North American Panel Markets: The Pain Continues

Presentation Outline

• US Woodbased Panel Markets

– US Economic and Housing Outlook– Structural Panels (Softwood Plywood and OSB)– Nonstructural Panels (Particleboard and MDF)

• Mexico Panel Market Outlook

• Brief Comments on South American Markets

2

3

Sub-Par Recovery in US GDP: Housing A Brake Not a Booster Rocket!

Sources: BEA & CFPA

US Housing Markets

• Demographic Fundamentals Are Solid– Pent-up demand will be a factor … before the decade is over!

• But Economic Fundamentals Are Weak– Household formations are being delayed by high

unemployment, slow income growth and consumer uncertainty

• Elements in Place for Recovery– Sales, production and prices appear to have hit bottom;

inventories of unsold homes are in decline

– Affordability is great … if you qualify for a mortgage!

– Rental demand is strengthening; boost for multifamily construction

4

Post-1990 Surge in Home Ownership is Being Reversed: What is “normal”?

5

New and Existing Home Sales: Have They Bottomed?

0

200

400

600

800

1000

1200

1400

1600

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000

00 01 02 03 04 05 06 07 08 09 10

Thousands, SAAR

Existing New (Right)

6

Unsold Inventory of New Single-Family Homes and Months Supply: Historic Lows

7

Affordability at Very Attractive Levels

4.5%

5.5%

6.5%

7.5%

8.5%

7%

9%

11%

13%

15%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 10 10

Affordability

Mortgage Rate (R)

Q1 Q2 Q3

Mortgage Payment as a % of Average Household Disposable Income

8

US Housing Production:RISI Base Case Outlook Through 2025

9

Million Units

Home Size and Mix Matter!!

SINGLE-FAMILY HOMES ARE A LOT LARGER THAN OTHER TYPES OF HOME CONSTRUCTION

• Average 2009 US Home Sizes (Square Feet):

» SINGLES 2,382

» MULTIS 1,171

» MOBILES 1,594

10

Average Single-Family Home Sizes

Thousand SF

11

Single-Family Home Share of Total Conventional Starts

Share (%)

12

US Furniture Production Bottomed in 2009/2010: Will It Start to Recover in 2011?

US Furniture and Related Production, 2002=1.00

13

What Will Happen to US Furniture Imports as Domestic Markets Recover?

Billion, $2009

14

Slow Recovery in Housing Will Be Reflected in North American Structural Panel Demand

BSF, 3/8-Inch Basis

15

Higher US OSB Consumption Needs Strong Single-Family Housing Starts

BSF, 3/8-Inch

16

How Large is North American OSB Capacity?

BSF, 3/8-Inch

17

Will Total NA Structural Panel Capacity Slip Further Before Climbing as Demand Recovers?

BSF, 3/8-Inch Basis

18

Recovery in NA D/C Ratios a Matter of Timing of Demand Growth and Capacity Rebound

19

OSB Prices Climbed Above Cost After Mid-2009; Back to Cost Floors by Sep. 2010!

$/MSF

20

Plywood More Profitable Than OSB: But Prices Have Recently Collapsed

$/MSF

21

OSB Prices: Dependent on Recovery in Housing Demand and Pace/Timing of Capacity Restarts

7/16-Inch OSB in the South (West)$/MSF

22

OSB Will Struggle to Stay Profitable in 2011 Average Mill Realization/Average Total Cost

23

Forecast for SYP Plywood Prices1/2-Inch, 3-ply CDX (Westside)

$/MSF

24

Plywood Profitability Rebounded in 2010, But Levels Will Not Be Sustained in 2011

Average Mill Realization/Average Total Cost

25

Conclusions: Structural Panels

• The strength and timing of housing’s recovery will largely determine the forecast outcome for wood products markets.

• Remainder of 2010 and first half of 2011 will be very difficult for producers as demand generally lags behind year-ago levels.

• No new total consumption records expected before late in the decade, although OSB should set new records around mid-decade.

• Effective operating capacity is substantially lower than name-plate. As demand recovers, capacity will come back on-stream in lagged response. Current market conditions will postpone the re-start of capacity.

• Ramp-up of currently operating mills to full capacity will largely meet the rebound in demand through 2012; mothballed capacity unlikely to be re-opened before 2013 at the earliest.

• Average demand/capacity ratios rebounded in 2010, but are likely to move sideways to lower through much of 2011 before again climbing in 2012.

• Prices and profitability will be under downward pressure in the first half of 2011 unless production runs consistently below year-ago levels.

26

Structural and Cyclical Pressures Persist in North American PB & MDF Panel Markets

BSF, ¾-Inch

27

Furniture and Residential Construction Dominate North American Particleboard Consumption

BSF, ¾-Inch

28

Furniture and Residential Construction Also Key to N. American MDF/HDF Consumption

(94%-95% of Total Domestic Consumption)BSF, ¾-Inch

29

Will MDF/HDF Consumption Overtake PB? Largely Depends on Furniture …

BSF, ¾-Inch Basis

30

How Should We Measure North American Particleboard Capacity?

