Forest Market Trends 09

8/6/2019 Forest Market Trends 09

1/50

North American and GlobalForest Market Trends

Peter J. InceUS Forest Products LaboratoryMadison, Wisconsin


2/50


3/50

Wood Pulp, Paper & Paperboard


4/50

0

10

20

30

40

50

60

70

1900

191

0

192

0

1930

194

0

1950

1960

197

0

1980

1990

2000

201

0

Millionsofm

etrictons

After decades of robust growth,U.S. wood pulp output peaked in

the mid-1990s and then declined,impacted by paper recycling gainsin the early 90s, shifts in globaldemands since the late 90s, andnow an economic recession . . .

Source: AF&PA, API, Forest Service, International Woodfiber Report

Pulpwood is still a big partof U.S. wood demand (andespecially in Wisconsin), butU.S. production has dropped

by -1%/yr. since the mid-1990s, versus 2% to 3%growth in 1970s and '80s.

U.S. Wood Pulp Production Now Declining:


5/50

-10

-5

0

5

10

15

20

25

30

35

40

1977-1986 1987-1996 1997-2006

Change in Paper & Board Production

(million metric tons per decade)

N. AmericaEurope

Asia

North American output ofpaper and paperboarddeclined in the mostrecent decade, whilegrowth was sustained inEurope and Asia.

China became the worlds

most rapidly expandingconsumer and producerof paper and paperboard,likely to surpass the USA

within the next decade.

Source: FAOSTAT

Outsourcing Production. . .


6/50

Global Drivers . . .

Trade liberalization (GATTWTO)Expanded global commerce

Shift of manufacturing growth to Asia and Europe

Collapse of global financial system (current recession)


7/50

80

85

90

95

100

105

110

115

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

U

.S.

DollarIndex

Real Broad Dollar Index

Globalization

Long-term historical

average (97.5)

Source: U.S. Federal Reserve (H.10 Real Broad Dollar Index)

$

The dollars real exchange value

soared above-averagefor a longperiod (1997-2005), placing U.S.manufacturers at a competitive

disadvantage. From 2005 to '08 thedollar fell below average, helpingimprove the U.S. trade balance . . .but the dollar gained in the past yearas the world economy sank into themost recent economic recession . . .

(Not a good sign for U.S. trade)

Real Broad Dollar Index


8/50

-15

-10

-5

0

5

10

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

PercentGrowth(yr.overyr.) U.S. Industrial Production Year-Over-Year Growth

Source: U.S. Federal Reserve (G.17 Industrial Production, seasonally adjusted)

As the dollar soared, manufacturing growth went abroad and U.S. industrialoutput plunged (in the recession of 2000-2001). Output rebounded with aweaker dollar, but growth barely reached 4% average growth of 1950-2000,. . . and in the past year, U.S. industrial output has collapsed again!!!

!!!

Growth

No Growth


9/50

72

76

80

84

88

92

96

100

104

108

112

116

120

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Indu

strialProductio

nIndex

78

80

82

84

86

88

90

92

94

96

98

100

102

Paper&BoardPurchases

(mill

ionmetrictonsyear-to-date)

U.S. Industrial Production Index

U.S. Paper & Board Purchases

Sources: U.S. Federal Reserve (G.17 Industrial Production); AF&PA (Paper and Board Purchases)

Paper and paperboard demands follow industrial production because ofusage in packaging and print advertising, but industrial outsourcing andelectronic media have displaced growth. U.S. paper and board purchasesplunged along with industrial output in the current recession . . .

Down 11%since 2007


10/50

Apart from the decadal trend in outsourcing anddownsizing of U.S. manufacturing, what causedthe recent dramatic plunge in U.S. production?

The Credit Crisis: Governments and central banksaround the world pursued policies that, with the

benefit of hindsight, caused a huge global boom incredit . . . to levels that defied gravity.Remarks by Treasury Secretary Timothy GeithnerFebruary 10, 2009

Translation: There was aglobal credit boom thatwent bust in 2008 . . .


11/50

The credit bust: When the credit boom wentbust in 2008, U.S. retail sales went into a suddensteep decline (unlike recession of 2001-2002) . . .

Total U.S. Retail Sales ($Billions/month)

0

50

100

150

200

250

300

350

400

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

With the suddencollapse of financialinstitutions and end toeasy credit terms,

total U.S. retail salesdropped by 12.4%from June toDecember of 2008.

The current recession

featured a big drop inconsumer spending(the largest element ofU.S. GDP), althoughspending may havebegun to stabilize in

the past few months.Source: U.S. Census Bureau (http://www.census.gov/marts/www/timeseries.html)


12/50

Motor Vehicle & Parts Sales ($Billions/month)

0

20

40

60

80

100

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

In some credit-dependent sectors, such asmotor vehicles & parts, the drop in salesactivity was even more pronounced . . .

