Forestry Investment Blog

An interesting story ran in the times last week about the United Kingdom, where forest cover could double as a result of the plans.

http://www.timesonline.co.uk/tol/news/environment/article6995796.ece

I f you don’t want to read the whole article here’s a quick summary……The plan is for the conversion of land to forestry plantations for wood burning power stations using eucalyptus and willow trees, chosen for their speed of growth. The forestry plantations could be planted on moorland, hillsides, even industrial zones.

Ultimately the trees would be turned into pellets and used for electricity generation in biomass power stations. Power stations are due to play a key role in reducing Britain’s emissions of carbon dioxide because the trees absorb it as they grow. The new forests would be cut down and replanted in a continuous cycle.

According to the report by the Times, a partnership between the Government and major energy companies states that almost  two and a half million hectares could be converted to plantations for biofuel.

The partnership is conducting a study to identify which areas are the most suitable for conversion to plantations in order to reduce the UKs reliance on imported wood. The amount of foreign-grown timber consumed in the UK is due to grow by 150 per cent because of plans for 16 large new biomass plants.

A biomass plant being built inWales, will use three million tonnes of wood per year and generate 300 megawatt hours of electricity.

Drax is planning to build three more 300 megawatt biomass plants in Yorkshire.

Britain needs to remove all carbon emissions from its electricity generation by 2030 in order to meet its target of cutting greenhouse gases by 50 per cent by 2050.

The Forestry Commission began trials last year to measure the yields from eucalyptus planted in six areas. Unlike conifers, which can take up to 40 years to produce a crop, eucalyptus can be harvested in as little as  five years.

Forestry invest is sponsored by Greenwood Management

In the United Kingdom, central government is estimated to purchase as much as twenty percent of all the country’s timber, (this figure rises to 40 per cent when local authorities and other government bodies are included),  and a commitment to procurement policy has been released by its central government.

To summarise, the social criteria that will now be included in the UK Governments procurement policy are:

Identification, documentation and respect of legal, customary and traditional tenure and use rights related to the forest;

Mechanisms for resolving grievances and disputes, including those relating to tenure and use rights, to forest management practices and to work conditions

Safeguarding the basic labour rights and health and safety of forest workers.

The social criteria have been adopted following a consultation with trade and environmental stakeholder organisations which concluded in August 2009.

Covering the numbers for a minute, forestry products imported into the UK in 2008 consisted of 11 million cubic metres of wood (sawnwood, other woodand woodbased panels) and 9 million tonnes of pulp and paper. Speaking on behalf of the Government, Mr Hilary Benn, said “Developed nations such as the UK must support developing nations so that they do not have to make a choice between their ecosystems and their economies. Developing countries have long and rightly called for action by consumer countries to support their own efforts to manage their forests.”

The new social criteria demonstrate the UK’s commitment to use government purchasing power to help push illegal and unsustainable timber out of the market by improving labour standards, protecting the interests of developing nations and tackling climate change. A welcome move.

According to Olga James a writer for the Baltic Times forestry will be vital to the future of Latvia. She explained that the timber industry and related sectors have made up a crucial part of the country’s economic structure and will continue to do so for many years.

However she also pointed out that changing technologies mean that new ways of working might have to be found. Ms James explained that the advent of biomass power production could help provide the country with another source of income.

Ms James said: “From the investment perspective, as the development of Latvian wood product manufacturing, using wood from Latvian forests has been a major industrial success story in the past years; the sector is likely to attract fresh foreign direct investment flows as soon as the situation on the global markets stabilises.”

This is reflected in the discussions currently going on between Latvia and Hungary.  Peter Balazs, the Hungarian foreign minister, met his Latvian counterpart, Maris Riekstins during a visit to Latvia. They met to discuss economic co-operation between the two countries, which include Latvian timber investment interests.

Forestry investors in eucalyptus plantations could be excused for feeling a little light-headed,  if they have spotted the news from Brazil.

http://www.cop15brasil.gov.br/en-US/?page=noticias/green-steel-for-the-brazilian-steel-industry

The text below is from the Brazilian federal government’s website on December 4^th 2009.

“Green steel for the Brazilian steel industry”

“Considered as an environmental villain, the steel industry may become an ally of the Federal Government in the challenge to reduce Brazil’s emission of greenhouse gases. The proposal presented by the Ministry of Environment aims to produce the “green steel”, which uses charcoal from afforested areas, instead of coal, to produce the pig iron (steel with impurity). As a result of the Brazilian proposal, the iron and steel industries will commit to use only charcoal in their high temperature furnaces.

Another point of the proposal conceives that the reposition of the timber used in the charcoal should be of 100% e will only involve exotic species like eucalyptus. This will ensure the preservation of the native vegetation. It is worth mentioning that one ton of pig iron produced from coal emits 1.9 tons of CO2, while the production of 1 ton of green steel removes 1.1 ton of gas from the atmosphere.

