About Forestry Investment
Forestry Profitability
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Forestry Investment
Learn here about some of the key factors affecting the profitability of forestry investments, including -
Supply
and Demand Factors
Reducing
Supply
Increasing
Demand
Substitute
Products likely to Increase in Price
Supply and Demand Factors
'The medium and long term profitability of any undertaking is ultimately determined by supply and demand factors for the end products produced.'
If supply is diminishing while demand is increasing, the underlying pressure will be for the price to increase.
If supply is increasing while demand is reducing, the underlying pressure will be for the price to reduce.
The profitability of investment in New Zealand Radiata pine plantation forestry is determined by supply and demand factors for the solid wood and wood fibre products produced from the logs extracted at harvest.
An understanding of the key supply and demand drivers for these products (and the position of substitute products) is important to understand forestry investment's profitability trend.
In addition to the information on this page you can also find out more about forestry supply and demand in What Others Say About Forestry Investment.
Reducing Supply
Approximately 94% of all forest produce consumed worldwide is sourced from indigenous forests and just 6% from plantation forests (plantation forests being treecrops grown especially for harvest).
To satisfy existing demand, the world's remaining areas of indigenous forests are diminishing each year at a rate equivalent to an area about the size of Switzerland.
The future available supply of forest produce will be determined by:
-
the degree of access to the remaining areas of indigenous forests for log supply
-
the ability worldwide to increase the area of plantation forests for log supply
-
the processing industries' ability to increase the yield of useable produce from the available log supply
Access to Indigenous Forests
Pressure is mounting to preserve the remaining estimated 2,700 million hectares of indigenous forest by either not logging at all, or by logging on a sustainable basis. This trend is towards a log supply reduction.
Increased Area of Plantation Forests
Plantation forests are estimated to cover 93 million hectares, just 3.44% of the area of indigenous forests. Although the area is increasing, plantation forests are not increasing fast enough to meet the reduction in supply from indigenous forests. This trend is not projected to be sufficient to halt the overall trend towards a log supply reduction.
Increasing Yield from Logs Harvested
The use of new technology is increasing the yield of useable product from the logs supply available. This trend is not projected to be sufficient to halt the overall trend towards a product supply reduction.
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Increasing Demand
Two main factors drive the demand for forest produce:
- population growth
- increase in standard of living
The world's population is increasing by approximately 100 million persons per year and is expected to reach 7.2 billion by the year 2010, in excess of 8 billion by 2020 and 9 billion by 2050.
At the same time as this population is increasing, the overall standard of living of a growing percentage of this total population is also increasing.
International statistics confirm that the higher the standard of living, the greater the consumption per head of solid wood and wood fibre.
The Food and Agriculture Organisation (FAO) projects that these two demand drivers will increase world wood consumption by 24% in the 14 years from 1996 to 2010 (see chart below).
Projected Demand for Forest Products
|
Product |
1996 |
2010 |
Increase |
|
(Million m3 per annum) |
|||
|
Fuel wood |
1800 |
2200 |
25% |
|
Industrial wood |
1490 |
1872 |
26% |
|
Sawn timber |
430 |
501 |
17% |
|
(Million tonnes per annum) |
|||
|
Wood-based panels |
149 |
180 |
20% |
|
Wood pulp |
179 |
208 |
16% |
|
Paper/board |
284 |
394 |
39% |
|
All Wood Products |
4332 |
5355 |
24% |
Source: Food and Agriculture Organisation of the United Nations
Substitute Products Likely to Increase in Price
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A natural consequence of supply and demand variables increasing prices, is a move to substitute products.
Such a move might represent a threat to wood products if the price of the substitutes was projected to be stable, or reducing, when the price for wood products was projected to be increasing.
The substitute products for solid wood like steel, aluminium, plastic and cement all have very high energy inputs and high carbon outputs. As the cost of energy increases and as carbon taxes are progressively introduced to limit global warming, inevitably the price for these substitutes will also increase.
Crops producing fibre substitutes for wood fibre are being developed. Wood fibre is sourced from the low-value pulp logs and is principally a by-product of high quality plantation forests. The contribution to the overall profitability of the investment from these logs is relatively minor.