Value-Added Wood Industry and Market

Trends for Ontario

Ian D. Manson, MNR

Wood Centre Feb. 23, 2007

Industry Organization

PRIMARY

HarvestingForestryNurseriesServices

SECONDARY

Commodity Value-added

LumberResidualsPulp Newsprint

Wood Products

Papers

$2.8B

$4.3B

$7.1B

$4.0B

$5.5B

$9.5B

$16.6B

In 1998 C$

What are value-added wood products?

Traditional BioProductsNon-TimberProducts &Services

• furniture• cabinets• millwork• EWPs• boards • mfd housing• converted papers

• bio-fuels• bio-materials• bio-chemicals

• health care• personal care• foods• crafts• decorative• recreation• services

Timber BioMassPlants

What makes something ‘value-

added’?

Primary ForestIndustry

Value-AddedWood Industry

X6

the more capital (technology) and labour used to process a raw material the more value is created

2004 % Mix of Ontario VA Wood

EWP32%

Wood Household Furniture

10%

Cabinets13%

Millwork25%

Wood Office Furniture

10%

Mfd Housing5%

Crates/Pallets5%

Sub-sector Segmentation

Based on $ Revenue: Statistics Canada, ASM

Selected Ontario Industry Employment, 2002

42,430

49,288

81,671

9,445

47,958

59,020

71,200

0 20,000 40,000 60,000 80,000 100,000

Employment

Plastics Mfg

Food Mfg

Value-Added Wood Mfg

Chemical Mfg

Electronic Mfg

Motor Vehicle Mfg

Aerospace Mfg

Importance to Ontario

Source: Statistics Canada, 2002 ASM

Importance to Ontario

42%

28% 24% 24%22%

23%

12%

25%

0%5%

10%15%20%25%30%35%40%45%

% Export Value

Primary P&PValue-AddedP&P

PrimaryWood

Products

Value-AddedWP

Exports as % of Total Ontario Forest Sector

1995 2004

1995 Exports Value $2.8BN2004 Exports Value $5.2BN

Source: Minister’s Council of Forest Sector Competitiveness, Statistics Canada

Ontario is a Leader in Value-Added Wood

VA (SW) Employment in Great Lakes Area, 2002

37,489

38,067

32,253

32,695

35,242

16,714

19,877

23,202

19,419

- 10,000 20,000 30,000 40,000

Penn

Ont

Ohio

Wisconsin

Indiana

Illinois

NY

Minnesota

Mich

VA Employment in Canada, 2002

Quebec, 57,627

Ontario, 59,020

Alberta, 14,611

BC, 20,954

0 20,000 40,000 60,000 80,000

Quebec

Ontario

Alberta

BC Quebec has grown51% in VA woodjobs since 1997 vs.Ontario at 31%.

Ontario ranks #5in North Americafor Value-Addedwood jobs, but noindustry association

Source: Statistics Canada, Dept of Commerce

• British Columbia - BC WOOD

• ALBERTA - Dept. of Value-Added Wood

• QUEBEC - QWEB

• Great Lake States - Secondary Wood Mfg Association • ONTARIO - nothing representing value-added wood

… without leadership.

Businesses by Employee SizeSouth Ontario Wood Processing Industries

0500

1,0001,5002,000

1-4 5-910-1920-4950-99

100-199200-499500 +

Employee Size Range

# of Businesses

SecondaryPrimary

Large… and small

Source, by % utilization

Code Industry ONT PQ BC ALT U.S OTH D.K.321215 EWP 30.5 62.2 0.4 1.4 3.0 2.5 0321911 Windows/Doors 35.0 15.0 0 0 0 0 50.0

321919 Other Millwork 32.7 13.6 0 0 48.7 1.4 3.5

321920 Pallets/Crates 31.1 61.2 5.1 0.2 0.1 0.6 1.7

321999 Misc. Wood 92.0 5.5 0.1 0.1 0.3 0 2.0

337110 Cabinets 76.8 23.1 0 0 0 0 0.1

337123 Furniture 66.2 13.5 1.6 0 17.6 0 1.1

321992 Mfd Housing 31.6 37.2 22.8 8.4 0 0 0

TOTAL 38.1 41.5 1.7 0.6 15.1 1.4 1.6

Source: Linking the Forest to the Factory, MNR

Lack of Sector Integration

Species, by % utilization

Softwoods

Code Industry Pw Sp Pr Ce SPF OTH TTL321215 EWP 0.7 15.6 0.1 0 28.7 0 45.2321911 Windows/Doors 70.5 0.4 0.1 0.7 0.9 0 72.6

