Dynamics of global roundwood prices - Cointegration analysis

The integration of roundwood markets needs to be analyzed and understood by timberland investors in order to make appropriate decisions. This paper addresses the performance of global roundwood markets by evaluating the order of market integration in the United States (the South and Pacific Northwest), New Zealand, Brazil, South Africa, Sweden, Chile, Canada, Finland and Austria. An overview of each of these wood markets is provided and quarterly data of delivered prices are evaluated over the period 1995Q1-2017Q4. Various unit root tests and Johansen's cointegration tests have been computed. Results show that in general non-coniferous and coniferous wood markets are not integrated. However, it was found that the law of one price seems to hold for coniferous sawlog prices between Sweden and Finland, and non-coniferous pulpwood prices of wattle and eucalyptus species in South Africa. It was concluded that probably due to a lack of perfect substitutability of roundwood products and significant transaction costs among trading regions, global roundwood markets are characterized by relatively moderate correlations and a lack of cointegration, which indicates an apparent independence of these markets. These findings are important to timberland investment managers as they support the concept of market diversification within international investment portfolios.