Southern plantations: ”Just a shooting star”

says Mr. Petri Lehtonen, Senior Partner in the consulting company Indufor

 

A hectare of bare land in Brazil may cost as much as a forest hectare in Finland. Rising costs in the south rehabilitate the competitiveness of forest industry in the north.

 

Plantation forestry in the southern hemisphere

It has been predicted that the plantation forestry in the southern hemisphere will beat boreal forestry, most of all due to cheap land as well as the fast and very productive growth of trees. In addition to this, the market for forest-based products has grown rapidly in the developing countries, too.

And yes, new production has been created in the south, but this seems to be a temporary development. Mr. Petri Lehtonen, Senior Partner in the consulting company Indufor, says that investment decisions have often been affected by the slow development of certain aspects of the market.

 

The forest industry are affecting land prices

Of course, the first plantation investments were and continue to be very profitable. This will not be the case in the future, however, because the profit potential of land and the monetary value added to it by the forest industry are affecting land prices. ”In addition to this, the level of costs in the south has increased for other reasons as well,” says Lehtonen.

This does not, according to Lehtonen, decrease the profitability of past investments, because they were made during the ”cheap land” era. On the contrary, their value has continued to increase.

 

Profitability of possible new investments looks different

But the potential profitability of possible new investments looks very different – in other words, unsatisfactory. According to Lehtonen, the excellent profitability of forest industry – especially pulp industry – has taken the same turn in most new producer countries.

”It looks like the brilliant future of the southern plantation forest industry is only going to be a shooting star,” says Lehtonen.

 

The cost level in Brazil

The cost level in Brazil has increased significantly during the past couple of years. At the same time, the profitability of forest industry has decreased sharply.

The mill prices of pulpwood have risen close to the European level. For a long time, the profitability of forest planting was over ten percent, but now it is on the same level as in Europe.

”Take the state of Paraná in Brazil: some five years ago, the price of a hectare of land there was some 800 euros. Now it is 3,500 euros. Thus, a hectare of land with no trees may cost as much as fully grown forest in central Finland,” says Lehtonen.

This may indicate that the relative cost advantage is returning to the north, at least partly. This can be explained by the fact that the Brazilian forestry and forest industry have expanded through a ”clearing of virgin lands” in a pioneering spirit. By now, suitable areas are becoming scarce.

 

Forest industry has invested in China

Forest industry has invested in China because of the vicinity of end-product markets and the low cost of production investments. However, even in China the cost level has risen.

China is not particularly rich in natural resources. The rural areas, which is where the plantation should be located, already suffer from a shortage of labour.

Many branches of industry have by now left China for countries with a larger and cheaper supply of labour. ”We have seen predictions that in the future, China will experience an increasing shortage of labour as well as a significant increase in cost levels,” says Lehtonen.

At the same time, forest investments in China suffer from disputes over land ownership and the increasing pressures on land use. This may weaken the attractiveness of China as a target of industrial investments.

 

Africa – the ”forgotten continent”

Africa has long been considered the ”forgotten continent”. The money arriving in Africa has most often consisted of development aid, charity or unsustainable ”grab and run” investments.

However, in some African countries the growth of the GDP has been ten percent or more throughout the past decade, and there are even more countries with a GDP growth of 7–8 percent. ”Eight out of the ten fastest-growing economies in the world are in Africa,” says Lehtonen.

There are vast tracts of land in Africa that are not utilized in any way. They would be good for plantation forests. The continent is also rich in other natural resources.

What is more, the African market for the end products of forest industry is growing. ”This might be of importance for the development of forestry and bioeconomy,” says Lehtonen.

 

The north will cope, after all

According to Lehtonen, the examples of China and Brazil show that a temporary relative advantage may be lost quickly as markets begin to function more efficiently. Fast biological growth as well as the growing demand for land and income expectations increase land prices. On the other hand, an increase in costs slows down the growth of productivity.

Lehtonen believes that new plantations will continue to be established in the south, though not enough to meet the increasing demand.

The northern hemisphere and Finland can still rely on their traditional advantages. We have cheap raw material and energy, efficient logistics, technology and know-how.

As regards Finland in particular, the land is flat and low-lying and the indigenous tree species make good raw material for sawmills and pulp mill – and the range of species growing on any given hectare is very limited. In addition to this, the harbours are relatively close to any forest area, the political climate is stable and forest ownership unambiguous and well-established.

Annual loggings could be increased by 15–20 million cubic metres in Finland. The use of forest chips could be tripled.

”This would create space for reorganising the production, which would improve productivity and logistical efficiency,” says Lehtonen.

 

By Hannes Mäntyranta

The article is based on a presentation by Petri Lehtonen in the Forest Forum for Decision-Makers in Espoo, Finland, on 7 May 2014, and published at https://www.forest.fi/smyforest/foresteng.nsf/tiedotteetlookup/6B2747A7E0358173C2257CED0030E86F