Motor vehicle and

parts dealer salesdropped by 29% fromOctober 2007 toMarch of 2009 (andsales continue todecline in 2009).

Source: U.S. Census Bureau (http://www.census.gov/marts/www/timeseries.html)


13/50

78

80

82

84

86

88

90

Bo

ardProduction,milliontonnes

(12

monthsyear-

to-date)

U.S. Paper & Board Production Annualized

Sources: AF&PA

Thus, U.S. paper and paperboard output generally declined over the pastdecade, and the latest drop in output was steep and abrupt, but it can benoted that the drop in annualized production since 2007 (-7%) was lessthanthe drop in U.S. purchases (-11%). This was due to gains in exports.

Down 7%since 2007


14/50

120

140

160

180

200

220

240

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

MillE

mployment(th

ousands)

U.S. Pulp, Paper & Board Mill Employment

Sources: U.S. Bureau of Labor Statistics

The U.S. pulp & paper industry responded to slowerdemand growth with consolidation & downsizing . . .

Since 1997, dozens of older less efficient mills wereclosed, and over 40% of all U.S. pulp, paper and boardmill jobs were eliminated . . . and another 18 millswere closed and 8,000 mill jobs eliminated in 2008 . . .


15/50

300

350

400

450

500

550

600

650

700

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Annua

l(YTD)output/e

mployee(m.

ton

s)

Sources: U.S. Bureau of Labor Statistics (pulp, paper & board mill employment)AF&PA (paper and paperboard production, in short tons)

Consolidation and downsizing yieldedproductivity gains Output per workerat U.S. mills increased by over 40% justsince 2001 . . . Productivity has leveledout but not declined in this recession . . .

U.S. Paper & Board Output per Mill Employee


16/50

14

16

18

20

22

24

26

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

MillionsofMetric

Tons

85

90

95

100

105

110

115

RealBroad$Index

Exports

Imports

Data Sources: AF&PA, Commerce Dept. (trade statistics); Federal Reserve (dollar index);[Data include paper and paperboard products and wood pulp shipments, and exclude recovered paper]

U.S. Pulp, Paper & Board Product Trade(Tonnage) The U.S. trade gap

in pulp, paper and

board had bulgedto 8 million metrictons in 2002 . . .

But as a result ofconsolidation, a

weaker dollar, andproductivity gains,the trade gap wasnarrowed, and in2008 the trade gap

was closed !!(exports actuallyexceeded importsin tonnage).


17/50

100

125

150

175

200

225

250

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

PriceInd

exes(1982=1

00)

PaperboardPaper

Pulp

Market Trends Pulp, Paper & Board Price Indexes

Source: BLS (Bureau of Labor Statistics)

Prices (in U.S. $) increased by ~ 50% over six years, after therecession of 2001-2002 . . . In the current economic recessionprices are receding and have likely peaked for the near term,but prices remained high well into 2008, partly due to exports.


18/50

70

80

90

100

110

120

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

PriceInd

exes(1982=1

00)

Pulpwood

Market Trends U.S. Pulpwood Price Index

Source: BLS (Bureau of Labor Statistics); not seasonally adjusted

Pulpwood prices also experienced an upturn for about six yearsfollowing the 2001-2002 recession . . . In the current economicrecession the pulpwood price index is trending downward.


19/50

Another aspect of consolidation and downsizing . . .Since the early 1990s, divestiture of timberland byvertically integrated forest product companies resulted in

a huge shift of timberland ownership to TIMOs & REITs:

Source: Cliff Hickman, Forest Service Policy Analysis Staff, Wash. DC


20/50

NCREIF Timberland Index--Total Returns (4-qtr. Moving Avg.)

-2

0

2

4

6

8

10

12

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Rate(Percent)

NCREIF Timberland Index

Polynomial Trendline

Timberland total returns (annual timber and land value appreciation)collapsed in the 2001-2002 recession, amid industry divestment.Returns rebounded, but are recently slipping again . . .

Source: NCREIF (National Council of Real Estate Investment Fiduciaries) Timberland Index

Period of substantial industrytimberland divestment


21/50

Summary of pulp & paper market trends

1. U.S. pulp, paper and board production peaked in the late1990s, as output was impacted by industry globalization.

2. The U.S. pulp and paper industry responded to thechallenge of globalization with consolidation anddownsizing; A weaker dollar and productivity gainshelped close the pulp and paper trade gap by 2008.

3. Pulp, paper and board prices climbed from 2002 to 2008

but have likely peaked in the near term, with recedingindustrial production and declining demand.

