North American and Global Forest Market Trends

Peter J. Ince US Forest Products Laboratory Madison, Wisconsin

Principal Forest Markets:

Wood Pulp, Paper & Board

Lumber & Wood Panels

Wood Pulp, Paper & Paperboard

U.S. Wood Pulp Production Now Declining:

70 60
After decades of robust growth, U.S. wood pulp output peaked in the mid-1990s and then declined, impacted by paper recycling gains in the early 90s, shifts in global demands since the late 90s, and now an economic recession . . .

Millions of metric tons

50 40 30 20 10 0

Pulpwood is still a big part of U.S. wood demand (and especially in Wisconsin), but U.S. production has dropped by -1%/yr. since the mid1990s, versus 2% to 3% growth in 1970s and '80s.

1900

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

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

Outsourcing Production . . .
40

Change in Paper & Board Production (million metric tons per decade) N. America Europe Asia

North American output of paper and paperboard declined in the most recent decade, while growth was sustained in Europe and Asia. China became the worlds most rapidly expanding consumer and producer of paper and paperboard, likely to surpass the USA within the next decade.

35 30 25 20 15 10 5 0 -5 -10

1977-1986

1987-1996

1997-2006
Source: FAOSTAT

Global Drivers . . .

Trade liberalization (GATT WTO) Expanded global commerce

Shift of manufacturing growth to Asia and Europe

Collapse of global financial system (current recession)

Globalization
Real Broad Dollar Index
115 110 105 100 95 90 85
Long-term historical average (97.5)

The dollars real exchange value soared above-average for a long period (1997-2005), placing U.S. manufacturers at a competitive disadvantage. From 2005 to '08 the dollar fell below average, helping improve the U.S. trade balance . . . but the dollar gained in the past year as the world economy sank into the most recent economic recession . . . (Not a good sign for U.S. trade)

U.S. Dollar Index

Real Broad Dollar Index

80
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: U.S. Federal Reserve (H.10 Real Broad Dollar Index)

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

Percent Growth (yr. over yr.)

10 5 0 -5 -10

U.S. Industrial Production Year-Over-Year Growth

Growth

No Growth

!!!
-15
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: U.S. Federal Reserve (G.17 Industrial Production, seasonally adjusted)

Paper and paperboard demands follow industrial production because of usage in packaging and print advertising, but industrial outsourcing and electronic media have displaced growth. U.S. paper and board purchases plunged along with industrial output in the current recession . . .
120 116 112
Industrial Production Index

U.S. Industrial Production Index U.S. Paper & Board Purchases

102 100
Paper & Board Purchases (million metric tons year-to-date)

98 96 94 92 90 88 86 84

108 104 100 96 92 88 84 80 76 72

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

Down 11% since 2007

82 80 78

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

Apart from the decadal trend in outsourcing and downsizing of U.S. manufacturing, what caused the recent dramatic plunge in U.S. production?

The Credit Crisis: Governments and central banks around the world pursued policies that, with the benefit of hindsight, caused a huge global boom in credit . . . to levels that defied gravity.
Remarks by Treasury Secretary Timothy Geithner February 10, 2009

Translation: There was a global credit boom that went bust in 2008 . . .

The credit bust: When the credit boom went bust in 2008, U.S. retail sales went into a sudden steep decline (unlike recession of 2001-2002) . . .
Total U.S. Retail Sales ($Billions/month)
400 350 300 250 200 150 100 50 0

With the sudden collapse of financial institutions and end to easy credit terms, total U.S. retail sales dropped by 12.4% from June to December of 2008. The current recession featured a big drop in consumer spending (the largest element of U.S. GDP), although spending may have begun to stabilize in the past few months.

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

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

In some credit-dependent sectors, such as motor vehicles & parts, the drop in sales activity was even more pronounced . . .
Motor Vehicle & Parts Sales ($Billions/month)
100

80

60

40

Motor vehicle and parts dealer sales dropped by 29% from October 2007 to March of 2009 (and sales continue to decline in 2009).

20

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

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

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

Board Production, million tonnes (12 months year-to-date)

90 88 86 84 82 80 78

U.S. Paper & Board Production Annualized

Down 7% since 2007

Sources: AF&PA

U.S. Pulp, Paper & Board Mill Employment

240

The U.S. pulp & paper industry responded to slower demand growth with consolidation & downsizing . . . Since 1997, dozens of older less efficient mills were closed, and over 40% of all U.S. pulp, paper and board mill jobs were eliminated . . . and another 18 mills were closed and 8,000 mill jobs eliminated in 2008 . . .

Mill Employment (thousands)

220

200

180

160

140

120
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: U.S. Bureau of Labor Statistics

U.S. Paper & Board Output per Mill Employee

700

Annual (YTD) output/employee (m. tons)

650 600 550 500 450 400 350 300

Consolidation and downsizing yielded productivity gains Output per worker at U.S. mills increased by over 40% just since 2001 . . . Productivity has leveled out but not declined in this recession . . .

