where is economy headed? implications for southern forestry!!

Where Is Economy Headed?

Implications for Southern Forestry!!

Dr. Lynn O. Michaelis—Executive Adviser, RISIPresentation to SCFA Annual MeetingNovember 3, 2011

2

Where We are Going Today!

Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand Regional implications: logs and timber Longer term: There WILL be a recovery

3

Bernanke’s said in 2010:

“An unusually uncertain environment”

Translation: flying blind

4

Financial meltdown: Sources of sustained recovery?

5

Unique cycle and source of global financial crisis

6

Perspective: More difficult than 1979-82

Extremely low operating rate “Depression” prices

7

Where We are Going Today!

Understanding the situation: WHY? Economic and housing outlook

8

The Challenge: Economic Forecast given the NEW WORLD

Current best view: sluggish growth through 2012-13– Key Driver: Consumer Spending -- not too exciting– Strong Business Investment last Quarter– Several Headwinds: Housing, State and Local Government,

Politics for 2012 Election Biggest Risk: European debt crisis (future of the Euro)

9

U.S. Growth : Revised down since May, with serious implications for employment

Key Driver: consumer spending, but..

– Employment– Confidence– Wealth

Strong Bus Investment Modest boost from

international—weaker Euro?

Truth: uncharted waters– Range of forecasts for

2012: .5%-3.5%

10

Decline in employment rate helps unemployment statistic

The statistic for: 2007 2009 2011

Unemployment rate (%) 4.6% 9.3% 9.2%

Labor force (millions) 153.1 154.2 153.7

Employment (millions) 146.0 139.9 139.6

11

Falling home prices have serious wealth impact and potentially on consumer spending

12

Oil Prices Supported by Emerging Economies and Weak Dollar

West Texas Intermediate Crude Oil, US$ per Barrel

Source: Fed, RISI

13

Expect rates to remain flat through 2012: but not an issue for housing

14

Housing Outlook: Unique situation

Single-family still flat– Problems persist for SF

into 2012– Falling prices and

foreclosure rates– Despite record affordability

Multifamily prospects improving– Vacancy rates, rents,

absorption rates

15

Housing Outlook: Inventory correction with a TWIST

New Housing “Model”: THINKING About Plausible Recovery Patterns—no history to build econometric model

Correct approach: simulate inventory correction process—must eliminate excess before production recovers

1. How big is the excess inventory?

2. Determine annual housing “demand” vs. housing production

3. What type of units will be required—Single Family vs. Multi Family?— This is the Twist!

4. Then, simulate housing start trajectory given some key assumptions—BE CAREFUL HERE!!

16

Starting Point of 1.8 Million Excess Vacant Units, but it could be……

Size of Stock (Millions)

Historical Vacancy Rate Avg. for ‘95-’05

CurrentVacancy Rate

Implied “excess”Inventory (Millions)

Owner Occupied 75 1.5% 2.7% 0.90

Renter Occupied 37 7.4% 9.4% 0.74

Occupancy Rate 130 88.0% 85.6% 3.10

17

Forecasting basic housing demand: Simple?

Housing Demand=Net Household Growth + Net Removals + Second Home demand

Net Household Growth developed by age group=population growth and headship rate

Net Removals: 350,000-450,000 per year

18

Household Formations: Outlook based on April GDP and employment growth

Starting point (April 2011) was 2.9% GDP growth and 3.4% in 2012

19

Illustration of economic impact on the younger age groups

Employment Rate Headship Rate

  2000-2005 2005-2010 2000-2005 2005-2010

20-24 -1.1% -8.1% 3.7% -13.2%

25-34 -0.3% -5.0% 2.1% -5.8%

If headship rate had been stable: another 2 million household or 400,000/ year in housing demand

20

Simulating Housing Production and Tracking the Inventory Correction

(Thousands) 2009 2010 2011 2012 2013 2014 2015

Housing Demand, given household forecast*

655 868 1,255 1,400 1,600 1,675 1,575

LESS: Production (Starts +Mobile Homes)

560 640 637 693 1,100 1,400 1,675

Inventory by Year End

2,028 1,800 1,182 475 -25 -300 -200

* Net removals assumption: 500,000/year

21

What type of units? Reason it is important

Ave. Size Usage/sf. Demand/unit

Lumber per unit

Single F 2464 6.3 15,170

Multi F 1285 4.2 4,970

OSB per unit

Single F 2464 4.8 11,400

Multi F 1285 3.0 3,500

Reference: 100,000 single family units need 1.5 billion bf lumber and 1.1 billion sq. ft. of OSB

22

Type of unit demanded: Ownership Rate is the KEY!

