A convergence of market and policy trends has triggered a surge in investment in new mills and expanded production capacity, both in solid wood products and pulp in several key producing regions around the world. This expanded production base should translate into increased demand for timber in these locations. In addition, the construction of new, large-scale, state-of-the-art production facilities improves the competitive position of these producing regions, making their timber markets more resilient to market cycles. 

In the case of solid wood products, companies are responding to the combination of an upswing in demand for building materials and from the surge in profitability that occurred over the past 2.5 years. New capacity coming online in 2021 follows the profitable 2017/2018 years, interrupted in 2019 as lumber and panel prices corrected, resuming profits through 2020 and into the first half of 2021 as U.S. lumber and wood panel prices reached historic highs. The strong performance of the forest product sector, bolstered by expectations of further gains in U.S. residential construction in the coming decade, has fueled a wave of new capital investment. Forisk estimates capital investment in North America in 2021 will be 29% greater than 2020, when US$5.8 billion of capital flowed into the industry.¹

Performance soars across producers of forest products

HNRG Research, September 2021.  North America forest products index is a market capitalization weighted index of top North American publically-traded forest products company profits. 2021 index through June, 30, 2021.

The U.S. South will receive most of the new investment in North America, with major projects in process in Texas, Alabama, North and South Carolina, Georgia, Louisiana, and Mississippi. Although the increased lumber and wood panel capacity being built in the U.S. South will boost demand for southern pine timber, the impacts for the companies undertaking these projects could be mixed. The expanded, industry-wide, capacity will moderate upswings in lumber and wood panel prices, and the stock market could question the management decision to invest in new mills versus channeling value back to shareholders by augmented dividends or bolstering stock prices through buybacks. In addition to new greenfield lumber mill investments, manufacturers are also investing in rebuilds and modernizations of existing mills in the U.S. South.

As well as the softwood lumber projects in the U.S. South, significant investment is also occurring in structural wood panels, oriented strand board (OSB), and mass timber products (cross-laminated timber or CLT). OSB production is targeted at traditional residential construction markets, and new OSB projects have been announced or started in the U.S. South, the U.S. Lake States, Eastern Canada, and British Columbia. We believe these OSB projects could boost total North American OSB capacity by at least 6% between 2020 and 2025.

CLT and other mass timber products are relatively new wood-based structural building systems focused on multistory residential, nonresidential, and institutional projects that have historically used concrete and steel construction. CLT represents a potentially significant new tier of demand for wood products, and its growth is being supported by the desire to use lower carbon-emitting products than concrete and steel and take advantage of the carbon sequestration capabilities of long-lived wood products. Announced and recently begun CLT projects in North America are in Ontario and in Arkansas. New Zealand has its first CLT plant, operational this year. And Australia will have its first CLT plant, scheduled for operations in 2023. Another region of new capacity additions in mass timber is Central Europe, in Germany, Austria, and the Czech Republic. Overall, CLT capacity in Germany,² Austria, Switzerland, and the Czech Republic combined is expected to reach two million m³ by 2022.³

The global pulp sector is also on the cusp of a major period of capacity expansion that is likely to extend well into the 2020s. Strong prices and profitability in the pulp sector in 2017/2018 triggered expansion plans for several mills that will begin to come on stream at the end of this year. Fastmarkets RISI is tracking 43 proposed market pulp capacity expansion projects across the globe planned to commence through 2025—representing 22.7 million tonnes of new capacity.⁴ Three bleached hardwood (eucalyptus) kraft (BHK) pulp producing projects in Brazil, Chile, and Uruguay will be operational before 2023, adding in total a projected 3.3 million net tonnes of new capacity, which will represent near 4.5% of the current global hardwood market (not integrated with paper/paperboard) pulp capacity.⁵

Growth in world market pulp capacity led by Latin America 

Source: Fastmarkets RISI, July 2021.

The largest of the three South America projects has production capacity of 2.8 million tonnes of BHK in Sao Paulo, Brazil, in the third quarter of this year, with full production slotted through the end of 2022.⁶ A project in Chile is planned for startup in the fourth quarter of this year, which will replace an existing BHK line with a new BHK line for a net capacity gain of close to 1.3 million tonnes. The third project is a greenfield BHK mill, with a 2.1 million tonne capacity nearing startup in Paso de Los Toros, Uruguay. These three state-of-the-art mills will be supplied with fast-growing eucalyptus plantation timber. With almost all the new capacity located outside of North America and Western Europe, the playing field for international trade in market pulp will continue to shift, favoring the newer, lower-cost producers, who will be benefiting from large-scale, highly efficient mills, together with competitive fiber and labor costs and favorable exchange rates.

