Lumber: back in vogue for a bio-based economy

Laurent Joué Head of Systematic Alternatives and Lead Portfolio Manager	Marc Pellaud, PhD Lead Portfolio Manager	Thomas Hohne Sparborth, PhD Head of Sustainability Research
Alexandre Garrett, CFA Senior Roadmap Analyst	Laura Garcia Velez Nature Specialist	Marc Palahi, PhD Chief Nature Officer

As a core building material, lumber is making a comeback¹. Its increasing use in construction and its role in the move to a low-carbon economy make lumber one of the core convictions in our Transition Materials strategy. Here we explain the reasons behind our positive demand outlook.

 

Key points: The use of lumber as a building material is undergoing a revival, thanks in part to technological advances with Engineered Wood Products (EWP)  Lumber products play a key role in accelerating the transition to a net-zero economy that is inclusive and nature-positive  However, the material comes with its own environmental and social challenges. Sustainable logging practices and reforestation efforts, for example, are essential

 

Lumber and EWPs: an introduction

The use of trees in the history of technology reportedly goes back at least 476,000 years. The earliest evidence for their structural use in the archeological record is on the site of Kalambo Falls, in what is now Zambia². The earliest known wood artefact is a fragment of polished plank found in Israel, dated at over 780,000 years old³. 

Lumber refers to processed wood that has been cut and prepared for various construction, building and woodworking purposes. It is derived from roundwood that is harvested and processed in sawmills or other facilities. Its availability, structural properties and renewable nature make lumber an increasingly popular choice in the building industry, particularly because of its strength, durability and aesthetic appeal.

Engineered Wood Products are a type of lumber. The term refers to layers of wood – either sawn or peeled – that are glued together to improve dimensional stability and mechanical performance⁴. These products are designed to withstand a given level of stress and to meet demanding building regulations. Some of the most common EWPs include cross-laminated timber (CLT), glued laminated timber (glulam) veneer lumber (LVL).

Lumber is sometimes referred to as timber in Europe, Australia and New Zealand, while in the US and Canada the term timber refers specifically to unprocessed logs (roundwood), or even standing trees prior to harvesting. 
 

Lumber’s revival as a building material mainly stems from three factors:   Technological advancements in producing stronger and more durable products, such as EWPs, have made it possible to use lumber even in high buildings, which require stronger foundations. EWPs contribute to climate change mitigation via two main mechanisms: substitution and carbon storage. EWPs have a lower carbon footprint than materials typically used in construction, such as steel or concrete. Also, trees sequester CO2 in standing forests through photosynthesis and store the carbon for the duration of the life cycle of the products.  EWPs offer various circularity advantages, including reduced construction times, improved production and safety, lower transportation costs, decreased material demand, noise reduction and waste reduction.

 

Demand drivers

Demand linked to system changes – 3/4 of total demand
Historically lumber has been used in round or plank shapes to build structures like homes and commercial buildings. It is used for elements including framing, flooring, roofing and walls, as well as for furniture. Different types of lumber are selected for their aesthetic appeal, strength and durability.

However, there are some substitution risks for lumber. First, the industry competes for resources with sectors like packaging, which uses roundwood to produce pulp and paper. Second, cement, bricks, iron and steel are more commonly used today because of their structural strength and space-saving benefits. Similarly, plastic, iron and steel are not uncommon in the furniture and packaging industry. This is due to the lightweight properties of plastic and the sturdiness of iron and steel.

Moving forward, however, we anticipate increasing demand for lumber as a substitute structural material. One significant trend is the growing use of EWPs to replace fossil fuel-based construction materials. This shift is driven in part by the significant average substitution effect (reduction in greenhouse gases) of EWPs, which ranges between 1.3 and 1.6 kg CO₂ per kg of EWPs⁵. This corresponds to the emission reductions that occur when materials like steel and cement are replaced with EWPs.

EWP’s circularity benefits 
The use of EWPs aligns with the objectives of transitioning from a fossil fuel-based economy to a circular bioeconomy. A circular bioeconomy is an economic model based on the sustainable use of biological resources, such as lumber, following circular economy principles⁶.

Moreover, EWPs offer several advantages over conventional construction materials, including a high strength-to-weight ratio and ease of handling. Ongoing innovations in the field of EWPs are currently focused on circularity and industrial prefabrication. These advancements bring numerous benefits to the construction industry, such as reduced project times, improved production and safety, lower transportation costs, decreased material demand, and noise and waste reduction.

For example, substituting a wooden frame for a concrete frame can markedly decrease the total material input required for a building. In fact, a wood-based structural frame has the potential to halve the overall material consumption in construction and reduce the weight of the structural frame by 70%⁷. Additionally, a lighter structural frame means less material is needed in the foundation. 

