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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



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%


Decline in employment rate helps unemployment statistic
Decline in employment rate helps unemployment statistic


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


Oil Prices Supported by Emerging Economies and Weak Dollar potentially on consumer spendingWest Texas Intermediate Crude Oil, US$ per Barrel

Source: Fed, RISI



Housing outlook unique situation
Housing Outlook: Unique situation for housing

  • 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 for housing

  • 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? could be……

  • 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 employment growthon 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 Correction

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 Started

  • Key driver for housing mix

  • Drove single family housing boom/bubble—now…


Risi base case expect little improvement until 2013
RISI BASE CASE: expect Startedlittle improvement until 2013


Existing home sales hard to interpret new homes message clear
Existing Home Sales Hard to Interpret – StartedNew Homes Message Clear


Small boost in product demand from r r
Small boost in product demand from R&R Started

  • 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! Started

  • Understanding the situation: WHY?

  • Economic and housing outlook

  • Translation to wood products demand


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


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



Key factor in cash cost and price outlook c forecast
Key factor in cash cost and price outlook: regional factorsC$ forecast

*based on RISI mill surveys




Demand for n a lumber very slow improvement in overall demand
Demand for N.A. Lumber: Very slow regional factors improvement in overall demand


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! domestic market

  • 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 domestic market

  • 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


West benefits from China domestic market

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 domestic market

(Million M3)

25% ofharvest demand

Note: Includes Alaska


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

(BBF, Softwood Sawtimber Demand*)

Western mills benefits from log exports

Slower demand recovery in South

*Coast and Inland region combined.


Stumpage price reflects expected syp lumber prices
Stumpage price reflects expected SYP domestic marketlumber prices

SYP Stumpage, $/GST



Where we are going today4
Where We are Going Today! reasons

  • 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!!! reasons

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 reasons

  • 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!!!!


What questions OR COMMENTS do you have? reasons

Contact: Lynn Michaelis

[email protected]

206-434-8102


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