An MFC Global Investment Management Company Timberland Investor Second Quarter 2005

Transcription

1 Hancock An MFC Global Investment Management Company Timberland Investor Second Quarter 2 Global and Domestic Response to Record Lumber Demand in the United States U.S. lumber consumption set a record in 2 at 6.9 billion board feet (BBF). Lumber consumption in the first half of 2 is proving to be a solid continuation of last year s demand. New home construction has been the driving force behind the record usage with single-family construction reaching 1.6 million units last year an all-time high. Both domestic and international lumber producers filled the demand. Domestic production in 2 at 38.4 BBF (minus 1. BBF exported), combined with 23.5 BBF of softwood lumber imports, for a total annual increase in consumption of 7. percent over 2 levels. Estimates for 2 suggest U.S. lumber demand will rise by another 2.5 percent. Global response Increased Imports As U.S. demand for lumber rose, softwood lumber imports in 2 rose at a faster rate than overall U.S. consumption with volumes up 11 percent over 2. From January through June of this year, imports are already up 1 percent over the same period last year. Interestingly, the share of non-canadian imports is up 45 percent over this time last year. Europe stands out as the greatest contributor to the rise in non-canadian imports, even during a period of relatively flat movements in euro/dollar exchange. Softwood lumber imports from Sweden although only 3 percent of the size of Canada s share are up over 2 percent for the first six months of the year. Imports from Germany are up over 45 percent. Lumber traditionally a national commodity, with both western and southern producers in the U.S. moving Billion Board Feet Chart 1: U.S. Softwood Lumber Consumption: Origin of Production and Share of Imports % e Domestic Production Source: RISI estimate for 2. Foreign Agricultural Service. Hancock Timber Resource Group High Street, Boston, MA Imports Import Share Table 1: U.S. Imports of softwood lumber (million cubic meters) January June 2 January June 2 % change Germany Sweden Austria Lithuania Czech Republic Total Europe 2,469 1, Brazil Chile Total South/Central America 9 6 New Zealand Total Oceania Total Non-Canadian 3,678 2, Total Canada 25,168 23,814 6 Source: Foreign Agricultural Service continued on page 2 4% 35% 3% 25% 2% 15% 1% 5% Import Percent of Total U.S. Consumption

2 Global and Domestic Response to Record Lumber Demand in the United States continued to similar market signals, has quickly become a global commodity. Regions outside of North America have rapidly stepped in and filled gaps in supply or more directly, substituted for a higherpriced lumber product here at home. Domestic Response Production, Capacity and Prices In the face of rising lumber demand, domestic sawmillers ramped up production and pushed operating rates to peak levels during 2. After a seasonal dip in operating rates during this past winter, mills were back to running close to 1 percent by June of this year. Record lumber demand has also spurred capacity expansions at existing U.S. mills, growing by 2. percent during 2, with estimates ranging from 1.5 to 2.5 BBF of announced capacity expansions for 2 (Random Lengths, Resource Information Services Inc.). Can this high level of U.S. production be sustained? Most analysts think yes in the short-run.yet, lumber producers must be able to cover production costs wood, labor, energy and capital. A review of the past decade and a half of revenues and costs for regional lumber producers allows for some interesting observations. For consistency, we use inflationadjusted prices for the lumber products tracked each quarter in the Hancock Timberland Investor (see page 3, Figures 2 and 3). Prices for both southern pine 2x4 dried lumber (delivered to Westside mills) and a combined average price of Douglas-fir 2x4 green lumber (delivered to Portland) and Hem-fir kiln dried 2x4 lumber (delivered to the West coast) experienced substantial price increases at 15 and 34 percent respectively in 2. Although, since 1, as lumber demand has steadily climbed, inflationadjusted lumber prices have not. Revenue and Costs (2$ per MBF - lumber tally) Revenue and Costs (2$ per MBF - lumber tally) Chart 2: Revenues and Costs for Sawmills in the U.S. Pacific Northwest e Other Manufacturing Costs Harvest and Haul Costs Stumpage Costs Lumber + Chip Revenue Source: RISI, HTRG Research Source: RISI, HTRG Research Actually, lumber prices in both the Pacific Northwest and the South have trended downward, in real terms, over the last fifteen years. We used data from RISI (Resource Information Services Inc.) for average Pacific Northwest and Southern U.S. costs, which include manufacturing (labor, energy and supplies), harvesting Lumber Revenue Chart 3: Revenues and Costs for Sawmills in the U.S. South Profit Margin e Other Manufacturing Costs Harvest and Haul Costs Stumpage Costs Lumber + Chip Revenue Lumber Revenue Profit Margin Profit Margin (2$ per MBF - lumbar tally) and wood costs. In both regions, inflation-adjusted harvesting, wood hauling and manufacturing costs have remained fairly constant over the last fifteen years. Inflation-adjusted wood costs, although, have trended downward in the Pacific Northwest and have been flat to downward-trending in the South continued on page 6 Profit Margin (2$ per MBF - lumbar tally) 2 Hancock Timberland Investor Second Quarter 2

