Andrew Morton1 and Graham Applegate2
The global timber industry has become increasingly interlinked, with trade in forest and wood products continuing to rise. Driving this change are the economic forces that utilize and reward efficient timber producers by securing their access to markets across the globe.
Forest and wood-product international trade was initiated through the middle and latter half of the twentieth century; it was then dominated by the trade of unprocessed log products. Whilst the log trade continues to be an important component of the sector, the real trend increases have been in processed products. Initially this was in sawntimber and pulpwood, but increasingly it is in nearly finished products such as paper and board, and most spectacularly wood-based panels. Wood-based panel trade has increased 800 percent in the last 30 years, and this trend is expected to continue.
Keywords: global market impacts, international trends, forest and wood products, imports/ exports, Asia–Pacific region
During the 1980s and 1990s, timber harvested from the tropical dipterocarp forests in Southeast Asia, particularly those in Malaysia and Indonesia, dominated much of the export trade in tropical hardwood logs and plywood products, with countries such as Papua New Guinea (PNG), Solomon Islands, Myanmar and Thailand contributing smaller quantities. From the mid-1990s, three important changes started to occur in the forestry sector in Asia and the Pacific: (1) The beginning of the decline in the production of plywood from the tropical dipterocarp forests, as the easily accessible forests were harvested and reharvested; (2) the commencement of the pulp and paper sector, particularly in Indonesia and Malaysia, with large pulpmills constructed in Indonesia in the late 1990s, designed to use mixed tropical hardwood species from the natural forests; and (3) China began its rise as a major importer of wood products. In recent years, as China has emerged as an economic powerhouse, so too has its demand for timber as well as pulp and paper products. China now has a major influence in the market for timber for furniture as well as pulpwood and pulp for its expanding paper production industry.
The major land-use change in the Asia–Pacific region over the past 30 years, and particularly over the past ten years, has been the huge loss of natural forest, with deforestation rates in natural forests in Indonesia (from 1990 to 2000) of 2.1 million hectares per year (Muliastra and Boccucci 2005). The main drivers of deforestation in the Asia–Pacific region are complex and numerous, but what is very noticeable is the expansion of the palm oil industry, with plantations being developed primarily on “converted forest land”. Indonesia now has more than 6.6 million hectares of palm oil plantations with a similar area in Malaysia; expansion is planned in many Asia–Pacific countries as palm oil is widely promoted as a so-called ecofriendly biofuel. There is also an increase in tree plantations containing high value species such as teak, rubber and mahogany, but primarily with fast growing pulpwood species, dominated by acacia and eucalypts many of which are planted on converted forest land.
These negative impacts on the natural forests in Asia and the Pacific over the past 20 years have prompted a number of initiatives designed to minimize negative impacts resulting from poor forest land-use planning and forest management. Some of the initiatives included the introduction in the 1990s of Reduced Impact Logging (RIL) and codes of practice for forest harvesting for improving harvesting practices in the forests of the Asia–Pacific region; how to combat the huge illegal logging industry; the prevention and suppression of forest and peatland fires and how to reduce their occurrence as countries in the region develop their natural resources; the application of criteria and indicators for sustainable forest management; and the use of forest certification and systems to facilitate legal wood supplies and Chain of Custody.
Experience in the forestry sector has been instrumental in increasing awareness of the need for improved environmental and social best practices to be introduced into the palm oil industry by developing principles and criteria for the production of sustainable palm oil plantations under the auspices of the Roundtable on Sustainable Palm Oil. In very recent months, Reduction Emissions from Deforestation and Degradation (REDD) has become prominent; an effort is being made to have REDD issues raised at COP133 in Bali, which may pave the way for huge carbon payments for keeping natural forests intact and to minimize forest degradation through improved harvesting practices that reduce carbon emissions.
Global industrial roundwood production has been stable over the last 15 years as indicated in Figure 1, but with a decline in Asian and European production. The declining production in Asia is due to the depletion of natural resources, introduction of sustainable management with reduced annual allowable cuts and smaller sized logs (re-entry logging areas). Production in South America increased by 80 million m3 over the same period and North and Central America, Africa and Oceania (Solomon Islands and PNG, Vanuatu, Fiji) all increased production by around 20 million m3.
Figure 1. Global roundwood production
The global timber industry has become increasingly interlinked with the rise in the trade of forest and wood products. Driving this change are the economic forces that utilize and reward efficient timber producers by securing their access to markets across the globe.
The rise of China, as a low cost manufacturer of wood products, has resulted in the widespread relocation of particular manufacturing processes into China and out of the western economies. Most notably the high cost labour in furniture manufacturing has resulted in China becoming a major furniture manufacturing base and subsequently exporting the finished products to the world.
International trade in forest and wood products was initiated in the middle and latter half of the twentieth century and was then dominated by the trade of unprocessed products in logs (Figure 2). Whilst the log trade continues to be an important component of the sector, the real trend increases have been in processed products. Initially this was in sawntimber and wood pulp, but increasingly it is in nearly finished products such as paper and board, and most spectacularly, wood-based panels. For example wood-based panel trade has increased 800 percent in the last 30 years and this trend is expected to continue.
Figure 2. Global trade of forest and wood products
China has been a critical influence in this trade — it is now the world’s largest importer of round logs, importing over 30 million m3/year (Figure 3), but also dominant in the trade of market pulp and recycled paper. This import trade is to support the Chinese domestic economy; however, it has also provided a low cost manufacturing base for the entire global wood product markets.
Figure 3. Chinese hardwood and softwood log imports
Whilst China imported products from across the world through the late 1990s and early 2000s, commodity prices remained relatively low as additional supplies were brought to the market. However, since 2004, tightened supply in many products, combined with minor policy shocks such as the Russian Federation’s Government announcement on log export excise duty, has resulted in price competition in particular markets. This has been most pronounced in high value tropical hardwoods (Figure 4) and noted in both log and sawntimber prices.
Figure 4. Meranti log and sawntimber prices
Interestingly, this trend is apparent in international softwood log prices also, but not in sawntimber prices where domestic economic factors can be the primary influence. For example structural grade sawntimber prices in the United States are now at decade-low nominal prices, reflecting the continued weakness in US housing markets.
This trend of rising log and timber prices, however, creates opportunities for the development of alternative products. A key recent trend has been the development of engineered wood products, most notably Laminated Veneer Lumber (LVL), but also derivatives such as strand lumber. The consumption of these products is growing exponentially in some markets, replacing traditional high strength large section solid wood timbers, and increasingly putting pressure on steel used in housing and semicommercial developments.
The current trends in Chinese pulp and paper output continue to increase. However, when looking at the global market, with rising pulp prices, and only marginal paper price rises, paper producers are currently facing a major margin squeeze (Figure 5). Hence, those paper producers reliant on market pulp continually face cost volatility from pulp pricing. As a result, the potential for any further upswing in pulp prices due to paper producers’ capacity to pay is very low. Consequently a number of manufacturers are looking to integrate their pulp operations with their paper mills.
Figure 5. Indexed pulp and paper prices
Source: Hawkins Wright Ltd, Pulpwatch.
Asia–Pacific market trends
The main market influence in Asia and the Pacific is China, which is driving the markets and is now receiving most of its raw material from the Russian Federation as shown in Figure 6. Malaysia is still a major supplier and combined with Papua New Guinea, Gabon and the Solomon Islands provides most of the tropical hardwood logs, although the supply from Pacific countries is declining and will continue to do so over the coming five to ten years.
Figure 6. Main countries supplying China with logs
The reduction in production of logs from tropical forests in Asia and the Pacific and the modification to timber producers in traditional importing countries such as Japan and Republic of Korea have been significant recently, with China taking up more than this amount from a variety of supply sources. Figure 7 shows the changes in Japan, where primary manufacturing of hardwood logs continues to decline; manufacturing has survived in Republic of Korea. However, China continues to increase its log imports (Figure 8), with imports in 2007 expected to be in excess of 35 million m3.
