Timberland Investment

With Thanksgiving and hunting season behind us, loggers are beginning to look forward to the winter logging season in the Lake States. The window for timber production has continued to shorten with evolving public perception and increasing regulations, making winter a critical time for efficient logging production.

Most of the Lake States have seen some snow, and ground conditions are beginning to firm up. After a brief warm-up into the 50’s around the beginning of December, the forecast through the start of the new year looks favorable for logging conditions.

While weather is certainly an important factor for production, demand is an equally critical component. Most pulpwood inventories are healthy, and some mills are beginning to limit deliveries as we head into 2013. Since pulpwood deliveries are such an important part of the Lake States economy, the ability to move pulpwood affects overall wood production, particularly hardwood sawlogs.

Massachusetts is expected to disqualify many wood-fired power plants from certain green-energy programs, starting Friday, because of concerns about their emissions.

Many U.S. biomass facilities, which burn wood and other plant matter to generate electricity, have received grants and other state and federal benefits aimed at encouraging alternative energy sources.

The new rules seek to ensure that biomass plants produce less net greenhouse gas than plants that burn fossil fuels.

Biomass, like solar, hydroelectric and wind power, has long been considered by many government agencies to be renewable, based on the fact that wood can be regrown. But there has been debate over some biomass plants because of their emission of smoke and other pollutants.

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The state plans to exclude plants with efficiency rates of less than 50%—that is, plants that turn less than half of the energy created from burning into electricity—from the renewable-energy certificate program. Many biomass plants now turn only about 25% of the energy released by burning into electricity. The wood used in these plants comes from logging and mill waste, and also, in some cases, from whole trees.

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As many as 20 plants in New England and New York state that can sell power in Massachusetts could be affected by the new rules, which will require them to boost their efficiency if they want to claim state renewable-energy credits, says Bob Cleaves, president of the Biomass Power Association, a trade group. Mr. Cleaves says none of the currently operating biomass plants in New England would qualify as renewable under the new rules, and some might have to close.

China’s phenomenal GDP growth of between 9 and 14 percent annually over the past decade slowed down last year and is forecasted by International Monetary Fund (IMF) to be “only” 8.25 percent in 2012. Reduced investments in public projects and a cooling residential property market have resulted in a decline in the importation of sawlogs during the first six months of 2012.

Georgia contains the largest area of forest cover of any state in the South, with forests making up 67 percent of land cover or 24.8 million acres, according to a Forest Inventory Analysis (FIA) Factsheet just released by the USDA Forest Service Southern Research Station (SRS). While this land area remains stable, timber inventory has increased.

"Forest area in Georgia remained relatively stable over the last 50 years," says Richard Harper, SRS forester and author of the analysis. "While forest area stayed about the same, timber inventory more than doubled over the same period—suggesting that Georgia's forest landowners are engaged in long-term strategies to improve sustainability of their forests."

The woodlands of central Maine, long dominated by logging and papermaking, are in the midst of a painful shift. Timber firms are abandoning the state, selling off vast tracts of pine and spruce. The disruption raises the question of what should come next: a transition to a tourism-based economy, or an all-out effort to bring in new industries.

In the current issue of Wood Bioenergy US (WBUS), Brooks Mendell and Amanda Lang focus on two aspects of regional wood bioenergy markets. First, they review the potential demand for pulpwood and chips by region to address the question “where does wood bioenergy most directly affect timberland investors and forest industry procurement managers at pulp mills and OSB plants?” Second, they evaluate the ability of regional markets to absorb and support new wood bioenergy projects by prioritizing regions with large, established, high-volume pulpwood markets, suppliers and the related infrastructure. The results show how “market depth” helps explain why new wood bioenergy investment and projects migrate to different parts of the United States, especially the US South (see Figure).

I remain cautiously optimistic. It appears that projects related to biomass and biopower have a chance to make a contribution to the U.S. energy mix, and my reasons for this follow.

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First, the Obama administration’s drive for renewable energy production and research will continue, as was vividly pointed out in the passing of fiscal cliff legislation.

