A bit over twenty years ago I spent a pleasant afternoon in the lock-up at Eden Police Station on the South Coast of New South Wales.
I was arrested at a protest into logging of native forests, cuffed, put into the paddy-wagon and left in a cell for about six hours, fingerprinted and released. The charges (obstruction) were later dropped. I was not obstructing anything...
What made this pleasant was the company. I was arrested as bystander at an “artists for forests” protest and in the lock-up with me were some of Australia's most famous artists.
The lock-up itself was a brick courtyard open to the sky except for bars that blocked an unlikely escape up the walls. Attached were two austere cells only one of which had a door. There was a toilet (no privacy) and a vinyl mattress and a total absence of hanging points. The other cell was firmly locked but if you peered through the feeding-slot there were a couple of tonnes of marijuana being kept as evidence after a huge local drug bust.
Supporters threw two dozen boxes of coloured chalk through the bars in the roof and for the next four hours I watched artists at work. Given the heady prices of Australian modern art these days the walls of this cell were probably worth seven figures by the end of the day – until the police hosed the work off.
I tell this story only to relate that during my early twenties I was an organiser for several anti-logging protests and I developed amongst other things a reasonable perception of the scale of a million tonne per annum fibre operation.
I never thought I would use that – and then along comes Sino Forests. Oh how I am enjoying this.
You see below – as a blast-from-my-past - an aerial photo of the woodchip mill in Eden. This was and remains a controversial beast. It is also pretty darn large. The docking station is so the bulk-carriers can dock and transport Australia's native forests away. [No doubting which side of the controversy I am on...]
This chip-mill processes almost precisely a million tonnes per annum in wood-chips. Given wood and water are roughly the same density it is roughly a million cubic meters per annum.
I say that so you get a picture of scale.
According to Sino Forest they sold – get this – 17 million cubic meters of wood last year and they expect that number to grow in the foreseeable future. Some of this they processed themselves – other wood they sold as standing timber. Obviously however when you sell it as standing timber someone else has to process it.
So lurking around Sino Forest's land are 17 mills this size (or one mill 17 times this size of some variant thereon). And that is presuming there are no other producers in the area other than Sino Forests. Sino has promised to take analysts and investors to see their operations. I make a suggestion: get them to take you to all the chip-mills that process their timber and stand there with a clicker counting the trucks in. [E&Y - the auditors - should do this pronto. The longer they delay the more their potential liability.]
I have my doubts. I had a number in my head for the size of the global pulp (for paper) industry: something just under 200 million tonnes per annum. 17 million tonnes per annum of fibre seemed large.
Wikipedia cites the global pulp market in 2006 as 160 million cubic meters. Paper is not much of a growth industry these days as anyone looking at newspaper circulation can attest – so I figure that is not far from the current number. There are other uses of fibre (cement form-work being the big one in China) but one bullish article is hoping for growth in total usage to 223 million tonnes per annum by 2015. Whatever – Sino Forest was claiming to be a high-single-digit percentage of global supply – and they were (implausibly) claiming it from 787,700 managed hectares.
When I read the Muddy Waters report something else jarred. Muddy Waters you see was using a different measure of the scale of the industry in China. They were quoting numbers like 420 million cubic meters of wood per annum in 2010 of which 240 million cubic meters was for industrial use (namely paper, cement formwork and packaging etc). China is a big place – but these numbers seemed a bit big to me especially as the majority of feedstock for industrial uses of wood-fibre is recycled material.
So I went looking for the source of the numbers. Here are some graphs from Sino Forest's annual report and they reveal the source of all the Chinese numbers:
The source is listed at the bottom of each graph as BOABC.
BOABC turns out to be an agricultural consultancy in China. They have a website. It offers reports on various industries but put your email in the box and try and get the grains report. It bounced me.
So what is this funny consultancy whose web-site does not do what it is meant to? According to its website is China's leading agriculture and food business consulting company. Also according to its website it is a subsidiary of Xinhua Finance. That is a name that should ring bells. The principal of Xinhua was indicted recently for fraud (and plead not-guilty) and lots of famous investors lost money. Xinhua collapsed. The stories about Loretta Freddy Bush are colourful.
Xinhua may be dead. Its subsidiary (probably not the most reputable source) is alive though and pumping out numbers which do not match generally accepted industry numbers and which are used to bolster Sino Forestry's stock. And Bay Street analysts are blindly using them. Even Carson Block – who is more than passingly cynical about numbers, accounts and Chinese companies used these numbers without question in his report.
The analysts I suspect went to good schools, Harvard, Yale and the like. I wasted my youth organising environmental protests in remote locations and learned that it was stupid to take at face value official statistics about rape-and-pillage forestry operations. The stats were as often as not lies. Learning about how people lie with numbers was – at least for a stock analyst – a darn good education.
To the Wall Street analysts who take these numbers at face value I got a song for you:
The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.