Figure 7. Japanese hardwood log imports
Figure 8. Japan, Republic of Korea and China total log imports
With the tropical forests in Asia and the Pacific in decline, in terms of total area of production forests, the number of concessions producing large volumes of logs of large piece size and more natural forests being taken out of production and converted to timber or other agriculture crops such as palm oil plantations, the production of one of the main manufactured products, plywood, has also declined. With this decline in production forests has come the decline in the legal production of specialty timbers such as ramin, merbau and the highly prized dipterocarp plywood. The export figures for Indonesian plywood, as shown in Figure 9, are symptomatic of the situation in many countries that relied on large dipterocarp forests to produce high quality plywood for export throughout the 1980s and 1990s.
Figure 9. Plywood exports from Indonesia
Source: Indonesian Plywood Association.
The expanding Chinese economy reflects the demand for paper and the large increase in paper machines using market pulp or that produced from an increase in pulp capacity to meet demand from paper makers. Figure 10 shows total imported chemical pulp into China to support the expanding paper manufacturers. Along with increases in the demand for pulp, there is a subsequent need for a huge amount of wood fibre which has subsequently placed pressure on the supply of sustainably produced raw material from plantations in Asia and the Pacific. This demand for raw material has impacted on numerous sectors outside forestry.
Figure 10. China chemical pulp imports
Asia–Pacific wood supply trends — plantations
Acacia and eucalypts
With the demise of tropical production forests in Asia and the Pacific over the coming decades and the requirement of the market to provide paper and paper products from sustainably managed sources, more emphasis will be placed on plantations to provide the raw material not only for the pulp and paper sector, but also for reconstituted wood products, panels and sawntimber.
Acacias have been used for many years to provide a range of products, such as gum in India, since 1889 (Prasad 1991) and for improving the fertility of soils and ameliorating saline soils. However, it was not until 1973 that the potential of acacias as a plantation species for wood production was fully appreciated (Gunn and Midgley 1991). In 1979, the Australian Tree Seed Centre, which is part of the CSIRO,4 embarked on a programme to explore the potential of A. mangium, auriculiformis, crassicarpa and aulacocarpa for use in plantations in the tropics. Trials were established throughout Asia, Africa and the Pacific to determine suitable species and provenances, grown under different conditions for a range of products (Gunn and Midgley 1991). The early trials focused on growth rates and tree form for timber production, but acacias are now selected for a range of traits, such as suitability for planting in saline soils, seed meal, oil production, farm forestry and community forestry for fuelwood, shelter, dryland rehabilitation, pulp and paper and furniture.
While eucalypts are the dominant species for the production of pulpwood in Lao PDR, China, Thailand and Viet Nam, A. mangium and A. crassicarpa form the largest area of industrial plantations in Malaysia and Indonesia, with a hybrid involving A. mangium and auriculiformis gaining in importance in Viet Nam and Thailand. The plantings of acacia in these countries is dominated by the private sector, which also owns the pulp and paper mills which utilize huge volumes of pulpwood logs. In Indonesia, for example, by 2009 the pulp industry will require in excess of 30 million m3 of pulpwood per year from plantations to sustain its expanding pulp production capacity. This is the equivalent to harvesting approximately 200 000 hectares of plantations each year. In Malaysia, acacias are well-established in Sabah and Peninsular Malaysia; Sarawak is now actively expanding its plantation programme in Bintulu, primarily to supply a proposed pulp mill, which will require over 23 000 hectares of plantations annually. Other plantings by the private sector are being designed for sawntimber production for the furniture trade and other similar high value uses.
The main acacia species produced on mineral soil in Southeast Asia is A. mangium. On peat soils, A. crassicarpa outperforms A. mangium and is the preferred species, as it has comparable pulping characteristics and better growth on these difficult sites. The last 30 years has seen a rapid expansion of the plantation sector in Malaysia and Indonesia. In the mid-1990s, Indonesia and Sabah began to develop acacia plantations to provide fibre for the growing bleached hardwood kraft pulp (BHKP) industry with production capacity now in the order of 6 million admt5/year and increasing (Applegate 2006). In southern China where the BHKP pulp capacity is about 2 million admt/year, vast areas of both eucalypt plantations are being planted to supply this demand for pulpwood.
The development of fast-growing tree plantations on a six-year rotation to provide pulpwood for the increasing number of pulp mills in Indonesia, Malaysia, China and Thailand has only occurred over the past 15 years. During this period, plantation development has undergone a number of radical changes which has also had an impact on the financial sector, the biophysical environment as well as on socio-economic development in many parts of Asia.
In Asia and the Pacific, the lowlands on the islands of Borneo and Sumatra are where most of the fast-growing acacia-dominated pulpwood plantations are concentrated. The lowland mineral soil sites in Sumatra, where most of the plantations for two of the world’s largest pulp mills are located, are considered highly productive for A. mangium. Similar lowland sites in Borneo contain soils with a lower pH and a higher clay content and consequently A. mangium can be less productive on some sites there. The current growth data for plantation-grown A. mangium indicate an average standing mean annual increment (MAI) in well-managed plantations of 24 m3/hectare/ year, with some companies reporting an average MAI of 30 m3/hectare/year (APP 2004). Growth rates for A. crassicarpa on peat soils tend to be lower than those of A. mangium. The location of the main pulpwood plantations is shown in Figure 11.
Figure 11. Location of main pulpwood plantations and pulp mills in Indonesia
Rubber (Hevea brasiliensis)
In its native South and Central America, rubber has been tapped from the hevea tree for a long time. When samples of rubber first arrived in England in 1770, it was observed by Joseph Priestly that a piece of the material was extremely good for rubbing out pencil marks on paper, hence the name.
The para rubber tree initially grew in South America where it was the main source of what limited amount of latex rubber was consumed during much of the nineteenth century. Henry Wickam gathered thousands of seeds from Brazil in 1876 and they were germinated in Kew Gardens, England. The seedlings were subsequently sent to many parts of the world where Britain had commercial interests, including what are now known as Indonesia and Malaysia. The rubber plantations which now cover large areas in Asia and the Pacific are grown for latex and furniture wood.
In 2006, the Asia–Pacific region, mainly Indonesia, Thailand and Malaysia, produced in excess of 80 percent of the world’s latex from over 5.5 million hectares as shown in Figure 12.
Figure 12. Locations and areas of rubber plantations
Indonesia produced 2.4 million tonnes of latex in 2006, an increase of 5.7 percent over previous years, with exports valued at US$5.62 billion in 2006. Malaysia also increased production by 3 percent and exported US$8.5 billion of latex in 2006.
Following the Asian financial crisis in 1997, latex prices were poor from 1998 through to 2005. The increase in latex prices in recent times has also placed pressure on log prices and availability of logs which are required for the furniture industry. Figure 13 shows the price increase in latex compared to the changes in log prices since the high prices at the time of the Asian financial downturn and the recent sharp increases in prices since 2005. However, while the price of latex continues to be firm, the profitability for the sawntimber industry is poor, as sawmillers face margin declines. With the decrease in availability of logs and the high latex prices, this provides an opportunity for investment in plantations for furniture and latex.
Figure 13. Rubberwood and latex price rises
Teak (Tectona grandis L.)
Teak is a tree originating from monsoon forests in parts of India, Thailand, Myanmar and Lao PDR. It is very popular as the wood is durable outdoors and most suitable for garden furniture. However, it first became popular in the maritime world, when it was noticed that the “wood did not splinter under gunfire”.
Teak is thought to have been introduced into Java in Indonesia in the fourteenth century. Plantations in India commenced in the early 1800s and in tropical America in the 1900s. It is a well-known timber species, which has performed well in plantations not only in its native Southeast Asia, but also in other parts of the Asia–Pacific region, as well as in Africa and Latin America. The total area under teak plantations today is estimated at 3 million hectares (FAOSTAT). It has shown good growth and produced high quality wood when grown on deep, flat and well-drained alluvial soils, rich in calcium and where the mean annual temperature is between 22 and 27°C and annual precipitation is from 1 500 to 2 500 mm, associated with a marked dry season of three to five months.
Indonesia has much of the plantation-grown teak which is managed by Peruntani, a state-owned enterprise in Indonesia that manages in excess of 1 000 000 hectares of plantations which are under review to be certified. The other main areas of teak are in Myanmar which has 6.1 million hectares in natural forests, Thailand which has in excess of 700 000 hectares of plantations and Viet Nam, Solomon Islands and PNG.
