Allegheny SAFStonewall Jackson State Park , WV

February 17-18, 2010

Al SchulerUSDA Forest Service

Princeton, WV(aschuler@fs.fed.us)

Urs BuehlmannVirginia Tech

Blacksburg, VA

Outlook for Markets – it’s a new worldout there as the housing collapse, changing

consumer preferencesand new legislation alter the playing field

Presentation Content

① U.S. Housing Markets② U.S. Economy – recovery outlook③ U.S. Wood Products Markets④ International Trade Issues⑤ U.S. Forest Products Industry – Future

Opportunities⑥ Summary

① U.S. HOUSING MARKETS

70% OF STRUCTURAL SOFTWOOD PRODUCTS AND 50% OR MORE OF HARDWOOD PRODUCTS ARE CONSUMED INRESIDNETIAL CONSTRUCTION (NEW PLUS REMODELING)

Bottom line – wood product markets will not improve muchuntil housing gets better

Past notable downturns featured rising interest rates. Interest rates did not rise this time, but borrowing collapsed. The recent housing bust featured declining home equity & prices.

Source: Peter Ince, USDA FS, NAHB and Census Bureau data

“Baby Boom” era

Ho

usin

g B

ust →

→ →

→ →

U.S. New Home Sales - Long History

The latest boom-bust cycle was the biggest ever! It was distinct from cycles of the “baby boom” era. The latest boom was driven by a global credit boom that kept pushing home prices up (until 2006).

Credit

Boom e

ra

Single Family Starts have Stabilizedbut, they are still down 74% from the peak(Jan. 2006)

Source: Census

Thousand units, SAAR

It’s tough to competeWith a resale marketThat includes a high proportionOf “distressed sales”

Single Family Resales have stabilized and are improving thanks to tax credit and low mortgage

rates, but

4,000

4,500

5,000

5,500

6,000

6,500

"2004" "2005" "2006" "2007" "2008" "2009"

Monthly, Thousand units, SAAR

Source: NAR (http://www.realtor.org/research)

many sales are “distressed” dueto foreclosures – this will continue until the employment situation improves. 2009 vs 2008:SF volume up 5%, butprices are down 12%

Prices are starting to come back to realityBut, foreclosure problems slow the processof balancing inventories

Until inventories come back to normal, pricePressures will continue and ImprovementIn housing will be slow.

Case Shiller 20 City Price Index

January 2000 = 100

Prices still down 29% from the peak,but they have stabilized thanks togovernment support – but, prices needto fall further to reach historicalprice/income ratios

Single family Housing Inventorystill “the problem”, but, its improving?

However, this is only the “listed inventory” – shadow inventory is substantial!

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1990199319961999200220052008

2009

2010

Existing New

Thousand Units, Single Family

Annual – 1990 - 2007

Monthly (SAAR) - 2008 – 2009

Source: U.S. Census (http://www.census.gov/hhes/www/housing/hvs/hvs.html)

TREND

The main problem in housing market - lost homes/foreclosures– by adding to supply, they put downwardpressure on prices – an insidious circle ,exacerbated byhigh unemployment and weak income growth

Forecast from Moody’s and National Assoc. Realtors

Latest Harvard* Housing Demand Forecasts 2010 – 2020 ( June 2009)

Source: HJCHS, W07-7 , amended (http://www.jchs.harvard.edu/publications/publications_by_year.htm)

Annual rate (000)

2009 starts forecast

Vacancy demand – 2nd homes, speculation buildingremovals – net loss from existing inventoryof housing stock

Low rate: lower household formations & lower immigration projections

② U.S. ECONOMY – RECOVERY OUTLOOK

Housing is stabilizing, albeit at low levelsForeclosures remain problem –

add to inventory and weak pricing

Consensus outlook (1) slow recovery in housing(2) slow recovery in the economy

Why a slow recovery ?

HousingToo much housing inventoryNeed stronger demand to sop up

inventory, butWeak Economy

high unemployment+ weak income growth -

(negative in 09)+ consumer debt= weak consumer spending

U.S. Economy in 2008

Source: BEA ( http://bea.gov/national/nipaweb)

Consumer spending 70%(consumption of goods & services by/for the consumer)

Net Exports (- 5)%

Government spending 20%

Non residential investment 11.7%

ResidentialInvestment (incl. R&A) 3.3%

Spending on goods/services for/by the consumer is 70% of the U.S. economy ( and

big part of global economy)

Economy won’t get better until consumer spending improvesand that will be difficult due to high levels of debt

exacerbated by low inflation(i.e, debt burden is more onerous in low inflation environment)

Wild card - - Implications for the economy(and wood products) if consumer spending pullsback to 65% ( or lower) of the economy? Long term, this is good ( less consumption = more investment) =Better productivity = more competitive = higher GDP