4. Markets are indicating generally lower pulpwood pricesand lower timberland returns for the near term.


22/50

Lumber & Wood panels


23/50

Historically, more than half of U.S. wood panel & lumberusage is in housing construction, so lumber & panelmarkets are impacted by changes in housing demand . . .


24/50

Since 2005, the big change was the end to the housing

boom with now lowest starts in more than 50 years . . .

Sources:Data - U.S. Census Bureau

2009-Feb = SAAR in February

Single-familyhousing unit

constructionstarts/year

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-Feb

Millionspery

ear


25/50

0

200

400

600

800

1000

1200

1400

196

3

196

5

196

7

196

9

197

1

197

3

197

5

197

7

197

9

198

1

198

3

198

5

198

7

198

9

199

1

199

3

199

5

199

7

199

9

200

1

200

3

200

5

200

7

200

9

Thousands(ann

ualrate)

Source: NAHB and Census Bureau data

Baby Boom era

U.S. New Home Sales - Long History The 90s - 2005 sales boom was the biggest ever! It was a driven by a global credit boom that kept

pushing home prices up (until 2006) It was distinct from earlier baby boom era

Past notable declines featured rising interest rates Interest rates today are low, but borrowing has collapsed The current collapse features declining home prices


26/50

Global forces were behind the recentboom and bust in U.S. housing demand.


27/50

Governments and central banks around theworld pursued policies that, with the benefit ofhindsight, caused a huge global boom in credit,pushing up housing prices and financial

markets to levels that defied gravity.

Remarks by Treasury Secretary Timothy Geithner

Introducing the Financial Stability Plan

Tuesday, February 10, 2009

(the rest of Tim Geithners quote) . . .


28/50

-50

0

50

100

150

200

250

300

1980

1985

1990

1995

2000

2005

B

illionsofDollarsperYear

Source: U.S. Dept. of the Treasury

As the U.S. trade deficit expandedsince the early 90s, billions of dollarscame back from foreign sources intoU.S. mortgage markets via foreignpurchases of GNMA, FNMA & FHLMC

agency bonds (and CDOs) that fundmortgages. This global credit boomhelped facilitate the U.S. housingboom, but loose credit led to inflatedhome values and bad debts . . .

By 2008globallines ofhousingcredit

weredryingup andforeignbondholderscashingout . .

Foreign Purchases ofU.S. Agency Bonds

B i dit f ilit t d b i h i b t


29/50

Median New Home Price

(NAHB; Single-Family)

150

175

200

225

250

275

T

housandsofDollars

U.S. Average Wage ofProduction Workers (BLS)

10

12.5

15

17.5

20

22.5

25

27.5

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

D

ollarsperhou

r

Booming credit facilitated booming home prices, but average wagegains did not keep up with new home prices, so home affordabilitybecame a big issue . . . Even after recent declines in home prices thegains in home prices still far exceed gains in average earnings.

Up 72%

Up 55%


30/50

-5

0

5

10

15

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

p

PercentChang

e(Yr./Yr.)

Source: National Association of Realtors (NAR) U.S. median sales price of existing homes

2009(p) year/year data through January only

Consequences of defying gravity . . . The credit boom drove up

home prices but in 2006 the rate of appreciation dropped. With thisabrupt change in home equity appreciation much of the economicincentive to buy or build new homes suddenly evaporated.

Polynomial

Trendline

Annual Change in Existing Home Sales Price


31/50

$

Without the lure of home equity gains new homesales collapsed since 2006. The record housingconstruction boom became the housing bubble,

which is still undergoing its long correction.

A global credit boom drove home prices andrecent housing boom, but wages did not keep

pace and eventually home values declined.


32/50


33/50

What experts said last year about housingdownturn and prospects for recovery . . .

. . . (still relevant today)

The housing boom was unprecedented in

U.S. history, and the correction will be as well.Michael Youngblood, FBR Investment Management(CNN Money, June 12, 2008)

. . . the housing correction, what's going

on in the housing market, this is not over . . .Hank Paulson, U.S. Treasury Secretary(YouTube, February 12, 2008)


34/50

10

15

20

25

30

35

40

45

The housing downturn has severelyimpactedU.S. softwood lumber production . . .

U.S. Softwood Lumber Production

Billion Board Feet

Source: WWPA

Down 54%

since 2005(based onJanuary 2009production atan annualizedrate)


35/50

125

150

175

200

225

250

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Pr

iceIndexes(19

82=100)

Hardwood Lumber

Softwood Lumber

Impact on lumber prices . . .