Natural forest teak log prices have continued to rise, with further increases for the most valuable grades as shown for the prices of logs from Myanmar in Figure 14. Again China is a dominant player, with most of its teak logs imported from Myanmar as shown in Figure 15.
Figure 14. Myanmar natural log prices (FOB)
Figure 15. China teak log imports
Future trends to 2020
This paper quantifies how the market is impacting both directly and indirectly on Asia–Pacific forests. We have defined the regional impact of trade flows and how product pricing is being affected. We suggest there are further changes in market developments that are likely in the period through to 2020.
Trends in production
Natural forests are and will continue to remain the primary source of fibre supply. This supply location is expected to continue to evolve, as the traditional supply zones such as Borneo and Sumatra are replaced in frontier forests such as the eastern Indonesian archipelago and central and eastern parts of the Russian Federation. The traditional supply zones will continue to provide fibre but increasingly of smaller log sizes, and commonly harvested as part of a forest or agricultural plantation expansion programme.
The effect of valuing carbon into forest management is in its infancy. The COP13 meetings appear to be heading towards major policy announcements on avoiding deforestation and forest degradation. The speed at which capital is allocated in response to these policy announcements will significantly influence natural forest management throughout Asia and the Pacific. Current analysis indicates payment of even low carbon values is sufficient to change the behaviour of natural forest owners.
Plantation supplies, most notably acacia plantations in Asia and the Pacific, are an increasingly important supply for the large industrial pulp mill developments through the region, as will be eucalypt plantations in China and Indo-China. However, opportunities exist to diversify the manufacturing processes of plantations and develop new high quality products and replace natural forest supplies. This will develop supply and pricing tension which could result in higher log prices in particular regions.
As well as wood-product markets changing, the flow of capital continues to develop. Timber land ownership has developed in North America; however the investors are now looking to further diversify their investment into forest ownership within the Asia–Pacific region. The potential revenue sources are both traditional timber sales and also carbon stores. This will result in new investor groups securing both plantation assets (primarily for their timber value) and natural forest (for both timber and carbon value).
Certification and supply chain analysis will continue to provide comfort to particular markets, ensuring a wide range of markets is available to Asia–Pacific timber producers.
Trends in market growth
The market for acacia and other plantation-grown products is likely to grow as they have many advantages. Fast-growing plantations have a potentially large resource base; as the resources for rubberwood, or naturally grown teak and mahogany tighten, or the quality decreases as is the case with some supply areas of teak, then acacia and eucalypts should compete. However, this can only occur if the marketing of fast-growing plantation species is undertaken on the back of existing markets for similar products, consistent quality and delivery and with favourable prices. In countries where acacia plantation-grown products are produced, the associations and agencies will need to keep statistics on the acacia used, as this information will assist policy-makers and investors as well as consumers/buyers who are interested in a sustainable resource.
The buyers of the fast plantation-grown logs of acacia and eucalypts will meet with competition from pulp and paper, unless a price differential is sufficient to encourage some plantations to grow longer plantations or produce larger log sizes more suitable for sawntimber production for furniture or flooring. The log buyers will need to become more active in promoting the differential they are prepared to pay.
Future supply of plantation timber
A number of factors will influence the supply from fast-growing plantations in the future. They include:
Outlook for the plantation sector in the Asia–Pacific region to 2020
The coming years will likely result in some changes to acacia plantations and to the industry using the products. These changes could include:
However, the development of plantations in many areas of the Asia–Pacific region has come at the expense of some tropical forest habitats with conservation and environmental values. Additionally this has had a large impact on the financial sector, brought about by poor performance of debt or equity investments. This has sometimes been associated with weak due diligence practices, weak financial regulations, financial mark-up schemes and favourable tax incentives (Applegate 2006). This is a legacy that may plague new plantation development and make investors cautious.
The plantation, processing sector and pulp and paper industry which is dependent on acacia/ eucalypt plantations is crucial to economic development in areas in which the operations are located. Estimates vary for the number of people employed in the pulp and paper and plantation sector, ranging from 0.1 to 0.2 per hectare for plantation and harvesting operations and much larger for the processing sector (Guizol and Aruan, personal communication, APP 2004.). This figure equates to approximately 340 000 to 400 000 people based on the current plantation estates in Malaysia and Indonesia alone.
Many plantation companies are facing a number of issues with local populations living in and around their forest concessions. Some of the issues relate to claims that the licensed areas were taken from local people without adequate compensation. This has resulted in large areas not being developed for plantations due to land claims. Improved community development programmes and outgrower schemes may assist in reducing land claims and reducing risks to established plantations, while improving local livelihoods. There are many social problems facing the plantation companies in Asia and the Pacific which preclude them from achieving their plantations’ development goals.
For companies to be successful, more emphasis is needed on social issues, as well as on technical management.
Abdul-Kader & Sahri. 1993. Properties and utilization. In Acacia mangium; growing and utilisation. Bangkok, Thailand, Winrock International and FAO.
APP. 2004. APP 2004 sustainability report for Indonesia. Jakarta. 61 pp.
Applegate, G.B. 2006. Acacia pulpwood plantations in Indonesia. In World of market pulp.
Guizol, P.H. & Aruan, A.L.P. Impact of incentives on the development of the forest plantations resources in Indonesia, with emphasis on industrial timber plantations in the outer islands.
Gunn & Midgley. 1991. Exploring and accessing the genetic resources of four selected tropical acacias. In J. Turnbull, ed. Advances in tropical acacia research. Proceedings of an international workshop held in Bangkok, Thailand, 11–15 February 1991.
International Tropical Timber Organization (ITTO). 1997. Tropical Forest Update, 7(2).
Muliastra, K.D. & Boccucci, M. 2005. Analysis of Indonesia’s forest cover change 1990– 2000. Unpublished draft. Jakarta, World Bank.
Prasad. 1991. Use of acacias in wastelands reforestation. In J. Turnbull, ed. Advances in tropical acacia research. Proceedings of an international workshop held in Bangkok, Thailand, 11– 15 February 1991.
1 Vice-President, URS Forestry, URS Forestry, Australia. Tel: +61 (0) 3 8699 7500. Fax: +61 (0) 3 8699 7550. E-mail: email@example.com
2 Principal Consultant, URS Forestry, Indonesia. Tel: +62 (21) 529 60385. Fax: +62 (21) 529 60373. E-mail: firstname.lastname@example.org
3 The United Nations Framework on Climate Change Convention (UNFCCC) in 1997, adopted the Kyoto Protocol and prepared a list of countries (hereafter called the “Annex B countries”), which have committed to reducing their greenhouse gas (GHG) emissions to stabilize the concentration of GHG in the atmosphere to a level that does not harm life. The Clean Development Mechanism (CDM) is one of the flexible components of the Kyoto Protocol, designed to facilitate Annex B countries to fulfil their commitments for reducing GHG emissions, and at the same time to assist non-Annex-B countries, which are mostly developing countries, in achieving sustainable development. The CDM is the only flexibility mechanism that involves developing countries. The Convention of Parties (COP) is the meeting of the UNFCCC, with the 13th meeting being hosted by Indonesia in Bali in December 2007.
4 Commonwealth Scientific and Industrial Research Organisation.
5 Air-dry metric tonnes.
There has been a major change in forest land ownership over the past 30 years — from government and integrated forest product ownership to institutional, equity fund and high net wealth ownership. Most of this activity has been in the United States, but it has recently spread to a number of southern hemisphere countries and also to Europe, Asia and Africa. Over US$50 billion has been invested by North American institutions alone and new fund sources are emerging.
Investments in forest lands have shown a high return with a negative correlation to other investments and with low volatility over a prolonged period.
Investors consider a number of macroeconomic, political, commercial and biological risk factors when assessing investment opportunities. Several Asian countries exhibit their own set of investment risk challenges compared with other continents. Accordingly, investors ascribe high risk premia to such investment opportunities. Changes in risk premia in several Asian and non-Asian countries between 2000 and 2007 are addressed.