3 Quarterly Average Regional Composite Prices for Softwood Sawtimber Stumpage (US$ per MBF) $1, $8 $6 $4 $2 $ 9 Sources: Log Lines, Timber Mart-South, New Zealand Ministry of Forestry and HTRG analysis U.S. Pacific Northwest Export U.S. Pacific Northwest Domestic U.S. South U.S. Northeast New Zealand Export 2 Figure 1. Softwood Sawtimber Stumpage Prices Sawtimber stumpage prices in the U.S.West moved higher second quarter with average prices for both domestic and export timber at levels higher than what we ve seen for several years. Our composite domestic stumpage price (a 5:5 blend of Douglas-fir and whitewoods) rose 11. percent over first quarter prices and ended the quarter at $317 per MBF, a high not reached since 19. Export grade stumpage in the Pacific Northwest rose 3. percent over last quarter, averaging $375 per MBF. On the other hand, New Zealand radiata prices slid back to year-end levels, loosing most of last quarter s $4 per MBF gain, averaging $176 per MBF second quarter. Quarterly Average Prices for U.S. South Lumber and Sawlogs ($ per MBF - lumber scale) $6 $5 $4 $3 $2 $1 Southern Pine (Westside), Kiln Dried, 2x4 #2, Random Length Lumber Southern Pine Sawlogs Sources: Random Lengths and Timber Mart-South Southern Pine Chip-n-Saw Logs Figure 2. Lumber and Sawlog Prices in the U.S. South Southern pine lumber as measured by Random Lengths westside kiln-dried 2x4s- averaged $433 per MBF for the second quarter, up 1 percent over last quarter and at an average high price not seen since 19. Southern pine logs remained relatively flat second quarter. $ 9 2 Quarterly Average Prices for U.S. Pacific Northwest Lumber and Sawlogs ($ per MBF - lumber scale) $5 $4 $3 $2 Figure 3. Lumber and Sawlog Prices in the U.S. Pacific Northwest Lumber prices in the U.S. West were mixed second quarter, with Random Lengths green Douglas-fir 2x4s staying flat at $365 per MBF. In contrast, coastal hem-fir lumber dropped ten percent from last quarter, averaging $358 per MBF. Delivered logs, both Douglas-fir and whitewoods, rose 6 and 1 percent respectively over last quarter. $1 Douglas-fir, Green, 2x4 Lumber Hem-fir (Coast), Kiln Dried, 2x4 Lumber Douglas-fir Sawlog Whitewood Sawlog $ 9 Sources: Random Lengths and Log Lines 2 Hancock Timberland Investor Second Quarter 2 3

