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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 3, 2011. Where We are Going Today!. Understanding the situation: WHY? Economic and housing outlook Translation to wood products demand

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where is economy headed implications for southern forestry

Where Is Economy Headed?Implications for Southern Forestry!!

Dr. Lynn O. Michaelis—Executive Adviser, RISI

Presentation to SCFA Annual Meeting

November 3, 2011

where we are going today
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
bernanke s said in 2010
Bernanke’s said in 2010:

“An unusually uncertain environment”

Translation: flying blind

slide5

Unique cycle and

source of global financial crisis

perspective more difficult than 1979 82
Perspective: More difficult than 1979-82
  • Extremely low operating rate
  • “Depression” prices
where we are going today1
Where We are Going Today!
  • Understanding the situation: WHY?
  • Economic and housing outlook
the challenge economic forecast given the new world
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)
u s growth revised down since may with serious implications for employment
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%
slide12
Oil Prices Supported by Emerging Economies and Weak DollarWest Texas Intermediate Crude Oil, US$ per Barrel

Source: Fed, RISI

housing outlook unique situation
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
housing outlook inventory correction with a twist
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
    • How big is the excess inventory?
    • Determine annual housing “demand” vs. housing production
    • What type of units will be required—Single Family vs. Multi Family?— This is the Twist!
    • Then, simulate housing start trajectory given some key assumptions—BE CAREFUL HERE!!
forecasting basic housing demand simple
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
household formations outlook based on april gdp and employment growth
Household Formations: Outlook based on April GDP and employment growth

Starting point (April 2011) was 2.9% GDP growth and 3.4% in 2012

illustration of economic impact on the younger age groups
Illustration of economic impact on the younger age groups

If headship rate had been stable: another 2 million household or 400,000/ year in housing demand

simulating housing production and tracking the inventory correction
Simulating Housing Production and Tracking the Inventory Correction

* Net removals assumption: 500,000/year

what type of units reason it is important
What type of units? Reason it is important

Reference: 100,000 single family units need 1.5 billion bf lumber and 1.1 billion sq. ft. of OSB

importance of ownership rate for mix of housing units started
Importance of Ownership Rate for Mix of Housing Units Started

*At 65.9% in 2011.2 and falling

step 3 mix of starts determined by ownership rate trends
Step 3: Mix of Starts Determined by Ownership Rate Trends
  • Key driver for housing mix
  • Drove single family housing boom/bubble—now…
small boost in product demand from r r
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
where we are going today2
Where We are Going Today!
  • Understanding the situation: WHY?
  • Economic and housing outlook
  • Translation to wood products demand
lumber prices bouncing off bottom and some very different regional factors
Lumber Prices: Bouncing off bottom and some very different regional factors

SPF reflects export market

SYP closes on SPF

exports no indication that south is making significant inroads in the offshore export market
Exports: No Indication That South Is Making Significant Inroads in the Offshore Export Market
where we are going today3
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
log prices follow lumber prices
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
slide41

West benefits from China

while the South remains depressed…

(Delivered Sawtimber Prices Compared, $/MBF, Scrib., qtrly)

*Third quarter is based on July average.

**Assumes 7.5 short tons per MBF.

us log exports to china are contracting in july august
US log exports to China are contracting in July-August

(Million M3)

25% ofharvest demand

Note: Includes Alaska

both regions recover slowly with overall demand but
Both Regions recover slowly with overall demand, but….

(BBF, Softwood Sawtimber Demand*)

Western mills benefits from log exports

Slower demand recovery in South

*Coast and Inland region combined.

where we are going today4
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
recovery eventually happens and will sustain
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

back to the beginning premise planning for recovery
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!!!!
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