Southern Forest Economics Workshop
Long Term Supply Agreements and their effect on
Volatility and Price Premiums
March 20, 2012
© 2010 Forest2Market®, Inc.; Business Confidential
Slide 1
1
Forest2Market
Overview
• Founded in 2000
• 22 professionals
• Headquartered in Charlotte, NC; Western office in Eugene, OR
Strategy
• Transformational data products for the forest and bio-energy industry
supply chain
• Deep analytics built over transaction based data sets
• Inject solutions into daily business decisions
• Lead industry adoption to F2M data standards
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 2
Forest2Market
• Relationships
–
–
–
–
–
90% Timberland Investment Management Organizations
80% Large forest products companies
Lumber manufacturers, treaters, wholesales and traders
Bio-energy facilities (pellets and bio-electric)
Thousands of landowners, consultants and wood buyers
• Market intelligence
– Raw Material Benchmarks
– Custom Analytics
• Proprietary Supply Agreement Indexing
– Site analysis/resource studies and long-term forecasts
– Lumber Price Benchmarks
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 3
Forest2Market
Data – Experience – Expertise
• Neutral-third party (independent in ownership and structure)
• Capture of transaction level data is the only way to achieve a true measure
of market price. Transaction data is the foundation of all our products and
services:
– Rigorously expertized by industry professionals
– Collected and distributed anonymously
– Broad network of data contributors
• Lumber manufacturers, paper, chip and bioenergy facilities
throughout the south and in the Pacific Northwest
• Large and small timber buying operations
• Private and investor owned sellers
• Headquartered in Charlotte, NC; Western office in Eugene, OR
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 4
4
About Forest2Market®
• Solid reputation for fundamentally changing
the standard for market data in the industries
we serve
• Neutral-third party
• Headquartered in Charlotte, NC;
• Western office in Eugene, OR
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 5
A History of Delivering Value
Wood Raw Material
Benchmarks – Northwest
Stumpage Price Service
2007
2009
2001
2006
Lumber Price Service
Wood Raw Material
Benchmarks - US South
2011
Recovered Fiber Service
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 6
Quiz and Prizes
Business Confidential
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2010 Forest2Market®, Inc.; Business Confidential
Slide 7
7
Who am I?
• Hint: Father of modern wood pulp process
Business Confidential
© 2011
2010 Forest2Market®, Inc.; Business Confidential
8
Slide 8
Who am I?
• Carl Dahl – Invented kraft pulp process in 1884; same basic
process used in most all pulp mills today
• First kraft mill in the United States – Pensacola, FL - 1911
Business Confidential
© 2011
2010 Forest2Market®, Inc.; Business Confidential
9
Slide 9
What am I?
Hint – Piece of equipment that revolutionized the pulp/paper
industry
Business Confidential
© 2011
2010 Forest2Market®, Inc.; Business Confidential
10
Slide 10
A Modern Version?
Business Confidential
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2010 Forest2Market®, Inc.; Business Confidential
11
Slide 11
What am I?
Answer: Recovery Boiler invented by G.H. Tomlinson in 1931.
Business Confidential
© 2011
2010 Forest2Market®, Inc.; Business Confidential
12
Slide 12
Southern Industry Took Off
U S Pulp Fiber C onsumption
m illion green tons
1980-2007
Sour ce : FRA and F2M
280
260
240
220
200
180
1980
Business Confidential
1985
© 2011
2010 Forest2Market®, Inc.; Business Confidential
1990
Slide 13
1995
2000
2005
13
What am I?
Business Confidential
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2010 Forest2Market®, Inc.; Business Confidential
14
Slide 14
What am I?
Georgia Biomass – Waycross, GA
Business Confidential
© 2011
2010 Forest2Market®, Inc.; Business Confidential
15
Slide 15
US South demand
Tons of wood required at various co-firing rates
7,000
tons x 1000
6,000
5,000
4,000
3,000
1%
5%
2,000
1,000
FL GA NC SC VA AL MS TN AR LA OK
Based upon current technology and estimates, every 1% of cofiring requires 10MM tons of wood
Business Confidential
© 2011
2010 Forest2Market®, Inc.; Business Confidential
16
Slide 16
European demand
•To meet green energy targets of 20% renewables by 2020, the UK must import 20
million tons of pellets annually
• If 1/3 is sourced from eastern US; then 8-12 new pellet plants are needed
•Total EU demand is expected to be 120 million tons by 2020 – more than 10x the
world’s installed manufacturing capacity
Business Confidential
© 2011
2010 Forest2Market®, Inc.; Business Confidential
17
Slide 17
What’s the Point
• This industry is OLD
• The customer is changing
• New entrants in the market
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 18
Industry is Shifting
• New entrants in the market desire long term contracts
• Does the presence of long term contracts add volatility to the
market? Or vice versa
• Wood Resource Supply Institute (WSRI) commissioned a study
to find out
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 19
Study Hypothesis
Price volatility is
reduced for wood
raw material
products sold under
supply agreement
(blue line) versus
non-supply
agreement (red).
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 20
Data Source
• Utilizing the Forest2Market Price Benchmark
– 70 to 92 percent of the market
• All data is collected and managed to exacting standards of
completeness, timeliness and accuracy.
• Data set used contains 29.8 million rows of data (loads);
approximately 747.1 million tons of wood raw material.
