"Clearly our view is if you want a successful forest industry you need more high value processing in this country," Mr O'Connor said.

VAFI chief executive Tim Johnston said the industry supported local processing although at times this was not possible.

"If exporting residual timber opens up new opportunities for the forest and wood products industry in Victoria and continues to support local businesses and jobs, then VAFI will support the move," Mr Johnston said.