Marketrecovery

hinges onrecovery inhousing

Sources: BLS (Bureau of Labor Statistics)


36/50

Some additional views on

hardwood lumber markets . . .

byWilliam Luppold

USDA Forest Service, Princeton, WV


37/50

Northeastern

Southeastern

South-Central

North-Central

32 to 36

32 to 36

27 to 29%

28 to 30%

32 to 33%

32 to 36%

Decline in Hardwood Lumber Production From Winter

of 2008 to Winter of 2009 (down ~30% in all regions)


38/50

States that are Hurting, Really

Hurting or in Real Pain Hurtingproduction down 25 to 30 percent

PA, NY, LA, VA, IA, OH

Really hurtingproduction down 35 to 40 percent

TN, MS, KY, NC, MI, ME, WV

Real pain

production down more than 45 percent AL, GA, WI, CT, MA


39/50

Production Employment in Wood

Household Furniture Industry

30

40

50

60

70

80

90

100

110

120

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Wood furniture production hasbeen moving abroad (e.g. mainly toChina) for a decade or more,resulting in declining U.S. furnitureindustry employment.


40/50

Production Employment in Kitchen

Cabinet Industry

70

80

90

100

110

120

130

140

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

A more abrupt andrecent drop in thekitchen cabinet industryis attributable to the

housing bust.


41/50

Indexes of Hardwood Lumber, Cross

Ties and Pallet Cant Prices 2004 to 2009

60

65

70

75

80

85

90

95

100

105

110

2004 2005 2006 2007 2008 2009

2004

=1

00

FAS 1C 2C Pallet Tie

Hardwood gradedlumber price indexeshave dropped muchmore than pallet or

crosstie prices.


42/50

Eastern Hardwood Lumber

Production 1958 to 2009

5000

6000

7000

8000

9000

10000

11000

1200013000

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Millionsofb

oardfeet

The decline in U.S.hardwood lumberoutput since the 1999peak is around -50% . . .

(back to 1950s levels)


43/50

Eastern Hardwood Lumber

Production 1904 to 1932

2000

4000

6000

8000

10000

12000

1904

1906

1908

1910

1912

1914

1916

1918

1920

1922

1924

1926

1928

1930

1932

Millionsofboardfeet

A 50% drop in lumberproduction has notoccurred since theGreat Depression.

U S Delivered Log Price Trends (2001 2007)


44/50

U.S. Delivered Log Price Trends (2001 2007) . . .

Log prices generally followed lumber markets, climbing to recentpeaks in 2004-2005, but collapsing with the housing bust. Thedrop in log prices (-30% for softwood and -33% for hardwood fromrecent peaks) is now similar to the average drop in lumber prices.

Source: BLS (Bureau of Labor Statistics)

50

75

100

125

150

175

2002 2003 2004 2005 2006 2007 2008

PriceIndexes(1982=1

00)

150

175

200

225

250

275

Hardwood Logs

Softwood Logs

N th A i OSB d ti l i d


45/50

0

2

4

6

8

10

12

14

16

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

North American OSB production was also crimpedby the housing downturn, but higher U.S. exportshelped sustain U.S. production into 2008:

Source: APA The Engineered Wood Assoc.

U.S. OSB ProductionBillion Sq Ft 3/8" Basis


46/50

0

50100

150

200

250

300

350

400

450

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

T

housandcubicmeters

Source: FAS

U.S. OSB exports surged in 2007-2008, due to low prices and excesscapacity, but a stronger U.S. dollar might dampen export growth . . .


47/50

Overall U.S. Trade Deficit has declined since 2005in Forest Products*

-$8

-$7

-$6

-$5

-$4

-$3

-$2

-$1

$01991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

U.S. Forest Products Trade Deficit, Billion $

Source: FAS

* Forest products here include roundwood, sawnwood, wood based panels, pulp

2008:

Imports

$4.2 billion

Exports

$1.13 billion

Deficit

$3.03 billion

(smallest in

15 years)


48/50

Summary of trends in lumber andwood panel markets

1. U.S. lumber and wood panel demands follow housing construction for

obvious reasons (homes and furnishings are made of wood).

2. The U.S. housing market experienced a big collapse in demand, following

the recent credit boom and peaking of home prices.

3. Since 2005 the collapse in housing has changed the market situation for

lumber and wood panel products, with lower demand and prices.

4. An upturn in U.S. markets for lumber and wood panels hinges upon an

upturn in the housing market, the timing of which remains uncertain.

5. The weaker U.S. dollar since 2005 helped improve the U.S. wood trade

balance, but a stronger dollar and global economic recession in the past

year raise doubts about export markets.


49/50


50/50

Forest Market Trends 09

Documents

Transcript of Forest Market Trends 09