From an investment point of view, timber could be as boring as they come. It takes years for a forest to be ready for harvest and, when prices are low, companies can withhold harvesting logs all together. This steady and boring nature has benefited the sector over the last twenty years. From 1987 to 2009, The National Council of Real Estate Investment Fiduciaries Timberland Index has generated an average annual return of 14% compared to 9.4% for the S&P 500. Many investors have taken notice and have been adding exposure to the uncorrelated asset class. However, while currently a boring sector, the forestry industry is undergoing a high-tech transformation that could power portfolios for years to come.
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The Birth of Bioproducts
Jet fuel, renewable plastics and high tech fibers are far removed from the normal forestry products of newsprint and lumber, but these goods could be exactly what the sector needs to become a real growth engine. Overall paper demand is shrinking between 3% and 5% annually and the continuing decline in the U.S. housing market is putting serious pressures on lumber prices. But, as biofuels have gained in popularity, researchers have also discovered that many of the processes for releasing the sugars can also be used to make things like antifreeze, plastics, glues and consumer products. In the face of higher commodity prices and constrained resources, these advanced bioproducts over the next 10 years have the potential to be a $200 billion-a-year industry. This could the spark that paper and forestry firms need. (For related reading, see Timber Investments: Cut Down Portfolio Risk.)
The bio- and renewable plastic sector has already begun to see tremendous growth in only a few short years. Consumers in certain states for example, can buy Coca-Cola (NYSE:KO) Dasani water in a bottle made form 30% plant-based plastics. Analysts predict that global bioplastics production will more than double from 2010 to 2015. A report by the European Bioplastics Association predicts that by 2015, annual bioplastics production will reach 1.7 million tons. Currently, the market for traditional polyolefin plastics is about 248 million tons annually, so there is plenty of room for substantial year-over-year growth in bioplastics.
The pulp and paper industry is also positioning itself to produce considerable amounts of biofuels, without the "food-for-fuel" problems associated with corn ethanol. The black liquor produced as a byproduct of paper manufacturing can be processed into value-added cellulosic biofuels, like ethanol, synthetic crude oil and biodiesel. Demand for these synthetic fuels is also expected to grow exponentially.
Playing the Forestry Resurgence
While many investors have flocked to the timber sector as way to diversify, the explosive growth prospects in bioproducts are often ignored. For portfolios, this untapped potential could lead to great gains. Both the Guggenheim Timber (NYSE:CUT) and iShares S&P Global Timber & Forestry (Nasdaq:WOOD) still represent the easiest ways to add a wide swath of the sector. However, there are plenty of other ways to play the bioproducts revolution.
Unlike other timber REITS such as Potlatch (NYSE:PCH), Rayonier (NYSE:RYN) has an ace up its sleeve. The company has synthetic fiber division which produces fibers used in everything from digital display screens, high impact plastics and pharmaceuticals. Rayonier is seeing demand increase for these fibers and ships them to more than 40 different countries. Shares yield 3.6%.
Alternative-fuel stock, Rentech (NYSE:RTK) maybe worth a gamble. The company won a contract from the government of Ontario to harvest acreage and use the wood to fuel a plant built on White River in Northern Ontario. Ultimately that plant will produce aviation fuel.
Finally, boring pulp firms such as Domtar Corporation (NYSE:UFS), Sappi (NYSE:SPP) and AbitibiBowater (NYSE:ABH) have all begun adding bioproduct capabilities to their operations. Domtar recently opened an experimental mill that will extract nano-crystalline cellulose from wood pulp.
The Bottom Line
The forestry sector has traditionally been a boring source of portfolio diversification for many investors. However, that could be changing. The advances in bioproducts could be the sectors salvation and grow it for years to come. The preceding stocks along International Paper (NYSE:IP) make ideal choices to play the growth. (For related reading, see Mine For Profits With Natural Resource Sector Funds.)
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