Second Quarter 2017 Hancock Timberland Investor · The global production of Cross Laminated Timber...
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Hancock Timberland Investor Second Quarter 2017 Cross Laminated Timber (CLT) is a building material which has the strength of concrete, yet ¼ the weight, requires less labor on building sites, and allows structures to be erected in ⅓ the time of typical concrete or steel construction 1 . CLT is a solid prefabricated engineered wood product (EWP) 2 made from long pieces of lower quality #2 or #3 grade lumber glued together, forming thick panels which can be as large as 10 feet wide and 40 feet - 60 feet long, and as much as 20 inches thick. The stacking arrangement of the panels adds strength, rigidity, dimensional stability, and mechanical properties to the panels, making CLT suitable for load-bearing construction. The term ‘mass timber’ is often used to describe the panels and their use as large, heavy timbers for structural use. CLT can substitute for concrete, masonry or steel in expanding wood building heights and spans and providing structural support. The key application areas for CLT include multi-unit residential, educational buildings, government and public structures, and commercial spaces. Using CLT in the construction of tall buildings is relatively new. In the past seven years, just over twenty CLT structures ranging in height from 6 to 14-stories have been built worldwide. Structures above six floors have been built using CLT in Europe, Canada, Australia, with the tallest, a 14 story building completed in Norway 3 (Photo on page 4). In the U.S., building codes allow wood construction up to 6-stories in some regions, but no more than four stories in others 4 . In 2015, CLT was added to the International Residential Codes as a heavy timber element, with applications for wide spans, and building use under the A Potential New Source of Demand for U.S. Timber: Cross Laminated Timber A new building product, Cross Laminated Timber (CLT), is beginning to gain traction in the U.S. and has the potential to add significant new demand for timber from a wide array of forest types. CLT use will be focused on market segments outside of the core markets for traditional lumber and wood panels (single-family residential construction). CLT will be competing more directly with concrete and steel construction. Implications for timber markets will be distinctly different than the major introductions of new wood products over the past thirty years—oriented strand board, medium density fiber board, and engineered wood I-beams— which took market share from building materials already made from wood. Hancock Timberland Investor Second Quarter 2017 (Continued on page 2) Lumber Stacking Creates Mass Timber Panel Chart 1: Cross Laminated Timber Panel Photo Source: FP Innovations 1 http://oregonbest.org/news-events/top-news/item/news/News/action/detail/story/new- study-describes-impacts-of-clt/ 2 Engineered Wood Products (EWP) represent a broad wood product group where lumber or panels are manufactured by using adhesives to hold together oriented veneers, wafers, wood fibers, or dimension lumber. 3 Dovetail Partners, Modern Tall Wood Buildings, Opportunities for Innovation, January 2016 4 FP Innovations, CLT Handbook, 2011
Transcript of Second Quarter 2017 Hancock Timberland Investor · The global production of Cross Laminated Timber...
Hancock Timberland Investor Second Quarter 2017
Cross Laminated Timber (CLT) is a building material which has the strength of concrete, yet ¼ the weight, requires less labor on building sites, and allows structures to be erected in ⅓ the time of typical concrete or steel construction1. CLT is a solid prefabricated engineered wood product (EWP)2 made from long pieces of lower quality #2 or #3 grade lumber glued together, forming thick panels which can be as large as 10 feet wide and 40 feet - 60 feet long, and as much as 20 inches thick. The stacking arrangement of the panels adds strength, rigidity, dimensional stability, and mechanical properties to the panels, making CLT suitable for load-bearing construction. The term ‘mass timber’ is often used to describe the panels and their use as large, heavy timbers for structural use. CLT can substitute for concrete, masonry or steel in expanding wood building heights and spans and providing structural support. The key application areas for CLT include multi-unit residential, educational buildings, government and public structures, and commercial spaces. Using CLT in the construction of tall buildings is relatively new. In the past seven years, just over twenty CLT structures ranging in height from 6 to 14-stories have been built worldwide. Structures above six floors have been built using CLT in Europe, Canada, Australia, with the tallest, a 14 story building completed in Norway3
(Photo on page 4). In the U.S., building codes allow wood construction up to 6-stories in some regions, but no more than four stories in others4. In 2015, CLT was added to the International Residential Codes as a heavy timber element, with applications for wide spans, and building use under the
A Potential New Source of Demand for U.S. Timber: Cross Laminated Timber A new building product, Cross Laminated Timber (CLT), is beginning to gain traction in the U.S. and has the potential to add significant new demand for timber from a wide array of forest types.
