A Forest Products Play for Cap-and-Trade

Beyond the obvious play on an improving economy, the forest products sector may get an additional boost from the sale of wood pellets for energy as the cap-and-trade legislation attempts to curb air pollution. The European Union has already enacted laws requiring 20% of electricity to be produced from renewable resources. Originally these laws were thought to benefit wind and solar companies, but wood has emerged as the cheaper alternative. The key feedstock for wood pellets is softwood pulp and, lucky for us, there is a futures contract we can use as proxy.

Softwood Pulp Futures (Click to enlarge)

Since March softwood pulp futures have jumped 16%. The USDA trade data provides a graphical look at the export of wood chips to the EU; notice the large increase in 2008 after the EU passed its laws. (Click to enlarge)

In 2009 YTD, exports to the EU are down relative to the 2008 pace. However, Plum Creek (PCL) has stated European utilities are looking to secure wood. Moreover, many U.S. utilities are also trying to get ahead of any environmental legislation.

Disclosure: Long PCL, RYN, WY