Wood Bioenergy: Which Projects Fail and Why?

The costs associated with citing and building wood bioenergy projects can exceed those to build and operate natural gas or coal plants (in terms of dollars per unit of electricity output).  As such, factors determining the success and failure of projects matter.  Analysis by Forisk Consulting of over 500 operating and announced wood-using bioenergy projects detail key trends since 2010 (Figure). [Note: detailed projects list and analysis are available to Wood Bioenergy US subscribers.]

Over the past year, key decreases have occurred with electricity projects, most increases in projects and volumes have been associated with wood pellet projects in the US South, while other sub-sectors – including CHP, thermal and liquid biofuel (i.e. cellulosic ethanol) – have remained relatively static.  While total projects that pass viability screens increased in the past year and a half, the fastest growing category is “shut down/canceled.” More projects have been canceled or shut down than have advanced to pass viability screens. Half of the projects that are on hold, shut down, or canceled are electricity projects.

For investors and analysts tracking bioenergy, wood and timber REIT markets, Forisk offers “Timber Market Analysis” on August 15^th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here. 

Timber REITs and Profit-Taking: History Repeats

Recent rosiness reported in US housing markets triggered interest and trading in public timber REITs.  Year-to-date, timber REITs and the Forisk Timber REIT (FTR) Index show positive performance (Table 1).  However, the results vary by firm and sit below 2012 peaks in March and April and May, replaying a scenario where investors capture profits opportunistically.  In sum, equity markets priced in the good news and shareholders shed shares to book the gains.

We have seen this story before.  In 2008, Forisk published the first peer-reviewed research evaluating timber REIT performance (“Investor Responses to Timberlands Structured as Real Estate Investment Trusts (REITs)” in the Journal of Forestry; for a copy, email Heather Clark at hclark@forisk.com).   The study analyzed equity market responses to announcements by forest industry firms of their decisions to restructure from traditional C-corporations to real estate investment trusts (REITs). Our research found that all four announcements were associated with significant abnormal increases in the stock prices.  On average, shareholders showed a 5.2% paper gain in share value one day following the announced intent to convert.   The analysis concluded that investors prefer holding industrial timberlands within a REIT – with its tax efficient structure and distribution requirements – rather than traditional C-corporation. In addition, in three out of four cases, investors took this sudden bump in stock prices as an opportunity to extract near-term profits.

Finally, the current increase in timber REIT prices is consistent with Forisk’s January 2011 firm-by-firm analysis ranking the potential upside for timber REITs (”Comparative Analysis of Timber REIT Forest Harvesting Activities: Who Wins as Housing Markets Return?”). While less than 50% – in cases, much less – of firm revenues derive from timber sales, direct exposure to housing – as measured by revenues from Timber, Wood Products and Homebuilding segments – exceeds 60% of revenues for three of four REITs.  Specifically, we noted that Weyerhaeuser will lead on an aggregate and relative basis and Rayonier retains the greatest potential for increasing mix-driven margins from timber harvesting.  Thanks to their liquidity, investments in public timber REITs have tremendous exposure to the moods of market.

For investors and analysts tracking wood and timber REIT markets, Forisk offers “Timber Market Analysis” on August 15^th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets. For more information, click here. 

Forest Certification Conundrum

From the desk of Amanda Lang, who attended and spoke at the Forest Landowner’s Association National Conference last week in Ponte Vedra Beach, Florida.

“Forest certification” generated lots of questions from those attending the 2012 Forest Landowner’s Association national meeting. Who is certified? Which program do they use? Why? Does it make sense for forest landowners to participate in these programs?  What do they accomplish when research indicates state-based forest management programs achieve similar improvements in forest and water quality?

First, let’s define our terms. Forest certification includes third-party programs that guarantee sustainable forest management based on a standard set of criteria. An established forest certification program in North America is the Sustainable Forestry Initiative (SFI).  In 2005, the Programme for the Endorsement of Forest Certification endorsed SFI, giving it international recognition. The Forest Stewardship Council (FSC), based in Oaxaca, Mexico, is a major international certifier. The American Tree Farm System (ATFS) supports a program for nonindustrial family forest owners in the United States.

