Are W e Out Of the W oods Yet: W hat Are The Main I ssues Facing Our - - PowerPoint PPT Presentation

Are W e Out Of the W oods Yet: W hat Are The Main I ssues Facing Our I ndustry and The Main I ssues Facing Our I ndustry and Econom y in 2 0 1 5 and Beyond?

Maine Forest Products Council Septem ber 8 th, 2 0 1 4 p ,

Key Topics

H i M k t

• Housing Markets
• Likely to disappoint in 2015
• The longer the time horizon the better we feel
• China
• To understand where China is headed, we must look at

why their lumber imports surged. why their lumber imports surged.

• The era of tremendous growth is over
• Lumber Demand Will Surge
• Where will supply come from?
• Canadian Dollar Will Remain Weak
• Purchasing Power Parity
• Purchasing Power Parity
• Little pressure on oil prices

I t Hasn't Been Easy for Borrow ers W ith a Credit Score Below 7 0 0 to Get a Mortgage g g

7 7 0 40% Percentage of Single-Fam ily Loans by Credit Score W eighted Average Credit Score 7 5 0 7 6 0 30% 35% 7 2 0 7 3 0 7 4 0 15% 20% 25% 7 0 0 7 1 0 7 2 0 5% 10% 15% 6 9 0 7 0 0 0% 5% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Less than 6 6 0 6 6 0 to 7 0 0 W eighted Average FI CO Score Less than 6 6 0 6 6 0 to 7 0 0 W eighted Average FI CO Score

New Hom e Sales Are Consistent w ith Few er Than One Million Starts Few er Than One Million Starts

New Single Family Home Sales 425* 558* * New Single-Family Home Sales 425* 558* * Owner Build Share 31% 31% Single-Family Starts Needed to Replenish Sales 616 804 Not All Starts Completed 98.5% 98.5% Single-Family Starts Needed to Replenish Sales 625 816 Single-Family Share 68% 68% Total Housing Starts Needed to Keep Inventories

4

Flat 920 1,200

* Average of the last 6 months ** Number Needed to Average 1.1M starts

New Single-Fam ily Hom e Sales Are Not Trending I n The Right Direction

1 2 0 0 1 ,3 0 0 1 ,4 0 0

Thousands

9 0 0 1 ,0 0 0 1 ,1 0 0 1 ,2 0 0 6 0 0 7 0 0 8 0 0 3 0 0 4 0 0 5 0 0 1 0 0 2 0 0

Builders Are Facing Shortages of Labor and Buildable Lots a d u dab e

• ts

Percent of Builders Reporting Problem s

53 0% 65.0% 55 0% 21 0% 30.0% 34.0% 53.0% 46.0% 55.0% 13.0% 21.0%

Cost/ Labor Availability Cost/ Land Availability

2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4

Cost/ abo a ab ty Cost/ a d a ab ty Source: NAHB HMI Survey, Jan 2014

There I s Light At The End Of The Tunnel: Housing Markets Are Set To I m prove

Housing Starts are Near Depression Levels

1 2 2 .4

Per ‘0 0 0 in Population Millions

9 1 0 1 1 1 .8 2 .0 2 .2 6 7 8 1 .2 1 .4 1 .6 3 4 5 0 .6 0 .8 1 .0

• 1

2 0 .0 0 .2 0 .4 0 .0 2 0 2 5 3 0 3 5 4 0 4 5 5 0 5 5 6 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

Real GDP Grow th W ill Pick Up in 2 0 1 5

6 % 2 % 4 % Potential GDP Grow th 0 % 2 %

• 4 %
• 2 %

5 -Year Moving Average

• 6 %
• 4 %

9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 6 1 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 6 1 8

US Hom e Equity Now Exceeds I ts Long-Term Trend

$14,000 Ow ner's Equity in Household Real Estate - Net W orth in Bil $ $10,000 $12,000 $6,000 $8,000