Several new forest land investment opportunities are emerging — in Asia and other regions, and they are also associated with global climate change/carbon and biofuel issues.
Commercial investments in natural forest around the world hold their own increasing challenges as the global market place for wood products seeks sustainable assurances.
Keywords: planted forests, private sector, investments, incentives, risk assessment, carbon trading
The role of the market in global planted forest development
Most planted forests around the world were initially established by governments. This was a natural occurrence as governments owned most original forest land and so were charged with managing these forests after harvesting (which in many instances meant planting trees) or played active “national good” roles in establishing new planted forests (for example the United Kingdom, South Africa, Australia, New Zealand and Chile). These initial public investments in planted forests by governments were often production driven, to provide future wood supplies for processing expansion and/or to demonstrate methods for planted forests’ management.
From the early twentieth century, private ownership of planted forests became more common; this trend accelerated after 1950 as global forest product processing companies expanded planted forest areas to secure wood resources for existing and future processing demand. This production-driven mentality by integrated forest product companies continued until the late twentieth century. However, since then, increasingly the private sector has responded to international and national market signals and commercial opportunities to invest in planted forests purely for financial returns.
Since the 1970s, some governments decided to sell off all or part of their plantings to private owners. These have included the governments of Chile, New Zealand, South Africa, Portugal and some Australian states. Most of these sales have involved the government continuing to own the land, while selling the trees and rights to grow future rotations on that land. The major reason why land has not been sold is the complications related to future indigenous people’s land claims.
More recently, some governments have provided long-term land concessions to companies in order to grow trees. These countries include Indonesia, Malaysia, China and the Russian Federation.
However, there are still major parts of the world, for instance Central and Eastern Europe, Western Asia and Africa, where government forest ownership is still dominant in the industry, and so a “market” influence on forest ownership is not significant. This situation may change in the future as increasingly democratic governments realize that owning forests is not paramount to the national interest.
Recent changes in corporate ownership of planted forests
It is only recently that substantial ownership of planted forests has moved from a production-driven motivation (mostly to secure wood supplies for processing) to more commercially motivated reasons. As a result, ownership patterns have changed and continue to change. The major ownership change trends are discussed hereunder.
The relaxation of investment and trade restrictions has facilitated increasing globalization, including international investment opportunities in planted forests. Since the 1980s there has been a significant rise in the ownership of planted forests around the world by institutional pension and endowment funds. This development commenced in the United States, with domestic institutions wanting to diversify their investment portfolios. One such diversified category was North American planted and managed native forests. In 2007, this region remained the focus of most planted and managed native forests owned by institutional funds, although there were also other smaller funds based in Europe, Oceania and Latin America.
One reason for these phenomena was the frustration of shareholders in listed forest product companies not being able to realize the true value of their planted and managed native forest holdings in the companies’ share prices. The only way to gain recognition was to liquidate their forest holdings. At the same time that more companies wanted to sell their forests, more and more institutional funds wanted to buy them — a perfect match. The scale of the ownership change from forest product companies to institutional and other owners has been phenomenal. For instance, in 1981 forest product companies owned 23.5 million hectares of managed forests in the United States. By the end of 2007, they will probably own less than 6 million hectares. In contrast, the investment by institutional funds in global planted and managed native forests has increased from less than US$1 billion in 1985 to perhaps more than US$30 billion in 2007.
Most sales of forests by companies have occurred for the above reason in North America, but they have also occurred in Finland, Sweden, South Africa, New Zealand and Australia.
New management vehicles had to be established in order to manage the initial investment and then the ongoing management of institutionally-owned forests. To accommodate this need, there has been an increase in the number of Timber Investment Management Organizations (TIMOs) from only two to three in the early 1980s to more than 25 in 2007. Of these, six to seven are investing outside North America. The TIMO vehicle suits many institutional investors who may not want to directly buy and manage planted forests, or may want to put only small amounts of their funds into investment and so need to have a structure that can accumulate funds from many organizations to provide large funds. TIMOs are not publicly traded and tend to establish funds which invest for about ten years only. There are some funds, however, which are so attracted to planted forest investment that they may buy and arrange management independent of TIMOs. These include the Harvard University Endowment Fund and the Ontario Teachers Pension Fund.
Another vehicle that has developed in North America recently is called the Timberlands Real Estate Investment Trust (T-REIT). These are tax efficient, publicly-listed vehicles and have grown rapidly since 2000. The largest private planted forest owner in the world (Plum Creek) is a T-REIT. Since 2004, the investment assets of a number of forest product companies have been restructured into T-REIT vehicles, which are more tax efficient for stakeholders and this process continued in 2007.
Since about 2005, yet another class of forest owner has emerged — the huge “hedge funds” that may buy and sell, or buy and hold vast tracts of planted and managed native forests. The ocean of inexpensive credit available until mid-2007 enabled these funds to often outbid forest product companies, TIMOs and REITs to acquire large areas of planted forests. Often they would immediately set out to break them up into smaller parcels to resell. The liquidity crisis of late 2007 may reduce this trend; although the pressure of vast amounts of money still in the global system may simply be too great for any temporary credit crunch to have a measurable effect in the medium term.
Indeed if these “new” North American-based planted forest investor types are grouped together, their total investment is estimated to be about US$50 billion in 2007, up from only US$2 billion in 1990 and US$16 billion in 2000.3
Since 2005 there has also been the development of a number of European-based private and listed funds that are investing in planted forests in both Europe and in other parts of the world, including the United States and Australia. Some have been formed specifically to invest where potential carbon trading rights are an attraction.
Another new phenomenon in planted forest investment is the development of specialist country funds. For instance, in 2007 a Colombian planted forest investment fund was launched; a similar Japanese planted forest fund may be launched in 2008.
Yet another new source of funds is emerging that could play a serious role in planted forest investment beyond 2007. This is the rapidly growing sector called the Sovereign Wealth Funds (SWF). At the end of 2006, a total of perhaps US$2.5 trillion dollars4 was held by these funds to invest; with the top 20 of these funds (ranging from the US$875 million Abu Dhabi Investment Authority to the US$10 billion New Zealand Superannuation Fund) holding more than US$2 trillion dollars.5 Six of these funds are located in Asia. The funds could grow to US$5 trillion by 2010 and to 12 trillion by 2015, providing a vast amount of wealth-seeking investment homes.
TIMOs and T-REITs tend to invest only in planted forests. They shy away from native forests, and to date have invested in only a small number of overseas countries/regions where they have concluded that strong government institutions and judicial independence exists. These include Oceania, Chile, Brazil, South Africa and Uruguay. To date, they have not yet invested significant amounts of money in Asia or sub-Saharan Africa, although one fund based in the United States is establishing some planted forests in Tanzania.
It is also important to note that only rarely do TIMOs or T-REITs invest in planted forest expansion. They may replant after harvesting (and indeed in some regions they do not even do this), but only a small number, and only in very selected regions, seek new land to establish an increasing planted forest area. This may change as the opportunity to invest in existing forests diminishes.
The major concerns about investing outside core regions include the perception of a lack of land tenure security, strong governance of administrative institutions and an independent judiciary.
A series of “rogue” investment companies that tempted international investors into bad teak projects in both Central America and India in the 1980s and 1990s has slowed a natural expansion into these planted forest options. However, in 2007 several institutions and high net wealth individuals closely examined teak and other native hardwood replacements. Escalating land prices will limit teak expansion, in Latin America at least. Planted forest investors are now being pushed to (at least) consider hardwood investments in relatively risky countries.
International investment to date in the Russian Federation and China has largely been via major European and Japanese forest product companies securing resources for processing plants. However, a few listed companies (mainly in Canada) are also expanding their planted and managed native forest holdings in both China and the Russian Federation, with one company delivering superb (sixfold) returns to its shareholders from 2005 to late 2007.
