Thoughts from 2011 UGA Timberland Investment Conference

30 03 2011

From the desk of Dr. Tim Sydor, Forest Economist:

The 2011 Timberland Investment Conference, hosted last week by the University of Georgia’s (UGA) Center for Forest Business at Lake Oconee, attracted over 350 participants from all aspects of the timberland investment spectrum. Here are my thoughts on select topics covered at the Conference:

The condition of housing markets in the US captured everyone’s attention on the first day.  Rightly so.  As the final use for numerous timber products, housing explicitly drives wood demand and prices for lumber and logs. I noted in particular two points from presentations by Harvard’s Joint Center for Housing Studies, the Federal Reserve Bank of Dallas and the Terry College of Business at UGA.  First, the panel estimated an “overhang” of 3 to 3.5 million housing units. This overbuilt inventory includes foreclosed and soon-to-be foreclosed homes, which could dampen any market recovery. Two, there exists an “overhang” of unrealized demand for housing on the order of 2 to 2.5 million units (also known as pent-up demand) stemming from delayed housing formation due to the recent recession and poor job markets.

Optimistic and pessimistic assessments in the forest industry use these points selectively to support conclusions of why a housing recovery is or is not on the horizon. From my view, the estimates of both “overhangs” are sufficiently close to each other to indicate that modest economic growth and activity is all that is needed for stronger employment and the clearing of excess inventory over the next few years.  Also, this same view would discourage any policy that slows the resolution of unhealthy and, where necessary, underwater mortgages.

Export markets to China of logs and lumber shined as one of the bright spots in the industry outlook. Log exports increased 600% since 2008 (wow!). Dr. Jack Lutz put this into context, noting that the associated volume was equivalent to the annual use at a single large sawmill. Hardly a game changer.  However, as an economist, I always look to the margin and found the activity encouraging.

What spurred recent Chinese demand?  Presentations shared multiple theses.  One, the Chinese Government increased plans from building 3 million affordable housing units in 2010 to 10 million units per year until 2015. Two, Chinese log importers felt compelled to react to uncertainty associated with Russian log export taxes (which have been in effect at the same 15 Euro/cubic meter since April 2008).

For me, it remains important to keep this development in perspective. Log exports are increasing to the country (China) where government expenditures keep demand growing for housing. These exports, to some degree, substitute for logs from another country (Russia) whose government chose to curb log exports to support its own lumber industry.  Net result?  The US, in the short term, increased its role as a Chinese source for wood raw materials.





Cellulosic Ethanol Projects Enhance Viability Through End-Market Flexibility

21 03 2011

Regardless US Department of Agriculture efforts to continue funding for biofuel programs (“USDA opens application window for biofuel funding programs”), individual projects associated with cellulosic ethanol have expanded their end-market options to increase their probability of operational viability.  In short, investors are asking, “how can we actually profit from wood-based ethanol projects?”

Currently, cellulosic ethanol projects rank last with respect to operational viability in the US according to Forisk’s wood bioenergy screening methodology.  While wood pellet and wood-to-electricity projects use proven technologies, we do not, today, have a cellulosic ethanol facility operating successfully at commercial scale.  Still, of the 445 operating and announced wood bioenergy projects in the US, 33 continue to pursue the conversion of wood to liquid fuels.  For example, ZeaChem has made significant progress in the construction of its cellulosic ethanol demonstration plant in Oregon. Ultimately, researchers will solve the wood-to-transportation fuel technical issues.  Meanwhile, those financing cellulosic ethanol and related projects seek ways to generate cash and develop markets.

For example, start-up Anellotech is developing a catalytic pyrolysis technology that converts wood waste and other agricultural residues for use in the chemicals industry and as fuel additives for gasoline producers (Anellotech’s technology is profiled here). Anellotech is of interest because it indicated that its technology may ultimately be applied to produce  transportation fuels such as gasoline and diesel.

Canadian firm Lignol Energy has refocused away from ethanol towards other chemical products that could be produced from wood wastes (“Lignol Energy hunts for new markets for wood waste products“).  While the firm is marketing a pure form of lignin and exploring applications for, as an example, replacing more expensive carbon fibre products, this road too remains challenging.  Researchers have long pursued lignin applications without clear, public breakthroughs to date.  That said, the conversion of wood to chemicals retains immediate promise.

To explore further the timber market and investment implications of cellulosic ethanol, note that Forisk and the Schiamberg Group have conducted a multi-client study to assess the wood-based liquid transportation fuel sector in the continental US.  This research evaluates projects based on technology risk, with profiles of firms, wood markets and technologies. For more about the study, “Transportation Fuels from Wood: Investment and Market Implications of Current Projects and Technologies,” or to purchase it, click here.





Timber Forecast: Sawtimber Prices Expected to Recover in 2012-2013; Pulpwood Driven by Bioenergy and OSB

9 03 2011

Our team at Forisk just released its 2011 timber (stumpage) forecast for pine sawtimber and pulpwood for the US South and by state.  Overall, we show increasing demand for wood raw materials and higher pine stumpage prices for forest owners and investors beginning late this year.  Sawtimber prices for the US South strengthen 4.6% into 2012 and 5.5% into 2013 as lumber production increases with housing starts. Alternately, pine pulpwood – the lower valued raw material used for pulp, OSB and bioenergy – gains 1.4% and 2.7% into 2012 and 2013 South-wide, with high variance across the 11 states covered in our models.  This point is central to our analysis of timber markets and stumpage prices going forward: the ForiskFORECAST emphasizes the limits of regional or national forecasts for timber, and the critical importance of assessing timber prices locally.

In 2011, states such as Georgia, Louisiana and Mississippi show sawtimber prices exceeding $30/ton, and Florida and Louisiana surpassing $11/ton for pine pulpwood.  Prices change annually across and between states in the 10-year forecast as local mills adjust to end-market demands.

In 2010, the benefit to forecast users of this bottom-up approach was evident.  “In 2010, Forisk’s sawtimber forecast was within 4% of actual prices, and within 1% for key end-use markets such as paper and paperboard,” said Dr. Tim Sydor, our Forest Economist.  “The key is understanding and updating the local, state-specific relationship – the elasticity – between wood demand and prices.”

For more information, visit www.foriskstore.com and click “Stumpage Price Forecasts.”

In addition, two short courses on May 11th – “Applied Forest Finance” and “Forecasting Timber Prices” – teach techniques for evaluating forest investment decisions and pricing in local wood markets. To learn more about these Atlanta-based courses, click here.