January 15, 2014

Impending Shortage of NA Lumber Capacity: Implications for U.S. Southern Industry

Alabama Forest Owners’ Association Webinar Dr. Lynn O. Michaelis, Partner

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

2

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!!!

Lumber Price

25

35

45

55

65

75

85

1975 1980 1985 1990 1995 2000 2005 2010

Bil

lio

n b

f

DemandCapacity

100

150

200

250

300

350

400

450

1977 1983 1989 1995 2001 2007 2013ytd

$/m

bf

DF green 2x4 price

I II III IV I II III IV

Demand vs. Capacity

Southern prices reflect domestic market, while exports boost West

250

300

350

400

450

500

550

600

650

700

$/

MB

F*

Doug Fir #2

Hem Fir #2

Southern Saw log

5

Sawtimber Demand in the US South Remains Depressed

BBF, Int’l ¼”

0

5

10

15

20

25

2000 2002 2004 2006 2008 2010 2012

Other

OSB

Pulp

Plywood

Lumber

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

40%,

30%

12%

16%

2%

Lumber Market Share*

New ResR&ANon-ResIndustrialNet Exports

*Market share average 1998-2007

8

Unique Housing Cycle: WHY?

0.0

0.5

1.0

1.5

2.0

2.5

70 74 78 82 86 90 94 98 02 06 10

Multi

Single

Million Units

Mixed messages in home sales data

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

100

300

500

700

900

1,100

1,300

1,500

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Exis

tin

g H

ome

Sal

es-0

00

un

its

New

Hom

e S

ales

-00

0 u

nit

s

New HomesExisting Homes (RT)

Price Rebound Should Help Consumer Spending, Especially….

Rebound in prices Helps consumer Balance Sheet

0

2

4

6

8

10

12

14

Trill

ion

$

Home Equity*

*SOURCE: FRB flow of funds

100

120

140

160

180

200

220

240

$0

00

Median Existing Price

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

Housing Collapse Was Due to Excesses: Requires different forecasting approach

Inventory correction is underway,

but….

14,500

15,000

15,500

16,000

16,500

17,000

17,500

18,000

18,500

19,000

19,500

Theoretical*Actual

Thousands

*Assumes 12.5% Vacancy Rate

This gap is one estimate of overhang of existing homes

Problem: Below trend household formation rate

0200400600800

100012001400160018002000

Household Formations* 000

*Based on occupied housing stock--Census

0.0

0.5

1.0

1.5

2.0

2.5

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Mill

ion

Un

its

Multi

Single

Our Outlook Calls For a Sustained Housing Starts Recovery Through at

Least 2017

Deep Cycle for Lumber Prices: Rebounding, but Volatile

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

03 04 05 06 07 08 09 10 01 12 13

SPF 2x4

SYP 2x4

DF green 2x4

$/MBF

North American Domestic Lumber Consumption

76%

77%

78%

79%

80%

81%

82%

83%

84%

85%

86%

20

30

40

50

60

70

80

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

US Canada US Share (R)

BBF

North American Offshore Trade

0%

5%

10%

15%

20%

25%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

CanadaUSExport Share (R)

BBF

Export Share of Total North American Lumber Consumption

Overall Lumber demand approaches 70 bbf by 2017

2025303540455055606570758085

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Lumber Demand on NA mills

US Canada Net Exports

BBF

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%

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%

Lumber Capacity (Billion Board Feet)

Inventory of Available Live and Dead Lodgepole Pine, by Years Since Attack,

1999-2020

0

200

400

600

800

1,000

1,200

1,400

1,600

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

>12 yrs

11-12 yrs

9-10 yrs

<8 yrs

Live

Source: FEA estimates

Million m3

16

20

24

28

32

36

Quebec AAC Will Fall Further

MMCM

The Deferred Volume in the South Substantial

200

210

220

230

240

250

260

270

280

290

300

0

5

10

15

20

25

30

35

40

45

50

2000 2002 2004 2006 2008 2010 2012 2014 2016

Inve

ntor

y, B

BF In

t'l 1

/4"

Grow

th &

Dra

in, B

BF, I

nt'l

1/4"

Growth

Drain

Inventory

Sawtimber Inventory

Growth Drain

U.S. Lumber Production: Near or Above Previous Peak

0

5

10

15

20

25

30

35

40

45

2005 2009 2012 2015 2017

Bill

ion

BF

Other

South

West Coast

0

5

10

15

20

25

2000 2005 2006 2009 2012 2013 2015 2017

South South Peak

High mill margins and timber supply, will push South to new peak production

levels BBF

26

Sawtimber Harvest returns to 2005 Levels

BBF, Int’l ¼”

0

5

10

15

20

25

2004 2006 2008 2010 2012 2014 2016 2018

Other

OSB

Pulp

Plywood

Lumber

North American Softwood Lumber Imports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

BBF

Log and stumpage prices continue to recover after..

Southern Lumber Prices Southern Log/Stumpage prices

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

2000 2002 2004 2006 2008 2010 2012 2014

$/M

BF

DeliveredDelivered ($2012)StumpageStumpage ($2012)

29

150

200

250

300

350

400

450

500

550

1994 1997 2000 2003 2006 2009 2012

$/

MB

F

Southern Lumber Prices

SYP2x4

SYP2x10

The US Wood Pellet Industry Is Undergoing Dramatic Growth

Production, Million Tons

0

2

4

6

8

10

12

14

16

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

North Central

Northwest

Northeast

South

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

25

35

45

55

65

75

85

1975 1980 1985 1990 1995 2000 2005 2010 2015

Bil

lio

n b

f

NA Lumber Demand vs. Capacity

Demand

Capacity

THE Key Message of Today’s Presentation

BIG WINNER: Timber Owners—South catches up!! ($$)