However, while many western forest product companies have decided to sell their planted forests to institutional funds (and to instead rely on long-term contracts for future wood supplies) a major exception is occurring with Japanese pulp and paper companies. They have been investing (by themselves, or in joint venture) in fast growing mainly hardwood crops in many countries including Australia, Chile, Ecuador, Brazil, South Africa, Lao PDR and China to secure future supplies of pulpwood fibre. At the end of 2006, Japanese companies owned or controlled 230 000 hectares of overseas planted forests, with a total target area of more than 400 000 hectares. And these targets are increasing. For instance, following the purchase of a major planted forest resource in Northern Brazil in late 2006, Nippon Paper Company had met its goal of a 100 000 hectare overseas estate; but in 2007 again raised its target area by another 200 000 hectares. Another company, Oji Paper Company has a target to raise its existing 170 000 hectares of pulpwood estate to 300 000 hectares by 2010.
A challenge for these companies is that they are increasingly running up against competition from (tax free) pension/endowment funds in the United States in seeking to secure land and planted forests.
Mobility of investments
TIMOs and T-REITs and other international investors expect a competitive return on their investments within acceptable levels of risk around the globe. If the levels of risk become unacceptable and/or the returns on investment insufficient, then they can sell down their investments and invest elsewhere.
While planted forest investments are very immobile (being locked onto the land they are planted in) planted forest investment funds by contrast have become very mobile in recent years. It is now common for TIMOs especially to buy planted forests and managed native forests, and then sell down part or all of them within a decade. TIMO funds are set up to have about a ten-year life span and it is most common for them to be wound up at the end of those periods, or before. Even endowment funds may buy and sell on very short time frames. For instance, The Harvard Endowment Fund recently bought and then resold over 300 000 hectares of forest land (mostly in the southernmost United States) over an 18- to 24-month period. A hedge fund bought all of the USA-based Boise Cascade planted forests in the United States in 2005 and reparcelled and resold them to TIMOs within 12 to 18 months. In addition, pension investment funds are also mobile. For instance, Australian and New Zealand pension funds are investing in planted forests not only in both countries, but also in the United States.
This “short-termism” of the new planted and managed native forest owners may be creating a new set of problems, including fire management and long-term wood supply security (or lack of it) for wood-processing companies.
Incentives — subsidies
There has been one very important factor that has linked almost all successful planted forest expansion projects internationally. This is the application by governments of generous direct subsidies, and/or tax concessions to planted forest establishment and management. There is always much criticism about providing free handouts, or tax concessions to any project. Such schemes invariably attract “fast money” investors who are only motivated by greed and not by the worthiness of the project itself; it also invariably means that planted forests are established in the wrong areas, outside sensible guidelines for suitable soils, rainfall and other factors necessary to grow a successful tree planted forest crop.
The reality, however, is that without generous payment/concession schemes, major planted forest expansion projects rarely, if ever, get off the ground.
One of the most successful global planted forest schemes was initiated by the Chilean Decree Law 701, which ran from the early 1970s to the mid-1990s without change. Under this scheme selected companies were able to plan for a long-term planted forest expansion programme, knowing that most of their development and management costs were going to be re-imbursed by the Chilean Government. This scheme has transformed the Chilean forest product industry into a world giant.
Another very generous tax-based scheme occurred in Brazil from 1967 to the early 1980s, which significantly expanded the softwood planted forest base. However, as expected, expansion stopped almost immediately after the scheme was cancelled, and Brazil now suffers from a planted forest softwood shortage as a result. A more focused subsidy scheme established by the Uruguayan Government successfully increased the area in planted forests in that country, which in 2007 was probably the world’s most attractive country for overseas planted forest investors.
A change to the tax structure in New Zealand in 1992 enabled a major expansion of its planted forest resources for the next decade. Very attractive subsidies and tax concessions enabled Indonesian pulp companies to establish several hundred thousand hectares of fast growing eucalyptus and acacia crops. These subsidies have caused the loss of huge areas of native forest, but they have to some extent achieved their objective in developing a planted forest industry. Unfortunately (until recently at least), lax monitoring of these schemes allowed some entrepreneurs to greatly benefit from them without necessarily establishing or properly managing trees, and many have since failed. Generous subsidies and land rental deferment policies in Viet Nam have enabled a very large planted forest base to be established by (mostly) small farmers.
A recent subsidy initiative in Kenya for planting pine trees has commenced and looks promising, if suitable monitoring audits can be put in place and maintained. Presently, one of the most attractive tax concession schemes for expanding planted forests is offered by the Australian Government and has resulted in several hundred thousands of hectares of new planted forests being established since the late 1990s. Because of its structure, most of the money invested has come from small, independent investors, paying into syndicated Managed Investment Scheme (MIS) projects. Demand for this scheme has been so great that it has forced up the price of rural land from A$3 000 per hectare to A$10 000 over the last five years, and has caused serious competitive issues with farmers. This scheme attracted almost US$540 million into planted forest investment funds in 2006/2007.
Some schemes that have worked in the past can later falter and may ultimately fail. For example, generous subsidies and tax incentives provided by the Government of the United Kingdom from the 1970s to the 1990s encouraged a major expansion of commercial softwood planted forests. Many of these incentives are still in place, but are now being redirected to basically noncommercial hardwood species, with a major disincentive to replant conifers. Not surprisingly, in spite of incentives, new planted forest expansion has plummeted. This is an example of a planted forest incentive policy basically failing, because it is targeting a planted forest philosophy that does not attract investors. And not unsurprisingly, if this “deconiferization” policy that the United Kingdom has apparently adopted is not reversed, wood shortages in that region may become chronic.
The positive impact of generous subsidies and/or tax concessions can been seen in a great many examples around the world; and in contrast, investor behaviour in not planting trees which occurs without subsidies or when subsidies are removed, provides a very clear picture of the critical importance of incentives to global planted forest development.
Risk assessment for investors in planted forests
International planted forest investors are regularly faced with a dilemma when choosing investment options.
It is common for the safest, least risky investment options, for example in a standard species/ regime in the United States, to attract only modest returns, when by contrast the potential returns in countries, regions, species and management regimes deemed to be “more risky” may be much higher. Such investment decisions are always a trade-off. The 2007 Tree Farm and Managed Forest Industry Review actually provided matrices of IRR returns versus “Country Attractiveness Ratings” for almost 100 case studies of softwood sawlog, hardwood sawlog and pulpwood investment options around the world.
There is now a growing number of well-established independent consulting firms that provide independent advice on investment proposals almost anywhere in the world. They range from multinational consulting firms, to large- and medium-sized country-specific or region-specific service firms. Many have now had decades of experience advising on valuations and due diligence of the full range of planted forest estates in both temperate and tropical countries.
Different investors will have different risk profiles and the country base of investors will affect their appetite and perception of risk. For instance, a Chilean investor may assess less risk in investing in Argentina than an investor in the United States would. Or, an Indian investor might assess less risk in investing in planted forests in Cambodia or Lao PDR than a German investor. By examining international transactions of planted forests around the world it is possible to determine the risk profiles of various investors.
It should be emphasized that it is very difficult to properly assess values of planted forests. Because of the long-term nature of even a single crop investment and the large amount of international trade of wood products from most large planted forest countries, decisions on such basic factors as what discount rate to use, future currency exchange rate movements and future log price assumptions can seriously impact a valuation. Assessment of potential future non-wood values further complicates the process.
In 2007, the Boston-based RISI organization6 completed a major review of global tree farm investment attractiveness.7 Using a proprietary template of 13 risk parameters it determined an attractiveness score for 70 countries from 1.0 (extremely risky) to 7.0 (no risk). In its survey it determined the least risky country was the United States. Other “attractive” countries/regions included Scandinavia, Western Europe, Oceania and Chile. Medium-risk countries included Argentina, China, Bulgaria and Viet Nam, while risky countries included Uganda, Cambodia, Madagascar, Angola and Zimbabwe.
Tables 1 to 5 show examples of scoring and ranking for the most attractive of the 70 countries reviewed by RISI; along with the eighteenth country, the thirty-sixth country, the fifty-second country and the worst country (#70). The tables illustrate how overall attractiveness scoring was developed and provides some assistance in understanding what investors look for in selecting investments in various countries.
