Producing Liquid Fuels from Wood: An Introduction

21 04 2011

Producing a proper wood-derived biofuel follows a three-step recipe.  One, grow trees. Two, break down wood from the trees into its components.  Three, use these components to produce biofuels.  Unfortunately, this simple recipe does not equate to “technologically doable and economically viable” in the current market place.  That said, dozens of firms are pursuing projects in the US to produce liquid transportation fuels from wood raw materials.  Forisk teamed with the Schiamberg Group to evaluate all US-based projects and technology pathways under consideration.  Below we share an introductory overview from this research:

Three general routes exist for converting wood biomass to transportation fuels. The first involves exposing wood to high heat in the presence of limited amounts of oxygen or steam – in a process called gasification – to produce a gas mixture called synthesis gas (commonly known as “syngas”) which can be converted to liquid fuels such as ethanol or diesel. The second route involves breaking down cellulose and hemicellulose to constituent sugars using acids and enzymes and then using microbes to ferment the sugars to ethanol. The third route involves heating wood in the absence of oxygen – in a process called pyrolysis – to produce a complex liquid called bio-oil. The bio-oil can then be stabilized before upgrading and refining to diesel, gasoline or associated blend products.

Complications arise because the chemical properties of wood differ from other feedstock types under development or in use for liquid fuels production. Wood bears a biochemical resemblance to other lignocellulosic feedstock types such as switchgrass or corn stover.  However, woody biomass has a higher density, lower ash content, higher lignin content, and lower pentose content. The density and ash content are advantages for transportation when comparing woody biomass to agricultural biomass. However, the higher levels of lignin in woody biomass compared to agricultural biomass make breakdown of woody biomass by microbes or enzymes more difficult than for agricultural biomass.  These challenges have encouraged wood biofuel firms to pursue multiple end product markets.

For more about the study, “Transportation Fuels from Wood: Investment and Market Implications of Current Projects and Technologies,” or to purchase it, click here

Potential Impacts on Timberland Investors from FDIC Proposals on Risk Retention and Mortgage Markets

14 04 2011

Recent comments by Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Blair regarding minimum down-payments of up to 20% for “qualified residential mortgages” (QRM) echoed discussions about residential housing markets at the UGA Timberland Investment Conference.  Our Equity Research Team (Neena Mishra, CFA, Director of Equity Research; Dr. Tim Sydor, Forest Economist; and Dr. Brooks Mendell) met to discuss potential issues and implications from this on housing and stumpage (timber) markets:

According to National Association of Homebuilders (NAHB) Chairman Bob Nielsen, the plan would disqualify a number of potential home buyers, reducing home sales and resulting in 50,000 fewer housing starts per year.  Changes in mortgage requirements affect housing starts, which in turn affect the forest products industry.

How might this affect timberland investors?  Using Forisk’s interactive Stumpage Forecasting models, we applied NAHB’s numbers.  The net impact of fewer home  built reduces softwood lumber consumption by 1.5 to 1.9 billion board feet per year which could lower softwood sawtimber stumpage prices in the US South by $0.60-0.80 per ton based on direct effects alone.  This does not include potential impacts on the shadow inventory of unsold homes and potential foreclosures in the pipeline.

In addition to affecting timber markets, the FDIC/Federal Reserve plan represents a significant shift in risk.  From one perspective, any probability of default whether due to job loss or equity loss (so-called “strategic default”) is borne by the buyer in the form of the 20% down-payment. As written the requirement is indiscriminate, even including buyers with high FICO scores.  Would rates actually decline as a result?

Requiring lenders to have “some skin in the game” is necessary but risk retention increases the cost of credit.  Thus a line must be drawn to determine which loans are less risky and the less risky loans should carry lower rates of interest (possible only if no/very low risk retention by the banks).  There is no doubt that QRM loans will carry a much better rate of interest, if the rules are imposed.  Overall rates may or may not come down but QRM loans would clearly carry much better rates than non-QRM loans.

