The forest sector’s status and opportunities from the perspective of an investor

14 jun 2012

Investor Don Roberts on the transformation

In Canada the average return on capital employed in the forest products industry is unacceptably low. Given the historical returns, forest product companies should be embracing change. If not, what are we protecting?

From the capital market’s perspective, the status quo is not an option. Simply changing the geographical footprint will not solve the problem. You need to change the game and if you are not mowing, someone else will!

Investment in bioenergy holds many uncertainties

Looking at these investment drivers when asking whether or not to invest in bioenergy, it is clear that there is a lot of uncertainty. The targets for biomass electricity for China, Europe and Brazil together reach costs of 175 billion dollars. If these goals are met the price of fibre will rise. The question is whether or not the goals will be met? If we look at the price of alternative sources of electricity, even if the price for biomass would decrease, the competitors (eg. solar, wind) will decrease more.

North America leading in second generation biofuels

Looking into second generation biofuels North America dominates the investments in this field. We expect the aggregate investment to significantly increase over the next 5-10 years, with most of the rise occurring in the US and Brazil. Within the second generation technologies, capital is increasingly being invested in thermo-chemical approaches, as opposed to bio-chemical approaches.

Technology and partnerships are critical to make this happen. The most important thing to remember is to use existing infrastructure and that size matters, big is often worse! The oil industry tends to forget the cost of delivering the biomass.

Partnerships and the right operating environment

Forest companies do not have the skill sets or capital to undergo transformative change on their own. There is a need for partners with expertise in technology, construction, marketing & distribution and finance. To mitigate technology risk, most forest companies want to be “first to be second” when adopting new technologies. Does this always make sense?

Many governments are broke, so they cannot provide much financial support. If they do spend, it should be in supporting the earliest stage R&D and training. As usual, governments can help provide the right operating environment. They can provide TLC: “Transparency” – clear rules & processes, “Longevity” – match policies/support to the length of the asset and “Certainty” – minimal policy changes over time. Increasingly, governments can play the role of “convener” and “information broker”.

Key investment drivers & trends

There are five key variables that drive investment in new bio-products:

• Availability of capital

• Price of fossil fuels – price signals vary (e.g. coal vs. oil vs. natural gas)

• Cost and quality of the resource

• Efficiency of the conversion technology – reaching out to other sectors.

• Public policy – in many cases some public support is required.

For more information about the project ”The Canadian forest sector and Swedish experiences”, please see: https://www.sifi.se/projekt/the-canadian-forest-sector-and-swedish-experiences/

Text: Don Roberts, Vice Chairman and Managing Director CIBC Market Inc.

Photo: https://www.fpac.ca/index.php/en/member_photo_gallery/