CLT use will be focused on market segments outside of the core markets for traditional lumber and wood panels
(single-family residential construction). CLT will be competing more directly with concrete and steel construction. Implications for timber markets will be distinctly different than the major introductions of new wood products over the past thirty years—oriented strand board, medium density fiber board, and engineered wood I-beams— which took market share from building materials already made from wood.
Hancock Timberland Investor Second Quarter 2017
(Continued on page 2)
Lumber Stacking Creates Mass Timber Panel Chart 1: Cross Laminated Timber Panel
Photo Source: FP Innovations
1 http://oregonbest.org/news-events/top-news/item/news/News/action/detail/story/new-study-describes-impacts-of-clt/ 2 Engineered Wood Products (EWP) represent a broad wood product group where lumber or panels are manufactured by using adhesives to hold together oriented veneers, wafers, wood fibers, or dimension lumber.
3 Dovetail Partners, Modern Tall Wood Buildings, Opportunities for Innovation, January 2016
4 FP Innovations, CLT Handbook, 2011
Hancock Timberland Investor Second Quarter 2017 2
average 6 story height range5. CLT in mid-rise multi-story buildings is in the testing phase in the U.S. for use in office buildings (7-16 stories) and multi-family homes (6-16 stories). Recently, in the U.S. a handful of tall
wood building projects have been granted exemptions to code in several cities, based upon positive product testing results for CLT6. Last year, the first tall wood building in the U.S. completed construction, a seven story office building using mass timber panels in floors and structural supports in Minneapolis7. In Portland, Oregon, an eight story condominium project is under construction with CLT floor systems for all of the above-ground floors8. Twenty Years in the Making
CLT was developed in Austria in the early 1990s, where in 1999, the first CLT facility started production. Today, Austria is the world's largest producer of CLT, but mills are now operating across Europe, in Germany, Czech Republic, Italy, Spain and Switzerland. Currently the largest producer of CLT is Stora Enso in Austria, with a capacity of 20,000 m3/ year, producing about 1,400 CLT panels annually, or 5 panels per shift9.
The global production of Cross Laminated Timber has grown at a CAGR of close to 16 percent from 2009 to 2016. In 2016, global production of CLT was reported to be 0.6 million m3, with 90 percent of manufacturing occurring in Europe’s 39 CLT facilities10. CLT production is growing rapidly, yet is small scale compared to traditional building materials. European lumber production currently is over 156 million m3per
A Potential New Source of Demand for U.S. Timber: Cross Laminated Timber (Continued from page 1)
(Continued on page 3)
CLT Panels Replace Concrete in Mid-rise Residential Construction Chart 2: Carbon 12, Portland Oregon
Source: Tall Wood Building Conference 2016
Photo: Carbon 12, Portland Oregon. Eight story condominium project which uses CLT as the floor systems for all of the above ground floors. Source: HNRG
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sCLT Production Tripled in the Last Eight Years Chart 3: Global Cross Laminated Timber Production
Source: HNRG, FAO 2017, International Mass Timber Conference 3.2017
CLT focus is primarily on market segments,
such as non-residential and multi-story
residential where wood products have had
limited penetration.
5 http://oregonbest.org/news-events/top-news/item/news/News/action/detail/story/new-study-describes-impacts-of-clt/ 6 http://oregonforests.org/pub/forest-frame
7 The Journal of the American Institute of Architects. November 8, 2016 8 The 2017 International Mass Timber Conference, Tour #1 March 28, 2016, Portland OR
9 Stora Enso Annual Report, 2016 10 The 2017 International Mass Timber Conference. Schmon A., Global Outlook for CLT:
2016—2021. March 29, 2016. Portland, Oregon.
