Timberland Investment

The forestry and timber industry may be poised for a recovery amid signs of improvement in the Kiwi and US construction markets, but industry players say it could be a delicate one.

According to industry figures, timber exports from New Zealand appear to have bottomed, with $774.5 million worth of cut lumber sold overseas in 2012, up from $770.4m in 2011, although more timber was sold at a lower unit price.

That's poised to pick up in the year ahead, according to forecasts from the Timber Industry Federation, as construction activity picks up due to the Christchurch earthquake rebuild and a rise in home building activity in Auckland.

Asian demand for New Zealand cut timber and logs is also expected to grow as North American timber supplies tighten due to a recovery in the United States home construction market.

***

But Andres Katz, a forestry economist at Resource Management Services, warns that too much of a good thing could be bad for the cut timber side of the industry. Katz said a sudden spike in demand out of China could lift the price of logs suddenly, and result in a knock-on effect for millers.

***

Mike King, chief executive at forestry and timber consultancy Interpine, said the other elephant in the room was the New Zealand dollar, which was currently trading at over US84 cents - its highest level in 16 months.

"Any gain we might make in the actual payments or in the value of the export commodity is often eroded by the high value dollar and shipping costs," he said. "Those could be the killers of any boom."

The biggest factor determining the performance of an investment portfolio is, according to a landmark paper produced quite a few years ago now, asset allocation.

...

The investment experts at the NZSF have determined that an appropriate asset allocation is 80 per cent in growth assets and 20 per cent in bonds - the rationale being that because NZSF has a very long term investment horizon it can afford to take a long term view and have a higher proportion of its money in higher growth, risky assets and in particular assets that are hard to sell and/or hard to price.

...

Looking at NZSFs portfolio some 27.5 per cent is in relatively illiquid sectors like infrastructure, timber, property and other private markets. The downside however is cost - it requires expensive experts to manage these sort of assets. Furthermore, to paraphrase George Orwell, some experts are more expert than others.

...

So far the Super Fund has performed relatively well returning 7.4 per cent pa versus 6.8 per cent pa for its benchmark which it calls the "reference portfolio" (RP). The RP is defined as 70 per cent international shares, 5 per cent NZ shares, 5 per cent international property and 20 per cent international bonds.

...

Whilst the Super Fund says that its asset allocation is 20 per cent bonds, 80 per cent shares it is important to understand how it gets to these figures.

...

The Super Fund has about 28 per cent of its portfolio in alternative assets like infrastructure and timber and when it calculates asset allocation it considers that these assets have some attributes of bonds and some of shares. So for example it reckons that infrastructure is 60 per cent shares and 40 per cent bonds. For timber it assumes that this asset is 70 per cent bonds, 30 per cent shares.

It is important that the public and politicians understand the NZSF's alternative treatment of alternative assets. With the future looking more uncertain than ever it will be interesting to see if NZSF continues to outperform its Reference Portfolio.

Just how big the bulge will be is up for debate. The current harvest is 25 million cubic metres, of which 40 per cent – about 10 million cum – is exported. Scenarios vary, but, according to the Agriculture and Forestry ministry, the annual harvest will spike to 60 million cum by about 2025 if all owners, big and small, harvest their trees at the age of 30. Two-thirds of the bulge would be from the newer, small-time players.

Crown-owned forest researcher Scion is set to present a report into the viability of generating biofuels from trees at the end of next month, a move that could throw a much-needed financial lifeline to the struggling sector.

Converting tree waste into biofuels and bioplastics has long been a Holy Grail for the forestry and wood-processing industry. It could turn pulp wood and sawmill waste into real revenue streams.

But while the technology has been proven in the lab, questions remain over the long-term commercial viability despite extensive research by forestry-dependent countries such as Canada and Sweden.

Funds managed by New Forests have taken a controlling interest in the 46,000 hectare Auspine estate. New Forests' Australia New Zealand Forest Fund is the lead investor in the transaction, which includes the land and trees of the 64-property estate, formerly owned and managed by Gunns Limited. The plantation estate will be managed by Sydney-based New Forests, an investment manager specializing in sustainable forestry and associated environmental markets.