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Sources: U.S. Bureau of Labor Statistics (pulp, paper & board mill employment) AF&PA (paper and paperboard production, in short tons)

U.S. Pulp, Paper & Board Product Trade (Tonnage) The U.S. trade gap
26 24
Millions of Metric Tons

Exports Imports

115 110 105 100 95 90 85

in pulp, paper and board had bulged to 8 million metric tons in 2002 . . . But as a result of consolidation, a weaker dollar, and productivity gains, the trade gap was narrowed, and in 2008 the trade gap was closed !! (exports actually exceeded imports in tonnage).
Real Broad $ Index

22 20 18 16 14
08 20 07 20 06 20 05 20 04 20 03 20 02 20 01 20 00 20 99 19 98 19 97 19 96 19

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]

Market Trends Pulp, Paper & Board Price Indexes

250

Price Indexes (1982 = 100)

225

Paperboard Paper Pulp

200

175

150

125

100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

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

Market Trends U.S. Pulpwood Price Index

120

Pulpwood
Price Indexes (1982 = 100)
110

100

90

80

70
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Pulpwood prices also experienced an upturn for about six years following the 2001-2002 recession . . . In the current economic recession the pulpwood price index is trending downward.
Source: BLS (Bureau of Labor Statistics); not seasonally adjusted

Another aspect of consolidation and downsizing . . . Since the early 1990s, divestiture of timberland by vertically 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

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 . . .
12
NCREIF Timberland Index--Total Returns (4-qtr. Moving Avg.)

NCREIF Timberland Index

10

Polynomial Trendline

8
Rate (Percent)

Period of substantial industry timberland divestment

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-2
Source: NCREIF (National Council of Real Estate Investment Fiduciaries) Timberland Index

Summary of pulp & paper market trends

1.
2.

U.S. pulp, paper and board production peaked in the late 1990s, as output was impacted by industry globalization.
The U.S. pulp and paper industry responded to the challenge of globalization with consolidation and downsizing; A weaker dollar and productivity gains helped close the pulp and paper trade gap by 2008. Pulp, paper and board prices climbed from 2002 to 2008 but have likely peaked in the near term, with receding industrial production and declining demand. Markets are indicating generally lower pulpwood prices and lower timberland returns for the near term.

3.

4.

Lumber & Wood panels

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

Since 2005, the big change was the end to the housing boom with now lowest starts in more than 50 years . . .
1.8 1.6 1.4

Millions per year

1.2 1.0 0.8 0.6 0.4 0.2 0.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-Feb

Single-family housing unit construction starts/year

Sources: Data - U.S. Census Bureau 2009-Feb = SAAR in February

U.S. New Home Sales - Long History

1400 1200 1000 800 600 400 200 0
Past notable declines featured rising interest rates Interest rates today are low, but borrowing has collapsed The current collapse features declining home prices
1963 - Ja 1965 - Ja 1967 - Ja 1969 - Ja 1971 - Ja 1973 - Ja 1975 - Ja 1977 - Ja 1979 - Ja 1981 - Ja 1983 - Ja 1985 - Ja 1987 - Ja 1989 - Ja 1991 - Ja 1993 - Ja 1995 - Ja 1997 - Ja 1999 - Ja 2001 - Ja 2003 - Ja 2005 - Ja 2007 - Ja 2009 - Ja

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

Thousands (annual rate)

Baby Boom era

Source: NAHB and Census Bureau data

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

(the rest of Tim Geithners quote) . . .

Governments and central banks around the world pursued policies that, with the benefit of hindsight, 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

300

250

Billions of Dollars per Year

200

As the U.S. trade deficit expanded since the early 90s, billions of dollars came back from foreign sources into U.S. mortgage markets via foreign purchases of GNMA, FNMA & FHLMC agency bonds (and CDOs) that fund mortgages. This global credit boom helped facilitate the U.S. housing boom, but loose credit led to inflated home values and bad debts . . .

150

100

Foreign Purchases of U.S. Agency Bonds

50

By 2008 global lines of housing credit were drying up and foreign bond holders cashing out . .
2000 2005

1980

1985

1990

1995

-50
Source: U.S. Dept. of the Treasury

Booming credit facilitated booming home prices, but average wage gains did not keep up with new home prices, so home affordability became a big issue . . . Even after recent declines in home prices the gains in home prices still far exceed gains in average earnings.
27.5

U.S. Average Wage of Production Workers (BLS)

Up 72%
Dollars per hour
275 250

25 22.5 20

Median New Home Price (NAHB; Single-Family)

Thousands of Dollars

Up 55%
17.5 15 12.5 10
2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995

225 200 175 150

Consequences of defying gravity . . . The credit boom drove up home prices but in 2006 the rate of appreciation dropped. With this abrupt change in home equity appreciation much of the economic incentive to buy or build new homes suddenly evaporated.

