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Research supports new model timber pricing index

New research has informed the development of a model pricing index that will meet the unique needs of the Australian hardwood and softwood sectors. The index will help to provide market participants with greater transparency and confidence, while supporting planning, growth and investment.

The structure of the Australian forest sector presents certain challenges in terms of log prices. Saw logs can take more than 30 years to grow, meaning a robust pricing mechanism is needed to ensure such a long-term investment generates an adequate return.

Meanwhile, potential customers, saw millers and other processors require security of supply in order to raise the investment funds and debt needed to build a new facility or expand an existing operation.

Jim Houghton, Statistics and Economics Manager at FWPA, said that in markets such as southern USA, this is achieved on a spot basis due to the many log sellers and buyers, alongside ready access to ports for export. Australia has to take a different approach.

“In the Australian market, it is often required for the supplier and buyer to enter into longer-term contracts, which necessitates a price adjustment mechanism.”

Against this background, the Timber Market Index Working Group (TMIWG), a sub-committee of the Australian Forest and Wood Products Association (AFPA), was established with the purpose of bringing together representatives from the grower and processor chambers, to consider options for a model timber-market index. 

FWPA has supported the working group by managing a research project to explore best practice in market indices. In particular, the study looked at data collection, data analysis and index methodologies. Practical consideration was given to the actual data available and how representative this was of historic price movements.

At the conclusion of the testing process, a model index was devised that researchers believe meets the critical requirements for a pricing index for the Australian hardwood and softwood sector. Importantly, the recommended index methodology was shown to closely approximate historic price movements.

“This analysis demonstrates the recommended pricing index approaches absolute best practice, is transparent and requires limited additional activity within industry, to be implemented,” Mr Houghton said.

A draft report is being considered by the working group with recommendations to be submitted to AFPA chambers for further review.

Posted Date: September 11, 2019

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