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Market watch

Timber: Rising Inflation, Physical assets set to benefit

Issue date: 2021-06-30

Pictet Asset Management

Already versatile and renewable timber is fast-becoming the ultimate sustainable material thanks to new technology. Investors should take note.

Trees can be our greatest ally in halting global warming and environmental degradation. Not only does wood provide a cost-effective means to reduce carbon emissions, it can also restore biodiversity and improve soil quality.

With the right technology, wood’s carbon-storage properties can be harnessed across a wide range of everyday activities – including construction, textile manufacture, food packaging and food preparation.

And demand for such tech is sure to grow, not least because changing consumer tastes and tighter regulations are forcing manufacturers to cut plastics use and switch to sustainable alternatives.

This, in turn, should boost demand for sustainable wood products, creating attractive opportunities in timber-related investments.

Four Reasons Why It is a Good Time to Invest in Timberland

Why has the price of timber kept rising since the start of the pandemic?

Investors who follow the raw materials market would know that due to tight supply and strong demand, inflation has hit the timber and pulp industry. Lumber futures prices climbed a record high of USD 1,575 in May, and Shanghai pulp futures prices also rose from around RMB 5,000 per tonne at the beginning of the year to over RMB 7,000 per tonne.

Is it worth it to invest in timber? Let's look at it from four perspectives.

Demand exceeds supply: Timber prices are soaring

When it comes to raw materials, the characteristic that many would think of immediately is scarcity. Although trees can be regrown, the process takes a very long time. When the rising demand of the people cannot be met, the price of the raw materials is driven up, even to astronomical levels.

Stimulated by low interest rates in the US housing market, data on the number of new housing starts, building permits and existing home sales showed that the sector has performed strongly. However, the current number of loggers has fallen by 40% compared to that of 20 years ago (as of the end of March this year), and the outbreak of the novel coronavirus has forced most logging farms to stop their operations. The severe shortage of timber supply provides investors a unique profit opportunity.

Inflation rises: Physical assets set to benefit

The global pandemic resulted in a decline in the consumption of physical goods. The US government implemented a rather generous subsidy policy to help its citizens weather the storm. As of the end of March this year, the total amount of personal savings in the US was USD 1.6 trillion higher than the normal level, which helped to drive retaliatory consumption and inflation.

In a time of uncertainty like this, physical assets play the role of a safe haven. In the forestry industry value chain, the value of trees increases with time and volume and is less affected by the economic environment. In addition, timberland is also a physical asset. Investing in companies that own timberland or that have access to forestry resources (especially in land-scarce countries) provides a promising opportunity for additional capital gains.

Undervalued prices: Stocks available at a discount

The question that concerns most investors is probably whether the current price is considered expensive or cheap. According to Pictet Asset Management, since the start of the US-China trade war in 2018 and the slowdown in China's economy, the stock-to-net value ratio of forestry resources has trailed behind the global stock market. The current price level is at a discount of around 40%, so it is not expensive at all.

An evergreen trend: Timber cannot be replaced

The year 2020 has been widely regarded as the first year of sustainability. Governments around the world continue to announce "carbon reduction" targets and corresponding policies. In the past year, financial products claiming "sustainability" and pledging "environmental protection" have sprung up. Timberland do not only naturally absorb carbon dioxide, their fibres can be used in many ways to replace plastic products made from fossil fuel. There are unlimited business opportunities in the foreseeable future.

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