International Markets: The Key to the Survival of the Forest Products Industry in

Virginia and the Carolinas?

January 26, 2012

APSAF 91st Annual Winter meeting

Quiz

According to the Hardwood Market Report, since 1999, 70% of US furniture manufacturing ?

Answer: moved off shore

#1 and #2 common lumber

What happened to the veneer industry?

Industrial wood products **Domestic use**

Ties – relatively stable @ 20 million annually

Pallets – economy and trade driven. Competitive material utilization

Mat Timbers/Board Road – exploration depended (Boom and Bust cycles)

1999

12.6 B bd. ft

2009

5.7 B bd. ft

2010

7.5 B bd.ft.

Growing Importance of US Hardwood Exports:

Exports as a % of US Production

6

7

8

9

10

11

12

13

14

15

16

2003 2004 2005 2006 2007 2008 2009 2010 Source: Hardwood Review,

Chip/Fuel markets

Consider new domestic pellet fuel projects

New domestic power generation - wood/biomass fuels

How will this market impact log and lumber markets?

How will this market impact forest management? (Pre-commercial thinning?)

Consider this fuel scenario: “For the first time ever this year there will be more corn used for ethanol than will be fed to livestock. Suffice it to say that ethanol is important to the farm economy as corn touches virtually every aspect of agriculture. But, the next chart indicates that the market does not like ethanol – the chart shows the unleaded gasoline/ethanol spread – Source: Virginia Farm Bureau, Commodity Comments, 1/18/2012

Source: Virginia Farm Bureau, Commodity Comments, 1/18/2012

The market is saying, at least for now, that it favors unleaded gasoline over ethanol by a large margin. As important as ethanol has become, it has probably gotten ‘too big to fail’, whether the market likes it or not .”

Source: Virginia Farm Bureau, Commodity Comments, 1/18/2012

U.S. Housing Construction

New Starts

(utilize millwork – FAS and SEL grade)

(cabinets and flooring – common grades)

2006 – 2,100,000 new houses

2011 – 600,000 new houses (75% lower!!)

Predicted to be stagnant for next 2-3 years. This is ¼ of what many experts see as necessary for a thriving forest products industry.

Source: USDA Forest Service

November Housing Comments

New Homes

New home sales the lowest since 1967 and trending lower

Multi-Family units, as a % of new starts, are increasing.

Single Family – smaller and fewer upgrades such as:

• Hardwood floors

• Solid hardwood millwork

• Solid hardwood cabinets

International Markets

“… estimates show exports have grown to over 47% of all grade lumber….. Therefore, all mills and resellers are reliant on a vibrant international marketplace.”

“Like it or not, international markets are a significant and growing portion of activity for US hardwood lumber suppliers.”

Source: Hardwood Market Report, International Markets, 4/30/2011

US Hardwood Lumber Exports by Value 2010

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000 550,000

S/C America

Caribbean

Oceania

Non EU Europe

India

Korea

Middle East

Japan

Southeast Asia

Mexico

Greater China

EU

Source: US Census Bureau

($1,000)

Europe Generally high incomes and “quality” focused

Traditionally purchased higher grades and veneers due to quality and high European labor costs

Hardwood species exist in Europe, so domestic wood in direct competition with our hardwoods

DEBT CRISIS has brought economies to a crawl and weakened the Euro, so US hardwoods are now more expensive. Not to change anytime soon…..

** Bright spot: Biomass/Power Generation fuel due to “green” Government regulation**

World’s Leading Hardwood Lumber Importers: 2010

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2002 2003 2004 2005 2006 2007 2008 2009 2010

$M

illi

on

EU15

China

United States

Japan

Canada

Hong Kong

Thailand

South Korea

Mexico

Taiwan

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2003 2004 2005 2006 2007 2008 2009 2010

Temperate Tropical

Source: EUROSTAT

EU Hardwood Lumber Imports (Billions of Euros)

China Large and growing “middle class”

Government controlled economy with Central decision-making

Domestic timber resource “controlled” and not significant

Accounted for 22% of global economic growth 2000-2010

Cultural nuances: negotiations, “saving face”, “endurance” testing, conspicuous consumption