Trend line for 1980-2014Q1

$2 000 $4,000 $0 $2,000 Source: Federal Reserve Flow of Funds data

Payroll Em ploym ent Breaking Out of 2 0 1 1 - 2 0 1 3 Range g

1 6 0 0

Monthly Change in Payroll Em ploym ent

0.8 0.9 1 2 0 0 4 0 0 6 0 0 0 5 0.6 0.7 2 0 0 2 0 0 0.3 0.4 0.5 6 0 0

• 4 0 0
• 2 0 0

Average 2011-2013

0.1 0.2

• 8 0 0
• 6 0 0
• 1 0 0 0

US Has Substantial Pent-Up Dem and for Durable Goods

12

Average Age of US Cars and Light Trucks

11 Source: Polk 9 10 7 8 6 7

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

The Federal Budget Deficit Picture Has I m proved Markedly I m proved Markedly

26%

Government Revenues and Outlays as Percent of GDP

22% 24%

Outlays

18% 20% 16% 18%

Revenues

12% 14%

Revenues

Dotted Lines are 1 9 7 2 -2 0 1 2 Averages

Source: Congressional Budget

Rise in Mortgage Rates and 1 0 -Year Governm ent Bond Yields Halted Governm ent Bond Yields Halted

4 .5 % 5 .0 %

10-Year Gov't Bond Yields

3 .5 % 4 .0 %

30-Year Mortgage Rates

2 .5 % 3 .0 % 1 5 % 2 .0 % 2 .5 % 1 .0 % 1 .5 %

Jan Feb Mar Apr May Jun Jul- Aug Sep Oct- Nov Dec Jan Feb Mar Apr May Jun Jul- Aug Sep Oct- Nov Dec Jan Feb Mar Apr May Jun Jul- Aug

• 12

b-12 r-12 r-12 y-12 n-12

• 12

g-12 p-12

• 12

v-12 c-12

• 13

b-13 r-13 r-13 y-13 n-13

• 13

g-13 p-13

• 13

v-13 c-13

• 14

b-14 r-14 r-14 y-14 n-14

• 14

g-14

Recent Rate I ncreases in Historical Context Context

1 6 % 1 8 % 1 2 % 1 4 %

10-Year Gov't Bond Yields 30-Year Mortgage Rates

8 % 1 0 %

g g

4 % 6 % 0 % 2 %

Housing W ill Rem ain Affordable Despite Higher Mortgage Rates and Hom e Prices

2 4 0 Source: NAR, FEA 1 6 0 1 8 0 2 0 0 2 2 0 Hom e Affordibilty I ndex Slightly Pessem istic Scenario* A 1 9 9 0 2 0 0 5 1 0 0 1 2 0 1 4 0 1 6 0 Average 1 9 9 0 -2 0 0 5 4 0 6 0 8 0

A value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced h i 20 t d t

2 0 8 1 8 3 8 5 8 7 8 9 9 1 9 3 9 5 9 7 9 9 0 1 0 3 0 5 0 7 0 9 1 1 1 3 1 5

home, assuming a 20 percent down payment.

* Assumes mortgage rate gradually increase to 5% by end of 2015, income growth averages 2.3% and home price increase at a 5.5% annual rate.

Lending Standards Eased in Third Quarter

( Net Percentage of Dom estic Respondents Tightening Standards for Prim e Mortgage Loans) Standards for Prim e Mortgage Loans)

70% 80% 50% 60% 70%

Source: Federal Reserve Senior Loan Officers Survey

20% 30% 40% 0% 10% 20%

• 20%
• 10%

2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 2 0 1 7 Q2 7 Q3 7 Q4 8 Q1 8 Q2 8 Q3 8 Q4 9 Q1 9 Q2 9 Q3 9 Q4 0 Q1 0 Q2 0 Q3 0 Q4 1 Q1 1 Q2 1 Q3 1 Q4 2 Q1 2 Q2 2 Q3 2 Q4 3 Q1 3 Q2 3 Q3 3 Q4 4 Q1 4 Q2 4 Q3

17

Purchase Share of Mortgage Lending W ill I ncrease As I nterest Rates Rise

9 % 1 0 % 9 0 % 1 0 0 % Purchase Share of Total Mortgage Originations 3 0 -Year Mortgage Rate 7 % 8 % 9 % 7 0 % 8 0 % 9 0 % 4 % 5 % 6 % 4 0 % 5 0 % 6 0 % 2 % 3 % 4 % 2 0 % 3 0 % 4 0 % Linear Trend 0 % 1 % 0 % 1 0 % Sources: Mortgage Bankers Association, Federal Reserve

New Hom e I nventories Are Near Rock Bottom

0 .6 0 Million Units 0 .5 0 Completed Under Construction Not Started Total 0 .3 0 0 .4 0 0 .2 0 0 .0 0 0 .1 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0 6 5 7 0 7 5 8 0 8 5 9 0 9 5 0 0 0 5 1 0

