This is the fourth in a series related to Forisk’s Q3 2015 forest industry analysis and timber price forecasts for the United States and Canada. This post includes an excerpt from the Q3 “Forisk Facts & Figures.”
Each issue, the Forisk Research Quarterly includes a “story in three slides” that addresses a topic of interest to forest industry executives and timberland investors. For example, in Q2, the question was “how has North America’s softwood lumber industry changed since the Softwood Lumber Agreement (SLA) went into effect in 2006?” This quarter, we summarize Forisk’s ongoing research into the forest product industry’s “ability-to-pay” for wood raw materials and ask, “What can we learn from comparing the cash breakeven position of different mill types?”
Wood raw materials go into manufactured forest products with widely varying margins: comparisons of estimated margins across wood products from pulp and paper to OSB to pellets to lumber reveal a wide range of potential profitability across products. A snapshot of current operating margins shows how pulp, paper and linerboard facilities, based on current end product prices, generate margins of 24% to 62%, while wood pellets and SYP lumber hover at 10% or lower. OSB, at current prices, generates negative operating margins.
Wood varies widely as a % of total manufacturing cost across products: sawmills, wood pellet plants and fluff pulp facilities have a higher percentages of costs associated with wood raw materials than do newsprint, linerboard or OSB. Changes in relative pine grade-to-pulpwood prices and yield assumptions – the tons of wood required per unit of finished product – are critical to this analysis across mill types.
Sensitivity analysis finds that finished product prices are significantly more important to exceeding breakeven cash positions and increasing mill profitability than are yields. Results in the Q3 FRQ show the range of maximum $/green ton of delivered wood different mill types could pay and remain cash breakeven given end market prices ranging from 10% higher to 10% lower than current prices. While currently low OSB and softwood lumber prices skew the results relative to historic norms, the analysis confirms the unchanging supremacy of pulp mills and the relative sensitivity of pellet facilities in the wood raw material market place.
To learn more about the Forisk Research Quarterly (FRQ), click here or call Forisk at 770.725.8447.
On the face of it Ability to pay or “Woodpaying” capability is the correct basis for predicting prices however it in itself is flawed unless you also take into acount the cost of capital and end price volatility.
One cannot ignore the cost of capital deployed to produce either revenue or cash margins. The methodology for determining capital intensity and applying this to the wood paying ability calculation are numerous e.g. WACC,Cash Return on Cash invested, depreciated replacement cost etc etc. so difficult to compare apples with apples when taking capital into account into account, never the less operational experience in the industry has taught me that a) higher margins reported for pulp paper and liner board requires significantly greater deployment of capital to produce than say Lumber and pellets and b)greater capital intensity will always incentivise producers to maximize output regardless of theirwood paying ability and c) the pulp and paper industry has the most volatile price cycles which also reflects in heir wood buying behavior.