By embracing these advancements and incorporating EWPs as construction materials, the bioeconomy can drive sustainable and efficient resource use while meeting the increasing demand for lumber products.

Projected demand
Global demand for lumber is projected to grow 6.1% per annum⁸ until 2030, driven by demand for wood-based panels and sawnwood. 

While lumber products may not always be the first choice for construction, we believe that the policy emphasis on decarbonisation and improvements in EWPs are factors that the market is undervaluing. The increased focus on bioeconomy products and the decarbonisation of the construction sector have already started to shift the attention of top companies towards lumber. According to a 2021 European Union survey, 67% of consumers in the EU purchased environmentally friendly products, even if they were more expensive⁹. 

FIG 1. Lumber’s key market characteristics

Sources: LOIM calculation, Food and agricultural organisations, Statistica. Data as at 2022.
 

Supply sources

• Primary sources:  roundwood
• Secondary sources: recycled or reclaimed wood repurposed for various applications, sawmill by-products. Promotes circular economy principles
   

FIG 2 & 3. Lumber: Top uses & producers by country

Source: Forest product statistics.
Source: Global lumber production 2022, by country and type | Statista.
 

Processing Lumber Several steps are involved in transforming raw roundwood logs into usable wood products. It begins with the harvesting of trees from forests and transportation to sawmills or wood-processing facilities. The logs are then bucked, which means cutting them into manageable lengths. The logs may also undergo debarking, where the outer bark layer is removed. Then logs are passed through saws, sorted and graded on criteria such as wood quality and characteristics to ensure that products meet specific standards and are suitable for their intended applications. Various additional processing steps, such as drying, planning and surfacing, can occur depending on the intended use. For EWPs, additional steps include gluing together different layers of material to create a composite with enhanced construction properties.

Remarkable timber buildings

Source: NinaRundsveen, CC BY-SA 4.0, via Wikimedia Commons.
 

LOIM’s conviction

Lumber is playing a vital role in the transition to a low-carbon economy. The dual effect of urbanisation and decarbonisation will lead to more new homes and cleaner, low carbon intensity buildings built from lumber. We expect lumber to substitute for steel and cement, with new forms of EWPs that are stronger and more versatile. Carbon pricing incentivises cement substitution, which leads to added upsides for some suppliers in the generation of carbon credits.

However, the supply of lumber is constrained by the long-term growth rate of productive plantation forests and the limited available land area. Additionally, climate change exacerbates the intensity, frequency and scale of wildfires and pests in unsustainably managed forests, leading to a diminishing supply of lumber. Due to climate and nature risks, lumber’s role as a substitute material is likely to be coupled with growing demand for lumber to be sustainably certified through programs such as the Forest Stewardship Council (FSC) or the Program for the Endorsement of Forest Certification (PEFC). This could create further upside pressure on pricing.

From a modeling standpoint, we expect global lumber demand to grow from 1.405 billion m³ in 2022 to 2.248 bn m³ by 2030, compared with the consensus forecast¹⁰ of 1.825 bn m³. This is equivalent to a 6.1% compound annual growth rate (CAGR). At the same time, global supply is expected to lag, which will create an estimated supply deficit of 6% by 2030.

FIG 4. Lumber: supply/demand outlook to 2030 (mn)

Source: LOIM calculations. Global Timber Outlook 2020, Gresham House.

In addition to these calculations, we performed a qualitative analysis to better reflect long-term uncertainties. Regarding demand, we estimated that lumber could materially benefit from system changes, and demand substitution was currently moderate. Meanwhile, risks to supply remained high, with climate change accelerating risks of wildfires and new pests. This underpins our highly positive outlook for lumber as a transition material. 

FIG 5. Lumber: conviction matrix

(*) estimated on country-level concentration of global production, governance of supplier countries, including environmental aspects. Source LOIM calculations as of December 2023.
 

Environmental and social considerations

There are several environmental and social issues related to the production and use of lumber that must be considered.  

Environmental - Unsustainable logging can cause deforestation and lead to habitat destruction, loss of biodiversity and soil erosion, and contribute to climate change. Certification programs like FSC or PEFC provide guidelines for responsible forest management and help consumers identify sustainably sourced lumber. 

Although certification is crucial to guiding the sector in the adoption of minimum environmental practices, the ultimate objective is the integration of Nature-based Solutions (NbS) into industry business models. By embracing NbS, the sector can mitigate existing nature and climate risks while enhancing its role in the bioeconomy. This approach not only helps address environmental challenges; it also ensures the maintenance and enhancement of nature services throughout the productive cycle. 

