Impending Shortage of NA Lumber Capacity: Implications for U.S. Southern Industry Alabama Forest Owners Association Webinar Dr. Lynn O. Michaelis, Partner January 15, 2014
2 Purpose of Today s Presentation 1. Explain what has happened to industry over the last 10 years 2. Clear understanding why future will be very different Key takeaway: Exciting period ahead for U.S. lumber and timber industry, especially for U.S. South
Agenda for Today History: Use Carefully! Outlook for Housing and Wood products demand Prospects on Southern Sawtimber Summary of Key Messages
Fundamental Change Every Decade!!! 85 75 Demand vs. Capacity Lumber Price I II III IV I II III IV 450 400 Billion bf 65 55 45 35 Demand Capacity $/mbf 350 300 250 200 150 25 1975 1980 1985 1990 1995 2000 2005 2010 100 1977 1983 1989 1995 2001 2007 2013 ytd DF green 2x4 price
5 $/MBF* 700 650 600 550 500 450 400 350 300 250 Southern prices reflect domestic market, while exports boost West Doug Fir #2 Hem Fir #2 Southern Saw log
Sawtimber Demand in the US South Remains Depressed BBF, Int l ¼ 25 20 15 10 5 0 Other OSB Pulp Plywood Lumber 2000 2002 2004 2006 2008 2010 2012
Agenda for Today History: Use Carefully! Outlook for Housing and Wood products demand Prospects on Southern Sawtimber Summary of Key Messages
Key drivers for U.S. Lumber Demand: Residential Lumber Market Share* 2% 8 12% 16% 30% 40%, New Res R&A Non-Res Industrial Net Exports *Market share average 1998-2007
Unique Housing Cycle: WHY? Million Units 2.5 2.0 Multi Single 1.5 1.0 0.5 0.0 70 74 78 82 86 90 94 98 02 06 10
Mixed messages in home sales data New Home Sales-000 units 1,500 1,300 1,100 900 700 500 New Homes 300 Existing Homes (RT) 100 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 Existing Home Sales-000 units
Price Rebound Should Help Consumer Spending, Especially. Rebound in prices Helps consumer Balance Sheet 240 Median Existing Price 14 Home Equity* 220 12 200 10 $000 180 160 140 Trillion $ 8 6 4 120 2 100 0 *SOURCE: FRB flow of funds
Housing Collapse Was Due to Excesses: Requires different forecasting approach 1. Aftermath of Crisis: Large vacant inventory and surge of foreclosures 2. Demand (Primarily household formations): will depend on economic and employment growth 3. Correction process: starts stay below demand until excess vacant inventory eliminated
Inventory correction is underway, but. Thousands 19,500 19,000 18,500 18,000 17,500 17,000 16,500 16,000 15,500 15,000 14,500 Theoretical* Actual *Assumes 12.5% Vacancy Rate This gap is one estimate of overhang of existing homes
Problem: Below trend household formation rate 000 2000 1800 1600 1400 1200 1000 800 600 400 200 0 Household Formations* *Based on occupied housing stock--census
2.5 Our Outlook Calls For a Sustained Housing Starts Recovery Through at Least 2017 Multi 2.0 Single Million Units 1.5 1.0 0.5 0.0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Deep Cycle for Lumber Prices: Rebounding, but Volatile $/MBF $550 $500 $450 $400 SPF 2x4 SYP 2x4 DF green 2x4 $350 $300 $250 $200 $150 $100 03 04 05 06 07 08 09 10 01 12 13
North American Domestic Lumber Consumption BBF 80 70 60 50 40 30 20 US Canada US Share (R) 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 86% 85% 84% 83% 82% 81% 80% 79% 78% 77% 76%
North American Offshore Trade BBF 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Export Share of Total North American Lumber Consumption Canada US Export Share (R) 25% 20% 15% 10% 5% 1.0 0.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 0%
Overall Lumber demand approaches 70 bbf by 2017 BBF 85 80 75 70 65 60 55 50 45 40 35 30 25 20 Lumber Demand on NA mills US Canada Net Exports 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Agenda for Today History: Use Carefully! Outlook for Housing and Wood products demand Prospects on Southern Sawtimber Summary of Key Messages
With Projected Capacity, Operating Rate Moves Above 90% Lumber Capacity (Billion Board Feet) Region 2005 2012 2017 Total 81 71 75 U.S. 43 40 44 South 20 19 22 West 21 19 20 Canada 38 31 31 B.C. Interior 18 16 15 East of Rockies 20 15 16 Operating Rate 91% 59% 94%
Inventory of Available Live and Dead Lodgepole Pine, by Years Since Attack, 1999-2020 Million m 3 1,600 1,400 1,200 1,000 800 600 400 200 >12 yrs 11-12 yrs 9-10 yrs <8 yrs Live 0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: FEA estimates
Quebec AAC Will Fall Further MMCM 36 32 28 24 20 16
The Deferred Volume in the South Substantial Growth & Drain, BBF, Int'l 1/4" 50 45 40 35 30 25 20 15 10 5 Growth Drain Inventory Sawtimber Inventory Growth Drain 300 290 280 270 260 250 240 230 220 210 Inventory, BBF Int'l 1/4" 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 200
U.S. Lumber Production: Near or Above Previous Peak Billion BF 45 40 35 30 25 20 15 Other South West Coast 10 5 0 2005 2009 2012 2015 2017
High mill margins and timber supply, will push South to new peak production levels BBF 25 20 15 10 5 South South Peak 0 2000 2005 2006 2009 2012 2013 2015 2017 26
Sawtimber Harvest returns to 2005 Levels BBF, Int l ¼ 25 20 15 10 5 0 Other OSB Pulp Plywood Lumber 2004 2006 2008 2010 2012 2014 2016 2018
North American Softwood Lumber Imports BBF 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 18
Log and stumpage prices continue to recover after.. Southern Lumber Prices 550 Southern Lumber Prices Southern Log/Stumpage prices $550 500 450 SYP 2x4 $500 $450 Delivered Delivered ($2012) Stumpage Stumpage ($2012) $/MBF 400 350 300 250 200 150 SYP 2x10 1994 1997 2000 2003 2006 2009 2012 $/MBF $400 $350 $300 $250 $200 $150 $100 2000 2002 2004 2006 2008 2010 2012 2014 29
The US Wood Pellet Industry Is Undergoing Dramatic Growth Production, Million Tons 16 14 12 10 North Central Northwest Northeast South 8 6 4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
SUMMARY OF KEY MESSAGES: Exciting Period Ahead!!!! The industry has improved, but still is not healthy Sustained housing and product demand recovery through 2017 Southern sawtimber harvest back to 2005 levels (2016-17) Log/Stumpage prices in South equal/exceed 2005 levels by 2016 Billion bf 85 NA Lumber Demand vs. Capacity 75 65 55 45 Demand 35 Capacity 25 1975 1980 1985 1990 1995 2000 2005 2010 2015
THE Key Message of Today s Presentation BIG WINNER: Timber Owners South catches up!! ($$)