China Domestic Timber Output Under NFCP

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1997 1998 1999 2000 2003 2004 2005 2006 Source: China Timber Import Export

19

“Middle Class” in Developing Countries Could Reach 616 Million

Households By 2020, Up 138% From 2009 Levels 25% of households in these countries are middle class. By 2020, this could

increase to 49% and the impact on food consumption will be large

234

60

12

9

8

7

6

5

4

3

3

2

2

1

0 25 50 75 100 125 150 175 200 225 250 275 300 325 350

China

India

Brazil

Indonesia

Russia

Egypt

Thailand

Mexico

Turkey

Vietnam

Philippines

Iran

Poland

Nigeria

Households with real PPP incomes greater than $20,000 (in millions)

2009 levels Proj gains by 2020

Developing countries with fastest growing “middle class”

Source: Global Insight’s Global Consumer Markets data as analyzed by OGA

0

10

20

30

40

50

60

1998 1999 2000 2001 2002 2003 2004 2005 2006

Production 10.5 12.6 14.5 16.9 19.88 24.58 34.1 42.5 56

Export 2.1 2.7 3.6 4 5.42 7.33 10.35 13.8 17

Production

Export

China Furniture Production &

Exports

Bil

lio

n U

SD

•China National Furniture Association

Per Capita Wood Consumption

0

0.2

0.4

0.6

0.8

1

1.2

1.4

China World OECD USAIn cubic meters per capita

Source: China Timber Import Export Co/Hardwoodmarkets.com 2008

Offshore Influences, slump’s longevity huge factor in 2012 Random Lengths International, 1/4/2012

“Another record-shattering year for shipments to China was again the centerpiece for both U.S. and Canadian suppliers.”

“U.S. exports to China reached 354 mmbf through October, up 264% compared to the 2010 pace. China surpassed Canada last year as the top foreign destination for U.S. exports, and the volume was far and away the highest on record.”

“Trends in China will remain a key driver in 2012, and likely for many more years. Chinese demand slowed late in 2011 as government measures to cool its bustling housing market took hold”

China’s Importance

“The importance of this one market destination for US hardwood lumber cannot be overstated; China purchased 38% of the volume exported, including Canada.”

Source: Hardwood Market Report, International Markets, 4/30/2011

Word of Caution: If domestic consumption of wood products in China stalls AND the economies that purchase exports from China (i.e. USA, EU, Middle East) recover slowly or stagnate, expect a Shockwave through our industry.

India

“U.S. shipments to India reached more than 17.2 million board feet through the third quarter, up 680% from the year-ago pace.”

“Southern Yellow Pine is the most commonly shipped species to India, accounting for roughly half of the total exports.”

Source: Random Lengths, International, 12/7/2011

U.S. Softwood Exports to India Surging in 2011

0

5

10

15

20

25

2007 2008 2009 2010 2011*

mmbf

*Projection based upon data through September

Source: U.S. Foreign Agricultural Service

0

100

200

300

400

500

600

700

800

900

2003 2004 2005 2006 2007 2008 2009 2010

)

Logs

Lumber

Indian Hardwood Imports: 2003-2010

Indian Imports of Sawn Hardwood

Lumber by Supplier

(m3)

Source: Broadleaf Consulting/Various

5,000

873442

9,813

0

2,000

4,000

6,000

8,000

10,000

Africa, Far East, Latin

America & Eastern

Europe

Malaysia USA EU

Why Export? Globalization

–Manufacturing is Global

–Consumption is Global

–Consumption of Wood products increasing fastest outside of US

–95% of the world’s population does NOT live in the USA

Survival vs. Change Higher value (lumber/dimension/veneer) vs.

commodity (chips, biomass, fuel, fiber)

Domestic markets vs. International markets

There will always be a need for wood.

Understanding the utilization trends and being able to scale up or scale down appropriately may determine “survival” of an enterprise, but it will only be “change” for the industry.

Questions?

Joel Stopha, International Marketing – Forest Products Virginia Department of Agriculture and Consumer Services

Richmond, VA

804-371-8991 office

804-382-0590 mobile

joel.stopha@vdacs.virginia.gov