Teak: the peak performer

Summary
• Teak is a fast-growing species native to India and South-east Asia.
• It is strong, durable and is dimensionally stable.
• It is widely used for garden furniture.
• Teak plantations are ideal for investors wishing to develop a ‘green portfolio’.

Widespread uncertainty in current financial markets has spurred the search for alternative investment opportunities that avoid volatile movements of stocks and shares. Teak is an asset class that is attracting much interest because of its low correlation to equities, proven price stability over time, minimum production risks and an optimistic future demand scenario. It is a high-priced, growing, tangible asset that lends itself to the preservation of capital.

Unfortunately, few investors understand the world of tropical hardwoods, which makes it difficult for them to reach an informed decision about putting money into teak cultivation. Once they do understand the merits of teak, however, the reasons are compelling.

Teak (Tectona grandis) is a fast-growing tropical hardwood tree species, native to India and South-east Asia. It has a formidable reputation for quality and has been described as the ace of marine timbers, thereby explaining its perennial demand amongst top-class yacht and boat manufacturers. Its timber properties include strength with lightness; durability; dimensional stability even under extremes of moisture and drying; non-corroding properties; ease of working and seasoning; termite, fungus and weather resistance and attractiveness. The species has been employed for a wide range of traditional end uses such as bridge and wharf construction, railway sleepers, cabinetwork and general carpentry. It is suitable for carving and lasts well, without maintenance, in garden furniture.

Teak is one of the few high-grade tropical hardwoods that can be cultivated in plantations, which gives it a considerable ‘edge’ over other tropical species – particularly those that are facing increasing scarcity of supply.

Supply issues

To satisfy demand for tropical timber on a sustainable basis will require the continued expansion of natural forest management, maintenance of current hardwood plantations and the development of new plantation resources. Supply restrictions are expected because natural forests must sustain not only the output of timber, but a wide range of goods and services, including: non-wood products, soil and water conservation and maintenance of biodiversity. As natural forest timber becomes increasingly scarce in the coming decades, current high-grade hardwood plantations, like teak, are likely to come under increasing pressure to provide their harvests earlier than planned, which could further endanger supply. Given this scenario it will be some time before new investments in plantations will be in danger of producing an oversupply.

Teak is, currently, the most appropriate fast-growing commercial high-grade hardwood species for developing new plantations. Unfortunately, lack of understanding about key commercial aspects of the species, particularly plantation prices, has led to widespread speculation about potential profitability leading, in turn, to the appearance of many dubious investment schemes. This is why it is important for investors to be able to recognise legitimate schemes. The purpose of this article is not to provide absolute data but to allow investors to pinpoint what to look out for in a particular scheme.

The key factors driving profitability in any teak investment are: high site productivity (growth), low costs, high returns and effective risk management.

Regarding anticipated growth, it is imperative that:

• a precise definition of volume be provided;
• a fully transparent and scientific approach to site selection is presented with correlated estimates of site productivity based on verifiable local information;
• applied silvicultural norms are in line with the highest standards of forestry practice;
• a detailed listing of anticipated risks shows how these are to be minimised within budget;
• an independent third party plantation audit is undertaken to ensure that growth targets are being monitored and met.

Concerning pricing:

• a clear definition of prices must be available and indicate if they are based on today’s prices or if they refer to future pricing that includes inflation;
• an unambiguous exposition of price assumptions for each stage and segment of the crop throughout the rotation must be provided;
• precise dates to which reference prices refer, must be supplied;
• where prices are based on the value chain the exact point along the chain must be indicated.

In relation to costs:

• a fully transparent listing of itemised costs, including taxes and fees, are necessary;
• precise dates to which reference costs refer, must be supplied.

Other characteristics that are crucial for good investment schemes:

• full compliance with international laws and the laws of the countries in which the schemes are working;
• adoption of a certified forestry scheme (from the environmental, social and management points of view) that has wide international recognition.

Potential investors also need to understand the nature of risks being considered. There are, of course, country risks, which include those arising from a variety of national inequalities in economic structures, policies, socio-political institutions, geography and currencies – although these would be part of any inward investment scheme. Among the specific risks to a teak plantation, fire, disease, flooding, river erosion, lightning, theft and wind can be cited.

Fire and pest resistance

Teak is a fire resistant species and is unlikely to be killed outright by fire. However, fire can cause nutrient loss on the site; it can also cause lesions in the bark through which fungi can enter and infect the timber, causing long-term damage. Therefore, effective fire management is a prerequisite of good risk management.

The species is relatively disease free and those diseases and insects that do afflict the trees (fungi, leaf skeletonisers and so on) are normally responsible for damaging part of the crop or for causing a temporary loss of increment rather than a total loss of the investment. Likewise flooding, river erosion, lightning, and theft may cause loss or damage to a small proportion of the crop rather than a total wipeout. In fact, good site selection and superior management can minimise the effects of these problems – avoid planting inside the hurricane belt, for example.

When realistic productivity, costs, returns and risks are assessed, the resulting range of internal rates of return on prime sites is within several points of 10%. This is not as much as some pundits are promising but not at all bad for an above-inflation return on investment over a rotation of 20 years or more.

The relatively long period of production tends to dampen investor interest. However, the realisation that tropical hardwoods are almost certain to be in extreme short supply in the next decades should counteract investment fears. Besides, for institutions like pension funds that are seeking long-term placements or for those who want to conserve capital or develop a perpetual ‘green portfolio’, teak plantations are ideal.

Raymond Keogh is the former head of the international teak unit of the Irish Forestry Board. TEAK 21, formerly called TEAK 2000, is a non-governmental, not-for-profit charitable organisation that was formed to highlight the issue of the sustainable supply of high-grade tropical hardwoods. For more information, visit www.teak21.org.