KEY POINTS:
After almost a decade of dismal returns, log prices are on the rise, making forests an increasingly attractive investment prospect.
But the short-term mentality which has seen some New Zealand's biggest forests sold off to foreign owners in the past five years looks set to cost the local investors, says one leading broker.
Despite the strength of the dollar, which eats into export returns, softwood log prices have risen steadily in local currency terms since 2004.
The ANZ Bank world commodity price index for April showed log prices up 5.6 per cent for the month.
Restrictions on the clear-felling of Siberian forests, ongoing demand from China and reduced US output have all contributed to the long-awaited upturn in the price cycle.
New Zealand was still ranked as the fourth-largest producer of softwood logs but there was no longer any way for New Zealand investors to participate in the industry, said Macquarie Equities investment director Arthur Lim.
"So at a time when New Zealand is identified as one of the top producers and could have been one of the biggest beneficiaries of this trend, the forests are now mostly owned by foreigners."
New Zealand's largest forest owner, Carter Holt Harvey, was taken over in 2005 by Graeme Hart, who subsequently sold its trees to US forestry investor Hancock last year for almost $1.5 billion.
The enormous 165,000ha central North Island Kaingaroa Forest, originally state owned, was sold out of receivership to the Harvard University Endowment fund in 2003.
Ironically, the New Zealand Superannuation Fund has repurchased a $300 million stake in that forest.
Fletcher Forests - now called Tenon - sold its forests to a consortium of Auckland property investors and North American pension funds for $560 million in 2004.
Lim said the revival of log prices highlighted the problem with the focus on short-term returns taken by many New Zealand investors.
US forestry firm Weyerhaeuser provided an example of how more established equity markets were rewarded for their patience, he said.
Weyerhaeuser shares have more than doubled since 2002 and are up 15 per cent so far this year.
"The deeper equity markets in the US have allowed Weyerhaeuser to continue to hold its trees and that company now provides meaningful exposure to the sector," Lim said.
It was really disappointing that, after years of waiting for the log price cycle to turn, investors would now miss out, he said.
Port of Tauranga was one of the only on-market investments left that would offer some exposure to the oncoming boom.
While prices were low many owners were leaving trees in the ground, Lim said, but the increase in harvesting would mean the port was likely to be busier.
Forsyth Barr analyst John Cairns - who covered forestry stocks until their disappearance from the market - was philosophical about the shift in ownership.
"The trees are still there. It's just that the ownership has changed from public listed companies to longer-term superannuation-type investors that can afford to look through the economic cycles."
But it was certainly no longer possible to invest in a listed entity, he said.
Two or three years ago prices were so depressed that the larger players started to defer harvest because the returns were not covering the cost of harvesting. It was around that time that companies like Fletcher Forests started looking for an exit from forest ownership.
One factor helping to lift the log price now was tough export taxes being applied to logs by the Russian Government.
The clear-felling of native Siberian forests has long been blamed by the New Zealand industry for depressing prices. But the Kremlin is trying to discourage the export of raw logs in the hope of creating a value-added wood products industry.
It recently tripled the export tax on logs to 20 per cent and has plans to lift that to 80 per cent by 2009.
Russia accounts for 40 per cent of global softwood log exports. The US is the second-biggest exporter followed by Germany, New Zealand and Canada.
Forestry sector
* More than 1.8 million hectares (7 per cent of the country) are planted with commercial forests.
* The forestry sector accounts for about 3.4 per cent of GDP.
* The sector generates $3 billion in export returns.
* Log prices are finally rising but most of the forests are now in foreign hands.