It is clear that high scores for policy consistency and in an independent judiciary are requirements for a high planted forest investment attractiveness rating and ranking against competitor countries.8
Table 1. Timberland investment attractiveness — # 1 United States
|Policy consistency||7||Land tenure||7|
|Economic climate||7||Market accessibility||7|
|Deviation from PPP||3||Biological and physical risks||6|
|Strength of judicial system||6|
|Corruption||6||Total score in 2006||6.36|
|Foreign ownership provisions||7|
|Transport infrastructure||7||2006 ranking||1|
|Local labour costs||2||2002 ranking||6|
Table 2. Timberland investment attractiveness — # 18 France
|Policy consistency||6||Land tenure||7|
|Economic climate||4||Market accessibility||7|
|Deviation from PPP||2||Biological and physical risks||5|
|Strength of judicial system||5|
|Corruption||5||Total score in 2006||5.14|
|Foreign ownership provisions||5|
|Transport infrastructure||7||2006 ranking||18|
|Local labour costs||2||2002 ranking||11|
Table 3. Timberland investment attractiveness — # 34= China
|Policy consistency||5||Land tenure||4|
|Economic climate||2||Market accessibility||7|
|Deviation from PPP||6||Biological and physical risks||4|
|Strength of judicial system||2|
|Corruption||3||Total score in 2006||4.10|
|Foreign ownership provisions||3|
|Transport infrastructure||5||2006 ranking||34=|
|Local labour costs||6||2002 ranking||28=|
Table 4. Timberland investment attractiveness # 52 Macedonia
|Policy consistency||3||Land tenure||4|
|Economic climate||3||Market accessibility||3|
|Deviation from PPP||6||Biological and physical risks||5|
|Strength of judicial system||2|
|Corruption||3||Total score in 2006||3.52|
|Foreign ownership provisions||3|
|Transport infrastructure||4||2006 ranking||52|
|Local labour costs||6||2002 ranking||na|
Table 5. Timberland investment attractiveness — # 70 Zimbabwe
|Policy consistency||1||Land tenure||1|
|Economic climate||1||Market accessibility||4|
|Deviation from PPP||6||Biological and physical risks||3|
|Strength of judicial system||1|
|Corruption||1||Total score in 2006||2.22|
|Foreign ownership provisions||2|
|Transport infrastructure||4||2006 ranking||70|
|Local labour costs||7||2002 ranking||80|
The increasing demand for planted forest assets being chased by more and more buyers has reduced the returns on timberland investment. For instance, RISI estimates that average returns on forest lands in the United States fell from 9 percent in 2001 to 6 percent in 2004 and to 4.5 percent in 2003. Other industry observers suggest that real returns from many recent investments will be only 3 to 4 percent.9
Risk assessment from a government and society viewpoint
Recent experience has shown that some governments and NGOs have taken a very hard, negative line on large-scale commercial planted forest expansions, especially in developing countries. The ogres of monocultures, indigenous people’s displacement, the loss of diversity of both planted forest and animal species and of non-wood economic activity in forests by villagers, the potential loss of water10 and soil erosion and carbon issues have all been raised as negatives. As a result, sound planted forest expansion programmes have floundered in many countries. In contrast however, massive expansion in agribusiness crops such as palm oil, the expansion of numbers of highly polluting farm animals and rapid urbanization (all of which are far more harmful to the environment and to indigenous people than almost all tree crops) has been tolerated with almost no criticism.
There are now several internationally credible services to study impacts of planted forest expansions in any location, and dozens of international case studies that can identify the positive and any possible negative results of major planted forest expansion programmes. There is no need to re-invent the wheel in this regard.
In spite of environmental and social NGO criticism, for all major planted forest expansion programmes that have been responsibly managed, governments and citizens mostly look back on them decades later with a positive view.
The need for clear, consistent, concise strategies to support planted forests
There are numerous examples around the world that illustrate the positive effect that clear government strategies and standards can have on the expansion of planted forests; and conversely several examples where their absence can hinder or prevent expansion. There are even several examples of where governments have changed policies, and as a result planted forest expansion has all but ceased.
Case studies of planted forest development and the role that governments played to ensure that investment was encouraged include the United Kingdom (to the 1990s), the United States, Australia, New Zealand (to the 2000s), Chile, Brazil, Uruguay, South Africa (to 2000), Viet Nam, Spain and Portugal.
Equally there are case studies of how a lack of government support and/or a lack of land tenure security and/or the lack of an independent judiciary have hindered development. Examples would include the United Kingdom post-1990s (when it abandoned a supportive role for commercial species), South Africa post-2000 (since then interdepartmental fighting between Forestry and Water has all but ceased expansion in a wood-starved area), Angola, Mozambique, Zimbabwe, West Africa, Cambodia, Lao PDR, Guatemala, Mexico and Paraguay.
Ironically, it is often overzealous and top-down interventions by governments and NGOs which have resulted in disappointing or failed planted forest results, especially with Community Forest Enterprises (CFEs). A July 2007 report by the International Tropical Timber Organization (ITTO)11 identifies major challenges in avoiding the sidelining of these enterprises. It provides examples of the huge gap between “official” plans and actual control by villagers. Examples include the following:
Unfortunately, well-meaning NGOs claim that people, particularly in richer countries, are needed to start paying for global CFEs. Well, they are not likely to start in any meaningful way if there is not something in it for them. This requires political and social stability and governments setting standards and then letting the market act as it should. There have been huge government and NGO investments in planted forest development in countries like Ivory Coast and Cameroon that have not succeeded. In contrast, for instance, once heavy government intervention and well-meaning NGO support of planted forest projects in Viet Nam largely ceased, then sustained and commercially successful planted forest projects (mainly controlled by small landowners) could begin to thrive. And they have.
Lessons from these failures, and the many success stories discussed in this paper should be reviewed; lessons should be learned and then applied.
It is not difficult for governments to create supportive policies. They just have to be clear and concise and be left basically untouched for at least a decade to engender confidence that money invested will not be wasted or misappropriated.
Even the recent decision of the New Zealand Government (for decades considered to be a planted forest-friendly developed country) to nationalize carbon credits from private forest ownership12 has resulted in a “revolt” by private planted forest owners and an almost complete cessation of planted forest expansion.
Economic valuation of wood and other non-wood-based products
For decades the single value driver for tree planted forest developments has been wood production. There are sometimes variations on wood-only valuations, but they themselves rely on wood value changes. For instance, some investors have benefited by purchasing a planted forest that is valued by the owners as one wood quality type (e.g. pulpwood), but for which the investor can identify more valuable wood types (e.g. sawlogs or ply-logs). Or, an investor may be able to change the planted forest management regime to produce more high value products than the vendor may have been able to identify. But in all of these variations, the only product being valued was wood.
Traditionally, an investor might have ascribed a lower discount rate if a long-term wood supply contract was in place with a major wood product company. This is because that contract could be identified to be all or part “securitization”, hence reducing the risk inherent in selling logs on a spot market in future. However, recently the major planted forest asset buyers (TIMOs and REITs) may actually ascribe a negative value to a planted forest that has long-term wood supply contract obligations. Most of these owners prefer to have their wood supplies unencumbered, so they can take account of market forces.
Also, traditionally the valuation of planted forests grown on freehold (or fee simple) land assumed that the cost of land would be entered as a positive cost at the start of the investment cycle, and then counted as a negative cost, with the same real value, at the end of the investment cycle. This standard valuation process assumed that the land would not increase in value over time, and so should be included in any valuation as a holding cost only.
Non-market values, such as social and environmental services that the planted forests may provide to society (nutrient sinks, protection of soils and water and other amenity or recreational values) have not played a major role in valuation or trade in these major wood product companies. However, if society values them sufficiently to pay for their services, then this could change in the future.
Higher and better land use (HBU)
In the last decade, and especially in the last five years, however, planted forest investors who can also own the underlying land have found that much of the inherent value of the “planted forest” is actually in the land itself. The term Higher or Better Land Use (HBU) has been coined in the United States, as millions of hectares of planted/managed native forest land have been reassessed during and after purchase as what it is worth in an alternative land use. Large tracts of forest land may be subdivided and sold as smaller units. This “wholesale to retail” process generally allows investors to attract higher bids for smaller blocks, even if the land use (planted forestry) remains the same. In addition, selected areas (and sometimes all) of the planted forest may be subdivided and sold off as hunting and recreational blocks, or for residential or industrial subdivisions. The term HBU reflects a higher market value of the land and a better return on investment but does not necessarily reflect more responsible land use.
