Like most raw materials, the price of roundwood timber used in building or pulp and paper products reflects both long term supply and demand, as well as external market events that move prices (often temporarily) higher or lower. Long term trends are defined by the availability of mature supply, relative to roundwood demand for a particular species and product. During the 1980’s and early 1990’s, the combination of increasing demand, and restricted supply as a result of heightened species and ecosystem preservation pressures routinely pushed delivered timber prices higher in real terms in many world regions as demand exceeded available supply. Many roundwood timber product prices peaked in the early 1990’s during the “spotted owl” crisis which significantly reduced available supply in the US Pacific Northwest, and had price ramifications throughout North America and Asia. ForestEdge LLC recently undertook an analysis of delivered timber prices in several world regions since the mid-1990’s to determine longer term trends, price volatility, and a point-in-time assessment of current prices relative to those trends. Relative to the run-up in prices that occurred in the highly liquid global economy of the early 2000’s, current prices are relatively low. However, looking at a longer 22-year period from 1Q 1995 to 4Q 2016, current prices in many regions are close to long term averages, and perhaps reflect “a new normal”.
The time period used to determine linear trendline value movements is always subjective and can, unfortunately be used to support almost any perspective. For this work, the 1995 start point was chosen as it postdated the significant run-up in timber prices that resulted from the US “spotted owl” induced timber supply scare of the early 1990’s. The 1995-2016 time period however includes both the strong run-up in timber prices that resulted from the housing boom of the early 2000’s, as well as the retrenchment of timber prices that resulted from the 2008-2010 great recession, so is thought to be a fair representation of timber market conditions over the past 20 years. This analysis is not intended to be reflective of timberland investment returns as many other factors influence the return an investor might achieve on a timberland investment (such as changes in land values, management costs, non-timber income, acquisition price, and the impact of sylvicultural treatments such as weed control or fertilization). It is also important to note that this analysis was performed on delivered timber prices, rather than standing or stumpage prices which would be more closely aligned with timberland investment asset performance. The extrapolation of these results to stumpage prices would assume that logging and transport costs remained constant as a percentage of delivered roundwood prices over the analysis period, and this assumption is unlikely to be true due to changes in logging technology, fuel and labor costs. However, it should be noted that an analysis of TimberMart-South Standing Timber Values and Delivered Prices for conifer sawtimber over the analysis period yielded a correlation coefficient of 80%.
- The best performing product in local nominal currency was small diameter conifer sawlogs in South Africa (A Grade) which increased in price at a CAGR of 11.12%/year between 1995 and 2016, followed by conifer pulpwood in Brazil (CAGR of 9.89%/year), and Eucalyptus pulpwood in Brazil (CAGR of 9.85%/year). The worst performing products in local nominal currency were hemlock sawlogs in the US Pacific Northwest which declined in price at a CAGR of -.28%/year over the 1995-2016 study period, and conifer sawlogs in the US South which declined in price at a CAGR of -.24%/year over this period.
- In nominal US$ terms, Brazilian roundwood products showed the highest price increases with an average CAGR of 2.51%/year across 3 product categories, followed by South Africa with an average CAGR of 2.34%/year across 5 product categories. Delivered prices in New Zealand improved slightly when converted to US$, but still only averaged a CAGR of .48%/year across 2 product categories over the 22-year period. Delivered conifer log prices in Chile increased at a lower rate in US$ terms, falling from a CAGR of 2.85%/year in local currency, to .48%/year in US$ terms. Delivered prices in the US South grew at a positive rate for conifer pulpwood (CAGR of .85%/year) and hardwood pulpwood (CAGR of 1.12%/year), but were negative for conifer sawlogs at -.24%/year.
- When US$ prices were deflated using the Federal Reserve US GDP deflator, most product categories turned negative with conifer sawlogs in Sweden being the most negative with a CAGR of -2.57%/year over the 1995-2016 period. Only pulpwood in Brazil (both conifer and Eucalyptus) and conifer products in South Africa (pulpwood, small and large sawlogs) registered increasing prices over the 1995-2016 period in inflation adjusted US$.
- An additional output from this analysis were point-in-time comparisons of 4Q 2016 prices and exchange rates with trend line values and 22 year averages. With respect to currency, only the NZ$ was found to be above its 22-year average exchange rate against the US$ in 4Q 2016 (+13%). The Brazilian Real (BRL) was 57% below its 22-year exchange rate average against the US$, the South Africa Rand (ZAR) was 78% below its 22-year average value against the US$, and the Swedish Krona and Chilean Peso 19% and 23% below their 22-year average against the US$ respectively. Given the strength of the US$ against nearly all global currencies in recent years, this is not a surprising result.
- With respect to current delivered timber prices in local currency (4Q 2016), it is interesting to note that with few exceptions, most timber prices in local currency in 4Q 2016 were not far from their trendline values. On average, current prices in local currency were 4% above trendline values. Notable exceptions were hemlock prices in the USPNW (+21%), conifer sawlogs in New Zealand (+15%) and South Africa (+30%), and Eucalyptus pulpwood in South Africa (+22%). At the other end of the spectrum, Brazilian pine products were -10% relative to their trend-line values and conifer sawlogs in Sweden were 9% below their trendline values. When converted to US$, current prices averaged only 87% of their US$ trendline values due to the recent strength of the US$.
Although an in-depth analysis of the drivers of timber prices for each geography is beyond the scope of this exercise, flat to declining timber prices generally reflect a market where available supply exceeds demand. This has been the situation in Sweden, the US South and New Zealand where improved growth rates and maturing plantation forests have more than offset increasing demand from the export market, and domestic demand in these relatively mature economies. In contrast, real increases in timber prices typically reflect shortages of supply or the restructuring of timber prices in a geography as prices move toward international levels. While regions of the world remain where timber is a scarce commodity and prices might be expected to rise in real terms, it is likely that the dramatic increases in plantation areas experienced in the 1990’s, combined with slower growth in demand for industrial timber has resulted in an environment of relative timber abundance for many regions of the world. The FAO reports that global production (e.g. demand) of industrial timber increased at a CAGR of only .9%/year between 1995 and 2015. Given on-going technology changes in the production of, and demand for, forest products (recycling, document technology, engineered wood products), it could be that available supply has temporarily overshot demand. This may not, however, be a long-term norm as pressure on forestland continues in many parts of the world, and demand for paper and wood products continues to be driven by population growth and GDP, especially in the developing world. A similar look-back at price developments over the next 20-25 years could provide different results.
Increases in delivered timber prices over the past 20 years have been tepid, and have perhaps reflected a period of relative timber supply abundance due to changes in both the supply and demand sides of the equation. Increases in delivered timber prices would not have been a significant driver of return for timberland investments held over this period, though investments bought and sold at opportune times would have performed better than overall price trends would suggest. Though current prices in local currency are generally lower than recorded prior to the great recession of 2008-2010, they are generally in-line with longer term price trends and might be considered, “the new normal”.
 Prices for this work were provided with permission by Wood Resources International, TimberMart-South, and Crickmay and Associates.