When analyzing timber markets and wood baskets for forest industry, bioenergy, and timberland investments, a key topic is the “riskiness”, viability, and competitiveness of nearby wood-using facilities.  Timberland investors want to confirm that announced mills get built and existing mills remain open. Procurement managers want to assess the health of current and potential competitors for wood raw materials. And new wood-using projects – such as greenfield sawmills or bioenergy projects – want to confirm the health and sustainability of local timber supplies, labor pools, and markets for residuals.

At Forisk, we have found that the systematic application of simple screens can clarify decisions when evaluating risk and ranking options. Next time you need to assess the viability of existing or announced wood-using mills, start with the following tests:

1. End markets. Are the end markets – such as newsprint versus fluff pulp versus OSB – served by the mill strong or weak? The answer to this question is knowable and answerable with readily available, public data and information. Simply understanding whether an end market is growing and profitable or shrinking and struggling provides a powerful, first-cut at stacking mills in a market.
2. Firm commitment. Ultimately, are the corporate parent and owners demonstrating high or low commitment to the continued operations of the mill or completion of the announced project? We maintain a checklist that, for the most part, is answerable with publicly-available info. Questions on this list include, for example, employment levels and hiring activity, signs of community involvement, and capital allocation as disclosed in press releases or public filings. [This process has been useful in tracking forest industry projects of all types across North America.]
3. Facility health. Is this facility, in its structure and equipment, old or new? Does it employ cutting edge technology? What is the “ability to pay” for raw material? How efficient is the plant relative to others in its sector? While the most difficult of the three categories to assess, strong conclusions on “end markets” and “firm commitment” typically correspond with conclusions associated with facility health. In this way, each category serves as a proxy for the others.

 

Sometimes, external events also come into play. Changes in interest rates affect borrowing costs, new trade policies affect product flows, and global events affect regional markets. For example, Russia’s invasion of Ukraine took over two million tons of Russian wood pellets off of the market for EU buyers, which reinvigorated export-oriented, wood pellets investments in the U.S. South.

This post includes topics covered in the (virtual) “Timber Market Analysis” course on October 11^th and 12^th, whichwalks through a process to track and analyze the price, demand, supply, and competitive dynamics of local timber markets and wood baskets. Early registration ends September 27^th! For more information, click here.