 In addition to the three South American projects that are approaching startup, major pulp projects (mostly integrated with paper and paperboard facilities) are in various stages of planning and early construction in other regions of the world. In Southwest China, a greenfield pulp and board complex in Jingzhou city, Hubei Province, will add 550,000 tonnes/yr of wood pulp capacity over the next two years and a greenfield pulp, paper, and board complex in Wuzhou city, Guangxi, with a total capacity of 3.67 million tonnes/yr, is scheduled to be built in two phases over the next four years.⁷ In addition, an 800,000 tonne/yr bleached hardwood kraft pulp line is scheduled to start at the end of 2021.⁸ In Northwest Russia, construction has started on a virgin-fiber containerboard mill, producing unbleached kraft liner with a production capacity of 700,000 tonnes/yr by 2027. Fastmarkets RISI is forecasting global pulp capacity to experience a 13% increase between 2020 and 2025, reaching 85 million tonnes.⁹

Global market opportunities—and challenges

The current wave of capital flowing into both the solid wood products and pulp sectors will positively affect the demand for timber and likely be beneficial for timberland returns in those regions where the investment in new plants is occurring. The major expansion in lumber, wood panel, and mass timber capacity that is in the process of occurring in the U.S. South could meaningfully tighten timber availability and support stronger prices for sawtimber. The next round of pulp mill capacity raises the level of global competition, and timberlands supplying these new pulp plants will enjoy secure market prospects, while pulpwood resources dependent on older, smaller, higher-cost mills will face challenges. With major market changes occurring across a wide range of forest products and geographies, timberland investors will need to be aware of opportunities and discern potential risks.

Q2 2021: timberland market indicators

Lumber prices reach peak, housing starts ease

Quarterly U.S. housing starts (‘000s units) and U.S. softwood lumber composite price (USD per MBF)

Source: Random Lengths, September 19, 2021, U.S. Census Bureau, June 2021. The source for the U.S. housing starts is U.S. Census Bureau. The housing starts data includes single-family and multifamily starts. Random Lengths is used for lumber prices.

Second-quarter lumber prices soared to record levels, reaching US$1,241/MBF (thousand board-feet) for the quarter average, a 197% increase from second-quarter average prices last year. Limited inventories due to mill curtailments and supply chain disruptions in 2020, coupled with robust demand for home renovations and new home construction, have fueled increases in lumber prices. Weekly average lumber prices into July and August have corrected and are expected to show a large reversal by the end of the third quarter. The pace of residential construction in the second quarter eased from the cyclical peaks reached in the first quarter due to limits on availability of building materials and labor. Housing starts in the second quarter slipped to a seasonally adjusted annual rate of 1.568 million units, down from 1.599 million units in the first quarter of 2021.   

Australian housing starts move higher, lumber prices surge in response

Australian softwood lumber AUD price, timber AUD price, and dwelling unit approvals (‘000s units)

Source: Australia Bureau of Statistics, June 2021, KPMG, December 2020, Indufor Asia Pacific (Australia) Pty Ltd, June 2021. Quarterly Australian dwelling unit approvals are published by the Australian Bureau of Statistics. The Lumber Index is published by Indufor Asia Pacific (Australia) Pty Ltd using softwood structural lumber prices (blended price–60% machine-graded pine MGP 10 90x35x4800, 40% MGP 10 70x35x4800). The Log Price Index is calculated using the Australian Pine Log Price Index radiata pine domestic stumpage prices. The log price is an average of intermediate and medium sawlog prices.

Strong housing demand in Australia continued in the second quarter, with private sector housing climbing for a fourth consecutive quarter. Softwood structural lumber demand and prices responded to the robust residential construction, generating solid demand for Australian pine sawtimber.

USD volatility continues in 2021

Quarterly exchange rates between USD and commodity currencies

The U.S. dollar (USD) depreciated slightly in the second quarter, falling 1.5% against the Canadian dollar, which gained strength from the revival in energy markets. The Brazilian real strengthened early in the second quarter, reflecting the uptick in global commodity markets as well as growth in Brazil’s GDP, beating expectations. The Australian dollar tracked the recent downshift in currencies against the USD during the second quarter yet regained some of its value after the Reserve Bank of Australia took tentative steps to taper policy in early July. The USD also appreciated slightly against the New Zealand dollar and Chilean peso. The USD is expected to remain volatile in 2021, as global economic activity revives, effective vaccines are deployed, and interest rates remain accommodative across most competing currencies. 

