1. Allegheny SAF Stonewall Jackson State Park, WV February 17-18, 2010 Al Schuler USDA Forest Service Princeton, WV (aschuler@fs.fed.us) Urs Buehlmann Virginia Tech Blacksburg, VA Outlook for Markets – it’s a new world out there as the housing collapse, changing consumer preferences and new legislation alter the playing field

2. Presentation Content ① U.S. Housing Markets ② U.S. Economy – recovery outlook ③ U.S. Wood Products Markets ④ International Trade Issues ⑤ U.S. Forest Products Industry – Future Opportunities ⑥ Summary

3. ① U.S. HOUSING MARKETS 70% OF STRUCTURAL SOFTWOOD PRODUCTS AND 50% OR MORE OF HARDWOOD PRODUCTS ARE CONSUMED IN RESIDNETIAL CONSTRUCTION (NEW PLUS REMODELING) Bottom line – wood product markets will not improve much until housing gets better

4.  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 Housing Bust → → → → → 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 era

5. Single Family Starts have Stabilized but, they are still down 74% from the peak (Jan. 2006) Source: Census Thousand units, SAAR It’s tough to compete With a resale market That includes a high proportion Of “distressed sales”

6. Single Family Resales have stabilized and are improving thanks to tax credit and low mortgage rates, but Monthly, Thousand units, SAAR Source: NAR (http://www.realtor.org/research)http://www.realtor.org/research many sales are “distressed” due to foreclosures – this will continue until the employment situation improves. 2009 vs 2008: SF volume up 5%, but prices are down 12%

7. Prices are starting to come back to reality But, foreclosure problems slow the process of balancing inventories Until inventories come back to normal, price Pressures will continue and Improvement In housing will be slow.

8. Case Shiller 20 City Price Index January 2000 = 100 Prices still down 29% from the peak, but they have stabilized thanks to government support – but, prices need to fall further to reach historical price/income ratios

9. Single family Housing Inventory still “the problem”, but, its improving? However, this is only the “listed inventory” – shadow inventory is substantial! 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)http://www.census.gov/hhes/www/housing/hvs/hvs.html TREND

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

11. Forecast from Moody’s and National Assoc. Realtors

12. Latest Harvard* Housing Demand Forecasts 2010 – 2020 ( June 2009) Source: HJCHS, W07-7, amended (http://www.jchs.harvard.edu/publications/publications_by_year.htm)http://www.jchs.harvard.edu/publications/publications_by_year.htm Annual rate (000) 2009 starts forecast Vacancy demand – 2 nd homes, speculation building removals – net loss from existing inventory of housing stock Low rate: lower household formations & lower immigration projections

13. ② U.S. ECONOMY – RECOVERY OUTLOOK Housing is stabilizing, albeit at low levels Foreclosures remain problem – add to inventory and weak pricing Consensus outlook (1) slow recovery in housing (2) slow recovery in the economy

14. Why a slow recovery ? Housing Too much housing inventory Need stronger demand to sop up inventory, but Weak Economy high unemployment + weak income growth - (negative in 09) + consumer debt = weak consumer spending

15. U.S. Economy in 2008 Source: BEA ( http://bea.gov/national/nipaweb)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% Residential Investment (incl. R&A) 3.3%

16. 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 improves and 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 pulls back to 65% ( or lower) of the economy? Long term, this is good ( less consumption = more investment) = Better productivity = more competitive = higher GDP

17. Cumulative Net change in Non Farm Payrolls over 7 million job losses in past 24 months 4.8 million in 2009 – 15.5 million unemployed today – but, it is definitely stabilizing Source: U.S. BLS ( www.bls.gov)www.bls.gov ( thousand ) January 2010(20,000)

18. 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

19. Global Economic Outlook 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

20. 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 housing activity, either directly ( e.g., kitchen cabinets, molding, flooring), or indirectly ( e.g. furniture).