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The administration’s intent in respect to certain biopower competitors, such as low-cost natural gas, is less obvious. Natural gas prices have been on a downward skid since January 2012, and currently they hover a little over $3 per MMBtu. This is a challenge for biomass, especially since the administration’s most effective carbon reduction method has been the replacement of coal power generation with natural gas generation.

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So the concurrent innovation of American oil and gas explorers and the administration has indirectly made new natural gas power generation the winner. This inadvertently hurts biopower, since the cost of biomass-derived power simply cannot beat out that derived from natural gas produced and sold for less than $5 to $6 per MMBtu.

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The federal government is not exclusively driving the bus on making natural gas a winner over biomass and other renewable energy forms, however. Industry and economics are playing a role. At a recent energy conference, I was caught off guard slightly when several energy executives representing utility, power plant equipment and services, and energy regulatory entities all believed that abundant North American natural gas resources would most likely hover between $4 and $6 per MMBtu for decades. For these folks, that makes natural gas very competitive, with ample room for coal to remain a major player. Biomass remains a player only when state or regional incentives come into play, or when feedstocks are fairly cheap.

After a second consecutive year of only 1% growth in 2012, world paper and board demand is predicted to rise 3% in 2013. Accelerating economic growth will be a significant factor in this positive forecast, although we are showing only a modest acceleration. More important will be our assumption that consumer inventories will stabilize, or even rise, as underlying consumption improves. Also, we are expecting that the graphic paper share losses to electronic alternatives will relent to some degree next year. Therefore, growth in global paper and board demand will move closer to the increase in the general economy compared to 2011-2012.

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The growth engines for the world paper and board industry will continue to be tissue and packaging. World tissue consumption is forecast to increase 4.5% in 2013, or slightly above the annual pace of the previous three years, and will be 6 million tonnes above its 2007 level or 22% higher. Global containerboard demand is predicted to rise 4% in 2013, following 2.5% annual growth in 2011-2012, with the growth relative to 2007 being 23 million tonnes or an 18% gain. Other paper and board usage, led by boxboard and specialty papers, is also expected to advance 4% in 2013, compared to 2% annual increases in 2011-2012. Other paper and board demand will be 9 million tonnes above 2007 in 2013, translating into an 11% rise.

The permanent closures in August of the Verso paper mill in Sartell and the Georgia-Pacific hardboard plant in Duluth compounded a tough situation for Minnesota's struggling logging industry.

Minnesota Public Radio reported (bit.ly/OFunHA) Friday that about a third of the state's logging businesses have gone out of business in the past few years, leaving about 1,500 loggers still working. With the closure of six wood-processing plants in the past five years, timber consumption in the state has dropped about a third since the early 2000s, according to the Minnesota Timber Producers Association.

The Verso and Georgia-Pacific shutdowns will eliminate 400 plant jobs while also erasing more of the market for timber.

"I would say the logging industry right now is close to a dying breed," said Mark Benson, whose Benson Brothers Trucking has laid off half its employees since mills started closing.

The Northwest was largely built on the timber industry's fortunes, but for years the logging and saw mill business has been in decline. Tightened environmental regulations first wreaked havoc on the industry, and then along came the demand-killing recession. According to the Wall Street Journal, though, a West Coast timber "revival" is under way.

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Carol Johnson, executive director of the North Olympic Timber Action Committee, an advocacy group for the timber industry on the Olympic Peninsula, says she's noticed a telling sign of increased timber sales at the Port Angeles port. "More logging ships have arrived in our port in the last two years than we've had in the last 10 years." The ships, she says, are taking logs to Asia.

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... the Chinese economy got so heated that, in the last year, the government decided to slow things down, for fear of having its bubble burst, American-style. That's meant that timber exports to China, which peaked in 2010 and 2011, have slowed somewhat.

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Here, the timber business has been quietly chugging on, diminished but not vanquished, sometimes doing better and sometimes doing worse. It's had a few good years of late, but not of the old baron-making variety. "The industry is still pretty edgy," says Bryon Monohon, mayor of the once mighty logging town Forks. "We have some mills operating, but nobody's getting rich on them."