The news is good and specialists from the sector believe that, in the near future, the green steel will help the Brazilian steel industry to distinguish from its competitors abroad.”

Brazils President Lula da Silva, post Copenhagen said

“And we have decided other three important things: to reduce deforestation in the Cerrado biome; in our steel industry sector, we will work for the utilization of charcoal and not mineral coal, also with the objective of reducing greenhouse gases; and in our energy mix, which is already the cleanest in the world – considering electric energy alone, we have 85% of clean power generation. Brazil was, thus, in a very comfortable position. Brazil was considered, during the whole meeting, as the country that had the best proposal, as the country that worked on this issue appropriately. And thank God the governmental decision we have submitted to the National Congress was approved and is now a law. Therefore, this is no longer the will of President Lula. Now, whoever is governing this country will have to comply with it”.

Again the link is here:

http://www.cop15brasil.gov.br/en-US/?page=noticias/presidente-lua-afetr-cop15

http://blog.planalto.gov.br/cafe-com-o-presidente-conferencia-das-nacoes-unidas-sobre-mudanca-do-clim. There is translation needed here for the non Portuguese speakers amongst us.  The mp3 download of the presidents comments are obviously in Portuguese too.

So a very compelling case for Eucalyptus grown charcoal is being presented straight from the Brazilian government.

Coal being withdrawn as an option for iron and steel makers will  place a massive strain on supplies of charcoal.  The upshot of which will surely  be increased competition for degraded land to grow the forestry plantations and even more competition for the charcoal itself.  Being a naturally conservative forestry type of chap,  I have tried to find some words of caution to add to the story but as yet I can’t find any!   I haven’t spoken to Greenwood Management, our sponsors here,  but I can only imagine they must feel exceptinally bullish about the situation that is unfolding out in Brazil.

From my own perspective,  I believe the decisions that the Brazilian government are making should be welcomed with open arms.  They have made enormous progress in respect of cutting their rates of deforestation ( something id like to cover later this week).  The demand for steel is forecast to be strengthening as the world emerges from recession, and as of today,  I am unaware of a better immediate solution to ways of forging the iron in way that doesn’t destroy the climate through carbon emmissions.

Forestry Invest is sponsored by Greenwood Mangement

The forestry  biomass sector came under scrutiny once more at the seventh annual natural resources forum in British Columbia, Canada. One of its key speakers, forestry analyst Don Roberts for CIBC (a North American Investment institution)  stated that bio nenergy is likely to play a pivotal role in the future of the forestry investment industry.

Recent studies of traditional and emerging forest industries and their technologies in British Columbia, Ontario and  Quebec showed that  timber could generate good returns despite market volatility but significantly, the forestry investment returns from the pulp and paper sector are not attractive enough, observed Mr Roberts.  The forestry sector has to find alternative ways of obtaining more products from the timber it harvests. The trend has been flagged by The United Nations European Economic Commission in its ” Forest products annual review” of  2009,  stating that a “structural change” was occurring within the forestry sector.  From the UNECE report …“The wood energy sector seems to have been immune to the global economic crisis. Demand for renewable energy sources, including wood biomass, continues to grow steadily due to Governments’ incentive policies fostering climate change mitigation efforts and energy security.”

So a similar theme seems to be emerging from all the analysis tht is being put out from within the forestry industry.   Getting back to the Canadian forum and forestry investments forum,  specifically in Canada,  it was stated that  some potential in bio-refining and attractive returns in producing wood pellets existed . The study revealed that integrating traditional and emerging sectors could prove beneficial, both in delivering adequate returns on forestry investment and creating employment.

The pulp sector has been producing power from wood waste for years, yet there is only one stand-alone biomass power plant in British Columbia.  The bioenergy plant, which uses wood waste from sawmills, has been in operation in Williams Lake for 16 years. However there are other projects in the pipeline, including a $250-million bio energy plant in Mackenzie. This had been delayed by the general economic downturn which inevitably affected forestry investments along with all other investment decisions at the time. The general  downturn, particularly in the construction industry had closed sawmills and a pulp mill in the community. A $50-million plant earmarked for Prince George was announced eight months ago. The plant is intended to produce power, bio-oil and charcoal from logging and milling waste fed by a log sort yard.

Still, according to Mr Roberts,  the Canadian  bioenergy sector is facing challenges from the financial downturn.  Competition from the United States, where the U.S. Government has set aggressive production targets for renewable fuels and is providing subsidies to industry.   For example the American Biomass Crop Assistance Program which provide up to $45 per tonne of dry biomass. Subsidies such as these will reduce costs and make capital investments more attractive south of the border, noted Roberts.