Hancock Timberland Investor Second Quarter 2017 3
year, and annual European veneer and plywood production is about 11 million m3.11 Investment in CLT in North America has lagged Europe, with just a handful of CLT facilities operating. Structurlam, in British Columbia, expanded its existing EWP business and opened the first North American CLT facility in 2011. SmartLAM, located in Montana was the first U.S. CLT facility to open. D R Johnson, a 50 year family-owned wood products manufacturer, has opened a CLT facility in Oregon.
CLT panels are made from commodity lumber, yet are far from a commodity product, with the panels adapted and manufactured to meet builder/architect size and performance specifications for the design of an individual project. CLT panels are prefabricated and can be pre-cut to accommodate the instillation of windows, wiring, plumbing, etc. at the factory and delivered to the construction site in a staged manner to facilitate on-site assembly, substantially reducing construction time, labor and material loss. We are seeing a new generation of builders and architects helping to drive CLT use, leveraging the products energy efficiency, low-carbon footprint, and the positive aesthetic visual appeal of incorporating wood in a building’s design. Builders report quick on-site construction - an estimated ¼ faster construction time than a similar project in concrete; 90 percent less construction traffic (delivery trucks to the job site); and 75 percent fewer workers at an active building project12. In Europe, capturing efficiencies in the construction process was a key driver of the growth in acceptance of CLT, providing a solution to limited availability of construction workers and logistical problems building within congested urban settings. In the U.S., lack of available labor has been cited as a major factor contributing to the slow pace of the recovery of U.S. housing construction. Similar to Europe, the trend favoring more urban patterns in housing development should favor the use of CLT.
CLT can be manufactured from a wider range of tree species than those used to produce construction grade lumber and plywood. Lumber produced from small diameter timber, or timber damaged by fire or insect/disease are suitable for producing CLT panels. Consequently, CLT has a potential role in addressing forest health issues and supporting rural economies. The expanded use of mass timber building systems is also receiving support from government initiatives. In Japan, the Forest Agency is developing a Road Map to Using CLT, a follow on to the Promotion for the Use of Wood in Public Buildings Act - with the stated goal to increase the wood use from 7 percent in 2013 to 24 percent by 2020. The Agency is working to accomplish this with 50 percent subsidy to mill start up – to drive the establishment of CLT facilities, with a goal of increasing CLT production capacity by 50,000 m3 per year for the next 10 years to provide new markets for Japan’s domestic timber supply13. California is seeking net-zero energy in residential construction by 2020, and net zero energy in non-residential construction by 203014. CLT’s low-carbon profile and construction efficiencies can contribute to meeting these net-zero energy construction goals.
How Much Wood Are We Talking About?
How and when will the growing utilization impact U.S. wood markets? Using the track record that CLT has established in Europe provides some indication of the possible growth trajectory for CLT use in low-rise multi-family residential construction (3 – 5 story buildings), high-rise multi-family construction and nonresidential construction (offices, stores, schools, public buildings, and hotels), all of which currently have relatively low penetration by wood construction. Forest economists at RISI estimate softwood U.S. lumber demand in 2016 to be just over 128 million m3 15. This year industry expert, FP Innovations estimates the potential market for mass timber in the U.S., based on tapping into these largely nonwood-using market segments, could add an additional 16 million m3 per year
A Potential New Source of Demand for U.S. Timber: Cross Laminated Timber (Continued from page 2)
(Continued on page 4)
The timber required to manufacture CLT
can be tree species not typically used
to produce construction grade
lumber and plywood
11 http://www.fao.org/faostat 12 Muszynski, University of Oregon, 2017 13 CINTRAFOR, October 2016
14 New Residential Zero net Energy Action Plan 2015-2020 launched June 2015 15 RISI North America Timber Outlook, June 2017