This process started in a small way in the United States in the 1980s when the St. Joe Pulp Company decided it could add value to its planted forests by shutting its pulp mill, and then by breaking up its vast planted forest area in Florida into non-wood uses: residential subdivisions, airports, towns and so forth. This has been a very successful strategy, and now more and more owners are seizing upon this opportunity to add value not to the trees, but to the land. A recent sale of 160 000 hectares by Weyerhaeuser in the state of Georgia in the United States was broken up approximately equally into timberland13 and HBU land before it was sold and marketed to different groups of people.
The identification that the land value may actually be the controlling influence has spread to other countries. In Latvia, for instance, international investors have added greatly to the value of managed forest investments by selecting forests that may be rezoned in future as they are located close to towns or they may have rock/gravel quarries on them that have not been recognized. In New Zealand one investor recently purchased fee simple planted forests and immediately commenced removing the trees and converting the land to dairy farms. One (covering more than 20 000 hectares) will probably be one of the largest contiguous dairy farms in the world. By changing land use the investor increased the value of its investment severalfold.
Of course this “non-wood” value is only available if the investor owns the land and also if government regulations allow a land-use change. Increasingly, authorities are placing limits on land use, sometimes related to carbon issues (see below).
Carbon trading and the impact on planted forest values
There has probably been more “hype” about the use of trees in carbon emission abatement schemes in the last decade than any other topic in the forestry world. And the debate and the confusions continue.
The potential and (in rare occurrences) the actual opportunity to utilize carbon credits produced by growing trees had it roots in the 1992 United Nations Framework Convention on Climate Change. Originally forests were going to be left out of any future protocols by major policy-makers, but a small group of planted forest experts managed to persuade the Convention that forests should be bundled up in an agreement, so they might be considered to provide carbon sequestration in future.
By 2007, however, one of the main architects of including native and planted forests in the 1992 protocol has apparently lived to regret this decision.14 In a meeting in New Zealand in August 2007 at a conference to explore post-Kyoto climate change options, he said that for various reasons forestry should be omitted altogether. He (and no doubt others) has found that it is not just the “international tortuous policy maze” or the “mind-boggling complexity of measurement” that is a problem; it is that so few people actually understand the dynamics of forests (including planted forests) related to the carbon cycle.
An investigation of just how many carbon-based planted forest projects that have been accredited makes for lean pickings. Notwithstanding the myriad of problems, however, the possibility of gaining positive carbon credits and future carbon trading values is attracting increasing numbers of investment consultants and investors globally.
The Australians have been pioneers in carbon trading “contracts” based on planted forests. However, they have generally been contracts between two government departments in the same state (e.g. a government-owned forest manager and a government-owned power station manager); or they may have been for an “option” to the carbon at a later date, if future trading was ever allowed. Some Japanese pulp and power companies have paid “deposits” for this right over Australian planted forests. New South Wales was the first government in the world to write legislation that enables planted forest owners to legally separate the land, the trees and the carbon, so all their “assets” can be owned by different entities.
In late 2006, the New Zealand Government sanctioned what it has described as the first carbon project in the world to be sanctioned by a government and which is Kyoto-compliant. This project was developed under what is known as the Permanent Forest Initiative, which allows the carbon ownership and trading of a forest established and not harvested for at least 35 years (and then thereafter always leaving a permanent canopy). European institutional money will reportedly fund the project.
In 2007, a number of companies were listed on the AIM stock exchange in London to attract international funds for planted forest investments involving the added benefit of future carbon trading. However, up to 2007 at least, the impact that possible carbon trading rights have had on attracting new investment money to expand planted forest areas has been modest.
In contrast, recently there has been much media attention about the carbon sequestration value of preserving existing native forests through reduced deforestation and degradation, known as REDD. For instance, two studies of tropical and of temperate forests suggest that it may be more valuable to preserve native forests for their carbon values than harvesting.15
At the 2006 rate of US$20 for a one-tonne unit of carbon dioxide, the forests of Bolivia, Central African Republic, Chile, Congo, Costa Rica, Democratic Republic of Congo, the Dominican Republic, Guatemala, Nicaragua and Papua New Guinea (coalition members) are reportedly worth about US$1.1 trillion for their carbon sequestration alone. These forests offer a great deal more value through the other, less measurable services they provide including fisheries protection, biodiversity preservation, erosion and flood control, recreation and tourism value, harvest of renewable products and water services.
A recent study by the Pembina Institute for the Canadian Boreal Initiative found that carbon stored in Canada’s boreal forests and peatlands is worth US$3.7 trillion, while the annual value of ecosystem services like water filtration, pest control services and carbon storage is US$93 billion, roughly 2.5 times greater than the net market value of forestry, hydroelectricity, mining and oil and gas extraction in Canada’s boreal region. The values can be expected to be similar in tropical countries.16
These studies are all very well as hypothetical ideas, but do not have much value until some government, or organization actually decides that it will outlay this sort of money to preserve these forests.
The impacts of bioenergy production and planted forest development
The bioenergy revolution, which started in Austria and Sweden in the early part of this decade, is now rapidly spreading around the world, although it is still largely focused on Europe and North America. The major raw material for wood-based power generation has been wood pellets. In late 2006, a total of 288 wood pellet plants were operating in Europe, up from only 236 plants in 2005. In 2006, 80 pellet plants were operating in the United States, with another 28 expected in 2007.17 Biofuel is now being traded across continents, with, for instance, biofuel shipments being made from Latin America and North America to Europe, and it is believed, Japan.
In 2006 to 2007, several governments decided to promote the use of ethanol as a substitute for gasoline. Brazil has been the pioneer in this effort, although most of the raw material has been sugar cane. The EU has a mandate for having 5.75 percent of all transport fuels as biofuels by 2010. The United States has embarked on a huge bioethanol expansion programme, but is mostly based to date on food products such as maize. The United States administration has announced a goal for a sevenfold increase in the use of biofuels, to 35 billion gallons, by 2017.
The International Energy Agency forecasts that global use of ethanol will increase from 51 billion litres in 2006 to 120 billion litres in 2020. The same organization predicts that biodiesel demand will grow from about 3.5 billion litres in 2005 to 24 billion litres in 2020.
There are still significant technical hurdles to be overcome before wood can be used in a cost-effective way to manufacture either ethanol or biodiesel. Major research into developing viable projects based on lignocellulosc ethanol production was conducted in 2007 in the United States, Japan, Sweden and New Zealand. Other work is being carried out on converting lignocellulose to other fuels such as butanol.
To date, however, there does not appear to be any specialist wood-based planted forest expansions specifically designed to meet this increasing demand. Waste wood from forests and wood-processing plants is being used including sawdust and woodchips. Recently major areas of wind-, insect- or fire-damaged forests in Europe, Sweden and the United States are being targeted to supply wood raw material for bioenergy use. The use of fast growing popular species is being investigated in Central Europe and New Zealand to grow biofuel crops.
It is believed at least some of the roundwood harvested from a eucalyptus planted forest in the Republic of Congo will be sold from 2008 to European power stations as biofuel. A woodchip plant and fibre export facility was built for this operation in 2007.
One species has been recently identified as an exciting plant to grow for future biofuel production. This is Jatropha curcas, which is a drought-resistant, inedible oilseed-bearing tree that does not require the good quality soil that would normally be used for food crops. The Government of India has singled out jatropha for large-scale planted forests and various government agencies offer subsidies and easy soft loans to individuals and companies investing in jatropha planting.18 The biodiesel content of its seeds is reported as 35 percent. Jatropha can live up to 50 years and can provide seeds up to three times per year.19 In mid-2007, British Petroleum and D1 Oils announced that they were to form a 50/50 joint venture, to be called D1-BP Fuel Crops Limited, to accelerate the planting of jatropha.