Housing Starts W ill I m prove But Rem ain W ell Below Trend I n 2 0 1 5

2 2 0 2 .4 0 Single Fam ily Multifam ily Millions of Units 1 .6 0 1 .8 0 2 .0 0 2 .2 0 Single Fam ily Multifam ily

Average Housing Starts 1 9 5 9 - 2 0 0 0

1 .0 0 1 .2 0 1 .4 0 1 .6 0 0 .4 0 0 .6 0 0 .8 0 1 .0 0 0 .0 0 0 .2 0 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4

L R H i St t W ill Long Run, Housing Starts W ill Be Strong

Cum ulative Over-/ Under-Building of Conventional US Hom es

3 .0 Millions 1 .0 2 .0

• 1 .0

0 .0

• 3 .0
• 2 .0

Forecast

• 5 .0
• 4 .0

9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0

Underlying Dem and for Housing

FEA Base Case FEA Base Case

1 9 8 0 - 1 9 9 0 1 9 9 0 - 2 0 0 0 2 0 0 0 - 2 0 1 0 2 0 1 0 - 2 0 2 0 2 0 2 0 - 2 0 3 0 1 9 9 0 2 0 0 0 2 0 1 0 2 0 2 0 2 0 3 0 Net Households Form ations 1.26 1.14 1.20 1.15 1.33 Form ations Rem ovals .27 .32 .30 .30 .32 Second Hom es .15 .06 .07 .05 .06 Frictional .09 .09 .08 .08 .08 Other Mobile Hom e .02 .02 .01 .01 .01 Total Dem and 1 78 1 63 1 68 1 59 1 80 Total Dem and 1.78 1.63 1.68 1.59 1.80

About 100K of these are mobile homes

W hen W ill Markets Return To W hen W ill Markets Return To “Norm al”: Household Form ations Form ations

US Household Form ation Are W ell Below Trend

2 ,0 0 0

Average 1 9 8 0 -2 0 0 7

Average of Household Form ation and Change in Occupied Housing 1 ,4 0 0 1 ,6 0 0 1 ,8 0 0

Average 1 9 8 0 -2 0 0 7

8 0 0 1 ,0 0 0 1 ,2 0 0 4 0 0 6 0 0 8 0 0 2 0 0

1 9 8 1 9 8 1 9 8 1 9 8 1 9 8 1 9 8 1 9 8 1 9 8 1 9 8 1 9 8 1 9 9 1 9 9 1 9 9 1 9 9 1 9 9 1 9 9 1 9 9 1 9 9 1 9 9 1 9 9 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 0 2 0 1 2 0 1 2 0 1 2 0 1

25

8 0 8 1 8 2 8 3 8 4 8 5 8 6 8 7 8 8 8 9 9 0 9 1 9 2 9 3 9 4 9 5 9 6 9 7 9 8 9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3

No Household Form ations Am ong Y P l ti Younger Population

Grow th in Population vs. Households 2 0 0 7 to 2 0 1 2

2 .0 1 .0 1 .5

n

Population Household 0 .0 0 .5

Millio

• 1 .0
• 0 .5

1 6 -2 4 age group 2 5 -2 9 age group 3 0 -3 4 age group 1 6 2 4 age group 2 5 2 9 age group 3 0 3 4 age group

The Em ploym ent-to-Population Rate for 2 5 - 3 4 Age Explains Low Headship Rate for Young Adults

4 0 % 8 5 % Aged 5 5 + Right Scale 3 0 % 3 5 % 7 5 % 8 0 % Aged 5 5 + Right Scale Aged 2 5 -3 4 2 5 % 3 0 % 7 0 % 7 5 % Aged 2 0 -2 4 2 0 % 6 5 %

All Ages

1 0 % 1 5 % 5 5 % 6 0 %

ges

Payroll Em ploym ent Breaking Out of 2 0 1 1 - 2 0 1 3 Range g

1 6 0 0

Monthly Change in Payroll Em ploym ent

0.8 0.9 1 2 0 0 4 0 0 6 0 0 0 5 0.6 0.7 2 0 0 2 0 0 0.3 0.4 0.5 6 0 0

• 4 0 0
• 2 0 0

Average 2011-2013

0.1 0.2

• 8 0 0
• 6 0 0
• 1 0 0 0

The Key 2 5 -3 4 Age Cohort W ill Soon Pass I ts Previous Peak

5 0 US Population Aged 2 5 -3 4 in Millions 4 5 4 0 3 0 3 5 2 5 Source: US Census, Reference Projection

