Outlook for the North American Softwood Lumber Industry

Quick Bio Master s Degree in Economics and Finance from International Business School at Brandeis University More than 12 years covering the forest products industry as part of the RISI economic analysis team Author of the Lumber Commentary, North American Lumber 5 Year Forecast and North American Lumber 15 Year Forecast Copyright 2017 RISI, Inc. Proprietary Information 2

Agenda Review current market conditions North American softwood lumber demand US housing driving growth in North American demand Exposure to offshore markets impacting demand North American softwood lumber supply Availability of timber driving investment trends Lumber conversion capacity by region Outlook for costs and prices Copyright 2017 RISI, Inc. Proprietary Information 3

Near Term: Cautious Inventory Strategies Continue in Early 2017 US Softwood Lumber Inventory Estimate, Months of Supply 2.2 2.0 1.8 Retroactive duty back to February 1.6 1.4 1.2 1.0 0.8 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Copyright 2017 RISI, Inc. Proprietary Information 5

Prices Jump Higher in Anticipation of Duties Crow s Composite Price, Monthly Average, $ Dollars per MBF 450 430 410 390 370 350 330 310 290 270 250 Crow's Composite SPF 2x4 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Copyright 2017 RISI, Inc. Proprietary Information 6

US and Canadian Trade Negotiations: Food for Thought Quota Could make supply curve infinitely steep Tariff and/or duty Affects lower end of cost curve US domestic consumption is improving Canadian supply is constrained British Columbia is approaching AAC limits Eastern Canada challenged by lack of demand for residuals Canadian dollar should strengthen (slightly) Canada has moved toward market based stumpage pricing Assumption in model is duties maintained over forecast Copyright 2017 RISI, Inc. Proprietary Information 7

Duties Move Canadian Producers Further Up the Softwood Lumber Cost Curve North American Softwood Lumber Average Variable Cost Delivered to Chicago* in 2017 US Dollars per MBF 450 400 350 300 250 200 150 Duty 2017 (No Duty) Delivered Costs US Dollars per MBF 450 400 350 300 250 200 150 2017 (26% Duty) 100 100 * Adjusted for product mix and underweights Copyright 2017 RISI, Inc. Proprietary Information 9

Quota Could Result in an Undersupplied US Market Canadian Share of the US Market and Volume Supplied (BBF, Right Hand Scale) 45% 40% Volume Supplied (R) Canadian Market Share 25 20 Impact of Quota on US Market 35% 15 1% US Market Share 0.5 BBF 30% 25% 20% 000102030405060708091011121314151617 10 5 0 Potential Lost Canadian Supply 28% Quota 1.5 BBF 25% Quota 3.0 BBF Copyright 2017 RISI, Inc. Proprietary Information 10

Despite Increased Focus on Offshore Markets, YTD Offshore Shipments Have Slid Lower YTD June (BBF) Export Share Softwood Lumber Exports 2016 2017 %Ch 2016 2017 Canada USA 7.39 7.29 1% 77% 78% China 1.33 1.20 10% 14% 13% Japan 0.46 0.47 2% 5% 5% Other 0.40 0.38 5% 4% 4% Total 9.59 9.34 3% 100% 100% Copyright 2017 RISI, Inc. Proprietary Information 11

Imports from Western Europe Key to Potential Constraints on Canadian Shipments US Offshore Imports (BBF) and Share of Domestic Demand (Right Hand Scale) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17* *Annualized YTD thru June Germany & Sweden Other Share of Domestic Demand (R) 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Copyright 2017 RISI, Inc. Proprietary Information 12

Net Exports Fall as Domestic Markets Improve and Competition in Offshore Markets Increases BBF 7 6 5 4 3 2 1 0 1 Net Exports Percent of Demand on North American Mills (R) 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 17.5% 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% 2.5% Copyright 2017 RISI, Inc. Proprietary Information 14

US Softwood Lumber Consumption: R&R Remains the Largest End Use Market for Lumber Market Share and Volume BBF 2016: 47.6 BBF 2019: 55.9 BBF 1.7 4% 14.3 30% 2.0 4% 18.7 33% 21.2 44% 24.7 44% 10.5 22% 10.6 19% Residential Industrial R&R Nonresidential Copyright 2017 RISI, Inc. Proprietary Information 15