In November 2011, the Southern Group of State Foresters published a report about the status of forest certification in the U.S. (available here).  By region, the Northeast has the highest percentage of forestland enrolled in certification programs, followed by the South (Table 1). Most acres enrolled in FSC certification are located in the Northeast while the South favors SFI and ATFS programs.

Currently, most wood buyers do not pay premiums for certified wood. The profile of landowners enrolled in SFI or FSC programs are industrial owners that participate in certification as an industry standard and to satisfy investor requirements for sustainable management and public relations.  Typically, small or nonindustrial private landowners either participate in ATFS or not at all.

If markets develop for certified wood and buyers offer premiums for certified wood, then landowner participation in these programs will increase.  Currently, few incentives exist for the nonindustrial private landowner to certify.  In fact, private landowners remain skeptical of incurring extra costs for programs that seem to mirror their existing sustainably-oriented forest management plans. This feeling has been reinforced by research that shows state-mandated management practice guidelines provide effective means to protect water quality*. For example, when best management practices are followed, water quality on stands in the South recovers in 2-5 years following a timber harvest. Research in the Pacific Northwest also confirms that buffer zones along stream banks allow water systems to recover following timber harvest.

*Lang, A.H. and B.C. Mendell. 2012. Sustainable wood procurement: What the literature tells us. Journal of Forestry. 110(3): 157-163.

Wood Market Realities, Part II: Demand Trumps Utilization

This is the second in a two-part series related to the analysis of wood baskets and timber markets for investments in forest industry mills, wood-using bioenergy projects and timberland.

Part I of Wood Market Realities (Stumpage Price Paranoia) addressed real and perceived issues associated with stumpage price data and forecasts.  The “paranoia” emphasizes the need to kick the tires on stumpage price data sets and the value of recognizing stumpage forecasts as one piece of a complete analytic effort.  Building a house requires more than a hammer.  Successful analysts deploy a set of tools to measure (twice or more), test and analyze markets for wood and timberland (and everything else….)

Consider the question of wood demand.  As a timberland investor, would you prioritize high volume markets (with lots of mills demanding lots of wood) or high utilization (where mills run at near capacity)?  As a wood user looking to locate a new facility, which would you prioritize?  Table 1 provides a snapshot of the disparity of wood demand for pine sawtimber (PST), utilization at PST-using mills and PST pricing across groups of states in the US South.  [Please note: “utilization” as reported by the Wood Demand Report captures the ratio of actual raw material purchases in a quarter to the potential wood demand at full capacity.  The ratio varies over time in part due to changes in mill inventories.]

What can we learn or ask about pine sawtimber markets based on the comparisons in Table 1?

1. Low demand is associated with lower prices, regardless utilization.  We observe this across markets and forest product types.  For both timberland investors and wood users, low volume markets correspond to high risk.  Typically, demand trumps utilization when investigating wood raw materials.
2. Demand, utilization and prices are all incomplete metrics when used independently.  High demand (volume) can, at any given time, correspond with low, market level utilization, and vice versa.  And high prices can easily correspond with low volume.  Selling the highest priced sawlogs in the free world into a market that consumes seven tons per year is not a business; it’s a hobby.
3. Timber market metrics temporarily and imperfectly quantify ambiguity. The Table 1 example generates questions of its own.  What happens to the comparison if we include (pine sawtimber-using) plywood plants?  What happens if we assess states individually or carve out firm or tract specific markets?  How do these figures look over time?

Forisk will address specific data and analytic issues during “Timber Market Analysis” on August 15^th in Atlanta, a one-day course for anyone who wants a step-by-step process to understand, track, and analyze the price, demand, supply, and competitive dynamics of local timber markets and wood baskets. For more information, click here.