Looking beyond coronavirus
In forestry, some disruptions, like new mill or seedling technologies, offer strategic choices, while others, like the COVID-19 coronavirus, get thrust upon us. What do we observe with how forest industry manufacturers and wood bioenergy firms have responded to the coronavirus in North America and around Louisiana? And what are the implications for forest owners and timberland investors?
Contemplating the Coronavirus
Our first quarter 2020 Strategy Note shares lessons and recommendations for where managers and investors can focus attentions and energies as the coronavirus, and other economic headwinds, work through the system.
In talking with forestry consultants and loggers and procurement managers, the struggle centers on short-term cash flow versus long-term business planning and capital investments.
Fortunately for some, timber sales and wood flows continue. One operating executive noted that, “with oil prices falling, it’s cheaper to haul logs so it provides a kind of cushion for the supply chain.”
That said, the impacts on capital projects, for 2020 at least, are real and significant. North American forest industry firms reduced capital investments and curtailed dozens of facilities walking into the second quarter 2020. Firms including West Fraser, Canfor, Interfor, LP, Weyerhaeuser, Boise Cascade and Norbord reduced 2020-21 investments by half-a-billion dollars. Analysis by firm and mill highlight a continued shift in capacity from Western Canada and neighboring regions to the U.S. South, which bodes well long term for industrial timber markets in Alabama, Georgia, Louisiana, Texas and elsewhere. In addition, the capacity reductions across sectors speak to the relative strength of the pulp and paper sector during this pandemic.
The graphic below, however, summarizes the physical evidence of a partial rebound. Most softwood sawmills worked through their inventories while curtailed and have since resumed producing with pace. Sawmills and plywood plants in all North American regions improved operating rates by the end of the second quarter 2020 when compared to three months earlier in March and April. Although recent sales replenished coffers, they do not guarantee stability for the third quarter. With this in mind, we’re monitoring the ongoing health of the sector by staying in touch with mills and forest managers.
And, as reported in the second quarter Forisk Wood Fiber Review, wood pellet markets remain forward-looking. U.S. export-oriented wood pellet capacity continues to increase, with most growth in the South Central region.
Pinnacle began construction on its 360K metric ton facility in Demopolis, Alabama. The project is scheduled to begin operations in second quarter 2021. Enviva continues to make progress on its announced “Pascagoula Cluster” of three new 700K metric ton pellet plants in the Gulf Coast: Lucedale, Mississippi; Epes, Alabama; and Taylorsville, Mississippi, (expected). Huntsville Pellets began operations at its 40K metric ton mill in Huntsville, Texas. Drax is expanding its Morehouse, Amite and LaSalle facilities by a combined 350K metric tons. Though still publicly committed, the timing of these capital investments is under review.
Turning to Timberland
In the economic environment, do traditional reasons for holding timberland investments still apply? In a recent study, we compared the long- and short-term performance of private timberlands to other assets and benchmarks. Historically, timberland investments outperformed appreciation of the S&P 500 over longer 20- and 30-year timeframes that included three recessions, while the S&P outperformed private timberlands between recessions.
For current forest owners, the risk profile of timberland looks strategic in its ability to preserve value, diversify portfolios and generate cash. Based on the fundamentals, it’s hard to make timberland look bad in a volatile world. While short term cash flows are and will be down, the underlying thesis for timberland holds as well as ever for long-term investors: stability; diversification; and security. P
(Brooks Mendell is president and CEO, Forisk Consulting. Forisk delivers forecasts and analysis of forest industry markets and timberland investments. Firms participate in Forisk’s research program by subscribing to the Forisk Research Quarterly [FRQ] or Wood Fiber Review [WFR], supporting benchmarking studies, and attending educational workshops and the annual Wood Flows & Cash Flows conference. www.forisk.com.)