It's the Biomass, Stupid
Although they have considerable political momentum, cellulosic ethanol and advanced biofuels are not the best way to use biomass in order to reduce carbon emissions. Greater carbon reductions can be had at lower cost by cofiring the same biomass in existing coal plants. If the goal is more ethanol to displace gasoline, wouldn't it make more sense to feed cows on grass instead of corn, and use the corn to make ethanol, than it makes to use grass to make ethanol? If the goal is more miles driven per ton of cellulose, you will get more miles per ton by burning the cellulose to make electricity and using that to charge an EV or PHEV. Finally, biomass can be used to sequester carbon as biochar, while also producing electricity, heat or liquid fuel.
Given all the possible uses of biomass, it makes far more sense to me to invest in the biomass itself, rather than in any one process for converting biomass into fuel or other form of energy. I first wrote about this idea over 2 years ago, when I suggested that sustainable forestry companies were a good way to invest in cellulosic ethanol. Another variation on this theme is waste management companies, two of which I included in a my Clean Energy Stocks Shopping list, while the recently profiled Algonquin Power Income Fund (AGQNF.PK) also manages wastewater treatment facilities. Here, I'll focus on wood and wood pulp.
Don't Miss The Forest
Many biomass investments are worth pursuing for those of us who believe that we both need to reduce carbon emissions and displace a dwindling supply of liquid fossil fuels. None, however, is as easy to invest in as forestry. Unlike most forms of biomass (aside from food), we already have an existing infrastructure to harvest and transport wood.
The Forestry industry is also well-established as an industry sector. Since I first started writing about the potential of forestry companies to benefit from the new uses for their timber, two sector Exchange Traded Funds have been launched, the iShares Global Timber & Forestry Index Fund (WOOD), and the Claymore/Clear Global Timber Index (CUT). Both these ETFs contain about 25 global companies that either own timberland or produce paper-related products.
However, an investor wishing to benefit from new uses of wood would want to own wood and pulp producers, but not wood consumers, such as paper companies that does not own its own timberland. Wood users are likely to lose from increasing prices for wood, while wood producers should gain.
I took a look at the portfolio holdings of both WOOD and CUT to see which had the best exposure to producers. These numbers are very approximate, based on my best guesses after reading the company profiles of the portfolio companies:
|ETF||% Producers||Expense Ratio||Daily volume||Close 9/17/09|
Even given my cursory analysis of each fund's holdings, WOOD stands out as clearly superior to CUT for investors interested in a Forestry ETF as an investment in Biomass, because of the significantly higher exposure to producers than consumers. CUT does have better liquidity, but that hardly makes up for the lower expense ratio of WOOD, and high exposure to wood consumers.
Even the 60% exposure of WOOD to biomass producers is not enough so that I think these funds are a good way to invest in the sector. It would be theoretically possible to get exposure just to producers by going long WOOD and shorting CUT, but such theories tend to work a lot better in theory than in practice.
Hence, I feel the best approach to get exposure to wood producers is with individual stocks. Most of the holdings of these two funds are international, but there are still a few US-listed ones. With the caveat that I have not researched any of these companies, here are the US-traded holdings of the two funds that seem to be mostly wood and pulp producers, as opposed to biomass consumers:
|Company/Ticker||% of WOOD||% of CUT||Notes|
|Aracruz Celulose S.A.(ARA)||4.73%||4.97%||Brazilian wood pulp producer|
|Plum Creek Timber Co. Inc. (PCL)||5.55%||2.24%||US Timber REIT; in DJ Sustainability index|
|Potlatch Corp (PCH)||6.5%||1.35%||US Timber REIT; Forests are FSC certified|
While a portfolio of only three stocks is not very diversified, few investors are likely to commit more than 10% of their portfolio to forestry, and devoting 3% or less of your portfolio to a single company should bring adequate diversification. The loss of global exposure (the ETFs contain several Japanese and European companies as well as US and Brazilian ones), but this loss seems worth avoiding significant exposure to an industry (paper and packaging) with a significant input (pulp) that we expect to become more expensive due to competing uses.
Just as farmers are now benefiting from higher corn and soy prices because of the production of ethanol and biodiesel, it seems fairly certain that timber companies will benefit from higher prices for both lumber and previously unused slash. Nevertheless, there remains a question of when. Cellulosic ethanol plants are still in the pilot stage, with not nearly enough being produced to make a difference to the forestry industry's revenue. In contrast, cofiring wood and using it for heat are both established industries. At the moment, however, these uses for wood tend to be driven by the prices of alternative fuels (coal and heating oil), and not by reduced carbon emissions.
Although forest waste and sawdust can be practically free at the source, the cost of gathering and transport often means that they are nearly as expensive as the alternatives at the point of use. In order for the industry to overcome the logistical barriers, a price on carbon emissions is probably necessary. For US investors considering Plum Creek or Potlatch, it probably makes sense to wait until we see action from the US on climate change before investing.
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