This is the second in a series related to analyzing timber markets and wood baskets. The first included tips for evaluating timber forecasts.

Prior to conducting due diligence for clients, I ask several questions before committing our team to a market study related to wood-using manufacturing facilities. Three of these questions establish the working relationship and process for how information will be shared and communicated to the ultimate decision makers. We understand that Boards of Directors and Investment Committees focused on value creation rely on analysis based on valid, complete, and transparent information and assumptions.

These three questions dictate the playing field for identifying and ranking potential wood baskets for forest industry capital investments:

1. Specifically, what type of wood does the facility need to make this work? This means detailing the species and form (e.g. roundwood and/or chips). While the question seems obvious, we have had multiple projects where raw material specifications get changed mid-stream, or a disagreement exists between the mill or project manager and the engineers. The road to hell is paved with good intentions, and at times messages get massaged because project developers want to minimize panic and resistance from wood using competitors, local communities or investors. However, we live in the real world and understand things change, but we’re all wasting time and baking in risk if we fail to clarify starting assumptions. To do good work, we need, like Bruce Willis, just the fax….
2. How much wood does the plant or project require? Volume and size matter in the forest products industry. Each feasibility study in forestry must assess the availability, accessibility and sustainability of the wood raw materials on a local basis. The volume needs tell us where the project fits on our viability matrix for capital investments: is this a niche play or market shifting investment? This matrix depends not only on understanding the wood type and volume, but also the economics of the technology…
3. What is the ability-to-pay for wood raw materials? The universe of forest industry products has a pecking order: some end markets and technologies are simply more profitable and flexible than others. By clarifying up front whether or not the proposed investment can compete for raw material under a basic understanding of forest industry economics, we can reduce unnecessary analyses and focus resources on the most promising and viable capital investments.

 

When comparing markets or wood baskets, the key remains estimating how local timber prices could change over time in one wood basket relative to other candidate baskets regardless of macroeconomic conditions. The analysis and the decisions for capitalizing mills and acquiring timberlands remind us to, first and foremost, “know what is knowable.” And these three questions help us confirm a common understanding of the starting assumptions and competitive requirements of the investment.

 

Forisk will discuss forest industry capital allocation with examples during “Timber Market Analysis” on October 13th in Atlanta, a one-day course for that details how to understand, track, and analyze the price, demand, supply, and competitive dynamics of timber markets and wood baskets.