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Where Is Economy Headed? Implications for Southern Forestry!! Dr. Lynn O. Michaelis—Executive Adviser, RISI Presentation to SCFA Annual Meeting November.

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Presentation on theme: "Where Is Economy Headed? Implications for Southern Forestry!! Dr. Lynn O. Michaelis—Executive Adviser, RISI Presentation to SCFA Annual Meeting November."— Presentation transcript:

1 Where Is Economy Headed? Implications for Southern Forestry!! Dr. Lynn O. Michaelis—Executive Adviser, RISI Presentation to SCFA Annual Meeting November 3, 2011

2 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 3 Bernanke’s said in 2010: “ An unusually uncertain environment” Translation: flying blind

4 4 Financial meltdown: Sources of sustained recovery?

5 5 Unique cycle and source of global financial crisis

6 6 Perspective: More difficult than 1979-82  Extremely low operating rate  “Depression” prices

7 7 Where We are Going Today!  Understanding the situation: WHY?  Economic and housing outlook

8 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 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 10 Decline in employment rate helps unemployment statistic The statistic for:200720092011 Unemployment rate (%)4.6%9.3%9.2% Labor force (millions)153.1154.2153.7 Employment (millions)146.0139.9139.6

11 11 Falling home prices have serious wealth impact and potentially on consumer spending

12 12 Oil Prices Supported by Emerging Economies and Weak Dollar West Texas Intermediate Crude Oil, US$ per Barrel Source: Fed, RISI

13 13 Expect rates to remain flat through 2012: but not an issue for housing

14 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 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 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 Current Vacancy Rate Implied “excess” Inventory (Millions) Owner Occupied 751.5%2.7%0.90 Renter Occupied 377.4%9.4%0.74 Occupancy Rate 13088.0%85.6%3.10

17 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 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 19 Illustration of economic impact on the younger age groups Employment RateHeadship Rate 2000-20052005-20102000-20052005-2010 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 20 Simulating Housing Production and Tracking the Inventory Correction (Thousands)2009201020112012201320142015 Housing Demand, given household forecast* 6558681,2551,4001,6001,6751,575 LESS: Production (Starts +Mobile Homes) 5606406376931,1001,4001,675 Inventory by Year End 2,0281,8001,182475-25-300-200 * Net removals assumption: 500,000/year

21 21 What type of units? Reason it is important Ave. SizeUsage/sf.Demand/unit Lumber per unit Single F24646.315,170 Multi F12854.24,970 OSB per unit Single F24644.811,400 Multi F12853.03,500 Reference: 100,000 single family units need 1.5 billion bf lumber and 1.1 billion sq. ft. of OSB

22 22 Type of unit demanded: Ownership Rate is the KEY! 199520052010 Total Occupied Housing Stock 97.1108.2 Owner 62.374.6 Rental 34.833.7 Ownership Rate 64%69% Average for Period Ending In: Owner Demand Annual Rate 1.31 Actual SF Starts Annual Average 1.66

23 23 Importance of Ownership Rate for Mix of Housing Units Started 199520052010 Total Occupied Housing Stock 97.1108.2112.1 Owner 62.374.675.1 Rental 34.833.737.0 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 24 Step 3: Mix of Starts Determined by Ownership Rate Trends  Key driver for housing mix  Drove single family housing boom/bubble—now…

25 25 RISI BASE CASE: expect little improvement until 2013

26 26 Existing Home Sales Hard to Interpret – New Homes Message Clear

27 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 28 Where We are Going Today!  Understanding the situation: WHY?  Economic and housing outlook  Translation to wood products demand

29 29 Given housing outlook, wood products demand outlook through 2013 is:

30 30 Lumber Prices: Bouncing off bottom and some very different regional factors SPF reflects export marketSYP closes on SPF

31 31 One factor: Housing starts in Canada vs. California

32 32 Key factor in cash cost and price outlook: C$ forecast BC $/mbf in*: 20042011 C$$269$195 U.S $/C$.771.05 US$ $207 $205 Plus duty---$31 Cash break-even today---$236 *based on RISI mill surveys

33 33 Canadian Dollar Overvalued, But Supported by Commodities

34 34 Factor #4: China demand for logs and lumber

35 35 Demand for N.A. Lumber: Very slow improvement in overall demand

36 36 Exports: No Indication That South Is Making Significant Inroads in the Offshore Export Market

37 37 Bottom Line: Prices near cash costs and SYP reflects domestic market

38 38 US Domestic Market: US South Is Capturing Market Share

39 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 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 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 42 US log exports to China are contracting in July-August (Million M 3 ) Note: Includes Alaska 25% of harvest demand

43 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 44 Stumpage price reflects expected SYP lumber prices SYP Stumpage, $/GST

45 45 U.S. Southern Pine Pulpwood outlook positive for several reasons

46 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 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 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 COMMENTS do you have? Contact: Lynn Michaelis lmichaelis@risi.com 206-434-8102


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