Cumulative Net change in Non Farm Payrollsover 7 million job losses in past 24 months

4.8 million in 2009 – 15.5 million unemployed today –but, it is definitely stabilizing

-8000-7500-7000-6500-6000-5500-5000-4500-4000-3500-3000-2500-2000-1500-1000

-5000

Source: U.S. BLS ( www.bls.gov)

( thousand )

January 2010(20,000)

Global Economic Outlook

2009 - World wide recession ( except China & India) 2010 will see slow rebound in U.S. and Europe and stronger rebound in emerging countries Recovery in global economy hinges on U.S. consumer

U.S. economy ~ 27% of global economy ( 2006 basis)at 70% of U.S. economy, spending by/for American consumer products account for ~ 20% of global economy

Global Economic Outlook

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2009 2010 2011-2016

China India World USA Euro region

Source: Conference Board ( December 2009)

GDP, percent change, YOY

Solid growth in China, India,and developing Asia Slow growth in advanced

economies – Europe, U.S.,Japan

③ U.S. WOOD PRODUCTS MARKETS

Heavily geared to housing activities

70% of softwood lumber and structural panels consumed in new construction plus remodeling activity

The majority of hardwood products are tied to housingactivity, either directly ( e.g., kitchen cabinets, molding,flooring), or indirectly ( e.g. furniture).

Softwood Market Shares:

Average use during 1998 – 2007

U.S. Softwood Lumber

Industrial16%

New Residential*40%

R&A30%

NR12%

U.S. Structural Panels

New Residential*53%

Industrial17%

R&A19%

NR.10%

*New Residential incl. SF, MF, and Mobile Homes

Source : Lumber – WWPA; Panels - APA

Export 2%

Export 2%

0

0.5

1

1.5

2

2.5

2002 2003 2004 2005 2006 2007 2008 2009

$160

$260

$360

$460

$560

$660

Starts Lumber ( FLC) Panels ( SPC)

Starts ( Million units) FOB, Price, $/M

Lumber and Panel Prices Follow HousingBetween 2005 – 2008: North American lumber production down 31% (23 BBF),

prices down 31%; structural panel production down 12.4 BSF, prices down 29%

U.S. Hardwood Lumber Consumption Trends

0

1

2

3

4

5

1963 1967 1972 1977 1982 1987 1992 1997 2002 2007

Furniture Construction & Remodeling*

Industrial Exports

BBF

Source: Bill Luppold, USDA FS

* flooring, millwork, trusses, cabinets, & fabricated wood members

Residential markets are now 3.5 times the size of furniture marketsExports bigger than furniture

Index of Hardwood Lumber, Cross Ties and Pallet Cant Prices 2004 to 2009

60

65

70

75

80

85

90

95

100

105

110

2004 2005 2006 2007 2008 2009

2004

= 1

00

FAS 1C 2C Pallet Tie

Source: Bill Luppold

Impact of housing collapse

Eastern Hardwood Lumber Production 1958 to 2009

5000

6000

7000

8000

9000

10000

11000

12000

13000

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Mil

lio

ns

of

bo

ard

fee

t

Source: Bill LUppold

2009 level about 6.5 BBFDown 48% from peak in 1999

(2009 estimated based on a survey of state utilization foresters)

0

5

10

15

20

25

30

35

40

45

2005

2006

2007

2008

2009p

U.S. softwood lumber output is currently down by -46% and OSB down by -56% since 2005 . . .

U.S. Softwood Lumber Production Billion Board Feet

Source: WWPA (p = 3rd Quarter 09)

0

5

10

15

20

25

30

2005

2006

2007

2008

2009p

Source: APA – The Engineered Wood Assoc.

OSB Production Billion Sq Ft 3/8" Basis

U.S. Log Price Trends (2002 – 2009) . . .Starting to get better!!

Log prices generally followed lumber markets, climbing to recent peaks in 2004-2005, but collapsing with the housing bust. The drop in log prices (-24% for softwood and -27% for hardwood from recent peaks) is now similar to the average drop in lumber prices.

Source: Peter Ince, USDA FS, BLS Source: Peter Ince, USDA FS, BLS (Bureau of Labor Statistics)(Bureau of Labor Statistics)

75

100

125

150

2002 2003 2004 2005 2006 2007 2008 2009

Pri

ce

In

de

xe

s (

19

82

= 1

00

)

150

175

200

225

250Hardwood Logs

Softwood Logs

Capacity Utilization - U.S. Softwoods

Production/Capacity

Sources: OSB – APA; Lumber RISI

Both approaching 50% utilizationThat means lots of downtime,shutdowns ,and little or no profit

Global Drivers . . .Global Drivers . . .