CLT has the potential to reduce on-site construction time and labor demands
Hancock Timberland Investor Second Quarter 2017 4
A Potential New Source of Demand for U.S. Timber: Cross Laminated Timber (Continued from page 3)
to U.S. lumber consumption. This 12 percent boost to softwood lumber demand translates into an increase in North American softwood sawlog demand on the order of 8 million m3, which is roughly 20 percent of the U.S. South’s timber harvest in 2016. 16,17 A twelve percent increase in softwood lumber demand is significant, yet the demand will be spread across multiple regions, and not concentrated in just one area or timber type. Today, North American CLT manufacturers are located exclusively in the Pacific Northwest, but CLT’s ability to use a broad range of timber grades and species suggest that future production could be geographically dispersed across regions, tapping into timber supplies outside the traditional softwood commercial timber species. When Oriented Strand Board was first introduced into structural panel markets in the 1980s, the key factor driving investment was OSB’s ability to use lower cost sources of fiber from under-utilized forests and lower value species and log grades. Over thirty years after its introduction, OSB accounts for 66 percent of the North American structural panel market, and OSB capacity in North America is spread across multiple regions; 52 percent in the U.S. South, 11 percent in the U.S. Northeast and Great Lakes, and 37 percent in Canada. 18 The time-line for the growth of CLT in the U.S. will be dependent on an array of factors: changing building
codes; competition from traditional building systems; and government carbon policy, to list a few. Looking to the development of CLT in Europe may provide some clues to the trajectory for the unfolding of North American CLT production. In Europe, CLT production levels are still under 1 million m3 per year after two decades of investment and market education. In addition, the penetration of construction markets by mass timber building systems could receive additional support from product improvements in CLT and other mass timber products including, Nail Laminated Timber (NLT), Dowel Laminated Timber (DLT), and Glue Laminated Timber (glulam). Assuming an accelerated pace of adaption in the U.S. compared to the experience in Europe, Japan, and other regions, it would still be optimistic to hope that CLT will reach the market potential in the U.S. identified by FP Innovations (16 million m3) in the near future.
CLT or other mass building systems have the potential to become a major component of timber demand in North America and globally, but the realization of this potential and its positive implications for timber values seems more likely to be decades, not years, away. 16 Estimate by HNRG based on 50% timber to lumber conversion 17 Estimate by HNRG based on U.S. South harvest demand from RISI North America
Timber Outlook, June 2017 18 RISI Structural Panel Commentary, September 2017
Photo: Treet by Artec in Bergen, Norway. CLT structures used in 14 story commercial building Source: Swedish Wood Magazine
Hancock Timberland Investor Second Quarter 2017 5
U.S. housing starts stalled in the second quarter of
2017 slipping to 1.15 million units (SAAR), a 6.7
percent decline from the previous quarter and nearly
even with the same period a year earlier. The
disappointing residential construction activity in the
second quarter was offset by the imposition of
countervailing and anti-dumping duties on Canadian
softwood lumber shipments to the U.S. which pushed
the Crow’s Framing Lumber Composite Index 8.2
percent higher compared to the previous quarter, and
17.9 percent above the same period in 2016. The
Crow’s index at $415/MBF in the second quarter was
at its highest quarterly average since the third quarter
of 2004.
In the second quarter of 2017, Australian dwelling
approvals (a key indicator of residential construction
activity) held close to the levels of the past two
quarters, but was down 13 percent from the same
period last year. The slowdown in Australia’s
housing activity that has characterized the past three
quarters follows from an easing in the overall
Australian economy reflecting weaker global
commodity markets and slower growth in China.
Structural lumber prices increased 2.2 from the
previous quarter and by 1.7 percent from a year
earlier despite the recent decline in housing starts.
Australian sawlog stumpage prices, reported
biannually, for the six months ending June, were flat
from the prior six months.
