Recently, at the CANOPY forestland investment conference in Portland, I participated on a panel about pulpwood markets in the U.S. South. While the region enjoys abundant forest resources and dozens of new wood-using mills, it has also seen the closure (or conversion) of 11 pulp and paper mills over the past five years. The panel discussion highlighted the importance of understanding the “riskiness”, viability, and competitiveness of wood-using facilities in each local timber market and wood basket.

Why is this important? 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 sawmills or bioenergy projects or OSB plants – want to confirm the health and sustainability of local timber supplies, labor pools, and markets for residuals.

When applying and teaching Timber Market Analysis (TMA), we have found that the systematic application of simple screens can clarify decisions and risk when 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 strongor 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 lowcommitment to the continued operations of the mill or completion of the project? We maintain a checklist that, for the most part, is answerable with publicly available info related to, for example, employment levels and hiring activity, signs of community involvement, and capital allocation as disclosed in press releases or public filings.
3. Facility health. Is this facility, in its structure and equipment, oldor 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.

 

The analysis and the decisions for capitalizing mills and acquiring timberlands remind us to “know what is knowable” and confirm the limitations and constraints of the local market relative to our objectives.

This post includes themes covered in the (virtual) “Timber Market Analysis” course on October 16^th and 17^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 October 2^nd. For more information, click here.