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Where Is Economy Headed? Implications for Southern Forestry!!. Dr. Lynn O. Michaelis—Executive Adviser, RISI Presentation to SCFA Annual Meeting November 3, 2011. Where We are Going Today!. Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand - PowerPoint PPT Presentation
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Where Is Economy Headed?
Implications for Southern Forestry!!
Dr. Lynn O. Michaelis—Executive Adviser, RISIPresentation to SCFA Annual MeetingNovember 3, 2011
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Where We are Going Today!
Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand Regional implications: logs and timber Longer term: There WILL be a recovery
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Bernanke’s said in 2010:
“An unusually uncertain environment”
Translation: flying blind
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Financial meltdown: Sources of sustained recovery?
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Unique cycle and source of global financial crisis
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Perspective: More difficult than 1979-82
Extremely low operating rate “Depression” prices
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Where We are Going Today!
Understanding the situation: WHY? Economic and housing outlook
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The Challenge: Economic Forecast given the NEW WORLD
Current best view: sluggish growth through 2012-13– Key Driver: Consumer Spending -- not too exciting– Strong Business Investment last Quarter– Several Headwinds: Housing, State and Local Government,
Politics for 2012 Election Biggest Risk: European debt crisis (future of the Euro)
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U.S. Growth : Revised down since May, with serious implications for employment
Key Driver: consumer spending, but..
– Employment– Confidence– Wealth
Strong Bus Investment Modest boost from
international—weaker Euro?
Truth: uncharted waters– Range of forecasts for
2012: .5%-3.5%
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Decline in employment rate helps unemployment statistic
The statistic for: 2007 2009 2011
Unemployment rate (%) 4.6% 9.3% 9.2%
Labor force (millions) 153.1 154.2 153.7
Employment (millions) 146.0 139.9 139.6
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Falling home prices have serious wealth impact and potentially on consumer spending
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Oil Prices Supported by Emerging Economies and Weak Dollar
West Texas Intermediate Crude Oil, US$ per Barrel
Source: Fed, RISI
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Expect rates to remain flat through 2012: but not an issue for housing
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Housing Outlook: Unique situation
Single-family still flat– Problems persist for SF
into 2012– Falling prices and
foreclosure rates– Despite record affordability
Multifamily prospects improving– Vacancy rates, rents,
absorption rates
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Housing Outlook: Inventory correction with a TWIST
New Housing “Model”: THINKING About Plausible Recovery Patterns—no history to build econometric model
Correct approach: simulate inventory correction process—must eliminate excess before production recovers
1. How big is the excess inventory?
2. Determine annual housing “demand” vs. housing production
3. What type of units will be required—Single Family vs. Multi Family?— This is the Twist!
4. Then, simulate housing start trajectory given some key assumptions—BE CAREFUL HERE!!
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Starting Point of 1.8 Million Excess Vacant Units, but it could be……
Size of Stock (Millions)
Historical Vacancy Rate Avg. for ‘95-’05
CurrentVacancy Rate
Implied “excess”Inventory (Millions)
Owner Occupied 75 1.5% 2.7% 0.90
Renter Occupied 37 7.4% 9.4% 0.74
Occupancy Rate 130 88.0% 85.6% 3.10
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Forecasting basic housing demand: Simple?
Housing Demand=Net Household Growth + Net Removals + Second Home demand
Net Household Growth developed by age group=population growth and headship rate
Net Removals: 350,000-450,000 per year
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Household Formations: Outlook based on April GDP and employment growth
Starting point (April 2011) was 2.9% GDP growth and 3.4% in 2012
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Illustration of economic impact on the younger age groups
Employment Rate Headship Rate
2000-2005 2005-2010 2000-2005 2005-2010
20-24 -1.1% -8.1% 3.7% -13.2%
25-34 -0.3% -5.0% 2.1% -5.8%
If headship rate had been stable: another 2 million household or 400,000/ year in housing demand
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Simulating Housing Production and Tracking the Inventory Correction
(Thousands) 2009 2010 2011 2012 2013 2014 2015
Housing Demand, given household forecast*
655 868 1,255 1,400 1,600 1,675 1,575
LESS: Production (Starts +Mobile Homes)
560 640 637 693 1,100 1,400 1,675
Inventory by Year End
2,028 1,800 1,182 475 -25 -300 -200
* Net removals assumption: 500,000/year
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What type of units? Reason it is important
Ave. Size Usage/sf. Demand/unit
Lumber per unit
Single F 2464 6.3 15,170
Multi F 1285 4.2 4,970
OSB per unit
Single F 2464 4.8 11,400
Multi F 1285 3.0 3,500
Reference: 100,000 single family units need 1.5 billion bf lumber and 1.1 billion sq. ft. of OSB
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Type of unit demanded: Ownership Rate is the KEY!
