Timberland investors could help pellet producers

Apr. 17, 2012, New York, NY – Supply agreements between well-funded timberland investment management organisations (Timos) and producers of industrial wood pellets could provide stability to raw material supply and prices, but many investor groups have yet to fully embrace the nascent biomass industry.

Timos and publicly traded timberland real estate investment trusts own swathes of land across the US. In many instances, holdings were formerly owned by pulp and paper companies that began selling off assets 20 years ago as a measure to reduce debt.

To date, timberland investors have taken a “passive, but receptive” stance towards the wood pellet industry, an analyst with a major US-based Timo told Argus. Pellet mills raise the demand for small logs and can affect investment decisions, but funds do not actively expose investments to biomass markets, according to the analyst.

Timos have relied on pulp and paper mills in the past to provide markets for low-quality wood and forest slash, but that industry is slowing down in the US at a rate of about 1pc/yr, leaving room in some regions of the US and Canada for new sources of demand, which could be a good fit for pellet mills.

Increasingly, mills must guarantee long-term sources of fibre at stable prices to their main customers, European utilities. Arrangements with timberland investors could provide pellet producers with substantial letters of credit, while also posing value to the investors, which, by the nature of investing in forests, are looking for long-term, stable returns.

The opportunities for mutually beneficial supply deals have been on the radar for a while. In limited number, Timos have already negotiated offtakes with pellet mills. In new developments, utilities and Timos have spoken directly to one another to explore the opportunities, according to the analyst. Either framework leaves pellet mills room to function as intermediaries, since investment funds are resource based, and tend to shy away from operations. “Many Timos would not be interested in owning a share of a pellet mill,” the analyst said.

Despite synergies, investors have been reluctant to expose themselves to pellet exports. The main reasons are that it still represents a relatively small percentage of wood demand — 2-3pc in the US — and it is policy driven, making the industry subject to changes in government. Economic challenges inherent in a still-maturing industry also deter some investors, looking for more traditional markets with more proven history.

Producers generally look forward to increased interaction with Timos, which could help bring price stability to raw material inputs that can fluctuate and must be bought from a number of smaller producers or aggregators. One potential drawback is the conflict between a fund's investment window and the lifecycle of the pellet mill. Deals could run into hurdles if, for example, a Timo wanted to monetise their investment in 10 years, but the mill is planning to stay on line much longer, a major North American pellet producer said. But in most cases, interests could be well aligned from investor to end user, the producer said.

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