21. Softwood Market Shares: Average use during 1998 – 2007 U.S. Softwood Lumber Industrial 16% New Residential* 40% R&A 30% NR 12% U.S. Structural Panels New Residential* 53% Industrial 17% R&A 19% NR. 10% *New Residential incl. SF, MF, and Mobile Homes Source : Lumber – WWPA; Panels - APA Export 2%

22. Starts ( Million units)FOB, Price, $/M Lumber and Panel Prices Follow Housing Between 2005 – 2008: North American lumber production down 31% (23 BBF), prices down 31% ; structural panel production down 12.4 BSF, prices down 29%

23. U.S. Hardwood Lumber Consumption Trends BBF Source: Bill Luppold, USDA FS * flooring, millwork, trusses, cabinets, & fabricated wood members  Residential markets are now 3.5 times the size of furniture markets  Exports bigger than furniture

24. Index of Hardwood Lumber, Cross Ties and Pallet Cant Prices 2004 to 2009 Source: Bill Luppold Impact of housing collapse

25. Eastern Hardwood Lumber Production 1958 to 2009 Source: Bill LUppold 2009 level about 6.5 BBF Down 48% from peak in 1999 (2009 estimated based on a survey of state utilization foresters)

26. 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 = 3 rd Quarter 09)Source: APA – The Engineered Wood Assoc. OSB Production Billion Sq Ft 3/8" Basis

27. 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 (Bureau of Labor Statistics)

28. Capacity Utilization - U.S. Softwoods Production/Capacity Sources: OSB – APA; Lumber RISI Both approaching 50% utilization That means lots of downtime, shutdowns,and little or no profit

29. Global Drivers... Global Drivers... Trade liberalization (GATT  WTO) Trade liberalization (GATT  WTO) Expanded global commerce Expanded global commerce Shift of manufacturing growth to Asia and Europe Shift 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

30. 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, ASM Imports & Exports : FAS, B. Luppold for hardwood lumber, P. Ince for paper & board 2006 data for flooring & molding

31. *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

32. Forest Products Export Trade World Exports (Billion $)U.S. Share (%) FAO – ForesSTAT (http://faostat.fao.org/site/626/DesktopDefault.aspx?PageID=626#ancor)http://faostat.fao.org/site/626/DesktopDefault.aspx?PageID=626#ancor

33. U.S. Softwood Lumber Trade Source: RISI, WWPA BBF

34. Hardwood Lumber Exports 1990 to 2009 (2009 based on volume through May 2009) Source: Bill Luppold, USDA FS

35. 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 m 3 from Russia including hardwoods and softwoods – 75% of China’s total log imports. In April, 2008, the tax went to 25% (from 5%), and is scheduled to go to 80% in 2010.

36. ProductsRate or minimum amount Jul1, 2007 Apr 1, 2008Jan1 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, Canada December 2009

37. World Log Exports – hardwoods and softwoods Source: Global trade atlas Billion $

38. World Log Imports – hardwoods and softwoods Source: Global trade atlas Billion $

39. Russian Log Exports – hardwoods and softwoods Source: Global trade atlas Billion $

40. China Log Imports – hardwoods and softwoods Source: Global trade atlas Billion $

41. ⑤ U.S. FOREST PRODUCTS INDUSTRY - FUTURE OPPORTUNITIES

42. 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 paper Now, uniquely positioned,or exposed, to political and economic forces that Are reshaping the regulatory and market landscapes” - - A,.Sauer, World Resources Institute

44. 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 economy carbon neutral/carbon negative products there will be incentives to reduce green house gas emissions via 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!

45. U.S. Oil Supply 58% 42%

46. 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

47. Source: EIA Great opportunity for wood as climate Change policies directly, or indirectly raise the price of energy from fossil fuels

49. 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 sources by 2020, and (2) high taxes on CO2 emissions from fossil fuels

50. Source: Forisk Consulting Changing Supply Chain - - - New/Additional Fiber Demand from Wood BioEnergy in U.S. South Ranges 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.

51. New fiber demands depend on technology, and financing of bioenegy facilities. Much of the fiber will be pulpwood and chips as economics of Harvesting 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.

52. Sign of the times?? Minnesota OSB plant converted to Biomass facility (Dec. 2009) With the demise in U.S. housing, the OSB industry has excess capacity – an older OSB plant in Cook, MN was recently purchased by Hill Biomass for conversion to biomass products (pellet plant) Another recent item (Feb. 2010) – Weyerhaeuser and Mitsubishi sign MOU to join forces to produce wood pellets

53. 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

54. 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

55. U.S. Residential Green Home Market Opportunity Billion $ Source: McGraw – Hill construction market forecast McGraw _ Hill construction, Green Outlook 2009

56. 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

57. Source: M. Snow, AHEC

59. Source: Mike Snow, AHEC Lacey Act, as amended*, will encourage more acreage of 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

60. 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

61.  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

62.  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