1995 2005 2010
Total OccupiedHousing Stock
97.1 108.2
Owner 62.3 74.6
Rental 34.8 33.7
Ownership Rate 64% 69%
Average for Period Ending In:
Owner Demand Annual Rate 1.31
Actual SF Starts Annual Average 1.66
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Importance of Ownership Rate for Mix of Housing Units Started
1995 2005 2010
Total OccupiedHousing Stock
97.1 108.2 112.1
Owner 62.3 74.6 75.1
Rental 34.8 33.7 37.0
Ownership Rate 64% 69% 67%*
Average for Period Ending In:
Owner Demand Annual Rate 1.31 -.8
Actual SF Starts Annual Average 1.66 .73
*At 65.9% in 2011.2 and falling
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Step 3: Mix of Starts Determined by Ownership Rate Trends
Key driver for housing mix Drove single family housing boom/bubble—
now…
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RISI BASE CASE: expect little improvement until 2013
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Existing Home Sales Hard to Interpret –New Homes Message Clear
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Small boost in product demand from R&R
Lag home sales Modest growth in 2012,
but recent events are not helping
Given who is buying existing homes: focus on improvements not additions
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Where We are Going Today!
Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand
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Given housing outlook, wood products demand outlook through 2013 is:
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Lumber Prices: Bouncing off bottom and some very different regional factors
SPF reflects export market SYP closes on SPF
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One factor: Housing starts in Canada vs. California
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Key factor in cash cost and price outlook: C$ forecast
BC $/mbf in*:
2004 2011
C$ $269 $195
U.S $/C$ .77 1.05
US$$207
$205
Plus duty --- $31
Cash break-even today --- $236
*based on RISI mill surveys
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Canadian Dollar Overvalued, But Supported by Commodities
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Factor #4: China demand for logs and lumber
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Demand for N.A. Lumber: Very slow improvement in overall demand
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Exports: No Indication That South Is Making Significant Inroads in the Offshore Export Market
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Bottom Line: Prices near cash costs and SYP reflects domestic market
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US Domestic Market: US South Is Capturing Market Share
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Where We are Going Today!
Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand Regional implications: logs and timber Longer term: There WILL be a recovery
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Log prices follow lumber prices
Overall harvest remains far below peak and sustainable levels– Inventory building in the U.S.
Western prices reflect impact of lumber price rebound and log exports to China
Southern log market: very different story for sawtimber and pulpwood
Canadian constraint becomes apparent as recovery proceeds, but not an issue in 2011-12sd
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*Third quarter is based on July average.
**Assumes 7.5 short tons per MBF.
(Delivered Sawtimber Prices Compared, $/MBF, Scrib., qtrly)
West benefits from China while the South remains depressed…
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US log exports to China are contracting in July-August
(Million M3)
Note: Includes Alaska
25% of harvest demand
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Both Regions recover slowly with overall demand, but….
Western mills benefits from log exports Slower demand recovery in South
(BBF, Softwood Sawtimber Demand*)
*Coast and Inland region combined.
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Stumpage price reflects expected SYP lumber prices
SYP Stumpage, $/GST
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U.S. Southern Pine Pulpwood outlook positive for several reasons
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Where We are Going Today!
Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand Regional implications: logs and timber Longer term: There WILL be a recovery
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Recovery eventually happens and will sustain!!!
When will be get to “trend” demand?What will be capacity/harvest limit?
Beetle kill is a constraint on BC Harvest long-term
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Back to the beginning premise: Planning for Recovery
VERY DIFFERENT THAN THE 1980’S:– CLEAR SUPPLY CONSTRAINTS– DEMAND RECOVERY THE PROBLEM THIS TIME
UNLIKE PAPER: – DEMAND WILL EVENTUALLY RECOVER– NO MAJOR INTERNATIONAL THREAT TO SOFTWOOD
STRUCTURAL GRADE PRODUCTS
– VERY POSITIVE OUTLOOK FOR N.A. WOOD AND TIMBER INDUSTRY BEYOND 2015: THERE WILL BE A RECOVERY!!!!
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What questions OR What questions OR COMMENTS do you COMMENTS do you
have?have?
Contact: Lynn [email protected]
