Look Long-Term For Better Markets

Article by Dan Shell, Managing Editor, Timber Processing (2011)

The other day I attended a ribbon-cutting ceremony at the world’s largest fuel pellet plant in Waycross, Ga. The Georgia Biomass facility is owned by a large German utility and is consuming more than 1 million tons of pulp-grade timber annually. The mill converts timber into fuel pellets that are co-fired with coal in European power plants. One visiting dignitary mentioned the benefits of “replacing European coal with wood coal from Georgia” in a quest to lower greenhouse gas emissions and find more sustainable energy supplies.

In a region that has hosted a significant forest products industry for more than 100 years, the latest large-scale venture emphasizes the durability of timberland as an asset.

The area has seen small and large family lumber operations, the rise of corporate ownership and the pulp and paper industry, and well-managed timberlands have sustained it all. Recent trends include a retrenching pulp and paper industry and tough lumber markets reducing demand, but now here comes Georgia Biomass and other similar energy operations that will stoke demand in the near future.

The ultimate impact of the growing wood bioenergy industry in anyone’s guess at this point, but imagine a procurement environment a decade or so down the road that includes 1.5+ million housing starts, booming Asian export markets, favorable pulp and paper prospects and a wood energy sector feeding domestic and offshore markets that are both growing.

That may have been on the minds of some at the recently concluded University of Georgia’s 2011 Timberland Investment Conference (Newsfeed, page 6). There, experts noted that global demand for wood is increasing even in the face of current economic conditions. The long-term outlook for timberland as an investment is bullish thanks to low-risk, consistent returns and flexibility with multiple cash flow sources.

Meanwhile, lumber markets are looking at a slow recovery marked by much lower demand and less consistent price strength than in past recoveries, said Lynn Michaelis, president of Strategic Economic Analysis, at a recent engagement.

Despite many mill closures during the downturn since 2008, the production capacity in the market will make it hard to sustain price boosts, he said.

While near-term forecasts show that the recovery will be “painfully slow” for producers, Michaelis said, longer-term projections are more optimistic due to sheer population growth, slowly improving economic conditions and long-term housing renewal.

The good news is that lumber producers have made it through the worst of the downturn, but longer-term thinking is the key. “We can get back to one and a half million starts pretty easily—over time,” he said.

The modern, ultra-fast business environment encourages and demands immediate results and improvement, but for the timber industry’s land and lumber segments, adjusting one’s perspective to a farther horizon is a more realistic outlook.