Tight Timber Market Creates Investment Opportunities, But Beware Locality

Earlier this week the Financial Times reported that demand in China is driving up timber prices throughout Europe, and one would imagine the world. The numbers were scary: wood products inflation at 13 percent last month; softwood prices up 30 percent in six months. Wood, it seems, is the new Argentine peso.

Or is it? The truth is that it's nearly impossible to get a read on what the global market really is, because there is no single market for Lumber; no globally recognized futures contract, etc.

But we can get an idea. There are composite prices for U.S. timber, and contrary to the sky-is-falling proclamations of Europe, North America is facing a rapidly falling timber market. The composite price (an index of 15 key types of wood, maintained by Random Lengths) fell to $288 at the end of April, vs. $377 a year ago. That 23 percent decline is almost an inverse of what’s happening in Europe.

That points to a big issue with the timber market. Raw timber is decidedly local. Big logs are expensive to harvest, expensive to move, and expensive to mill. In order for 2 x 4s to end up on a giant ship headed across the Pacific from the U.S, the price pressures have to be significant. So, many people believe that prices in Europe and Asia are better indicators for Chinese demand, and as mentioned in the FT, local numbers in the Western EU are climbing: prices for sawn lumber are up somewhere between 20 and 40 percent in the last year.

To make the waters even murkier, there are a half-dozen factors that have North American timber buyers worried about future prices. Canada has been hit with significant pest problems and bad weather for logging; Russia is set to tax exports of raw lumber in an attempt to get Russian factories making more finished products; etc. You get the idea.

On balance, the FT story is just one of dozens of factors, all pointing to a tighter global market for timber products. That does create certain opportunities for investors. But folks looking to timber as the next global commodities boom may want to look carefully, as different local market conditions can vary dramatically.

Editor's note: As described in this article among others on Seeking Alpha, timber stocks include:

• Plum Creek Timber (PCL) - a REIT that's the largest landowner in the United States
• Rayonier (RYN) - also a REIT, though somewhat smaller - RYN holds about 2.4M acres of timberland in the United States, Australia and New Zealand
• Deltic Timber (DEL) - timber landholder that also markets lumber and is therefore exposed to housing market
• Universal Forest Products (UFPI) - lumber products manufacturer and distributor that is also highly exposed to the housing market
• Paper giants International Paper (IP) and Wayerhauser (WY) own timberlands that they use as raw materials for their own paper manufacture, plus sell timber in the open market