The RISI Forest Products and Timberland Investment Conference was held in New York at the end of March. This 2 day conference provides a forum for exploring current timberland investment issues which is complemented by detailed analysis of end use product markets including; logs, timber, panels and pulp and paper markets.
Timberland investors were generally very positive about the outlook commenting that institutional investors were including more real assets within their portfolio allocations. Timberlands fit within the real asset class and it was suggested by some presenters that the global investment opportunities for timberlands ranged from $100 billion to $285 billion (the theoretical investable universe).
The US and the US south in particular were the benchmarks for timberland investment performance. These areas attract the best rating because there are many buyers and sellers of forest products. This combines with good infrastructure, extensive internal end use product markets plus access to many ports of export to create a genuinely liquid market. Other locations were rated by Bruce Vicary, VP, James W Sewall Company, a forest valuation expert as:
Tier 1 Australia, NZ, Chile, Canada
Tier 2 Brazil, Uruguay
Frontier Markets – Africa, Asia
According to Bruce Vicary the benchmark hurdle rate for investment in the US South was currently 5.5%. He then identified risk premiums (increase in the hurdle rate) for other locations. This included Australian pine at approximately 150bps and Australian Eucalypt at approximately 180 bps. Some of the frontier locations were significantly higher with South Africa plantations attracting a risk premium of approximately 450bps.
In terms of product markets the starting point was the outlook for US housing starts. This was generally seen as positive with most presenters of the view that US housing starts in 2015 would reach 1.1 million and possibly 1.2 million units. Currently, housing starts for the year ending March 2015 seasonally adjusted are running at 926,000. Looking further forward the expectation is that housing should return to an average position of around 1.5 million units per year.
These positive forecasts are driven by demographic data (household formation rates running at 1.13 million per year) and progress with employment. These factors combined with a reduction in the housing stock overhang from the Global Financial Crisis meant commentators were generally positive about the housing outlook.
Some broader issues which arose during other discussions and which may impact Australia include:
The Softwood Lumber Agreement (SLA) between Canada and US has run into a political impasse and is not expected to be renewed. This is expected to result in the placement of some tariffs on imports from Canada. This could have a ripple effect in the Region as Canadian producers need to look for alternative markets.
In terms of the wood pallet trade the US Farm Bill includes positive provisions to support residue use in wood pellets. Biomass Crop Assistance Program (BCAP) has provided an important incentive supporting the recent expansion of production in US South. This has impacted British Columbia where reduced exports of wood pellets are now expected. As with the Softwood Lumber Agreement this may have a ripple effect in our Region where developing markets for pellets in Korea and Japan electricity generators maybe attractive.
Prices of European sawlogs varied significantly in the December Quarter of 2014, with the Scandinavian prices slipping for a second or third successive quarter in US Dollar terms, while the prices for non-Scandinavian supply were more stable. As the detailed analysis shows, currency movements are playing their part in the European sawlog trade, with implications for the price of Australian sawnwood imports.