Under the terms of the agreement, BP and D1 Oils intend to invest about US$160 million over the next five years. D1 Oils will contribute its 172 000 hectares of existing planted forests in India, Southern Africa and Southeast Asia, and the joint venture will have exclusive access to the elite jatropha seedlings produced through D1 Oils’ plant science programme. It is anticipated that some 1 million hectares will be planted over the next four years, with an estimated 300 000 hectares per year thereafter.20 If this planned project is implemented, it would become the largest single project tree planting programme anywhere on the globe.
Overall outlook in planted forest investment
As discussed above, massive “investments” have been made in planted and managed native forests by institutional and high net wealth investors over the last decade. However, almost all this investment has gone into existing planted and managed native forests and has not been spent on expanding the area of planted forests (with a few, very minor exceptions in Latin America).
The actual expansion of planted forests has historically been directly correlated with clear governmental support for this process, coupled with affordable land purchase/rent costs and identified markets for wood products.
The alignment of many of these positive factors in several countries, which occurred from 1960 to 2000, is no longer so obvious. The great expansions in both government and private sector forest areas in South Africa, Australia (softwoods), New Zealand, Chile, the United States and elsewhere have effectively stalled.
The Chinese Government is clear in its intention to expand planted forests. It is notable, however, that the area of “timber planted forests” in China actually diminished by 4.1 percent to 23.2 million hectares from 1998 to 2003. During the same period the area of “other” (probably protection) planted forests increased by 82 percent to 9.1 million hectares.21 RISI (2007) predicts that China’s “operable timber planted forests” will increase from about 25.5 million hectares in 2005 to about 29.5 million hectares in 2020. The supergenerous tax breaks for planted forests in Australia are continuing to allow expansion there, at least until land prices limit affordability (many would suggest that this is already occurring).
Future demand for pulpwood fibre is driving expansions of planted forests in Brazil, Malaysia and Viet Nam; and is even starting in Lao PDR. Continuing expansion of planted forests in Indonesia was expected, but in late 2007 a major standoff between the Department of Forestry and the police has stalled conversion of native forests to planted forests. The police are reported to be re-assessing the legality of all existing permits to convert native forest land to planted forests.22 Historically much of this land conversion process was controversial and has been widely criticized by environmental groups and NGOs.
Various companies and investors are investigating major expansions of planted forests in sub-Saharan Africa, where there may be in excess of 25.5 million hectares of land suitable for planting south of the Congo River.23 This land is on sites that have more than 1 000 mm (40 inches) of annual rainfall, are in humid or semihumid climates and are on slopes greater than 8o (given that food production would be paramount on flat land). This was almost 15 percent of the total global area in planted forests in 2001, as assessed by FAO (and probably more than 20 percent of the actual global areas surviving). However, major political policy, corruption and other issues have to date severely limited the conversion of this potential into viable projects.
For decades, planted forest investment (whether undertaken by governments or private enterprise) was driven by “patient” funds. Investors used to accept a period of 20, 30 or even 50 years or more between planting and harvesting. This is no longer the case. Most investors now want to be able to harvest trees within five to 15 years. So future planted forest expansion trends will be for shorter crops and for processing technological innovation to allow added value solid wood processing of young trees.
Continuing investment in existing planted forests by institutional funds can be expected, which will be re-arranging ownership of existing assets, but will not likely add to the global planted forest resource. Loss of planted forests to HBU will likely continue.
In addition, increasing competition from major agribusiness crops including palm oil and maize (often heavily subsidized by governments) and by new rapidly expanding biofuel crops such as jatropha will likely continue to drive up global land prices and rents. This trend will limit planted forest expansion rates — it is already happening in Indonesia, Malaysia and Brazil; planted forest expansion in Thailand had faltered recently as farmers were being paid more for growing tapioca than for growing even short rotation eucalyptus tree crops.
The continuing loss of native forests in Africa, Asia and Latin America (in spite of the best efforts to slow the rate of forest destruction), will likely lead to growth in wood prices from planted forests. It is becoming apparent that available native forest resources in Indonesia and Malaysia have diminished rapidly since 2000. The large-scale harvesting of native forests in Africa to feed Western, and more recently, Chinese industries will have the same effect within five to ten years. Changes to tax policies in major wood-producing countries, e.g. the Russian Federation, may also lift wood prices. Entrepreneurial efforts to raise funds for multi-use planted forests, including wood, carbon and biofuel values are likely to increase establishment rates somewhat, even if locating suitable land becomes more difficult.
The rapidly growing Indian economy will require more wood resources in the future. To date, very restrictive government policies have limited the expansion of planted forests in India, but this may change. In the meantime, some Indian companies are deciding that they will expand planted forest areas in other countries, such as Malaysia and Lao PDR.
And finally, regional political blocs may become a new catalyst for planted forest expansion. They would do this in conjunction with goals and targets related to reducing greenhouse gas emissions. For instance, the leaders of the Asia Pacific Economic Cooperation (APEC) in their agreed target of reducing “energy intensity” by 25 percent by 2030, pledged to increase forest cover in the Asia–Pacific region by at least 20 million hectares.
Over the past 50 years, most countries that have measurably expanded their sustainable, commercial planted forest base have had some characteristics in common. Most are considered to have stable governments, strong security of land tenure and an independent judiciary to protect investor rights. Almost all have introduced very generous tax relief of direct subsidy schemes that have operated over long periods of time. These may have been discontinued, or modified once a target area had been established.
The most effective way major international institutions such as FAO and the World Bank can ensure similar expansion of private planted forest investments in developing countries would be to encourage and assist governments to adopt measures to improve security of land tenure and to ensure that investors are protected by independent legal systems.
The ownership of planted forests in many countries in North America, Oceania and Latin America has been transformed in the last 30 years and accelerated in the last five to ten years, from mainly government and integrated forest product ownership to institutional funds and private equity funds ownership. This process continues with additional funding sectors entering into this sector.
There are many initiatives from governments and political blocs to substantially increase the area of planted forests in future, largely driven by the global warming and carbon sequestration issue. However, the mechanisms to identify and secure the land necessary for this expansion; and specific funding sources are still not known.
Planted forest expansion will encounter an increasing amount of competition, in both developed and developing countries from food production projects, many of which are now also becoming a source of raw material for biofuels.
1This paper is reproduced from FAO (2007): Corporate private sector dimensions in planted forest investments. Planted Forests and Trees Working Paper FP/40E. http:www.fao.org/forestry/site/10368/en/
2 DANA Limited, PO Box 392, Rotorua, New Zealand. E-mail: email@example.com. Web site: www.dana.co.nz
3 Hancock Timber Resources Group, August 2007.
4 Morgan Stanley, March 2007.
5Another new SWF, China Investment Corp. Limited, with US$200 billion to invest, was launched in late September 2007.
7The global tree farm and managed forest industry review — 2007 edition.
8These risks reflect the international private sector/corporate investor risk profiles. Local smallholder investors may spread their risks with other activities (e.g. agroforestry), have lower expected returns and may attribute non-financial values to their planted forest assets.
9 Because neither United States-based TIMOs, nor their largely institutional funding base pay tax in the United States, pre- and posttax returns are effectively the same. When TIMOs invest overseas, they may be subject to the tax laws of the countries they invest in, but most have developed funding mechanisms that are able to eliminate all or most of their tax liability.
10Water issues have stopped the development of planted forests in South Africa, which uses less than 10 percent of the nation’s water, while sugar-cane farming, which uses almost 50 percent of the nation’s water, has been allowed to continue almost without restrictions.
11The ITTO report discussed both native and planted forests.
12The New Zealand Government, possibly bowing to forest owner pressure, announced a new carbon policy in September 2007 that will allow owners an option to be allocated carbon credits beyond 2008. However, the full implications of the new policy have yet to be analysed. 13 “Timberland” is the American term for “forest land”.
14New Zealand Journal of Forestry, August 2007.
17 Bioenergy International.
19 Prospects for Jatropha biofuels in developing countries: An analysis for Tanzania with strategic niche management by van Eijck and Romijn; Eindhoven Centre for Innovation Studies, 2003.
21 China’s National Forest Inventory.
22 Industry sources.
23 Sappi (2002).