Global softwood sawtimber prices move higher, led by New Zealand radiata pine

Regional softwood sawtimber stumpage prices (USD per cubic meter)

Source: Fastmarkets RISI, June 2021, Timber Mart-South, June 2021, New Zealand Ministry of Primary Industries (NZMPI) June 2021, KPMG, December 2020. Quarterly softwood sawtimber stumpage prices for the U.S. Pacific Northwest is reported in Loglines published by Fastmarkets RISI. The weighted index is made up of 50% domestic Douglas fir (47% #2 and 53% #3 sawmill sorts) and 50% whitewoods (47% #2 and 53% #3 sawmill sorts) with harvesting and hauling costs, informed by HNRG, subtracted. U.S. South prices are published by Timber Mart-South (60% Southern pine sawtimber and 40% chip-n-saw). Australian domestic prices are calculated using the KPMG Australian Pine Log Price Index radiata pine domestic stumpage prices. The log price is an average of intermediate and medium sawlog prices converted to USD/m³. New Zealand radiata pine export log prices are a blend of grade A, K and J log prices published by NZMPI converted to USD, with harvesting and hauling costs, informed by HNRG, subtracted.

Prices for sawtimber stumpage moved upward across four global timber markets: the U.S. Pacific Northwest, U.S. South, Australia, and New Zealand. Prices for imported New Zealand radiata pine logs soared into the second quarter, surpassing prior price peaks. Strong Chinese demand and limited competing supplies of softwood lumber at reasonable prices available to Chinese buyers continue to push New Zealand radiata log prices higher. Douglas fir sawtimber prices in the U.S. West increased 4.4% in the second quarter, the region’s fourth consecutive quarterly price rise. Strong housing demand in Australia continued in the second quarter, with private sector housing climbing for a fourth consecutive quarter. Softwood structural lumber demand and prices responded to robust residential construction, generating solid demand for Australian pine sawtimber.

In the U.S. South, softwood sawtimber prices were mixed. In the western gulf subregion, wet weather hindered harvesting operations, while in the mid-Atlantic, increased production at new and existing mills pushed sawtimber prices higher. Constraints on labor and transportation, both in the woods and at mills, are continuing to disrupt supply chains and contribute to market volatility.  

Second-quarter timberland cash yields above four-year average

U.S. timberland annualized operating cash yields (% per year)

Timberland cash yields were 3% annualized during the second quarter, driven by stronger timber prices in the United States, along with increased demand from regional mills which pulled forward harvest volumes, where able, to take advantage of the strong demand. 

Private timberland value appreciation in the second quarter

Quarterly U.S. South timberland values (USD per acre)

Source: NCREIF, June 2021, HNRG, June 2021. Public equity values are derived from HNRG's Timberland Enterprise Value (TEV) per Southern Equivalent Acre (SEA) calculation for five timber-intensive publicly traded companies as compared to southern timberland values per acre calculated from the National Council of Real Estate Investment Fiduciaries (NCREIF) database. TEV is a quarterly estimate based on total enterprise value (total market equity + book value debt) less estimated value of processing facilities, other non-timber assets and non-enterprise working capital. SEA uses regional NCREIF $/acre values to translate a company’s timberland holdings in various regions to the area of southern timberland that would have an equivalent market value. Hancock Natural Resource Group is a participating member in the NCREIF Timberland Property Index. The index requires participating managers to report all eligible properties to the index. Usage of this data is not an offer to buy or sell properties.

U.S. South timberland values moved upward in private markets and decreased slightly in public markets in the second quarter. U.S. South timberland values in public markets decreased 5% during the second quarter from the first quarter of 2021 yet were still 33% up from the second quarter of 2020. Private market timberland in the U.S. South moved upward 0.3% during the first quarter compared to second-quarter 2021 values, although this represented a decrease of 0.7% from second-quarter 2020 values. 

1 “Capital Investments in the Forest Industry,” FORISK blog, May 25, 2021. 2 “Companies are investing more,” Timber-Online.net, April 15, 2021. 3 “CLT capacity expected to double until 2022,” Timber-ONLINE.net, June 11, 2020. 4 Fastmarkets, July 29, 2021. 5 Fastmarkets, RISI, June 19, 2020. 6 Fastmarkets RISI, June 19, 2020. 7 Fastmarkets RISI, June 19, 2020. 8 Fastmarkets RISI, October 2020. 9 Fastmarkets RISI, July 2021.