6 Nov 2018
Blog: Timberland investors are facing unforeseen challenges in changing global markets
Global timber markets are facing major pressures and undergoing unforeseen changes. In the sawnwood and log markets we see an increasing convergence of regional demand growth. Regions where there is lack of local wood supply will be forced to source from longer distances, and mobilise forest resources that until recently were seen to be uneconomical.
In order to realise competitive returns, investors need to have a better insight on global market development, the best technologies and management concepts, and the most efficient investment vehicles. Significant changes can be foreseen in the shape and constitution of the supply cost curve globally and regionally, especially in markets with an undersupply situation, where we expect the marginal cost of supply to continue increasing.
Global lumber/log market is entering a convergence of regional demand growth.
Regions with available forest resources will have to play a larger role in the global trade. However, this may not be easy to achieve especially in Russia, where remarkable infrastructure investment needs to be put in place to realise the potential. Additionally, we project that the U.S. needs to play an increasing role in fulfilling the global wood demand gap with accelerated investment levels, but also the change in mindsets from being domestically focused to treating the Asian market as strategic.
Global soft sawnwood trade flows
The forest investment market is also undergoing major structural changes with regard to investment vehicles and operating models. Selecting proper investment structures to match investor capabilities and expectations is essential in striving for competitive investor returns. There are a number of structures available, selection needs to be adapted to the investor’s goals and strategy, finding an optimum trade-off between financial, control and other aspects. Investors need to be increasingly proactive to benefit from the return upside potentials in the wood market, cost management and operational excellence to realise the extra return.
Matching forest/plantation development with intended market and end use
Future developments remain uncertain and require close monitoring of key indicators and continuous evaluation of various development scenarios. This is where the opportunity for the industry and forest investors exists. Industry players need to identify which regions will benefit from the global supply and demand imbalance and start taking early positions there. Matching forest/plantation development with intended market and end use remains a key success factor for investors to reach higher returns. Growing demand will require opening of new frontiers of wood supply in places with the lowest marginal cost.
The development opportunity goes beyond technologies
There is great potential to enhance the operational efficiency and manage the cost pressures in forestry and wood supply. Major cost savings are achievable through mechanisation, automation and digitalisation. New precision forestry solutions can be introduced in forest plantation operations e.g. by applying and adapting innovations developed and implemented in agriculture. The development opportunity goes beyond technologies; it requires adopting new holistic management concepts. Pöyry’s Smart Forestry concept combines all key elements for achieving top quartile investment returns by focusing on:
Value maximisation through in-depth market intelligence and modelling tools
Highest efficiency through state-of-the-art technologies and digitalisation
Continuous value increase through operational excellence
Pöyry has developed unique capabilities and tools to support the industry and investors with these strategic questions. Our global market modelling tool, based on linear optimisation, ensures the best possible investment decisions. Pöyry’s services cover the entire life cycle of timberland investment, starting from the strategy and investment phases, and extending over operation and exit phases. We provide global experience and insight adapted to local conditions.
This topic was presented at the Pöyry Business Meeting in Alternative Investment Forum in London in October 2018.
Petteri Pihlajamäki, Director
George Goroyias, Senior Principal, Head of Forest & Biomass Practice
Sami Pastila, Principal