US Population By Age

5.0

Million

3.5 4.0 4.5

Peak Age Group: 23 Year Olds

2.5 3.0 3 5

23 Year Olds

1.0 1.5 2.0 0.0 0.5

00 05 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

W hen W ill Markets Return To W hen W ill Markets Return To “Norm al”: The Housing I nventory Correction I nventory Correction

Vacant I nventory I s Trending Low er

19,500

Thousands

18,000 18,500 19,000

Theoretical* Actual

17,000 17,500 18,000 This gap is one estimate

• f overhang of existing

homes 15 500 16,000 16,500 14,500 15,000 15,500

*Assumes 12.5% Vacancy Rate

The Shadow I nventory I s Correcting Rapidly

US Mortgage Foreclosures US Mortgage Foreclosures

6

Percent

4 5 6

Mortgage Payments Past Due 90+ Days: United States (SA, % )

2 3 4

y ( , ) Mortgage Foreclosure Inventory: United States (EOP, NSA, % ) Mortgage Foreclosures Started: United States (SA, % )

1 2 Q1-1990 Q3-1991 Q1-1993 Q3-1994 Q1-1996 Q3-1997 Q1-1999 Q3-2000 Q1-2002 Q3-2003 Q1-2005 Q3-2006 Q1-2008 Q3-2009 Q1-2011 Q3-2012 Q1-2014 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

I nventory of Current Plus Expected Foreclosures is Concentrated in Several States

Source: Mortgage Bankers'

Florida, 2 9 2 ,4 3 0

Total* = 1 ,4 6 5 ,7 6 2 Mortgage Bankers Association NDS

California, 9 6 ,7 7 7 Rest of US, 7 5 3 ,2 4 9 New York, 1 2 9 ,8 9 4 New Jersey New Jersey, 1 0 7 ,5 4 2 I llinois, 8 5 ,8 7 0 * This sam ple covers 8 8 % of US m ortgages

Mortgage Foreclosures in “Trouble States” Have Plunged g

3

Percentage

2 3 1 2

Mortgage Foreclosures Started: California (NSA, % ) Mortgage Foreclosures

1

g g Started: Arizona (NSA, % ) Mortgage Foreclosures Started: Florida (NSA, % )

Q1-1996 Q2-1997 Q3-1998 Q4-1999 Q1-2001 Q2-2002 Q3-2003 Q4-2004 Q1-2006 Q2-2007 Q3-2008 Q4-2009 Q1-2011 Q2-2012 Q3-2013 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

I nventory Correction W ill Be Mostly Com pleted by 2 0 1 5 Under Base Case Forecast Base Case Forecast

2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 HH Formations 525 950 1150 725 1150 1250 Plus: Removals 300 300 300 300 300 300 Plus: Removals 300 300 300 300 300 300 Plus: New Home Inventory Change

• 100
• 35

35 50 75 Equals: Housing Demand 725 1215 1450 1060 1500 1625 Less: Housing Starts 590 610 780 930 990 1200 Equals: Change in Existing Home Inventory

• 135
• 605
• 670
• 130
• 510
• 425

Year-End Excess 2 4 0 0 1 7 9 5 1 1 2 5 9 9 5 4 8 5 6 0

FEA Housing Starts Forecast

2 2 0 2 .4 0 Single Fam ily Multifam ily Millions of Units 1 .6 0 1 .8 0 2 .0 0 2 .2 0 Single Fam ily Multifam ily

Average Housing Starts 1 9 5 9 - 2 0 0 0

1 .0 0 1 .2 0 1 .4 0 1 .6 0 0 .4 0 0 .6 0 0 .8 0 1 .0 0 0 .0 0 0 .2 0 8 0 8 2 8 4 8 6 8 8 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 6 1 8 2 0

The Single-Fam ily Share of Housing W ill Rem ain Below its 3 0-Year Average W ill Rem ain Below its 3 0-Year Average