1995 2005 2010

Total OccupiedHousing Stock

97.1 108.2

Owner 62.3 74.6

Rental 34.8 33.7

Ownership Rate 64% 69%

Average for Period Ending In:

Owner Demand Annual Rate 1.31

Actual SF Starts Annual Average 1.66

23

Importance of Ownership Rate for Mix of Housing Units Started

1995 2005 2010

Total OccupiedHousing Stock

97.1 108.2 112.1

Owner 62.3 74.6 75.1

Rental 34.8 33.7 37.0

Ownership Rate 64% 69% 67%*

Average for Period Ending In:

Owner Demand Annual Rate 1.31 -.8

Actual SF Starts Annual Average 1.66 .73

*At 65.9% in 2011.2 and falling

24

Step 3: Mix of Starts Determined by Ownership Rate Trends

Key driver for housing mix Drove single family housing boom/bubble—

now…

25

RISI BASE CASE: expect little improvement until 2013

26

Existing Home Sales Hard to Interpret –New Homes Message Clear

27

Small boost in product demand from R&R

Lag home sales Modest growth in 2012,

but recent events are not helping

Given who is buying existing homes: focus on improvements not additions

28

Where We are Going Today!

Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand

29

Given housing outlook, wood products demand outlook through 2013 is:

30

Lumber Prices: Bouncing off bottom and some very different regional factors

SPF reflects export market SYP closes on SPF

31

One factor: Housing starts in Canada vs. California

32

Key factor in cash cost and price outlook: C$ forecast

BC $/mbf in*:

2004 2011

C$ $269 $195

U.S $/C$ .77 1.05

US$$207

$205

Plus duty --- $31

Cash break-even today --- $236

*based on RISI mill surveys

33

Canadian Dollar Overvalued, But Supported by Commodities

34

Factor #4: China demand for logs and lumber

35

Demand for N.A. Lumber: Very slow improvement in overall demand

36

Exports: No Indication That South Is Making Significant Inroads in the Offshore Export Market

37

Bottom Line: Prices near cash costs and SYP reflects domestic market

38

US Domestic Market: US South Is Capturing Market Share

39

Where We are Going Today!

Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand Regional implications: logs and timber Longer term: There WILL be a recovery

40

Log prices follow lumber prices

Overall harvest remains far below peak and sustainable levels– Inventory building in the U.S.

Western prices reflect impact of lumber price rebound and log exports to China

Southern log market: very different story for sawtimber and pulpwood

Canadian constraint becomes apparent as recovery proceeds, but not an issue in 2011-12sd

41

*Third quarter is based on July average.

**Assumes 7.5 short tons per MBF.

(Delivered Sawtimber Prices Compared, $/MBF, Scrib., qtrly)

West benefits from China while the South remains depressed…

42

US log exports to China are contracting in July-August

(Million M3)

Note: Includes Alaska

25% of harvest demand

43

Both Regions recover slowly with overall demand, but….

Western mills benefits from log exports Slower demand recovery in South

(BBF, Softwood Sawtimber Demand*)

*Coast and Inland region combined.

44

Stumpage price reflects expected SYP lumber prices

SYP Stumpage, $/GST

45

U.S. Southern Pine Pulpwood outlook positive for several reasons

46

Where We are Going Today!

Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand Regional implications: logs and timber Longer term: There WILL be a recovery

47

Recovery eventually happens and will sustain!!!

When will be get to “trend” demand?What will be capacity/harvest limit?

Beetle kill is a constraint on BC Harvest long-term

48

Back to the beginning premise: Planning for Recovery

VERY DIFFERENT THAN THE 1980’S:– CLEAR SUPPLY CONSTRAINTS– DEMAND RECOVERY THE PROBLEM THIS TIME

UNLIKE PAPER: – DEMAND WILL EVENTUALLY RECOVER– NO MAJOR INTERNATIONAL THREAT TO SOFTWOOD

STRUCTURAL GRADE PRODUCTS

– VERY POSITIVE OUTLOOK FOR N.A. WOOD AND TIMBER INDUSTRY BEYOND 2015: THERE WILL BE A RECOVERY!!!!

49

49

What questions OR What questions OR COMMENTS do you COMMENTS do you

have?have?

Contact: Lynn Michaelislmichaelis@risi.com206-434-8102