The picture is further clouded by the fact that the private securitization market for housing is gasping; securitization brings down the cost of credit and increases the availability of credit. Reviving the private securitization market would be difficult if very strict risk retention requirements are imposed.  This is further exacerbated because current rules exempt FHA, Freddie Mac and Fannie Mae loans (while Freddie and Fannie remain in conservatorship) from any risk retention requirement. Currently about 90% of the loans are backed by these agencies, so the actual impact on the housing markets may not be that great.  As such, the rules actually favor Freddie-Fannie, making their exit – an oft cited objective of reforming the mortgage markets and reducing tax-payer exposure – from the housing markets anytime soon nearly impossible.

Timber REITs Outpace S&P in 2011 Based on Long and Short-Term Market Factors

7 04 2011

From the desk of Neena Mishra, Director of Equity Research:

The Forisk Timber REIT (FTR) Index of public timberland-owning real estate investment trusts (REITs) continues to outpace the overall market in 2011, returning 23.78% year-to-date compared with 6.19% for the S&P 500 (as of April 6, 2011).

What factors have contributed to the outperformance of the FTR Index over the broader markets?  We highlight one longer-term investment upside and two shorter-term market drivers.

First, market analysts and investors have incorporated the positive upside imbedded in timber REIT timberland assets over the next few years.  During the downturn, timber REITs deferred their forest harvests and changed the harvest mix (away from higher priced sawlogs towards pulpwood). This effectively increased the capacity to harvest more and improve the mix in the future. When the recovery occurs, these REITs will benefit from higher harvest volumes, improved harvest mix and strengthened pricing.  [We proposed this thesis and detailed the volume impact by firm in our January 2011 Technical Note, which specified Weyerhaeuser (WY) as the primary beneficiary.]

Second, China rapidly increased imports of both logs and lumber since last year, which strengthened sawlog prices in the Pacific Northwest. Though Southern sawlog prices remain impacted by weak domestic demand, pulpwood prices continued to benefit from demand for bioenergy (i.e. pellets) and steady demand from the pulp and paper industry. On the supply side, tailwinds from declining merchantable pine volumes in British Columbia due to feasting by the mountain pine beetle continue to affect pricing.

Third, the recent catastrophic events in Japan will increase demand for logs and lumber once rebuilding starts.  Approximately 150,000 buildings were destroyed by the earthquake and tsunami; these will be rebuilt over the next few years. Most rebuilding will use wood as it is more earthquake resistant.  Of the four public timber REITs, WY is best positioned to gain from the rebuilding, due to the coastal location of its Western timberlands, its focus on higher valued-premium sawlogs and its long-standing client relationships in Japan. Japan has been WY’s largest log export market and currently represents about 10% of its total sales and 75% of its export volume.

As a result of the improved outlook for the timber REITs, Moody’s raised Plum Creek’s (PCL) debt rating one notch, to Baa2 from Baa3, with a stable outlook; and affirmed the debt rating for Rayonier (RYN), while raising the outlook to positive from stable.

To receive the free FTR Weekly Summary along with an Excel file with the historical data that can be used for market research and benchmarking, email Neena Mishra, .

Wood Bioenergy: 55% of Announced Demand Considered Viable; New Study of Cellulosic Ethanol Projects Provides Insights

4 04 2011

As of March 30, 2011, Wood Bioenergy US tracked 451 wood-consuming, announced and operating bioenergy projects in the continental US.  Electricity (biopower) and wood pellet projects dominate the Forisk database (see table), while cellulosic ethanol projects continue to pursue multiple technologies and end-market options.

In total, these projects represent potential, incremental wood use of 127 million green tons/year by 2021.  Based on Forisk analysis, projects representing only 69.5 million tons/year (55%) pass basic viability screening.  [To download the complete February/March summary of Wood Bioenergy US, click here.]

Strong interest in a practical assessment of wood-based transportation fuels motivated our team to partner with the Schiamberg Group to conduct a comparative analysis of US-based projects.  This research evaluates over 30 projects across 11 technology approaches in 19 states.  Core findings of the analysis emphasize the range of technologies pursued (from off-the-shelf to experimental), to the range of potential timelines for commercial viability to the range of end-product outputs under consideration.  [To learn about a special pre-publication offer, click here or contact Brooks Mendell at]