China and the European Union have also set aggressive targets for bioenergy production, but Mr Roberts remains unconvinced that they will be able to meet their targets. Canada is well behind other jurisdictions in bioenergy production, accounting for less than two per cent of world biofuel and bioenergy output despite its large forest sector.

Forestry Invest is sponsored by Greenwood Management.

Putting my financial hat on today, I decided to trawl back over the past eighteen months and look back  over the global financial crisis and see if I could learn any lessons and mitigate my risks in investing generally. Forestry is often quoted as being uncorrelated to financial markets and so it seems sensible to look back over the crisis to see what figures have come out so far from the eighteen months meltdown.

“Defensive” stocks are always being tipped as being the place for investors to turn in times like these, but sadly (for me at least) many of the stocks that would normally qualify as “defensive”  took an absolute hammering. Who would have believed the banks stocks would fall off a cliff? Many investors were wiped out.

An elderly neighbour of mine was tempted to “top up”, after his bank shares had tumbled from 8 pounds down to 4 pounds. How could they go much lower?   This was one of the UK largest financial institutions after all,  so when he received a fundraising notice offering a rather tasty  “discounted offer to existing holders” almost 40 percent  off to the existing share price,  he gave into temptation.

His 25k  is now worth about 4k…..  His wife still doesn’t know.

“Utilities” are another sector tipped by the city boys in troubled times . There is no discretionary spending here, we all need gas, electricity, water…so the profits will still come pouring in surely?   Dividends were at an unprecedented high of  9 percent… plus capital growth,  blimey!  Price per earnings ratios  etc were at historic lows.   Fill yer boots!     Sadly the market spits out all such analysis in times like this and all logic goes out of the window.

Don’t get me wrong,   I’m not saying all defensive stocks went down the pan,  but the market meltdown took no prisoners.

The thing that triggers  “Black Friday”  moments is unrelated to the individual stocks unfortunately.   A kind of synchronised sinking takes everything down with it.  Institutions become forced sellers in all stocks as their stop losses are automatically triggered….Once this process begins, all bets are off and  the “shorting” brigade smell blood.    Shorting stocks was where the hot money came in (effectively selling stocks in advance),  confident that they would be able to buy back the same stock at a much lower price and make a quick killing.

Even the regulatory markets stepped in at one point to stop some stocks being shorted.  Some of the most soundly based banks fell victim to this kind of speculation. Barclays being a notable case, with its share price hitting 60 odd pence down from well over 6 pounds, ouch!

Despite numerous assurances from the bank that’s its finances were sound, directors purchasing their own stock to reassure us all  that all was well in the Barclays house, the market bullied the price lower and lower.  The fact that the share price has recovered nicley is no consolation if you were forced out.

Anyhow,  getting back to the rather more sedate world of forestry investing.  Trees remained relatively unperturbed by all this turbulence.  The foliage flittered in the chill economic winds,  but nothing else happened really. Gordon Gekko said “greed is good”, but maybe “boring” is good sometimes?  Ok, I’m getting carried away, but looking across the United Kingdom for instance, according to the IPD UK forestry,  investment in forestry outperformed domestic commercial property and equities,  producing a positive annual total return of 7.0%, beaten only by bonds.  By comparison, commercial property plunged -22.1¹%;  UK equities  -29.9²%, while listed property companies and trusts were the most vulnerable to the global market downturn, returning -46.6³% over 2008.     Gulp.

The performance of the forestry sector remains significantly lower than the record levels seen in 2006 and 2007, when total returns of 20.6% and 31.6%, respectively, were seen. Over a three-year annualised basis to end of 2008, forestry investment outperformed the three main asset classes,  returning 19.3% per annum, while mid to long-term performance improved, returning 16.2% per annum in the five years to end of 2008 and 5.2% per annum since the start of the index back in 1992.

Simon Hart, a woodland investment advisor at UPM Tilhill, a sponsor of the IPD UK Forestry Index  said, “2008 was a tumultuous period for the global economy with major price corrections for many asset classes.  However the value of UK commercial forests held and with very low leverage in the UK forestry market”

Source: IPD UK Annual Index 2008

Source: FTSE All-Share Index

Source: FTSE All-Share Real Estate Index

Source: FTSE UK Gilts Index 5-15 yrs

Forestry invest is sponsored by Greenwood management

The exceptionally harsh winter conditions  across northern Europe at the end of last year and the beginning of 2010,  has had serious repercussions in the Scottish forestry and timber  sector. The timber supply chain there has almost ground to halt as the big freeze engulfed the region for an unusually prolonged period.   The Scotsman newspaper reported that many of the forests were proving to be inaccessible to workers and trucks, with trees felling schedules going into disarray. As the knock on effect spreads across the forestry and timber investment industry,  other related businesses are likely to run out of wood within a matter of days according to various reports in the press.  Forestry related employees are being laid off across the industry and the report stated that the impact will be severe. There are fears small firms in the haulage sector in particular could face serious cashflow problems, whilst workers at large mills face lay-offs.

