SCOTTISH FORESTRY owners and wood processors are combining to show their faith in their industry with an unprecedented investment spree in defiance of fast-sinking markets.

In the past month alone one wealthy investor has begun planting more than one million trees at Langholm in the Borders while new sawmills have been commissioned by the likes of James Jones & Sons, BSW and James Callendar & Sons at a total cost of some £60 million.

The investment comes at a time when demand for wood products has fallen sharply as a result of the downturn in the UK construction industry, while global prices have slumped by 20% or more from peak levels reached last year.

Producers are having to cope also with the effects of the high oil price on both transport and harvesting costs.

"Unfortunately timber is a cyclical business and there have been reports that some processors are having to make temporary cutbacks which is almost unheard of at this time of the year," said Stirling-based David Sulman of the UK Forest Products Association.

"But the level of present investment shows that the industry is taking very sensible steps to increase its efficiency and to take a bigger share of the market from overseas competitors once demand resumes its normal growth pattern."

Most experts say the present situation would have been still worse but for the impact of the rising value of the euro on timber exports from mainland Europe and Scandinavia and wind damage in the big eastern European forests.

Keith Ainslie, sales director at Howie Forest Products, believes some of his overseas competitors may also have sacrificed goodwill by forcing through unsustainable price increases during the boom times which came to an abrupt end last September.

"We are in it for the long haul and value our customers so we held our prices at around £140 a cubic metre at a time when Swedish and Baltic suppliers were charging anything from £180 to £190 a cubic metre, " he says. "They may have obtained a short-term gain but we have the continuing support of our customers."

The Edinburgh-based Confederation of Forest Industries (ConFor) believes that something like £1 billion has been invested in Scotland's forests and timber industry over the past 20 years and says production has soared by 39% to around three million cubic metres since 2000.

Much of the increase is down to forests planted in the 1960s and 1970s when showbiz stars such as Terry Wogan and Cliff Richard joined an investment rush into timber as a result of attractive tax breaks.

And the growth is set to continue following the Scottish government's commitment to creating some 25,000 acres of new woodlands annually as part of its drive to cut carbon emissions.

A further bonus to the industry is the development of new biomass generators that will require upwards of two million tonnes of wood fuel within a few years, including waste products such as sawdust, offcuts and top branches of trees.

The new E.On generator at Lockerbie, for example, requires some 288,000 tonnes of sawmill products a year to be mixed with other fuel to provide electricity for some 70,000 homes.

Ironically, this development is likely to hit Scotland's modest timber export trade as local suppliers have quickly diverted their waste to the generator rather than ship it out to Sweden where it has been used in chipboard manufacture.

Much of the new forestry is being planted by wealthy investors rather than the Forestry Commission and the commercial sector now accounts for more than half all production.

Investors have had mixed fortunes over the years. Figures from the respected IPD Forestry Index showed that average annual returns topped 20% during 2006 and industry experts say the returns could reach as much as 30% when 2007 results are announced towards the end of this month.

But the pattern is unlikely to be repeated this year and, in real terms, the index is still well below peak levels reached back in March 1995.

FIM Services has been responsible for more than £150m of investments in timber since it was founded back in 1979 and points out that investors also enjoy substantial perks, including 100% relief from capital gains, inheritance and income taxes.

"Forestry is not intended for the short term and we would expect our clients to beat the industry average," said director Colin Lees-Millais. "Many of them are repeat investors and are prepared to sit out times of falling prices in the knowledge that their product continues to grow."