ITTO reports China’s timber demand increasing

The ITTO’s bi-weekly market update newsletter contained an interesting lead story on surging demand from China. From 2001 to 2010, log imports doubled from 17 million cubic meters (m3) to 35.4 million m3.

 ... With the international supply of commodity wood products falling and with rising domestic demand analysts expect to see a strong upward pressure on timber prices in the domestic market.

Interestingly, the article predicts that by 2015 the deficit of timber will be 180 million m3 - an increase of 550% increase over the amount imported in 2010. Meanwhile, log imports from Russia increased 12% by volume and 40% by value just in the first half of the year.

The report did not cite its source of information, but even after discounting the projected deficit by 50%, the growth in future demand and prices could be significant.

That’s positive news for the value of the timber being produced on Planting Empowerment’s plantations.

New forestry investment in Brazil

A three year old teak tree in Planting Empowerment's plantationsThe title of a recent article on the Environmental Finance website reads Brazil forestry fund eyes $350m. While this amount may not be significant for huge institutional funds to whom the investments are marketed, it is impressive in the world of foreign-managed forestry funds.

Two things about the fund stood out:

• Targeted 14% internal rate of return (IRR)
  A 14% IRR is possible, but challenging. The main holding of the fund will be monoculture plantations of Eucalyptus, which in Brazil is used for charcoal, pulp, and non-traditional products such as furniture. Forestry investments are most profitable when investors can buy low and sell high. Given that commodity prices are already high and look to remain this way for some time, and assuming this pricing is built into the targeted return, it might be difficult to deliver 14%.

• 15 year time period for the investments
  While a 15 year time period will make it easier for investors to hold their purchased assets and wait to sell at the top of an economic cycle, such a short time period presents a challenge. 20 years would be a better time period and give them more flexibility to exit their investments at the right time. The most successful timber investments have been made by endowments with no investment time frame who can hold the illiquid investments until the best opportunity presents itself and not be forced to prematurely sell at a discount.

For those who can’t invest millions, Planting Empowerment is offering smaller investment options. Our previous investment term of 25 years was too long, especially considering the lack of exit options. However, we are optimistic that our new opportunities based on shorter term debt periods and convertible debt will be interesting for smaller investors. Assuming that we can bundle the plantations into assets that funds will hold, we should be able to produce exit opportunities within 15 years that produce competitive returns.

The increasing number and variety of forest investments is a good thing, but we still need more funding to flow into the forestry sector to increase its production and reduce pressure on primary forests. While some of the stated goals will be difficult for some funds to reach, investors overall can still expect reasonable returns.

FSC certification and pricing update

A cocobolo tree in our Friends and Family plantation demonstrating strong growthThe ITTO's most recent timber report included an anecdote about a Peruvian logging concessionaire receiving FSC certification for its operations in Madre de Dios. They noted the large enterprise could barely afford the certification and annual verification process, and is seeing no prospect of better pricing because of the FSC certification. This makes sense considering that India and China are major purchasers and are not as demanding regarding timber certifications. It appears that producers with more direct sales channels into the US and/or Europe are in a better position to capture the higher pricing that FSC certification provides.

While we manage our investor-owned plantations to exceed FSC certification standards we have yet to actually certify those plantations due to the high cost and the current small scale of our operations. Once timber production from our plantations begins, we will analyze the market conditions when production comes on line to see whether the price premium validates the cost of certification. 

The ITTO also reports that timber demand and prices are holding steady across the globe. Pricing for plantation teak (Panamanian included) arriving into the Indian market held steady after a recent bump. Flooring originating from China is now being hit by anti-dumping levies by the US, so that will potentially depress demand slightly. However, a long term study of timber needs in Australia was pointing to the lack of local supply and the need to increase imports in the future.