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Lumber Prices Rise Despite Stalled Housing Starts Figure 1: Quarterly U.S. Housing Starts (1,000 units) and U.S. Softwood Lumber Composite Price (USD per MBF)
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Sources: Australia Bureau of Statistics as of August 2017, KPMG as of September 2017 and Indufor Timber Market Survey as of August 2017
Sources: Random Lengths Lumber Report as of June 2017, U.S. Bureau of Census as of July 2017
Timberland Market Indicators
Hancock Timberland Investor Second Quarter 2017 6
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Exchange rate movements in the second quarter were
relatively mixed, with the U.S. dollar weakening
against the currencies of Australia, Canada and New
Zealand, while making small gains to the Brazilian
real and the Chilean peso. Compared to the prior
quarter, the U.S. dollar lost 0.6 percent relative to the
Australian dollar; 2.7 percent with the Canadian
dollar; and 4.8 percent versus the New Zealand
dollar. The U.S. dollar gained 4.1 percent against the
Brazilian real in the second quarter, while making a
small 0.4 percent advance relative to the Chilean
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U.S. Dollar Mixed Figure 4: Quarterly Exchange Rates Between USD and Commodity Currencies
Source: International Wood Markets Inc. as of August 2017
New Zealand log export volumes to China eased
modestly in the second quarter dropping 4.4 percent
from the first quarter, and were just 1.8 percent
below the volume shipped to China from New
Zealand in the second quarter of last year. The
small setback in shipped volume to China in the
second quarter was not reflected in the China import
price, which made a 2.6 percent advance over the
previous quarter.
Strong Exports Push New Zealand Log Prices Higher Figure 3: Quarterly New Zealand Softwood Log Export Volume to China (million m3) and Price in China (USD per m3 CIF)
Timberland Market Indicators
Hancock Timberland Investor Second Quarter 2017 7
Prices for Bleached Eucalyptus Kraft Pulp (BEKP)
and Southern Bleached Softwood Kraft (SBSK)
both made substantive gains in the second quarter,
with BEKP up 13.3 percent compared to the
previous quarter and SBSK up 6.6 percent. Pulp
prices were pushed higher by a combination of
strong global production of packaging grades
coupled with the upward surge in the price of
recovered paper. The strong upward movement in
pulp prices did not carry over to pulpwood markets
in the second quarter. The delivered price of pine
pulpwood in the U.S. South lost ground, dropping
1.8 percent compared to the prior quarter, facing
competition from readily available manufacturing
residuals from the expanding production at the
region’s lumber mills. Eucalyptus delivered
pulpwood prices in Brazil fell 1.4 percent in the
second quarter.
Second quarter softwood sawtimber prices (in
USD) continued to move higher in both the U.S.
Pacific Northwest (up 6.3 percent) and in New
Zealand (up 2.1 percent) from the previous quarter.
New Zealand price gains were fueled by strong
Chinese demand for log exports. The upward
movement in U.S. Pacific Northwest prices
reflected strong domestic and export log demand
and higher U.S. softwood lumber prices. In the
second quarter, the price of Southern Pine
sawtimber stumpage lost another 1.6 percent
compared to the previous quarter, sinking to a level
not seen since the fourth quarter of 2012. Australian
Radiata Pine sawlog stumpage prices, reported
biannually, for the six months ending June,
decreased by 1 percent from the prior six months. $0
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Sources: Log Lines as of July 2017, Timber Mart-South as of Q2 2017, NZMPI and Agrifax as of August 2017, and KPMG as of September 2017
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Sources: Hawkins Wright as of August 2017, Timber Mart-South as of Q2 2017 and STCP as of August 2017
New Zealand and U.S. Pacific Northwest Sawlogs Prices Move Higher Figure 5: Regional Softwood Sawtimber Stumpage Prices (USD per m3)
Market Pulp Prices Gain Momentum While Pulpwood Prices Languish Figure 6: Quarterly Prices for Market Pulp and Delivered Pulpwood (USD per metric ton)
Timberland Market Indicators
Hancock Timberland Investor Second Quarter 2017 8
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Private Timberland
Private Timberland
Public and Private Timberland Values Hold Figure 8: Quarterly U.S. South Timberland Values (USD per acre)
U.S. cash yields from timberland operations in the
second quarter of 2017 were 2.3 percent
annualized, which is at the same level of 2016
second quarter cash yields, which are just below
the 10 year average for second quarter, at 2.4
percent.
