The fundamentals that underpin timberland, and their strategic role on the path to net zero, will reward consistent investment in productive natural capital. Aleksi Ehtee, timberland team lead at the Church Commissioners for England explains why forestry is a real opportunity for patient capital to tap into favourable long-term supply-demand dynamics while generating positive financial, environmental and social value.
This year has seen relatively muted timber prices across major markets, as reduced economic activity has applied drag on the demand for wood-based products, and construction starts have stalled owing largely to affordability.
For several reasons, however, this short-term downturn is expected to see a reversal supported by deep-rooted market fundamentals. Investors that have been involved in timberland for some time are used to waiting for end values to mature. Patience also tends to pay off.
For example, temporary price fluctuations may impact cash yields, typically with limited impact on capital values, while timber can be kept ‘on the stump’ until there are stronger signals to sell. Similar defensive strategies to ride out downward pressure may also see investors benefiting from the optionality to participate in voluntary carbon credit markets where credit pricing and markets are favourable, and diversifying risk exposure through the introduction of complementary land uses.
Like many institutions with decades-long hold periods, however, it is the dynamics and the structural resilience of the sector that make sustainable forestry especially attractive to the Church Commissioners for England. That the idiosyncrasies of the asset class allow for a degree of ‘tactical’ yield protection is valuable. But it is the fundamentals that underpin timberland and the timber commodity, and their strategic role on the path to net zero, that will really reward consistent investment in productive natural capital.
Consider socio-demographic trends. On one level, the UN estimates that the world’s population is expected to increase by nearly 2 billion to 9.7 billion in 2050, which will expand the base demand for raw materials, including timber, over time. Layer on top of that the positive correlation exhibited between net GDP per capita and the consumption of wood-based products; as well as the observation that developed and developing economies are using timber more resourcefully to replace non-renewable materials such as plastics. Factor in that the constrained net supply of timber is decreasing globally, and sustainable forestry begins to look relatively undervalued at a global scale.
The proposition that more people equals greater demand would hold water for most commodities, so what else makes timberland a worthy addition to portfolios with longer time horizons? Demand quality is one differentiator.
International timber markets are deepening with the steady increase of timber used in construction and the adoption of cross-laminated timber as an alternative to steel and concrete in the built environment. Markets are also broadening thanks to the push for increased use of sustainable materials, which is supporting demand for wood fibre (in the form of paper and cardboard) as a viable replacement for plastics in consumer industries. New applications are rapidly emerging for wood-derived products, ranging from bio-based plastics and renewable chemicals to eco-friendly battery energy storage technologies.
For the aforementioned reasons, World Bank forecasts predict a quadrupling of demand for timber by 2050, while other more conservative estimates from public bodies such as the UK Forestry Commission and the Softwood Council still suggest a three-fold increase over a similar period.
Our trees continue to grow, regardless of financial market conditions
Of course, there are further factors at play that will push prices upwards over a longer period. Timber supply, particularly that of lumber-grade timber, is not expected to keep up with demand. Around half of all institutional-quality timberland is concentrated in the US, with Europe, Latin America and Australasia representing the other half.
Increasing supply has its limitations – not least the time it takes for newly planted trees to mature. Another factor is certification. End users, as well as investors themselves, are increasingly wanting to procure sustainably managed and FSC or PEFC accredited stock as part of responsible supply chain practices.
Then there is competitive tension between the price of timber and the carbon stored therein.
Timber – be it standing or locked up in the built environment – uniquely benefits from dual purposes. Forests can be used as either an offset – to essentially act as a ‘sink’ in the carbon cycle – or as a perpetual source of commercial timber supply.
Moreover, capital directed toward conservation may reduce commercial timber production from natural managed forests. If increasing value is placed on carbon and biodiversity, this could further limit timber supply going forward – while potentially providing asset owners alternative income opportunities.
As responsible investors, our 88,000-acre sustainable timberland portfolio is a cornerstone of our contribution to people and the planet.
We’re proud to have planted 11 million trees in the past five years alone, and the fact that our sustainably managed forests combine renewable resource production and carbon sequestration, with caring for our environment and rural communities.
For the Church Commissioners for England, forestry is a real opportunity for patient capital to tap into favourable long-term supply-demand dynamics while generating positive financial, environmental and social value. All the while, our trees continue to grow – regardless of financial market conditions.
Aleksi Ehtee is timberland team lead at the Church Commissioners for England.