1 90%

Share of Single-Family Housing Starts

0.7 0.8 0.9 80% 85% 0.5 0.6 0.7 70% 75% 0 2 0.3 0.4 60% 65%

30-Year Average Share = 76.3%

0.1 0.2 50% 55%

I m provem ent Expenditures W ill Not Return to Pre-Bubble Trend Until 2 0 1 6

$ 1 6 0 Billions of 2 0 0 5 USD $ 1 3 0 $ 1 4 0 $ 1 5 0 $ 1 0 0 $ 1 1 0 $ 1 2 0 $ 8 0 $ 9 0 $ 1 0 0 Trend from 1 9 9 3 to 2 0 0 2 $ 6 0 $ 7 0

US Hom e Equity Now Exceeds I ts Long-Term Trend

$14,000 Ow ner's Equity in Household Real Estate - Net W orth in Bil $ $10,000 $12,000 $6,000 $8,000

Trend line for 1980-2014Q1

$2 000 $4,000 $0 $2,000 Source: Federal Reserve Flow of Funds data

Existing Hom e Sales Are Trending Up

7 .0

Million Units, SAAR

6 .0 6 .5 5 .0 5 .5 4 .0 4 .5 3 .0 3 .5

W h t D Thi M F W hat Does This Mean For North Am erican Producers?

North Am erican Dom estic Consum ption W ill Surge g

8 0 BBF 6 0 7 0 4 0 5 0 2 0 3 0

US Canada

1 0 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0

US Canada

China

North Am erican Saw Trem endous Grow th I n Lum ber Exports To China p

6 .0

Canada US

BBF 4 .0 5 .0

Canada US

3 .0 4 .0 1 .0 2 .0 0 .0 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3

China I m ports of Softw ood Logs

2 5 Thousand m 3 Russian Export Tariffs Raised to 2 5 % 2 0 Russian Export Tariffs Raised to 2 5 % 1 5 5 1 0

Russia N Zealand US Canada

5 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3

Canada

0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3

Source: Chinese Customs, US Census, NZ MPI, Statistics Canada

I nventory of Available Live and Dead Lodgepole Pine, by Years Since Attack, 1 9 9 9 -2 0 2 0

1 ,6 0 0 Million M 3 1 ,2 0 0 1 ,4 0 0 8 0 0 1 ,0 0 0

> 12 yrs

4 0 0 6 0 0

> 12 yrs 9-12 yrs < 8 yrs

2 0 0

Live

9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0

Source: FEA estimates

North Am erican Dom estic Consum ption Collapsed p

8 0 BBF 6 0 7 0 4 0 5 0 2 0 3 0 1 0 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3

US Canada

Chinese Dem and For I m ported Lum ber

1 8 0 2 0 .0

Canada Russia US

MMCM 1 4 .0 1 6 .0 1 8 .0

Chile NZ Other

8 0 1 0 .0 1 2 .0 YTD 4 .0 6 .0 8 .0 0 .0 2 .0 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 3 1 4

China grow th below 8 % , Som e think going below 7 % g g

12 0 13 0 10.0 12.0 12.0 13.0 6.0 8.0 10.0 11.0 2.0 4.0 8.0 9.0

• 2 0

0.0 6 0 7.0 2.0 6.0 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

REAL GDP (LHS) GDP DEFLATOR (RHS)

China Housing Starts are Key Driver

• f Lum ber and Log Exports
• f Lum ber and Log Exports

1 6

Com m odity Housing Starts*

1 2 1 4 Started Com pleted 8 1 0 ion Units 4 6 Mill 2 2 0 0 5 2 0 0 8 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4

China Hom e Price Bubble Far Exceeds Those I n North Am erica and Europe p

4 0 Hom e Price To I ncom e Ratio 2 5 3 0 3 5 1 5 2 0 2 5 5 1 0 1 5

The Era of Trem endous Grow th I n Exports I s Over

9 .0

Exports Imports

BBF 6 .0 7 .0 8 .0 4 .0 5 .0 6 .0 2 .0 3 .0 0 .0 1 .0 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0

Consum ption W ill Grow by 1 7 BBF over the Current Cycle. How W ill Dem and Be Met? y

1.3 1.4 Dom Production I m ports Low er Exports 15.8

W here W ill The Lum ber W here W ill The Lum ber Production Com e From ? Fiber Supply W ill pp y Determ ine That.