BSF, 3/4-Inch

31

Forecast for PB Effective Operating Capacity NA Particleboard Capacity Still Too High Even With These Lower Estimates?

BSF, ¾-Inch

32

PB Demand/Capacity Ratios Will Remain Very Low; MDF/HDF Ratios Average Higher

(Depends on Import Levels)

33

Weak Dollar and Increased North American HDF Capacity Have Reduced MDF/HDF Imports: How Far Will They Rebound?

BSF, ¾-Inch – Offshore Imports

34

N. American Particleboard Inflation-Adjusted Prices: The 1990s Were the Golden Years!

$2009/MSF, ¾-Inch Industrial Prices

35

Particleboard Profitability Will Be Hard to Detect Over the Next Few Years

Mill Realization/Avg. Total Cost

36

North American MDF Inflation-Adjusted Prices: Nothing Like the Early to Mid-1990s Again!

$2009/MSF, ¾-Inch Prices

37

MDF Profitability Recovered in 2010, But Uncertainty Surrounds 2011

Mill Realization/Avg. Total Cost

38

Conclusions: Nonstructural Panel Markets March to Different Drummers

• Particleboard’s outlook is a lot less positive than that for MDF/HDF

– Even with an optimistic forecast for North American furniture production, in-place particleboard capacity is excessive

– Without aggressive capacity closures, it will be difficult for particleboard producers to gain pricing power over the next few years

– Production costs are worrisomely high relative to history, especially outside the South; this could threaten industry’s competitive position

• MDF/HDF seem better positioned than particleboard but with 30%+ of that market served by off-shore imports, North American producers are vulnerable to added off-shore competition particularly if North American pricing proves attractive enough to offset a weak US dollar.

39

Mexico’s Wood Panel Markets

40

Mexico’s Panel Markets Tumbled in 2009, But Rebounded in 2010

• Strong growth in fiberboard consumption has offset weakness in particleboard

• 2011 – Prognosis is positive providing Mexico’s domestic economic growth remains healthy

– Export opportunities will be limited by slow US recovery and weakening US dollar

– Mexico’s plywood and particleboard producers most at risk; growing import threats and loss of market share (also to other types of panels)?

– Fiberboard and OSB imports represent major growth opportunities– Will Mexican particleboard production recover to match past peaks?

41

42

Mexico and ABC Countries: A Generally Short and Shallow Recession … Except for Mexico

Sources: IMF & CFPA

Mexico: Recovery in 2010 Supported By Healthy Domestic Markets Even as US Languishes

% Change 2006 2007 2008 2009 2010 2011 2012

GDP 4.9 3.3 1.5 -6.5 4.8 3.8 4.2

IndustrialProduction 5.9 1.7 -0.6 -10.2 8.3 4.8

5.0

ConsumerPrices 4.1 3.8 6.5 3.6 4.4 3.8

3.7

43

Mexican Panel Consumption Rebounded in 2010: New Records in 2011-2012?

Thousand M3

44

Mexico’s Plywood Market Remains an Import Story

Thousand M3

45

Mexico’s Fiberboard Markets Shrugged Off the Recession: Further New Records To Be Set

Thousand M3

46

Mexico’s Particleboard Producers Struggle to Recover As Market Share is Lost to MDF

Thousand M3

47

Panel Consumption in MexicoThousand M3

2006 2007 2008 2009 2010 2011 2012

Plywood 660 668 713 578 653 689 711

Particleboard 641 691 523 386 489 566 619

Fiberboard 347 351 331 312 373 412 450

OSB 67 35 85 74 86 94 101

TOTAL 1,715 1,745 1,652 1,350 1,601 1,761 1,881

48

Miscellaneous Considerations: Brazil and Chile

49

50

Brazil and Chile Have Enjoyed Healthy Growth Despite Recession and Earthquakes …

• Fiscal stimulus and the run-up to an election boosted Brazil’s economy strongly, especially in the first half of 2010

• Chile has been quick to recover from the February earthquake; growth in 2011 will outpace 2010 as rebuilding provides significant economic stimulus to the whole economy

• Ramp-up of new MDP and MDF capacity in Brazil has been controlled; consequently pricing held up well, at least through mid-year

– Further industry shakeout and consolidation? Slower economic growth in 2011 could result in another wave of M&A

51

Brazil’s Panel Production Recovered in 2010

Million M3

Total = 7.55

52

Chile’s Rebound Initially Held Back by February Earthquake

Million M3

Total = 2.04

Climbing Out of the Chasm: Global Lumber Markets Still Need North America and Europe …

Million M3

53

… But Global Panel Markets Will Recover Sooner and Faster Because of China’s Strength

Million M3

54

Conclusions: Latin America

• The Great Recession so far has done surprisingly minimal damage to Latin America’s wood panel markets

• MEXICO’s panel markets have been hurt more than most but are in a healthy recovery which should persist at least through 2011

• Domestic market growth will be key to sustained increases in panel consumption in Mexico, Brazil and elsewhere in Latin America

• Fastest growth in panel markets will be in MDF/HDF and OSB

• Chilean producers will buck the weak overall trend in plywood output as capacity expands further

55