North American Softwood Lumber Demand: Growth in Domestic Demand More Than Offsets Decline in Net Exports BBF 80 70 60 50 40 30 20 10 0 10 1980s 1990s 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 US Canadian Net Exports Copyright 2017 RISI, Inc. Proprietary Information 16

BC Runs Up Against Fiber Constraints, While E Canada Seems to Have Room to Expand Roundwood Harvest Demand, Million Cubic Meters, All Species 120 Eastern Canada 120 British Columbia 100 100 80 80 Million m 3 60 40 Million m 3 60 40 Total Harvest 20 Operable Sustainable Allowable Annual Cut 0 2000 2005 2010 2015 2020 2025 20 0 2000 2005 2010 2015 2020 2025 Copyright 2017 RISI, Inc. Proprietary Information 18

Softwood Sawtimber Demand Is Unlikely to Fully Recover Billion Board Feet 25 US South 14 US West (Inland and Coast) 20 12 10 15 8 10 6 5 4 2 0 2001 2006 2011 2016 2021 0 2001 2006 2011 2016 2021 Copyright 2017 RISI, Inc. Proprietary Information 19

US West Coast Log Cost Premium Drives Investment to the US South 750 700 650 600 550 500 450 400 350 300 2000 2001 2002 US Delivered Log Prices (MBF, Scribner) Douglas fir (West Coast) Southern Yellow Pine Douglas fir Premium (%) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 120% 100% 80% 60% 40% 20% 0% Copyright 2017 RISI, Inc. Proprietary Information 20

Sawmill Employment Basically Flat Even as Production Moves Higher US Lumber Production (BBF) and Number of People Employed (Right Hand Scale) 45 80 BBF 40 35 30 25 20 15 10 5 0 US Production Number of Employees 2002 2004 2006 2008 2010 2012 2014 2016 70 60 50 40 30 20 10 0 Thousands Employed Copyright 2017 RISI, Inc. Proprietary Information 21

Modest Supply Growth Masks Divergent Regional Trends Average Annual Capacity Growth 2017 2019 2005 (BBF) 2016 (BBF) 2019 (BBF) Change (BBF) Average % Ch Canada 38.7 31.0 30.6 0.4 0.4% British Columbia 18.6 15.2 14.0 1.2 2.8% Eastern Canada 20.1 15.8 16.7 0.9 1.7% United States 43.3 39.4 42.8 3.3 2.8% US South 19.4 20.5 22.6 2.1 3.3% Other USA 23.9 18.9 20.3 1.4 2.2% Total North America 82.0 70.5 73.5 3.0 1.4% Copyright 2017 RISI, Inc. Proprietary Information 22

US South Will Continue to Be the Low Cost Region Average Variable Production Costs, US Dollars per MBF 400 350 300 250 200 150 100 50 US South US Coast US Inland 0 1Q00 1Q03 1Q06 1Q09 1Q12 1Q15 1Q18 Copyright 2017 RISI, Inc. Proprietary Information 23

North American Softwood Lumber Market Tightens Further Demand/Capacity Ratio for North American Softwood Lumber 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Copyright 2017 RISI, Inc. Proprietary Information 25

Lumber Prices More Volatile and Prices Trend Higher as Demand/Capacity Reaches Mid 80s Scatter Plot of Price/AVC and Demand/Capacity Ratio Price/AVC 2.05 1.85 1.65 1.45 1.25 1.05 0.85 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 Demand/Capacity Copyright 2017 RISI, Inc. Proprietary Information 26

Take Home Points Domestic consumption will continue to grow Increased competition in offshore markets and strong domestic pricing environment will: Moderate growth in offshore shipments Attract more imports from offshore Duties moderating supply growth in Eastern Canada Canadian producers have been pushed further up the industry cost curve Markets tightening with upward pressure on prices and volatility Profits vary greatly between regions Copyright 2017 RISI, Inc. Proprietary Information 27

Thank you for your attention! For more information: David Fortin Email: dfortin@risi.com North American Lumber & Wood Panels 5 and 15 Year Forecasts www.risi.com/lumber5year www.risi.com/lumber15year www.risi.com/woodpanel5year www.risi.com/woodpanel15year Lumber, Structural Panel and PB/MDF Commentaries www.risi.com/lumbercommentary www.risi.com/structuralpanelcommentary www.risi.com/pbandmdfcommentary Copyright 2017 RISI, Inc. Proprietary Information 28