Annual Change in Existing Home Sales Price

Polynomial Trendline

15
Percent Change (Yr./Yr.)

10 5 0 -5

1990

Source: National Association of Realtors (NAR) U.S. median sales price of existing homes 2009(p) year/year data through January only

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009p

A global credit boom drove home prices and recent housing boom, but wages did not keep pace and eventually home values declined.

$
Without the lure of home equity gains new home sales collapsed since 2006. The record housing construction boom became the housing bubble, which is still undergoing its long correction.

2.00 1.80

U.S. Single-Family Housing Starts, SAAR

Housing Starts (millions, annual rate)

1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: U.S. Census Bureau, Seasonally Adjusted Annual Rate (SAAR), by month

The credit-driven home building boom became a bubble that burst since 2006 as home values declined. The downturn may be reaching a bottom, simply because there is not much more room to fall (housing starts are now down 80% since their 2006 peak) . . .

What experts said last year about housing downturn 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)

The housing downturn has severely impacted U.S. softwood lumber production . . .
U.S. Softwood Lumber Production
Billion Board Feet

45 40 35 30 25 20 15 10

Down 54% since 2005 (based on January 2009 production at an annualized rate)

Source: WWPA

Impact on lumber prices . . .

250

Price Indexes (1982 = 100)

225

Hardwood Lumber Softwood Lumber

200

175

150

Market recovery hinges on recovery in housing

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

125

Sources: BLS (Bureau of Labor Statistics)

Some additional views on hardwood lumber markets . . . by

William Luppold
USDA Forest Service, Princeton, WV

Decline in Hardwood Lumber Production From Winter of 2008 to Winter of 2009 (down ~30% in all regions)
Northeastern North-Central

28 to 30%

27 to 29%

32 to 36

32 to 36
Southeastern

32 to 36%
South-Central

32 to 33%

States that are Hurting, Really Hurting or in Real Pain

Hurting production down 25 to 30 percent

PA, NY, LA, VA, IA, OH

Really hurting production 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

Production Employment in Wood Household Furniture Industry

120 110 100 90 80 70 60 50 40 30

Wood furniture production has been moving abroad (e.g. mainly to China) for a decade or more, resulting in declining U.S. furniture industry employment.

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Production Employment in Kitchen Cabinet Industry

140 130 120 110 100 90 80 70

A more abrupt and recent drop in the kitchen cabinet industry is attributable to the housing bust.

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09

Indexes of Hardwood Lumber, Cross Ties and Pallet Cant Prices 2004 to 2009
110 105 100 95 90 85 80 75 70 65 60

2004 = 100

Hardwood graded lumber price indexes have dropped much more than pallet or crosstie prices.

2004

2005 FAS

2006 1C 2C

2007 Pallet

2008 Tie

2009

Eastern Hardwood Lumber Production 1958 to 2009

13000

Millions of board feet

12000 11000 10000 9000 8000 7000 6000 5000

The decline in U.S. hardwood lumber output since the 1999 peak is around -50% . . . (back to 1950s levels)

19 58 19 61 19 64 19 67 19 70 19 73 19 76 19 79 19 82 19 85 19 88 19 91 19 94 19 97 20 00 20 03 20 06 20 09

Eastern Hardwood Lumber Production 1904 to 1932

12000
Millions of board feet

10000 8000 6000 4000 2000

19 04 19 06 19 08 19 10 19 12 19 14 19 16 19 18 19 20 19 22 19 24

A 50% drop in lumber production has not occurred since the Great Depression.

19 26

19 28

19 30

19 32

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

175
275

Price Indexes (1982 = 100)

150

Hardwood Logs Softwood Logs

250

125

225

100

200

75

175

50 2002 2003 2004 2005 2006 2007 2008

150

Log prices generally followed lumber markets, climbing to recent peaks in 2004-2005, but collapsing with the housing bust. The drop in log prices (-30% for softwood and -33% for hardwood from recent peaks) is now similar to the average drop in lumber prices.
Source: BLS (Bureau of Labor Statistics)

North American OSB production was also crimped by the housing downturn, but higher U.S. exports helped sustain U.S. production into 2008:
16 14 12 10 8 6 4 2 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

U.S. OSB Production

Billion Sq Ft 3/8" Basis

Source: APA The Engineered Wood Assoc.

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

450 400
Thousand cubic meters

350 300 250 200 150 100 50 0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: FAS

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

$0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

2008: Imports

-$1 -$2 -$3 -$4 -$5 -$6 -$7 -$8

$4.2 billion Exports

$1.13 billion
Deficit $3.03 billion (smallest in 15 years)
Source: FAS

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

Summary of trends in lumber and wood 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.

General Summary: Global shifts in trade and manufacturing led to declining U.S. pulp, paper & board production since the 1990s.

A credit boom from the early 90s to 2005 gave a big boost to housing, but the boom led to an unsustainable housing bubble and market bust.

Forest markets were deeply impacted by the ongoing recession with declining demand and uncertainty about recovery.