Strong forestry returns are fueled by steady Chinese demand.
New Zealand’s forestry sector is experiencing a period of strong returns fuelled by a combination of steady Chinese demand, restrictions in export markets on native-forest harvesting, low shipping costs, a local building boom and a supportive NZ dollar.
Many of these trends look like they could extend for a number of years, supporting demand for forestry products and returns. In addition, there is a range of new applications emerging in the likes of housing fitouts, wood remanufacturing, furniture end-uses and cellulose fibre which could open up new opportunities in the sector.
Despite this positive outlook the overall plantation area has declined 5 per cent over the last 10 years. Such levels of deforestation are leading many industry participants to worry about the long-term supply of wood beyond 2030.
This is restricting investment further along the supply chain in new wood-processing facilities which produce higher-margin products.
Recent returns should encourage replanting. Prices over the last 12 months suggest forests good-to-excellent in quality and yield located within 200 kilometres of a port and/or mill would have shown an average pre-tax real rate of return (excluding carbon revenue) of 6.3 per cent, with a range from 4.4 per cent to 7.9 per cent.
If you include carbon revenue the average pre-tax real rate of return lifts to 9.9 per cent, with a range of 8.3 per cent to 11.25 per cent.