How to in­vest in wood

Tim­ber funds can help your cash grow

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In­vest­ing in tim­ber could dis­prove the old adage that money doesn’t grow on trees. Gain­ing ex­po­sure to the tim­ber in­dus­try doesn’t mean buy­ing a patch of for­est in a dis­tant lo­ca­tion. A far more ac­ces­si­ble way to tap into this trade is by in­vest­ing in the shares of com­pa­nies which pro­duce pulp or lum­ber, busi­nesses which sup­ply the con­struc­tion in­dus­try, or pa­per and pack­ag­ing firms. Not only are com­pany shares eas­ier to buy, they are more liq­uid than real es­tate or land.

And many in­vestors will pre­fer to buy a fund which in­vests in a bas­ket of stocks op­er­at­ing in this space.

Tim­ber is a so-called soft com­mod­ity – one which is grown such as cof­fee or soy­beans, rather than mined or ex­tracted such as ‘hard’ metal com­modi­ties such as cop­per or nickel. ‘Cru­cially, un­like most com­modi­ties which are fi­nite re­sources, trees grow,’ says Nathan Sweeney, in­vest­ment man­ager at Ar­chi­tas.

DRIVEN BY HOUS­ING SEC­TOR Also un­like hard com­modi­ties, the pri­mary driver for the tim­ber in­dus­try is the hous­ing sec­tor, with its for­tunes heav­ily tied to the num­ber of con­struc­tion starts. As a re­sult, the tim­ber in­dus­try was hit hard dur­ing the global fi­nan­cial cri­sis when build­ing work dried up and con­struc­tion vol­umes fell as much as 75%.

When de­mand drops com­mod­ity com­pa­nies typ­i­cally rein in their spend­ing on ex­plo­ration and, for metal min­ers, that means there is usu­ally a dearth of sup­ply when de­mand picks up again. The same is not true for tim­ber and lum­ber pro­duc­ers, of course, be­cause trees will keep on grow­ing re­gard­less of the econ­omy.

The price of lum­ber is up more than 25% over the past year. And that price could keep ris­ing as the num­ber of new home starts climbs. It is es­ti­mated that the US needs to in­crease con­struc­tion of sin­gle homes by 80% to sus­tain long-term trend needs. Cur­rently there are around 1.2m hous­ing starts a year – well be­low his­tor­i­cal av­er­ages.

David Heyl is an an­a­lyst on the In­vestec En­hanced Nat­u­ral Re­sources (GB00B2QVX896) fund, which has 20% of its as­sets in soft com­modi­ties. He says: ‘Grow­ing trees re­quires very lit­tle on­go­ing run­ning costs so, even though there weren’t nec­es­sar­ily new plan­ta­tions started, the nat­u­ral growth from 2008 to 2013 meant that more wood and fi­bre was avail­able once de­mand re­turned.’

IN THE US THE AV­ER­AGE IN­DI­VID­UAL USES AL­MOST 300 KI­LOS OF PA­PER A YEAR, THE GLOBAL AV­ER­AGE IS JUST 55 KI­LOS, SUG­GEST­ING THERE IS PLENTY OF LA­TENT DE­MAND

THE ROLE OF TECH­NOL­OGY

But Heyl is con­cerned that the abun­dant sup­ply could drag prices lower in the com­ing years. He adds: ‘This ad­di­tional sup­ply is still far from be­ing ab­sorbed by de­mand growth’.

You can off­set this by tap­ping into other parts of the sup­ply chain. Heyl, for ex­am­ple, prefers com­pa­nies such as Toronto-based Nor­bord, which is fo­cused on other build­ing prod­ucts such as ori­ented strand board and ply­wood. The fund has re­turned 12.2% over the past year.

Gary Green­berg, head of emerg­ing mar­kets at Her­mes In­vest­ment Man­age­ment, likes Klabin, which is the largest pa­per pro­ducer and ex­porter in Brazil, where steady rain­fall through the year al­lows eu­ca­lyp­tus and pine trees to thrive.

While in the US the av­er­age in­di­vid­ual uses al­most 300 ki­los of pa­per a year, the global av­er­age is just 55 ki­los, sug­gest­ing there is plenty of la­tent de­mand. Mean­while, de­mand for wood fi­bre from China is ex­pected to in­crease by 30% be­tween 2015 and 2020, and new tech­nolo­gies mean the ma­te­rial can now be put to use in much larger build­ing projects.

Christoph Butz, co­man­ager of the Pictet Tim­ber (LU0448837087) fund, says: ‘Tim­ber is used in far more ap­pli­ca­tions than you might think.’ He says the trend to­wards in­ter­net shop­ping is sup­port­ive of the in­dus­try as re­tail­ers need strong pack­ag­ing, such as cor­ru­gated card­board wrap, in which to post their prod­ucts.

His fund, which has re­turned 21.4% over the past year, in­vests across the en­tire sup­ply chain with in­vest­ments in tim­ber land own­ers Wey­er­haeuser, UK pa­per sup­plier Mondi (MNDI) and US pack­ag­ing man­u­fac­turer WestRock.

RISK WARN­ING

In­vest­ing in tim­ber is not with­out its risks. This is a small, con­cen­trated in­vest­ment uni­verse, with only around 160 com­pa­nies in the sup­ply chain; the top four pack­ag­ing providers have a mar­ket share of 75% be­tween them.

And while tim­ber might grow re­gard­less of the eco­nomic en­vi­ron­ment, it is not im­mune to its sur­round­ings – in Canada, it is feared up to 50% of this year’s tim­ber crop may have been dam­aged by a bee­tle in­fes­ta­tion.

Other risks for the in­dus­try include US pres­i­dent Trump’s pro­tec­tion­ist trade poli­cies which could im­pact the amount of lum­ber be­ing im­ported – typ­i­cally the US has im­ported around 30% of its lum­ber from Bri­tish Columbia. There are also sus­tain­abil­ity is­sues, with some man­agers avoid­ing in­vest­ments in coun­tries such as In­done­sia where there is not a strong fo­cus on sus­tain­able grow­ing prac­tices.

Sweeney says: ‘De­mo­graph­ics and grow­ing pop­u­la­tions sup­port the case for in­vest­ing in tim­ber, par­tic­u­larly at times such as now where a ma­jor nat­u­ral dis­as­ter can lead to an uptick in build­ing work. But there are chal­lenges for this in­dus­try over the long-term too and in­vestors should not put more than a small amount of their money into th­ese as­sets.’ (HB)

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