2011 05 31 Raymond James Super Lumber Cycle

1!

Pacific Northwest Regional Economic Conference

§  NBSK Pulp: Strong Market Fundamentals •  Capital Cycle Constrains Supply •  Rising Demand from China & Global Tissue Usage

§  Peak Lumber – Super Cycle Thesis •  Biological Supply Constraints •  Increasing Asian Shipments •  US Housing Market Recovery

Daryl Swetlishoff, CFA [email protected] ph: (604) 659-8246 David Quezada, CFA (Associate) [email protected] ph: (604) 659-8257

May 2011

2!

Raymond James Financial

§  Founded in 1962, Raymond James Financial (RJF) is a diversified financial services holding company with subsidiaries engaged in investment and financial planning, investment banking and asset management.

§  RJF shares are listed on the New York Stock Exchange §  Raymond James Ltd., the Canadian subsidiary of RJF,

is a full service investment dealer and employs approximately 1,000 people across the country.

§  More information is available at www.raymondjames.ca

and www.raymondjames.com

3!

Raymond James Forest Products Coverage Universe

Price  ($) 6-­‐‑12  Mth Implied  Total RatingCompany Symbol Target Return

BUILDING  MATERIALSCanfor TSX:CFP 11.77$ 14.00$ 19% MARKET PERFORM 3Interfor TSX:IFP.A 5.80$ 7.00$ 21% MARKET PERFORM 3Norbord TSX:NBD 12.70$ 16.00$ 26% MARKET PERFORM 3TimberWest TSX:TWF.UN 6.36$ 7.75$ 22% OUTPERFORM 2West Fraser Timber TSX:WFT 51.84$ 60.00$ 17% MARKET PERFORM 3Sino-Forest TRE 21.75$ 37.00$ 70% STRONG BUY 1

PULP  &  PAPERCanfor Pulp TSX:CFX.UN 19.20$ 19.00$ 6% OUTPERFORM 2Domtar UFS 101.56$ 120.00$ 19% STRONG BUY 1Fortress Paper TSX:FTP 40.50$ 75.00$ 85% STRONG BUY 1Mercer (US) MERC 12.54$ 20.00$ 59% STRONG BUY 1Fibrek TSX:FBK 1.59$ 1.45$ -9% MARKET PERFORM 3

4!

Historical NBSK Pulp Prices

Source:RISI, Bloomberg

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Pulp

Pric

es $

/mt

0.00

0.20

0.40

0.60

0.80

1.00

1.20

USD/CAD FX Rate NBSK Pulp ($CAD) NBSK Pulp ($US)

C$730/mt

5!

U.S. and German Annual GDP Growth Rates

Source: Bloomberg

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Annual Real GDP Growth - US Annual Real GDP Growth - Germany

FORECAST

6!

Global Softwood Pulp Capacity Reductions

Source: Company Reports, Raymond James Ltd Estimates

720

19,6241,235

4,61123,000

20,344

16,000

17,000

18,000

19,000

20,000

21,000

22,000

23,000

24,000

Global - 2006

Closures S

ince2006

Restarts S

ince2010

Global - 2011

Greenfield

Expansion - 2012-

2013

Global - 2012/2013

mt (

000'

s)

15% 12%

7!

New Pulp Demand from Rising Global Tissue Output

Source: FAO

Annual World Tissue Output

0

5

10

15

20

25

3019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

tonn

es (m

lns)

2000-2009 Average annual growth rate = 3.9%

8!

Surging Demand from China

*Annualized rate based on YTD shipmetnsSource: International Wood Markets, Raymond James Ltd.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2007 2008 2009 2010 2011E*

mt (

mln

s)

9!

NBSK Pulp Markets Remain Tight

Source: Pulp & Paper Products Council, Raymond James Ltd

0

100

200

300

400

500

600

Jan-

09Fe

b-09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9A

ug-0

9

Sep

-09

Oct

-09

Nov

-09

Dec

-09

Jan-

10

Feb-

10M

ar-1

0

Apr

-10

May

-10

Jun-

10Ju

l-10

Aug

-10

Sep

-10

Oct

-10

Nov

-10

Dec

-10

Jan-

11

Feb-

11M

ar-1

1

-

200

400

600

800

1,000

1,200Ja

n-09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

US$

/mt

0

5

10

15

20

25

30

35

40

45

50

Day

s In

vent

ory

(Sea

sona

l Adj

.)

Softwood Inventories (SA) NBSK Prices Balanced Inventory Level

BUYERSSELLERS

10!

The Raymond James Peak Lumber Thesis: A Super Cycle Looms

100

150

200

250

300

350

400

450

500

550

600

2009

2010

2011

2012

2013

2014

US$/mfbm

Benchmark WSFP 2X4

US$500

11!

The Raymond James “Peak Lumber” Thesis – Related Research

12!

B.C. Sawlog Reduction from Mountain Pine Beetle E

Interfor*: West Fraser*: Canfor*: *Location of mills is approximate

13!

Historical Lumber Prices & Supply Shocks

Source: Random Lengths, Raymond James Ltd.

0

50

100

150

200

250

300

350

400

450

500

550

6001980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

US$

/mfb

m

WSPF 2X4 Lumber Price

BA

EDC

14!