55

I nventory of Available Live and Dead Lodgepole Pine, by Years Since Attack, 1 9 9 9 -2 0 2 0

1 ,6 0 0 Million M 3 1 ,2 0 0 1 ,4 0 0 8 0 0 1 ,0 0 0

> 12 yrs

4 0 0 6 0 0

> 12 yrs 9-12 yrs < 8 yrs

2 0 0

Live

9 9 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0

Source: FEA estimates

Quebec and Ontario’s AAC W ill Fall Further

36

MMCM

32 28 24 16 20

Quebec Ontario

16 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Quebec W ill Lose More Capacity: Bill 5 7

• Bill 57 went into effect in 2013

5 e

• e e

0 3

• New Ecosystem Based Forest Management

L R t ti 11 5% d li i AAC (i iti l – Longer Rotations= > 11.5% decline in AAC (initial estimates)

• None of the following matters to total supply but

could effect individual mills:

– 70% remaining timber (current AAC-11.5% ) will be g ( ) sold at auction – Individual mills could lose some supply, but other mills would pick it up

Quebec W ill Lose Capacity: North For All

• Still in initial stages of the plan to be implemented in 2016
• Initial plan: 50% of timber North of the 49th parallel put

into “protected” area

– 53% of province’s timber is North of the 49th parallel 53% of province s timber is North of the 49 parallel

• Of the 50% 12% (in other words 6% of the total supply)

will go into “traditional” protected areas (no harvest) will go into traditional protected areas (no harvest)

• The other 38% will go into “new” protected areas. In

these you can’t do anything “permanent” Forestry is these you can’t do anything “permanent”. Forestry is allowed. l l k l h l d

• Bottom line: likely 6% + more coming out with Plan Nord

A Significant Volum e of Deferred Harvests I s Accum ulating in All US Regions g g

BBF, I nt’l ¼ ” 3 5 2 5 3 0 Estim ated Deferred Harvests Average Drain, 2 0 0 0 -0 5 3 3 % 1 5 2 0 1 0 1 5 8 % 2 3 % 5 Coast I nland South 2 3 %

The US W est W ill See Significant Grow th

1 4 BBF 1 0 1 2 6 8 4 6

Coast Inland

2

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Coast Inland Coast Peak Inland Peak

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

US South Production W ill Exceed I ts Previous Peaks

2 5

Previous Peaks

BBF 2 0 1 0 1 5 5 1 0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

South South Peak

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

As W ill Other US and Canadian Production

2 .5 BBF 2 .0 1 0 1 .5 0 .5 1 .0 0 .0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Other US Oth US Peak

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Putting I t All Together, O ti R t W ill S Operating Rates W ill Soar I n 2 0 1 6 -1 8

64

Longer Run, Operating Rates W ill Tighten

1 .0 0 9 0 BBF 0 .9 0 7 0 8 0 0 .8 0 5 0 6 0 0 .7 0 3 0 4 0 0 .6 0 1 0 2 0 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0

Capacity Demand D/ C Ratio (R)

C di D ll W ill R i Canadian Dollar W ill Rem ain W eak

The Canadian Dollar Tracks Oil Prices

$140 $1.10

2012 USD per Barrel USD per CAD

$100 $120 $1.00 $60 $80 $0.90 $40 $60 $0.70 $0.80 $- $20 $0.60 $0.70

The EI A Has Low ered its Oil Price Projections by About 1 0 % j y

$140

W TI Oil Price, 2 0 1 2 $ per Barrel

$120 $130 $140 $90 $100 $110 $70 $80 $90 $60 2014 R f F t 2013 R f F t 2014 Reference Forecast 2013 Reference Forecast

US Motorists are Driving Less Despite I m proving Econom y p g y

Low er Oil Prices Mean a W eaker Canadian Dollar

$140 $1.10

I MF’s Purchasing-Pow er-Parity 2012 USD per Barrel USD per CAD

$100 $120 $1.00

I MF s Purchasing Pow er Parity

$60 $80 $0.90 $40 $60 $0.70 $0.80 $- $20 $0.60 $0.70

Take Hom e Points

• Housing markets are likely to be on the low end in

2015, but they will exceed expectations longer run.

• Domestic consumption will increase significantly
• ver the next five years.

y

• Net exports must fall to meet higher consumption.
• Total Chinese demand is a big risk

Total Chinese demand is a big risk

• Chinese demand for North American lumber will fall
• US and non-British Columbia/ Quebec/ Ontario

US and non British Columbia/ Quebec/ Ontario production will increase significantly to meet higher domestic consumption.

Thank you! Thank you!

Questions: Paul Jannke 9 7 8 4 9 6 6 3 3 6 9 7 8 4 9 6 6 3 3 6 pjannke@getfea.com