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 21
Data Source
Transaction Details
2006
2007
2008
2009
2010
US South
Number
6,918,801
6,721,370
7,322,985
7,806,252
8,033,112
Estimated 2011
Total =
7,772,479
44,574,999
Analysis Set
29,883,719
747,092,975
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 22
Year
Tons
172,970,025
168,034,250
183,074,625
195,156,300
200,827,800
Pacific Northwest
Year
Number
2006
2007
2,208,195
2008
13,633,022
2009
7,829,723
2010
15,162,892
194,311,980 Estimated 2011
1,114,374,980
Total =
15,645,108
54,478,940
Data Preparation
• Sixteen quarters of data were examined (Q1-2007 - Q4-2010).
• To eliminate price distortion resulting from the variability of
haul distance, each load’s dollar per ton-mile freight rate was
adjusted to a haul cost of a standard fifty-mile haul distance.
• Transactions known to be sold under supply agreement were
tagged; all others are considered open-market sales.
• Two data sets
– Transactions bought under long term agreement
– Transactions bought as gatewood, lump sum, pay-as-cut, etc.
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 23
Methodology - Data
For each paired set containing critical mass of data:
The Coefficient of Variation (CV) was calculated. CV is a measure of the
magnitude of the difference between highest and lowest price* in a set,
expressed as a percent of the mean price of the set.
CV=standard deviation ÷ mean ( ÷ ).
This calculation is used in this analysis to negate the effect of the difference in
the number of individual values in an evaluation set on standard deviation.
(The number of transactions present in a “no supply agreement” set is higher than the number of
transactions present in a “supply agreement “ set, as less product moves under supply agreement. )
PRODUCT_ID
Pine Pulpwood
Pine Pulpwood
Pine Pulpwood
Facility_Type
Paper
Paper
Paper
QUARTER_ID CV_Non_Supply CV_Supply CV_Diff
20074
101.38
81.43 19.95
20081
98.32
77.75 20.57
20082
82.89
75.66
7.24
* Price adjusted to a standard 50 mile haul (see slide 5)
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 24
Methodology - Data
The list of paired CV values was then subjected to the Wilcoxon Signed-Rank Test
to determine the significance of the magnitude of the difference of the CV for
each set.
The result of the Wilcoxon Signed-Rank Test is shown in this report as a p-value
expressed as a ratio. P-values are shown on the navigation pages under each
paired set’s description and on the maps below the state name (see examples on
slides 8 and 10).
The final evaluation was to examine the direction of difference in variation
between the paired sets (CV_Diff). A positive result shows that the price variation
under supply agreement was lower than price variation for non-supply agreement.
In the table below, row 1 shows a CV_Diff of 19.95 (101.38 - 81.43) for pine
pulpwood delivered to a paper facility in Q4 2007 (quarter id = 20074).
PRODUCT_ID
Pine Pulpwood
Pine Pulpwood
Pine Pulpwood
Facility_Type
Paper
Paper
Paper
© 2011
2010 Forest2Market®, Inc.; Business Confidential
QUARTER_ID CV_Non_Supply CV_Supply CV_Diff
20074
101.38
81.43 19.95
20081
98.32
77.75 20.57
20082
82.89
75.66 7.24
Slide 25
Supply agreements lower volatility
for pine pulpwood
Pulp/Paper
P-value: 0.0105
Facility
Pine Pulpwood
< 750K tons
P-value: 0.0171
P-value: 0.5417
Consumption
750 - 1,250K tons
P-value: 0.0398
+ 1,250K tons
P-value: 0.0012
> 99 %
95 - 98.9%
90 - 94.9 %
85 - 89.9 %
81 - 84.9 %
< 80 %
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 26
Summary of Findings
• Forest2Market’s results prove the hypothesis,
price volatility is reduced for wood raw
material products sold under supply
agreement, is true for all products evaluated.
Pine Pulpwood
Hardwood
Pulpwood
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Pine
Sawtimber
Slide 31
Pine Residual
Chips
Other Findings
Hardwood Pulpwood – come along benefit
Although hardwood pulpwood is not (to our
knowledge) traded under supply agreement, we found
less price volatility for hardwood pulpwood sales
conducted between pine pulpwood supply agreement
partners than hardwood pulpwood sales between
partners where no supply agreement exists.
Hardwood Pulpwood
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 32
Other Findings
Price
When a strong difference
in price volatility existed,
mean supply agreement
price was often higher
than the mean non-supply
agreement price.
Depending on the
product, the difference
was $1.00 to $2.00 higher.
© 2011
2010 Forest2Market®, Inc.; Business Confidential
The red vertical line
represents mean price of
non-supply agreement sales.
The blue vertical line mean
price of sales under supply
agreement.
Slide 33
Implications
•Landowners
–Long term agreements are good
•Premiums + lower volatility
•Indicates supply chain efficiency
•Market recognition of value add of large owners
that can effect a supply agreement
–Lower procurement cost
–Lower risk
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 34
Contact
Peter J. Stewart
President/CEO
704 540 1440 ext. 11
pete.stewart@forest2market.com
Forest2Market®
14045 Ballantyne Corporate Place, Suite 150
Charlotte, NC 28277
www.forest2market.com
© 2011
2010 Forest2Market®, Inc.; Business Confidential
Slide 35