14 Nov 2018
Blog: A new way to forecast log prices to enable better forest asset and industrial investment decisions
Experience shows that there have been periods where forest managers and investors have significantly under or overvalued forest assets, mainly due to incorrect forecasts of market price development, especially in markets where a trend breaker takes place.
Forest product demand is reaching unprecedented levels globally. We are witnessing an increasing supply and demand gap which is further exaggerated by a geographical miss match. We expect to see an increase of mobilisation in the future of forest resources, globally driving the marginal cost of supply for wood products up. This will impact on future forest values and it is critical forest managers and investors can understand what this will mean for their assets and market strategies.
"The challenge to forecast log prices has traditionally been approached looking backwards to provide an outlook based on historical correlations of supply, demand and price.” says Dr George Goroyias, Pöyry’s Global Practice Area Leader - Forestry and Biomass.
Linear optimisation modelling analytics offers new visibility to wood supply
Market modelling allows for the quantification of the effects of such changes in complex markets and allows investors, wood processors and forest managers to be ahead of the market and make better informed decisions.
Linear programming allows for the simulation of large scale markets with large numbers of parameters and variables. These may include different scenarios; of macroeconomic development, wood availability and cost of supply, substitution, and scenarios of key cost factors such as currency movements, transportation or trade policies.
"Pöyry is using an alternative approach using advanced linear optimisation modelling analytics as the tool to forecast wood product prices. This requires very detailed mapping of all major wood consuming sectors, their capacities, cost competitiveness and understanding of key market and substitution dynamics between product grades and species"continues Dr George Goroyias.
Pöyry’s modelling focuses on maximising the contribution margin of the sawmills in each supply region in order to determine the lumber price development by grade and market, trade flows and market shares.
PÖYRY’S LUMBER-LOG MARKET MODEL
Examples of questions the Pöyry lumber-log market modelling can answer are:
- What is the optimal cost of supply at a given market?
- How will market prices develop under increasing demand?
- What will be my future profit margin?
- What will the effect of capacity expansions be on raw material costs?
- What will the impact be of a drop in currency exchange rates on market share?
- How will new policies affect prices?
At Pöyry we provide a wide range of services analysing and modelling in depth wood product markets. Our wood product market models are used in actual forest and processing asset transactions, new processing feasibility studies, supporting commercial contract negotiations and supporting business & market strategy development.
From 9th to 10th October 2018 the Australian Forest industry met in Launceston Tasmania for the 2018 DANA Australia Forest - Wood Products Conference. This year around 100 people attended the conference. Mr. Andrew Crisp, Principal at Pöyry Management Consulting based in London presented on both days. Mr. Crisp who has worked 7 of the last 10 years in Pöyry’s Asian consulting offices gave two presentations that covered the topics of Chinese Log Markets and Log Price Forecasting.