The Scotish forestry sector employs 20,000 people directly and 40,000 indirectly and is worth approximately 1 billion pounds to the United Kingdom’s economy.

Chief executive of the Confederation of Forest Industries (ConFor) Stuart Goodall said: “It is an unprecedented situation. The most frustrating aspect is Scottish timber firms made significant progress in capturing market share against imports over the past year.” They have also been in meetings with the Forestry Commission in an attempt to keep the industry working through these unprecedented timed.

The Forestry Commission has promised to fast-track felling licences for private woodland owners who have forestry/timber that can be harvested now, while ConFor is also lobbying for a temporary relaxation in the enforcement of drivers’ hours regulations.

Greenwood Management are the sponsors of Forestry-Investment

News relating to forestry and timber investments:

Lurio Green resources,  a Norwegian company has plans to invest over 2 billion $US in Eucalyptus plantations in Mozambique, Africa.  The government in Mozambique  has just approved the eucalyptus project.  The  forestry species will be specifically grown and harvested for industrial purposes across the northern province of Nampula.

Luis Covane,  government minister stated that over 200 million dollars will be spent on the eucalyptus plantation itself and approximately two billion will be invested in timber related  industrial infrastructure.

“The company will establish a forestry plantation for the production of paper, sawn wood and charcoal, and also for the generation of electricity. Part of the land granted to the company will be used for food production”.

According to report from the “Macauhub”,   Lurio Green Resources requested up to 210,000 hectares of land for it’s eucalyptus platations, but was actually allocated 126,000 hectares in the Mecuburi, Ribaue and Nampula districts.  From a local  employment perspective,  the benefits will be wide ranging, with the creation of up to 12000 new jobs being expected directly and indirectly as a result of the new investments in forestry projects.

Additionally, the  Norwegian company intends to  invest up to 30 million dollars in community infrastructure for the indigenous people, with schools and health centres being constructed  in the area.

Other  forestry investments in the region were  also announced  in the report,  with the news that just shy of 175,000 hectares of eucalyptus plantations in the  Ile and Namarroi districts are in the proceess of  developing by a  Portuguese company Portucel.  In this case, the  forestry investor is the Portuguese forestry and paper group Portucel (one of Europes largest producers of paper and pulp), which plans to construct a paper/pulp manufacturing faciliity in Mozambique.

http://www.macauhub.com.mo/en/news.php?ID=8651

Greenwood  Management are the current sponsors of “Forestry Invest”

Thirty two percent of all energy produced in Brazil is from  biomass. Of this, firewood and charcoal account for 11.4% of the total. Brazil produced about ten million tons of charcoal, of which 84% was used in the steel industry for the production of iron, 8% for residential use and 8% for other activities. These figures place Brazil as the largest producer of charcoal in the world. However the main and perhaps the most important problems associated with charcoal production in Brazil are in fact related to the supply of raw material. Numbers of Forestry Mining Association (AMS) show that in 2008, of all the charcoal produced in the country, 47% of the raw material used originated from native forests, obviously a matter of some concern.

Although the current situation in the supply of raw material is exrtremely worrying,  it can be easily resolved. According to the Brazilian Association of Planted Forests (ABRAF), there are about six million hectares of planted forests in Brazil. Over four  million hectares are planted with eucalyptus plantations,  which take up less than 1% of arable land in Brazil.
Consequently there remains an enormous growth potential in managed forestry plantations. Brazil has abundant water and solar energy combined with very fertile soil conditions. So ideal conditions prevail for the growth of many tree species, which puts Brazilian forestry investing companies in an enviable position.

To illustrate thisfact, the production of wood per hectare per year in Brazil can often exceed  50 m3 in many parts of the country       (with genetic advances providing opportunity for even higher growth rates still). Yet in Finland for example, growth is no more than 5 m3 per hectare per year, yet Finland has achieved a high level of economic development with much of its  income coming  from the forestry investment community.

Studies carried out by academic bodies in the Brazilian forest show that, to meet the demand of raw materials forests over the next 10 years, Brazil will need over 7.5 million hectares of additional  forestry, or about 13.5 million hectares of forestry in total will be required by 2020. Large scale biomass production will be essential,  through increased forestry plantation investments.

A further challenge is related to the technologies for converting biomass into energy. Charcoal is produced today, for the most extent, the same way as ever. The technology can and will be improved. So the need to provide more abundant and efficient, sustainable charcoal is there for all to see.

Sponsored by Greenwood Management