Investment
Potential
"Pure forestry investment (ie. land
and trees) has outperformed stocks and bonds over the last 30
years" says a report in the New York Times dated 26 August 2001.
Wood is one of the world's most important
commodities . . .
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Wood is the most versatile raw
material known to man
Average wood demand globally increases
by 7,000 cubic metres every hour
Softwood, which represents 60% of the
world's consumption and is the preferred sawn timber
Wood is used in over 10,000 different
ways.
Timber from non-sustainable native
forests is becoming increasingly scarce.
Long term plantation forestry
will have to provide the bulk of global timber supply.
Environmental controversies are
halting logging of old native forests, especially in North America
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Pure timberland investment should not be
confused with the 'corporates' whose balance sheets are also laden with
mills and inventories of finished products.
When you invest in pure timberland you do
not get the processing assets and the liability that comes with them.
"The main appeal of the sector is
its long-term profitability. Over the last 30 years, annualized returns
on timber have averaged 15.2% compared with 13.2% for the Standard &
Poor's 500 stock index." Source: Hancock Natural Resource Group, a
unit of John Hancock Financial Services, Boston, USA.
With the world losing over 15 million
hectares of forest per year and a climbing global population, the
long-term outlook remains bright."
Market Prospects
The Asia Pacific region has the fastest
growing demand for forest products in the world. While New Zealand first
started exporting radiata pine logs to Japan, China and Korea have
emerged as significant markets in the past decade maintaining strong
demand for logs for packaging and construction. Australia is currently
New Zealand's largest wood product export market, buying mainly sawn
timber and newsprint.
Rapid economic growth throughout the Asia
Pacific region will continue to generate strong demand for radiata pine
products. The United States, which is the world's largest wood producer,
is now purchasing logs from New Zealand.
*Limited
Alternative Supplies
While demand is increasing, there is
limited availability of wood from traditional sources that include the
United States and Malaysia, as a result of environmental pressure to
preserve old growth forests and their wildlife. Eastern Russia has the
capacity to meet growing timber demand from its large resource of
standing forests, but uncertain economic factors are most likely to
limit its prospects of increased harvests.
*Increasing World
Demand
The United Nations Food and Agricultural
Organisation (FAO) has forecasted that world wood demand will increase
from the 3506 million cubic metres consumed in 1990 to over 5000 million
cubic metres annually by the year 2010 - an increase of 40% over 20
years. This represents an annual increase equivalent to 78 million cubic
metres per year, which is five times New Zealand's current annual
production.
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Long Life As
Industrial Material
Timber is integral to the world's
construction, furniture and packaging industries and its versatility
ensures its continued use as an industrial material. Already its uses
range from the manufacture of paper and panel board, to: · conversion
into gas alcohol, · manufacture of cellophane, · animal feedstuffs
and, · textiles, such as rayon and cellulose.
* It is interesting to note that despite
the increasing availability of wood substitutes, plastics, concrete,
aluminium and steel, world timber consumption per capita has increased
over the last 40 years. Global per capita consumption rates are expected
to increase further as the Asian economies develop.
Sources: WRJ Sutton - various
publications FAO Yearbook of Forest Products 1991 FAO Forestry Series
No.26 Rome 1993 FAO 1961 - 2010 Wood & Wood Products FAO Rome 1991 |
Investment
Comparisons
Forestry returns historically have been 6
- 10% above inflation (*Real rate of return) compared to 2 - 5% for
pastoral farming and 8 - 12% for manufacturing and service industries.
The real rate of return is the annual
percentage compounded growth of the initial contribution over and above
inflation. This is a very important factor when analysing alternative
investments.
Taxation
Comparison
Annual Taxation vs. Delayed Taxation
Forestry Investment Taxed at End of Term
• Assumes $1000 invested for 25 years at
10% · Income taxed once only after 25 years at 33% · Effective annual
tax rate 15.6%
Other Investments Taxed Annually
• Assumes $1000 invested for 25 years at
10% · Income taxed at 33% each year · Effective annual tax rate
remains at 33%
New Zealand Stock Exchange Indices -
Relative Forestry Sector Performances
Gross indices since 1986
Forecast IRR vs. Bank Investment
$1000 invested for 25 years at the
Trustwood Forests forecast IRR of 10.6% taxed (at 33%) in the final year
versus an identical bank investment at the forecast interest rate of 7
per cent taxed annually.
Risk Factor
We believe forestry is one of the
soundest investments you can make, however the investor must recognize
that a guarantee of profits or freedom from loss are impossible and
inappropriate in such a venture.
Investors are recommended to consult
their legal advisors in assessing the potential merit of any venture.
Investment in securities is not free from
risk. Some of the risks include the future currency and market prices
for forestry that may be subject to fluctuations. Natural disasters
include fire (for which insurance cover is arranged), pest infestation
and further risks may include increased costs over the period of the
project.
Investors should carefully consider
whether such an investment is suited to their financial resources and
whether they are able financially and otherwise to assume the risks of
such an investment.