321919 Other Millwork 5.2 0.7 2.6 0.9 0.2 0.2 9.7

321920 Pallets/Crates 0.9 8.2 0.3 0.1 79.2 0 88.6

321999 Misc. Wood 2.8 9.1 0.4 0.8 44.7 2.0 59.7

337110 Cabinets 2.3 0 1.8 0.1 0 0 4.1

337123 Furniture 16.3 0 0.1 0.1 0 1.6 24.4

321992 Mfd Housing 6.3 60.3 0 6.2 32.6 0 99.4

TOTAL 3.6 9.1 0.9 0.7 27.6 0.2 42.0

Source: Linking the Forest to the Factory, MNR

Species, by % utilization

Hardwoods

Other - cherry, basswood, walnuts, exotics

Code Industry Mh Bw Po Or Aw OTH TTL321215 EWP 0.9 1.6 51.5 0.4 0.4 0 54.9

321911 Windows/Doors 2.6 0.5 3.60 5.9 0.5 14.3 27.4

321919 Other Millwork 23.7 0.4 15.5 26.6 4.8 19.3 90.3

321920 Pallets/Crates 3.4 2.1 2.5 2.0 1.2 0.2 11.4

321999 Misc. Wood 16.2 2.3 10.4 2.3 1.9 6.3 40.3

337110 Cabinets 34.3 15.0 3.3 25.0 0.4 17.7 95.9

337123 Furniture 23.5 2.1 3.9 20.5 0.8 24.8 75.7

321992 Mfd Housing 0 0 0 0.6 0 0 0.6

TOTAL 9.8 1.4 27.6 9.7 1.9 7.5 58.0

Source: Linking the Forest to the Factory, MNR

Materials, by % utilization

Solids

Code Industry RawLum Retail Spec Veneer MSR OTH TTL321215 EWP 4.9 2.6 18.8 2.4 2.7 46.8 78.2

321911 Windows/Doors 1.6 0.2 68.3 0.1 1.0 0.4 71.6

321919 Other Millwork 84.5 1.2 7.1 0.8 0.2 1.0 94.8

321920 Pallets/Crates 85.0 7.0 3.4 0.1 0.4 0.6 96.5

321999 Misc. Wood 28.1 54.9 12.8 0.2 0.2 0.4 96.6

337110 Cabinets 6.7 9.3 18.6 7.1 0 0.9 42.6

337123 Furniture 25.4 9.6 14.5 9.0 0 4.5 63.0

321992 Mfd Housing 0.6 2.8 17.4 0.1 4.4 6.3 31.6

AVERAGE 36.5 3.5 22.6 1.6 1.3 17.1 82.6

Source: Linking the Forest to the Factory, MNR

Materials, by % utilization

Composites

Code Industry Plywood Particle Chip Laminate OTH TTL321215 EWP 0.1 0 0 0 21.9 22.0

321911 Windows/Doors 9.8 0.1 18.5 0.1 0.1 28.6

321919 Other Millwork 3.5 1.6 0 0.1 0 5.2

321920 Pallets/Crates 3.1 1.2 0.2 0 0.1 4.6

321999 Misc. Wood 2.5 0.9 0 0 0 3.4

337110 Cabinets 13.4 22.3 1.3 16.5 3.8 57.3

337123 Furniture 13.3 14.1 0.2 8.4 1.0 37.0

321992 Mfd Housing 20.3 0 45.4 2.8 0 68.5

AVERAGE 4.1 1.3 3.8 0.6 7.8 17.6

Source: Linking the Forest to the Factory, MNR

5.0

1.0

2.0

3.0

4.0

ManagementCapability

WorkforceSkill Level Clustering Policy

Industry & Market

Structure TechnologyRaw

Material5.0

1.0

2.0

Denmark

Alberta

3.0

4.0 BC

NordicGermany

US Great Lakes

Quebec

Ontario

QuantitativeRanking

* based on labour, energy and productivity costs

Source: Jaakko Poyry: Assessment of the Status and Future Opportunities of Ontario’s Solid Wood Value Added Sector, June 2001

Benchmarking

Ontario’s Wood Manufacturing Sector

is….• Large• Diverse• Export focused• Technically sophisticated• Expensive• Rudderless

