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Lumbering up

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Money might not grow on trees but it can be made from them. And while that may surprise some students of commodities – over the last decade to December 31, 2009, prices for gold and copper rose by 300 per cent while timber prices fell by 32 per cent – a number of factors, not least the mass urbanisation of the Chinese economy, mean timber is set for a growth spurt.

Like everything associated with the world’s most populous nation, the figures are huge. As around 20 million people move from the country to the city each year, residential construction is soaring. China’s much vaunted economic stimulus plan has earmarked almost £90bn for low-cost housing and much of that demand will be satisfied by woodframe construction. Likewise, demand for timber will be voracious, with many predicting it to grow by one-third over the next five years. China’s widespread ban on logging in 1998 following catastrophic floods has left its myriad infrastructure projects heavily reliant on imported wood.

Demand is equally robust away from the building sites. A new class of consumer is busily shopping for all manner of wooden products, from dining tables to chairs and beds and rising living standards mean a growing appetite for processed forestry products such as paper, cardboard and toilet roll.

In more developed economies, wood has benefited from a new enthusiasm, partly because it is easier to recycle than concrete or steel. A burgeoning interest in second-generation biofuels will bolster this. New techniques have been developed to produce bioethanol from wood fibres by extracting cellulose. Better this, say proponents, than using increasingly scarce food crops.

Factors on the supply side have also forced up prices. Pressures on commercial forestry are mounting. As governments seek to reduce carbon emissions, the brake on supply is likely to become even more significant. In particular, countries in the tropics are using environmental legislation to restrict logging in primary forests.

There are other reasons to consider timber as an investment. Its low correlation with equities provides useful diversification benefits. Moreover, timber prices have risen at 3.3 per cent above the rate of inflation over the last century, meaning the commodity is an excellent potential hedge against rising consumer prices.

In 2010, the price of raw lumber has already risen by more than 25 per cent despite the fact that new house construction North America remains depressed. The price is partly a reflection of supply constraints as timber companies cut back on their harvests but it is unlikely to retreat as the US emerges from recession and demand for new homes picks up.

Growing trees is good for the planet but cutting some down is proving important for global economic health. Through specialist funds investors can enter this increasingly crucial commodities market – and perhaps branch out, as it were, into a new area of investing.

Mark Harries is head of multi-manager at Swip

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