4 Quarterly Average Regional Composite Prices for Softwood Pulpwood Stumpage ($ per ton) $4 $35 $3 $25 $2 $15 $1 $5 $ U.S. Pacific Northwest U.S. Northeast U.S. South Figure 4. Softwood Pulpwood Stumpage Prices Pulpwood stumpage prices moved up to an average of $7.5 per ton south-wide, a 3 cent increase over second quarter. Pulpwood stumpage in the Pacific Northwest was also up over last quarter albeit still below our estimates of harvest and haul costs for the region. $-5 $-1 9 Sources: Log Lines, Timber Mart-South and HTRG analysis 2 Quarterly Average Prices for Market Pulp ($ per metric ton) and U.S. Pulp Logs ($ per 1 tons) $9 $8 $7 $6 $5 $4 NBSK Market Price Douglas-fir Pulp Logs Figure 5. Market Pulp and U.S. Pulp Log Prices Delivered softwood pulpwood, in both the Pacific Northwest and Southern U.S., remained flat second quarter while the Northern Bleached Softwood Kraft (NBSK) market pulp price index rose $47 dollars over first quarter, ending the quarter at $5 per ton. $3 $2 $1 Southern Pine Pulp Logs Sources: FOEX Industries Ltd, Log Lines and Timber Mart-South 9 2 Quarterly U.S. Timberland Values ($ per acre) $2,5 $2, $1,5 $1, $5 Pacific Northwest South Figure 6. U.S. Timberland Values in Private Property Markets Timberland values in the South and the Pacific Northwest moved upward second quarter with southern timberland averaging $1, per acre, a 1. percent increase over last quarter. Pacific Northwest timberland was valued at $1,7 per acre, a 3.5 percent increase from last quarter. $ Source: NCREIF Hancock Timberland Investor Second Quarter 2

5 Quarterly EBITDDA Multiples for Privately Traded Timberland (trailing 4-quarter EBITDDA) South Sources: NCREIF and HTRG analysis Pacific Northwest 2 Figure 7. U.S. Timberland Valuation Multiples in Private Property Markets EBITDDA multiples for privately traded timberland continued to move lower second quarter in both Pacific Northwest and Southern U.S. markets. Just as timber prices in the Pacific Northwest rose, so too did timberland income in the region, rising 3. percent from year-ago levels to an average of $59 per acre. A comparable rise in Pacific Northwest timberland values (see Figure 6) worked to mute effects of strong income gains. Although timberland values in the U.S. South rose second quarter, they occurred at only a fraction of the rise in operating income. Southern income rose 48% over year-ago levels, as stumpage prices in the South remained strong through the first two quarters of this year. Monthly Securitized Timberland Share Value (Indexed to 1 at start date) Rayonier Plum Creek Crown Pacific U.S. Timberlands The Timber Company Deltic TimberWest Index Figure 8. Hancock Securitized Timberland Index Share prices for public timber-focused companies were mixed second quarter, resulting in little movement in our overall Securitized Index from last quarter. Rayonier, contributing 23 percent to our Index based on a market capitalization weight, had strong second quarter earnings, benefiting from gains in lumber and timber markets. Share prices for Plum Creek moved little over first quarter, yet up 13 percent over the same period of 2. 4 Source: HTRG analysis 12/ 12/ 12/ 12/ 12/ 12/ 12/ 12/2 12/ 12/ Quarterly U.S. South Timberland Values ($ per acre) $1,4 $1,2 $1, $8 $6 Private Property Market Public Equity Market Figure 9. U.S. South Timberland Values in Public Equity and Private Property Markets Southern timberland values in both private and public markets inched upward second quarter maintaining last quarter s gap in value of just over $1 per acre. This difference in market value continues to reflect the reversal of trend, with public timberland market values at a higher level than private timberland values. $4 $2 Sources: NCREIF and HTRG analysis $ 9 2 Hancock Timberland Investor Second Quarter 2 5