Trade liberalization (GATT Trade liberalization (GATT WTO) WTO)

Expanded global commerce Expanded global commerce

Shift of manufacturing growth to Asia and EuropeShift of manufacturing growth to Asia and Europe

Collapse of global financial system (current recession)Collapse of global financial system (current recession)

④ International Trade Issues

Source: Peter Ince, USDA FS

Domestically-produced shares* of U.S. consumption declined for many wood products from 1990 to 2008 –Implications for demand for U.S. wood and timber?

*Consumption Value = P + I – E Import share = I / C Domestic share = 1.0 – ( I / C)

Sources: Shipments : Dept Commerce, Bureau Census , ASMImports & Exports : FAS, B. Luppold for hardwood lumber, P. Ince for paper & board

2006 datafor flooring &molding

0%

10%

20%

30%

40%

50%

60%

Kitchen cabinets Upholstered Wood Office

HH Furniture Molding(hwd + soft) Hardwood Flooring

*These market shares are conservative because some imported components and finished furniture is included in the domestic shipments

Consumption = shipments + imports – exports. Import share = imports/consumption

Source: Census, ASM; ITA (www.ita.doc.gov)

Market Share of U.S. Imports

Forest Products Export Trade

$0

$50

$100

$150

$200

$250

0%

2%

4%

6%

8%

10%

12%

14%

16%

World (L)

U.S. Share (R )

World Exports (Billion $) U.S. Share (%)

FAO – ForesSTAT (http://faostat.fao.org/site/626/DesktopDefault.aspx?PageID=626#ancor)

U.S. Softwood Lumber Trade

0

5

10

15

20

25

30

0

5

10

15

20

25

30

Imports- Canada Imports - Elsewhere Exports

Source: RISI, WWPA

BBF

Hardwood Lumber Exports 1990 to 2009

(2009 based on volume through May 2009)

500

600

700

800

900

1000

1100

1200

1300

1400

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Mill

ion

s o

f b

oa

rd f

ee

t

Source: Bill Luppold, USDA FS

Export opportunities -

China building code changes– to allow wood frame construction in Shanghai – the Shanghai local code may be easily adaptable to other cities and provinces across China

Russian export tax – opportunities for other suppliers e.g., China is largest importer of Russian logs –

in 2007, China imported 27 million m3 from Russiaincluding hardwoods and softwoods – 75% of

China’stotal log imports. In April, 2008, the tax went to 25%(from 5%), and is scheduled to go to 80% in 2010.

Products Rate or minimum amount

Jul1, 2007

Apr 1, 2008 Jan1 2009

Softwood logs (>15cm)

%Euro/m3

20%10

25%15

25%50

Hardwood logs(.>15cm)

%Euro/m3

20%24

20%24

100%50

Poplar %Euro/m3

10%5

10%5

80%50

Industrial Birch %Euro/m3

10%5

Russian Export Tax Update

Source: Russ Taylor, Wood Markets Monthly, Vancouver, CanadaDecember 2009

World Log Exports – hardwoods and softwoods

Source: Global trade atlas

Billion $

World Log Imports – hardwoods and softwoods

Source: Global trade atlas

Billion $

Russian Log Exports – hardwoods and softwoods

Source: Global trade atlas

Billion $

China Log Imports – hardwoods and softwoods

Source: Global trade atlas

Billion $

⑤ U.S. FOREST PRODUCTS INDUSTRY - FUTURE OPPORTUNITIES

New Opportunities – new climate –Good or Bad – Depends on us!

Energy Independence and Security Act of 2008 - sets targets for cellulosic biofuels production through 2022 – 36 billion gallons renewable fuels by 2022 – 21 of the 36 must be “advanced biofuels such as cellulosic ethanol

American Clean Energy and Security Act of 2009(Waxman/Markley climate change bill - establish targets to obtain a certain percent of electricity (17%) from “renewable sources” fuels including biomass by 2018 – objective is to reduce GHG emissions

Resource constraints + climate change policies + shifting consumer values

“Use to be a simple business of converting trees into lumber, panels, and paperNow, uniquely positioned ,or exposed, to political and economic forces that Are reshaping the regulatory and market landscapes” - - A,.Sauer, World Resources Institute

Impacts on forest products industry

New revenue streams and markets for forest products and services(1) carbon storage and sequestration – “being paid to grow

trees”(2) biomass and biofuels for transport fuels and electricity

Competitive advantages in a low carbon economycarbon neutral/carbon negative productsthere will be incentives to reduce green house gas emissionsvia carbon tax or cap and trade system

Green preferences will increase with increasing awareness of climate change benefits of sustainable forest products.

Wood products industry must get involved to make sure these benefits evolve!

