Margules Groome looks back at 2017 and reviews the current and potential state of Australian sawmilling sector based on structural changes that have occurred and/or are likely to happen in 2018.
After a positive performance in 2016, 2017 has been an excellent year for some industry players and a challenging journey for others. 2017 will probably be remembered as the year featuring many announcements of investment intentions and M&A activity; also with a long-time in the making conversation about Cross Laminated Timber (CLT) and timber prefabricated systems developments.
Consequently, the traditional wood processing sector have proved that moving forward is actually possible!
The reconstituted wood panels processing sector has continued its dynamic changes that began in 2016. First, Borg Panels announced its intention to invest in new Particleboard (PB) capacity in Oberon (New South Wales) while OneFortyOne Plantations unveiled plans to establish a new PB capacity in the Green Triangle region.
Margules Groome maintains the view that the PB market outlook remains positive. However, the newly planned capacities and the change in ownership for some plants will alter the Australian PB sector structure and market dynamics.
With an average demand growth of 1.9% for the next 2-3 years, incremental production capacity planned to come online in 2018-2019, assuming both investments proceed, will create a 20%-35% production surplus. Will the exports be an opportunity or a challenge?
Recent legislative changes in Indonesia have the potential to create disturbance in the logs and woodchips markets as well as opportunities for regional players.
The Indonesian President Joko Widodo in January 2016 announced President’s Regulation 1/2016 affecting tree plantation developed on deep peat soils in Indonesia. The presidential decree established the Peatland Restoration Agency (Badan Restorasi Gambut – BRG) to oversee the new regulations.
Significant areas of pulpwood plantation are affected by the decree and if converted to conservation land, will have significant wood supply implications for Indonesia’s pulp and paper sector. Plantation rotation length in Indonesia is very short (4-5 years) meaning that the consequences of this change will impact the market soon.
The Asia-Pacific region continues to be dominated by the Japanese and South Korean large-scale energy producers taking advantage of generous government subsidies as well as solid green energy policies.
In Japan, a country with an ambitious biomass renewable energy target of 4.6% by 2030 (it reached 1.8% by March 2016), there are more than 800 projects that have won government approval. These projects are targeting to establish of more than 12 gigawatts capacity, the equivalent of 12 nuclear power stations – ambitious developments that are facing potential challenges.
What is the market potential for CLT in Australia? There is continuous strong interest in Cross Laminated Timber (CLT) in Australia/New Zealand and around the world.
New CLT facilities plans have been announced and some are getting ready to start-up production in APAC region. Which markets would those new CLT producers target?
Margules Groome’s view is that the CLT market potential in Australia is hard to define. Part of the reason is the absence of longer-term historical trends as the use of CLT for domestic consumption only started in 2012. Based on the observation that most of the decline in apartment approvals in Australia comes from the 8+ storey buildings, CLT is well placed to take advantage of the 4, 5 and 6 storey apartments sub-sector which still looks promising.
Well established products such Oriented Strand Board (OSB), Parallam (PSL) or Laminated Strand Lumber (LSL) in the European and North American markets are yet to attract the attention of the Australian wood processing sector.
Australian reconstituted wood panels producers and consumers remain consistent with their traditional products (Particleboard (PB), Medium Density Fibre (MDF) and Low-Pressure Laminates (LPM) products). Over the past 18 months we saw proposals for new capacity developments and acquisitions. Margules Groome’s view is that with new players will come more efficient production and potentially new products, new business models and improved value chains. There are also strong indications that the ANZ as well as regional market dynamics will start to change.
The global wood pellet market continues its development with volumes and prices oscillating in Europe driven by seasonality and traditional fuels cost. Over the past 5 years, total global pellet production increased by 58%, reaching 28.6 million metric tonnes.
Oceania and Africa still produce less than 1% of global demand, however there are signs that this will change.
In APAC region South Korea’s pellet imports reached 2.1 million m3 (year ending July 2017) a growth of 30% compared to the previous year, with prices on an upward trend, growing at 2%. Over the same period, Japanese wood pellet imports totaled 397 000 m3, a 13% increase compared to 2016 but with prices down by 8%.
With a keen interest in forestry investment in Africa, Margules Groome participated at the second DANA Africa Forest Industry Investment Conference that took place between 12th and 13th of September 2017 in South Africa. Presenters highlighted a number of commonalities between countries and forestry and timber processing projects in South Africa, Mozambique, Malawi, Zambia, Tanzania, Uganda, Kenya, Swaziland and Gabon.
Increasing demand on the African forest products markets are supported by stable economic and infrastructure development and population growth, a growing supply and demand gap, good bio-physical conditions for tree growth as well as good geographic location of East African countries for exports to the East.
Large areas planted with pine, eucalypt and teak are making the bulk of the current forestry greenfields projects in East Africa. Future investments will thus have to look at better linking forests to markets and products.
With a growing fibre deficit in the Asia region, Africa must be part of the global increase in wood products demand’s solution. In April this year, Margules Groome opened its first office in Africa to better service the African and international clients interested in the opportunities the continent offers.
Driven by a strong wood demand from China, Australia’s exports of softwood logs have surged by 146% to a shipped volume of 3.7 million m3 in 2016. Margules Groome considers that this trend has the potential to be a major game-changer that domestic sawmilling industry players should prepare for.