MIS Time Bomb?

[Vainglorious]

Interesting analysis of the future of forestry managed investment schemes (TIM, GPT, etc). It appears - like a lot of government interventions - that things never turn out as expected. A huge amount of pulp forest has been planted over the last decade and this massive supply is coming home to roost which is going to burn a lot of investors and leave the whole MIS industry with a huge PR problem.

http://www.treasury.gov.au/documents/1122/PDF/011_Dr_Judy_Clark.PDF

 

[wayneL]

The parallels with mining are obvious.

 

[BSD]

The parallels with mining are obvious.

Sorry, but I cannot see the similarities (??)

A few points:

Forestry projects have been planted with reckless abandon, subsidised by tax breaks and now potentially in excess supply. Name a base metal in excess supply at the moment?

In financing the industry, bankers have lent unsecured money on individuals ability to repay -not the economics of the individualprojects like in mining.

Good mining projects are like hens teeth and getting more rare, land for forestry in Australia is plentiful. The barriers to entry in most metals are massive; not so in forestry.

Paper consumption is not growing at the rate of copper/steel/nickel

The industrialisation of China is copper and steel intensive; as opposed to timber/paper intensive

 

[wayneL]

Sorry, but I cannot see the similarities (??)

A few points:

Forestry projects have been planted with reckless abandon, subsidised by tax breaks and now potentially in excess supply. Name a base metal in excess supply at the moment?

In financing the industry, bankers have lent unsecured money on individuals ability to repay -not the economics of the individualprojects like in mining.

Good mining projects are like hens teeth and getting more rare, land for forestry in Australia is plentiful. The barriers to entry in most metals are massive; not so in forestry.

Paper consumption is not growing at the rate of copper/steel/nickel

The industrialisation of China is copper and steel intensive; as opposed to timber/paper intensive

BSD

Once overcapacity becomes obvious so will oversupply. Contrary to pulp/paper. Base metals can be a "self-feeding" monster.

The increase in demand (and therefore supply requirements) of base metals requires... ummm, base metals. Therefore, oversupply of base metals, *when* that occurs, will cause a massive drop in demand of the very same metals.

e.g. notwithstanding the massive rise in copper since 2003, between 1995 and 2001, copper more than halved
...ditto other base metals.

Anyone who does not recognise the "potential" for base metal prices to halve from todays levels, are not pricing in risk properly

Cheers

 

[BSD]

Thanks for the reply Wayne, I understand more where you are coming from.


I don't doubt the potential for metals to enter oversupply sometime in the future. Just the comparison to timber.

On the supply side:

Metals (and oil) have finite reserves with rising production cost profiles; unlike timber

Miners/explorers currently unable to generate sufficient new production to meet annual demand growth – where is the new copper coming from? Plenty of subsidised timber coming.

Diminishing return on capital from marginal mining projects (lower grade, greater depth) – woodchips industry still very inefficient (10% commissions, 100% deductions etc)

Financing of metals projects being completed at long term prices 1/3 of spot – forestry financing completely separated from project quality

I use $1.20 Cu still for my long term NPVs – but I do not expect the price to get back there. More of a stress testing than anything else.

A great majority of producers now cannot produce at prices sub $1.00, let alone explore

Equally, I can see Cu hitting $4.50 before $2.00

The mining industry in Australia needs to be supported - the MIS sector needs to be wound up if it cant survive without 100% deductibility.



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