Trends

Industrial

Markets

Top Strategic Industry Issues

56%

46%

41%

41%

37%

30%

28%

27%

26%

26%

24%

23%

23%

20%

20%

0% 10% 20% 30% 40% 50% 60%

RISING BUSINESS COSTS

STRONGER CANADIAN DOLLAR

CHANGING PATTERNS OF CUSTOMER DEMAND

AVAILABILITY/COST OF ENERGY

AVAILABILITY OF SKILLED & EXPERIENCED PERSONNEL

TECHNOLOGICAL CHANGE

COMPETITION FROM CHINA

BRINGING NEW PRODUCTS/SERVICES ONTO THE MARKET

HIGHER TAX & REGULATORY COSTS

INCREASING COMPETITION FROM OTHER COUNTRIES

MANAGING BUSINESS GROWTH

INTRODUCING NEW/IMPROVED PROCESSES

GLOBAL SOURCING BY CUSTOMERS

BUSINESS OPPORTUNITIES IN OTHER COUNTRIES

AGEING WORKFORCE

PERCENTAGE OF COMPANIESSource: Canadian Manufacturers Export Association

Trends Effecting Value-added Wood Markets

1. developing populations2. disposable incomes3. housing starts4. renovation market5. ‘greening’ wave6. skilled labour shortages 7. Changing consumer tastes8. Glut of wood world wide9. U.S. protectionism – commodities

Trends in Value-Added Wood

Comparison of VA Wood Segment Growth in Ontario

0 5000 10000 15000

Millwork

Mfg Housing

Boards, EWP

Cabinets

Furniture

Employment

2002

1998

45.2%

19.6%

25.5%

37.4%

17.4%

Source: Statistics Canada, 2002 ASM

Opportunities

1. Manufactured Housing2. Building components - EWPs3. Doors, Windows, Moldings, other millwork 4. Furniture 5. Cabinets – Kitchen, bath & storage

1. Manufactured Housing

The evolution of residential construction

ExistingProducts

CommodityLumber

EmergingGrowth

EWPs andBldg components

New Technologies

IntegratedStructural Systems

$31

Manufactured Home

$95 Hand-CraftedTimber Frame

Log home

$55

$80

$72Site built Single Family

Std Precut, Panelized

Per sq ft

Con

stru

ctio

nT

ype

“ in 2006, one in seven American homeswere ‘manufactured’”

Population = 83 millionConstruction Sales = $239B

EWP/Components = $800mManufactured Housing = $300m

Millwork = $150m

Woodbridge Report

… Manufactured Housing

Manufactured Housing

• Increasing export focus– e.g. Confederation Log Homes

• But foreign markets don’t like dealing with Ontario companies, because they lack critical mass

• Strategy to go after traditional domestic stick built market first?

2. EWP’s Product Life Cycle

Introductory Growth Maturity Decline Stage Stage Stage Stage

2nd/3rd Generation EWP’s

2nd Generation Wall Panels

Species Segregated Softwood Lumber

Composites

Custom Orders

Installed Sales

New LaminateTechnologies(fibre polymers)

Eastern SPF MSR

I-Joists

PSL & LSL

Eastern SPF FJ

Commodity LVL

Commodity OSB

Glulam

Parallam

Commodity EasternSPF framing lumber

Variable qualityDimension lumber

-Building components account for 14% of total VA sales with 11% CAGR, but last two years growth at 28%, again driven by buoyant housing starts.

3. Millwork

- Windows and doors account for 13% of total VA sales, with compound annual growth rate of 7%, but 16% in last 2 years, driven by high Canadian housing starts

- However, window and door markets moving rapidly away from wood usage towards vinyl and steel respectively

- Other millwork (moldings, stairs, flooring, etc.) = 22% of total, with a CAGR of 15%, and stable at 13% recent growth

- Also, many of these products are moving away from solid wood towards FJ, MDF and composites

Millwork - Flooring

• the solid wood flooring market is rapidly giving way to engineered wood flooring

• one piece of solid wood can provide up to 6surfaces on an EWF• built on an composite substrate, EWF can gostraight onto concrete and doesn’t move like solid

Solid Engineered

4. Furniture

– Furniture = 36% of total VA sales with CAGRof 12%, falling to 1% in last two years

– Perfect storm for most of industry as retail marketsconvert to RTA and imports; quality and design still important but becoming more of a niche market

– Also large anticipated boom in office furniture

5. Cabinets

– Cabinets are a very regional market businessunless standardized sizes

– Cabinets = 15% of total VA with CAGR of 11% and reasonably strong recent growth = 9% – Cabinet demand will double in 10 years driven by

new home construction and home renovations

Cdn Housing Starts and US Reno $ Projections

0

50

100

150

200

250

90 92 94 96 982000 2002 2004 2006 2008 2010

Housing Starts and US$ BN

StartsRenos

Best Opportunities

Capital Investment

Mar

ket

Gro

wth

ManufacturedHousing

Bio-energy

Bio-Materials

Bio-chemicals

EWPs

Millwork –Doors/Windows

Millwork - Other

NutraceuticalsPharmaceuticals (collection)

Cabinets

Furniture

NTFPs

Bio’s

$Thousands $ millions

Questions?