Over the second quarter of 2017, privately-held
timberland in the U.S. South averaged $1,782 per
acre which represents a $7 (0.4 percent) decrease
from last quarter, and a $2 (0.1 percent) increase
from the year prior. Public timberland values,
measured by the Timberland Enterprise per
Southern Equivalent Acre (TEV/SEA), increased
0.2 percent over the quarter, from $2,128 to $2,131
per acre. Year over year, the TEV/SEA increased
by 12.1 percent. Over the last quarter, most stocks
in the Index saw minimal changes to market values,
resulting in immaterial changes in value. Year over
year, the 12.1 percent increase is largely due to a
significant increase in the price of Weyerhaeuser
stock which constitutes nearly 80 percent of the
Index’s value in average.
Cash Yields Just Below 10 Year Average Figure 7: U.S. Timberland Annualized Operating Cash Yields (percent per year)
Sources: NCREIF as of Q2 2017 and HTRG as of August 2017
Sources: NCREIF and HTRG as of July 2017
Timberland Market Indicators
Hancock Timberland Investor Second Quarter 2017 9
Notes Timberland Market Indicators
Investing involves risks, including the loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a fund’s investments. The natural resources industry can be significantly affected by events relating to international political and economic developments, energy conservation, the success of exploration projects, commodity prices, and taxes and other governmental regulations. The information provided herein does not take into account the suitability, investment objectives, financial situation or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
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Figure 1: The source for the U.S. Housing Starts is U.S. Bureau of Census. The Housing Starts data includes Single-family and Multi-family starts. Random Lengths Lumber Report is used for lumber prices. Figure 2: Quarterly Australian Dwelling Unit Approvals is published by the Australian Bureau of Statistics. The Lumber Index is published by Indufor Timber Market Survey using Softwood Structural lumber prices (Blended Price - 60 percent MGP 10 90x35x4800, 40 percent MGP 10 70x35x4800). Log Price Index is calculated using the (APLPI) Radiata Pine Domestic Stumpage prices. The log price is an average of Intermediate and Medium sawlog prices Figure 3. Quarterly New Zealand softwood log export volume to China and China Import prices are published by International Wood Markets Group Inc. Figure 4. Monthly average Exchange Rates are from Macrobond. Figure 5: Quarterly Softwood Sawtimber Stumpage Prices for the U.S. Pacific Northwest is reported in Loglines published by RISI. The weighted index is made up of 50 percent Domestic Douglas-fir (47 percent #2 and 53 percent #3 Sawmill sorts) and 50 percent Whitewoods (47 percent #2 and 53 percent #3 Sawmill sorts). U.S. South prices are published by Timber Mart-South (60 percent Southern Pine Sawtimber and 40 percent Chip-n-Saw). Australian domestic prices are calculated using the KPMG Australian Pine Log Price Index (APLPI) Radiata Pine Domestic Stumpage prices. The log price is an average of Intermediate and Medium sawlog prices converted to USD/m3. New Zealand radiata pine export log prices are a blend of Agri-Fax A and K log sort prices and A,K and J log prices published by New Zealand Ministry of Primary Industries converted to USD. Figure 6. Quarterly Market Pulp prices are published by Hawkins Wright. U.S. Southern Pine Pulpwood prices are published by Timber Mart-South. Brazil Eucalyptus Pulpwood prices are published by STCP Engenharia de Projetos Ltda. Figure 7. Annualized Operating Cash Yields are published by National Council of Real Estate Investment Fiduciaries (NCREIF). Yields are calculated using 60 percent U.S. South and 40 percent U.S. West. Figure 8. Public equity values are derived from our Timberland Enterprise Value per Southern Equivalent Acre (TEV/SEA) calculation for five timber-intensive publicly traded companies as compared to southern timberland values per acre calculated from the NCREIF database. TEV is a quarterly estimate based on total enterprise value (total market equity + book value debt) less estimated value of processing facilities, other non-timber assets and non-enterprise working capital. SEA uses regional NCREIF $/acre values to translate a company’s timberland holdings in various regions to the area of southern timberland that would have an equivalent market value.
Court Washburn Managing Director and Chief Investment Officer [email protected] Keith Balter Director of Economic Research [email protected] Mary Ellen Aronow Associate Director, Forest Economics [email protected] Bill Devens Associate Director, Agricultural Economics [email protected] Elizabeth Shestakova Economic Research Analyst [email protected] Keith Goplerud Economic Research Analyst [email protected]
HNRG Research Team