6 Global and Domestic Response to Record Lumber Demand in the United States continued Did the last year and a half boom in lumber production produce greater than average profits? We used data from RISI again for average residue (chip) income to arrive at total revenue received by lumber producers in both regions.we calculated an average profit margin as the difference between total revenue and total average costs. In 2, profits in the Pacific Northwest were at the highest level calculated since 1, over 1 percent of 2 profits and over 4 percent of the average profit level calculated for the fifteen year period. Observation of the trend shows inflation-adjusted profits in the Pacific Northwest have steadily climbed upward over the past fifteen years. This has not been the case in the South, as profits have been relatively flat since 1. Profits in 2 did rise 63 percent over 2 levels, yet historically, were up only 11 percent over average profits for the fifteen years. Summary The supply response from both U.S. and non-u.s. producers to the largest volume of lumber consumed in the U.S. has been what one would typically expect, although the details show some interesting observations. As lumber prices moved upward, lowercost lumber from outside the U.S. became more desirable, and it has been European countries that have increased their lumber imports into the U.S. to the greatest degree. In the U.S, increased demand and abrupt increases in lumber prices spurred new and existing capacity expansions. A look historically at Pacific Northwest and Southern producer costs and revenues showed mixed results. In the Pacific Northwest, lumber revenues and wood costs have been trending downward,yet not at the same rate, as shown by producer profits in the region trending upward. In the South, lumber revenues have also trended downward, combined with flat to downward trending wood costs, have resulted in relatively flat Southern lumber manufacturer s profits. Research Team NOTES: Courtland L. Washburn, Ph.D. Managing Director and Chief Investment Officer cwashburn@hnrg.com Peter D Anieri Director of Portfolio Management & Research pdanieri@hnrg.com Mary Ellen Aronow Senior Forest Economist maronow@hnrg.com Hancock Timber Resource Group is a division of Hancock Natural Resource Group, Inc., a registered investment adviser and wholly owned subsidiary of Manulife Financial Corporation. Figure 1. The composite price for southern sawtimber is based on quarterly average Timber Mart-South published prices for pine sawtimber and chip-n-saw stumpage. Pacific Northwest prices are derived from quarterly average Log Lines published prices for whitewoods and Douglas-fir with internal analysis of logging costs for stumpage calculations. New Zealand export prices are based on New Zealand Ministry of Forestry quarterly average published prices for Radiata unpruned A, J and K sort export logs with internal analysis of logging costs for stumpage calculations. Northeast sawtimber prices are calculated from internal analysis. Figure 2. Quarterly southern pine (westside), kiln dried, 2x4 #2 lumber price published by Random Lengths. Timber Mart-South published southern pine sawlog and chip-n-saw log prices converted to lumber scale using RISI historical lumber recovery rates as published in North American Lumber Forecast. Figure 3. Quarterly Douglas-fir, green 2x4 lumber (Portland rate) and Hem-Fir (coast), kiln dried, 2x4 lumber prices published by Random Lengths. Douglas-fir and whitewood sawlog prices derived from Log Lines published prices for #2 and #3 sawlogs in various regions in the Pacific Northwest converted to lumber scale using RISI historical lumber recovery rates as published in North American Lumber Forecast. Figure 4. Pulpwood composite prices are derived from quarterly average Timber Mart-South published prices for southern pine pulp wood stumpage, Log Lines published whitewood and Douglas-fir pulp logs with internal analysis of logging costs for the Pacific Northwest, and HTRG analysis of Spruce/Fir pulpwood in the Northeast. Figure 5. Quarterly NBSK pulp prices derived from daily list prices reported by FOEX Industries Ltd. Southern pine pulp log prices published by Timber Mart-South. Pacific Northwest Douglas-fir pulp log prices published by Log Lines. Pulp log prices expressed in multiples of 1 to accommodate market pulp pricing scale. Figure 6. Regional NCREIF timberland market value per acre is derived by dividing the total regional market value at quarter end by the number of acres reported in that region. Market values for Northeast timberland were re-estimated for the period 19Q4 through 19Q3 to adjust for what we believe to be an anomalous property included in the NCREIF database during those quarters. Figure 7. EBITDDA multiples are calculated using NCREIF timberland value per acre at quarter end divided by a trailing four-quarter average NCREIF net income per acre. Figure 8. The Hancock Securitized Timberland Index (HSTI) uses a base-weighted aggregate methodology (similar to that used to construct the S&P 5) to calculate a market capitalization-weighted value for seven publicly traded timber-intensive forest products companies. Base weights were readjusted for the emergence of new companies or at the beginning of each year. Dividends are not reinvested. The companies included in the HSTI have no investment relationship with the Hancock Timber Resource Group. Figure 9. Public equity derived from our Timberland Enterprise Value per Southern Equivalent Acre (TEV/SEA) for five timber-intensive publicly traded companies compared to southern timberland values per acre calculated from the NCREIF database. TEV is a quarterly estimate based on total enterprise value (total market equity + book value debt) less estimated value of processing facilities, other non-timber assets and non-enterprise working capital. SEA uses regional NCREIF $/acre values to translate a company s timberland holdings in various regions to the area of southern timberland that would have an equivalent market value. 2 Hancock Natural Resource Group, Inc. References to expected investment performance in this newsletter are based on historical information and are based on management's projections. Potential for profit as well as for loss exists. 6 Hancock Timber Resource Group High Street, Boston, MA