U.S. Oil Supply

58%42%

World comparisons – Carbon Dioxide Emissions

Source: EIA

U.S. produces 20% of emissions,With 5% of population

American Clean Energy and Security Act of 2009 mandates goals/targets/timetables for reduction in CO2 emissions – data below shows the U.S.Has long ways to go

Source: EIA

Great opportunity for wood as climateChange policies directly, or indirectly raise theprice of energy from fossil fuels

Source: FAO – state of world’s forests 2009

Domestic production

Imports

Europe is largest market for wood pellets – why?(1) European Union mandated 20% of electricity from renewable sourcesby 2020, and (2) high taxes on CO2 emissions from fossil fuels

Source: Forisk Consulting

Changing Supply Chain - - - New/Additional Fiber Demand from Wood BioEnergy in U.S. SouthRanges from 10% to 25% depending on technology and financing –Will drive pulpwood/chip prices higher, and eventually, sawtimber, and veneer prices as landowners shorten rotations/harvest age.

New fiber demands depend on technology, and financing of bioenegy facilities. Much of the fiber will be pulpwood and chips as economics ofHarvesting crowns, limbs, etc. is ”iffy”. Estimates range from 15 to 35 million additional tons of pulpwood/chips will be needed for bioenergy by 2020.Thus, 10 % to 25% additional fiber demand based on 2006 consumption levels of 130 million tons.

Sign of the times??Minnesota OSB plant converted to Biomass facility

(Dec. 2009)

With the demise in U.S. housing, the OSB industryhas excess capacity – an older OSB plant in Cook, MNwas recently purchased by Hill Biomass for conversionto biomass products (pellet plant)

Another recent item (Feb. 2010) – Weyerhaeuser andMitsubishi sign MOU to join forces to produce wood pellets

10

12

14

16

18

20

22

24

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Supply

Demand

North American Wood Residue Supply (from 3 main sources) and Demand (from 4 main end uses).

Million Metric Tons

Excess supply of fine wood residues has nearly evaporated . . . suggesting that future expansion of wood pellet capacity would have to rely on more costly alternative wood sources . . .

Source: Spelter, USDA, FPL

Green Building (sustainable) Trends

• Market for “green homes” is expected to increase from $2 billion

to $20 billion over the next five years in the USA• Implications for wood products industry: certified wood

products plus LEED and other green building certification programs will benefit wood – any trends that promote sustainable products will favor wood!

Life cycle analysis shows that wood is a sustainable material.

What is green building? A philosophy that focuses on buildings that:(1) Efficiently using water, energy, and other resources(2) Protecting occupant health and improving employee productivity(3) Reducing waste, pollution and environmental degradation

U.S. Residential Green Home Market Opportunity

$7 $12

$40$8

$30

$0

$10

$20

$30

$40

$50

$60

$70

$80

2005 2008 2013

Lower market size Upper market size

Billion $

Source: McGraw – Hill construction market forecastMcGraw _ Hill construction, Green Outlook 2009

Green homes accounted for 17% of SF homes built in 2008-- - up from 12% in 2007 - - over 1 million new homes have the Energy Star designation

Source: M. Snow, AHEC

Source: M. Snow, AHEC

Source: Mike Snow, AHEC

Lacey Act, as amended*, will encourage more acreageof certified forests plus more COC certificates?*The Lacy Act of 1900,originally designed to combat illegal trafficking of wildlife and fish, was amended in 2008 to include illegal logging and products made from illegally harvested timber

Today, 8% of global forest area is certified by the FSC or PEFC In addition, there are additional areas certified by other systems

Source: FAO, AFPMR – 2008-2009

Wood products markets won’t improve until housing improves

Housing improvement hinges on balancing supply and demand - Foreclosures are a big problem on supply side

Stronger economy is key to stronger housing demand and fewer foreclosures

Consumer spending is big question mark – 70% of economy - - consumers are heavily in debt ( so is federal government)

U.S. economy will recover slowly as will housing

⑥ Conclusions

International economy in recession in 2009 with mixed recovery in 2010 – U.S., Europe, and Japan recover slowly while China and India see stronger growth. Growth depends on health of U.S.

consumer International trade in wood products – stronger world growth (2010)

and favorable exchange rates should fuel stronger U.S. exports. Opportunities to expand log and lumber exports to wood starved

China

New opportunities ( and challenges) for forest product industry brought on by changing consumer preferences and new legislation - - biofuels, wood pellets, carbon storage – cap and trade legislation,

green building materials, certified forest products, amended Lacey Act

Problems – higher wood fiber prices if biofuels and wood pellets compete with existing industries for roundwood and residues – good for log prices, but not so good for OSB , PB, and MDF industries