Waste and by-products generated by sawmills and wood-processing facilities are significant. It is estimated that around 80% of the lumber wasted today is not recycled, resulting in approximately 165 mn tons of carbon emissions. Proper waste management can help minimise environmental impacts. By-products can be used for energy production and processed into value-added products, such as composite wood panels. 

Water is used in various stages of lumber processing. Efficient water-management practices, such as recycling and treating wastewater, can help minimise water use and prevent pollution. Responsible chemical use and proper disposal of chemicals used in lumber treatment are essential to preventing environmental contamination. 

End-of-life management, promotion of recycling, reuse and repurposing can help extend lumber’s lifespan and reduce demand for new materials.

Social – Many forests around the world are traditionally owned or managed by indigenous communities. Recognition and engagement with these communities can help ensure their participation and sharing of the benefits, as well as safeguard their cultural heritage. 
 

Market analysis

Lumber is traded on the Chicago Mercantile Exchange. The CME trades a contract that is 27,500 board feet, which is physically settled. The futures listing cycle will include expiries in January, March, May, July, September and November. The deliverable species for the Lumber futures contract include SPF¹³ (stamped SPF), Douglas Fir, Lir Larch and Hem Fir. Contracts are quoted in USD¹⁴. 

The price of lumber is mostly influenced by:

• Supply and demand. Factors affecting demand include housing construction and infrastructure projects, as well as global economic conditions
• Tariffs and trade policies. Trade policies can have a significant impact on lumber prices. Tariffs imposed on imported lumber can increase its cost in different markets
• The US Dollar. Lumber is priced in USD 
• Energy and production costs. Sawmills and wood-processing facilities require energy, together with transportation. Fluctuations in energy prices can impact the price of lumber
• Government regulations and policies. Those related to forestry management, environmental protection, labor standards and trade can affect the cost of lumber production 
• Natural disasters and climate events. Hurricanes, wildfires or insect infestations can have a significant impact on lumber prices. Other climate events, such as droughts or heavy rainfall, can also affect forest growth, and lumber quality and availability 

FIG 6. Lumber price 

Source: Bloomberg, CME-Chicago Mercantile Exchange. For illustrative purposes only. 
 

Conviction statement

Our outlook for lumber is broadly driven by these dynamics:

• Decarbonisation policy and regulation. We believe that Target Net Zero commitments and the push towards decarbonisation in the construction sector will drive the demand for lumber products, such as EWPs, as substitutes for fossil fuel-based materials like steel, iron and cement
• Engineered wood production innovation. EWPs like CLT and other laminated lumbers provide more sturdiness and strength than traditional lumber products used in the construction sector. This improvement in quality, we believe, provides greater confidence in the increased use of lumber
  
   

Sources.

1  Any reference to a specific company or security does not constitute a recommendation to buy, sell hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document. 
2  Barham et al. Evidence for the earliest structural use of wood at least 476,000 years ago. Nature 622, 107-111 (2023). 
3  Goran-Inbar, N., Werker, E. & Feibel, C. S. The Acheulian Site of Gesher Benot Ya’aqov, 
Israel: The Wood Assemblage (Oxbow, 2002), Belitzky, S., Goren-Inbar, N. & Werker, E. A Middle Pleistocene wooden plank with man-made polish. J. Hum. Evol. 20, 349–353 (1991)
4  Hurmekoski, E. 2017. How can wood construction reduce environmental degradation? European Forest Institute.
5  Hetemäki, L., Palahí, M. and Nasi, R. 2020. Seeing the wood in the forests. Knowledge to Action 01, European Forest Institute. ttps://doi.org/10.36333/k2a01
6  According to the Ellen Macarthur Foundation, these are: the elimination of waste and pollution, the circulation of products and materials at their highest value, and the regeneration of nature.
7  Hurmekoski, E. 2017. How can wood construction reduce environmental degradation? European Forest Institute.
8  Source LOIM calculation, using data from sources including Global Timber Outlook 2020, Gresham House
9  New consumer survey shows impact of COVID-19 (europa.eu)
10  Global Timber Outlook 2020, Gresham House 
11 Source LOIM calculation.
12  Based on EU Critical Raw Material Studies.
13  SPF stands for spruce-pine-fir, a common grouping of some of the Eastern softwoods.
14  Source CME 

For professional investor use only

This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Asset Management (Europe) Limited prior consent. In the United Kingdom, this material is a marketing material and has been approved by Lombard Odier Asset Management (Europe) Limited  which is authorized and regulated by the FCA.

© 2024 Lombard Odier IM. All rights reserved.