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Januari 2018

Approaching the sweet spot in the timber cycle

Demand for timber is on the rise mainly stimulated by the housing industry in the United States.

Among commodities, timber is unique from an investor’s perspective due to its buy-and-hold characteristics. Timberland-companies have a big incentive to resist the temptation to cut down trees as soon as they can be sold. Indeed, the value of wood increases steadily as a tree ages and the trunk thickens. On the contrary, agricultural raw materials, such as food crops, must be harvested at the end of the season, regardless of whether farmers would rather wait for prices to rise.

Patience rewarded

From the time a new tree is planted, it takes at least ten years for it to become thick enough before the trunk can be processed into pulp. After about 13 years, the tree reaches about 20 meters and represents a value of about $10 per ton. This increases to over $30 per ton for a 30-meter-high tree, usually after 24 years. As a result of this steady value increase, timberland companies have the luxury of being able to patiently wait for market conditions to be favourable before felling their trees. In 2017, it seems the time to harvest has arrived.

Timber rally

On commodity exchange CME Group in the United States, timber futures have risen by 25% in 2017.This rally can be partly attributed to extraordinary factors, such as forest fires, which are putting pressure on supply in some regions. A much more important factor is the steadily increasing demand from the American construction industry. In the second half of 2017, the number of building permits has peaked to their highest level in almost ten years.2 After a dramatic decrease in the wake of the 2008 credit crisis, construction activity is gaining momentum due to a catch up-effect as well as a rise in economic activity in the United States.

The construction industry has room to run

Despite the recent pick up, the homebuilding industry in the United States is still a long way from overheated territory.
About 1,3 million new homes have been constructed in 2017. During historic peak times that number has hovered around 2 million. “The current production level is barely adequate to fill the demand for new homes as a result of demographics and a growing population”, explains Christoph Butz, co-manager of the Pictet-Timber fund: “And that is not taking into account the production that is needed to replace old houses that are demolished.”

Sustainable trends

The momentum observed in the timber industry is an important tailwind for Pictet-Timber. However, the fund’s investment success is not wholly dependent on timber companies. Indeed, the fund has the flexibility to invest in the entire value chain of timber: from paper  and pulp producers to packaging companies. Aside from the favourable economic climate, these sectors are also benefiting from an increased focus on sustainability. Through the more efficient packaging of their products, companies are able to reduce transportation and storage costs.