The Chinese Wood Fibre Shortage

Source: International Wood Markets

0

50

100

150

200

250

300

350

400

2010 2015

mln

m3

DemandSupplyShortfall (Imports)

Papermaking Industry

37%

Construction, Decoration &

Furniture45%

Agricultural and Other

18%

60% Increase in fibre shortage by 2015 to 150 mln m3

15!

Raymond James U.S. Housing Regression Model

Independent Variables 2007 2008 2009 2010 2011 2012 2013 2014+

US GDP 2.5 (1.8) (0.6) 2.7 3.4 3.1 3.0 2.6 CASE SHILLER INDEX 215 179 156 158 152 150 156 160 FANNIE MAE 30 Yr MORTGAGE RATE 4.7 3.7 3.3 3.2 3.6 4.1 5.6 7.2 FORECLOSURES STARTED 0.7 1.1 1.4 1.4 1.4 1.1 0.9 0.6 25-34 YRS 0.9 0.8 0.9 1.3 1.6 1.5 1.5 1.5 >65 YRS 1.7 2.0 2.2 1.8 2.2 2.6 2.6 2.6 UNEMPLOYMENT RATE 4.6 5.8 9.3 9.8 9.1 8.5 7.8 7.5 TOTAL HOUSING INVENTORY 5.2 5.1 4.1 4.8 5.0 4.7 3.6 3.5

US Total Housing Starts (mln) 1.34 0.90 0.55 0.59 0.58 0.75 1.20 1.40 Yr/Yr % Change -33% -39% 7% -2% 31% 59% 16%

---Forecast------Actuals---

16!

Raymond James U.S. Housing Regression Model

0.0

0.5

1.0

1.5

2.0

2.5

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

mln

s

Actual Forecast In Sample Forecast Trend

R² = 0.95

Total U.S. Housing Starts

17!

Key Input: Foreclosure Starts

US Housing Starts vs. US Foreclosure Start Rate

0.0

0.3

0.5

0.8

1.0

1.3

1.5

88 90 92 94 96 98 00 02 04 06 08 10 12

% o

f tot

al lo

ans

outs

tand

ing

0.0

0.5

1.0

1.5

2.0

2.5

mln

s

TOTAL USHS (SAAR) TOTAL USHS - Forecast

FORECLOSURES - Reported FORECLOSURES - Fundamental

US Housing Starts vs. Population > 65 Years

0.0

0.5

1.0

1.5

2.0

2.5

3.0

88 90 92 94 96 98 00 02 04 06 08 10 12

yr/y

r %

0.0

0.5

1.0

1.5

2.0

2.5

mln

s

TOTAL USHS (SAAR) > 65 YRS

18!

Key Input: Housing Inventories

US Housing Starts vs. Population 25-34 Years

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

88 90 92 94 96 98 00 02 04 06 08 10 12

yr/y

r %

0.0

0.5

1.0

1.5

2.0

2.5

mln

s

TOTAL USHS (SAAR) 25-34 YRS

.

US Housing Starts vs. Total US Housing Inventory

0.0

1.0

2.0

3.0

4.0

5.0

6.0

88 90 92 94 96 98 00 02 04 06 08 10 12

mln

s

0.0

0.5

1.0

1.5

2.0

2.5

mln

s

TOTAL USHS (SAAR) HOUSING INVENTORY

US Housing Starts vs. Population > 65 Years

0.0

0.5

1.0

1.5

2.0

2.5

3.0

88 90 92 94 96 98 00 02 04 06 08 10 12

yr/y

r %

0.0

0.5

1.0

1.5

2.0

2.5

mln

s

TOTAL USHS (SAAR) > 65 YRS

19!

Macro Hosting Conditions Required for Trend Housing Starts of 1.4 mln units

* Case-Shiller comparative level is current reading, as opposed to 20 yr averageSource: Raymond James Ltd Estimates

3.3

2.6

5.8

7.2

0.6

3.5

2.6

7.57.2

0.5

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

ForeclosuresStarted (% of total

mortgages)

HousingInventories (mlns)

Annual GDPGrowth (%)

Unemployment (%) Fannie Mae 30 YrBond Yield (%)

20 Yr. Average Level Required for Trend Starts

157 160

0

20

40

60

80

100

120

140

160

Case Shiller Home PriceIndex *

20!

North American Lumber Supply/Demand Model

2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E+North American Lumber Supply/Demand (bln fbm)

U.S. Total Housing Starts (mlns) 1.95 2.07 1.81 1.34 0.90 0.54 0.59 0.58 0.75 1.20 1.40 North American Demand (bln fbm) 73.1 74.7 72.7 63.7 51.3 41.9 43.5 43.6 47.7 57.0 61.0 Net Exports (bln fbm) 3.1 2.5 3.3 3.5 3.4 4.0 5.9 6.0 6.5 8.5 10.0NA Shipments 76.2 77.2 76.0 67.2 54.7 45.9 49.4 49.6 54.2 65.5 71.0NA Lumber Capacity 79.8 81.9 81.4 79.7 75.7 70.8 69.4 69.0 70.0 73.0 75.0

NA Shipments to Capacity (%) 95% 94% 93% 84% 72% 65% 71% 72% 77% 90% 95%

WSPF Lumber Pricing (C$/mfbm) 511$ 429$ 336$ 266$ 234$ 207$ 263$ 275$ 290$ 350$ 500$

US$/C$ 0.77$ 0.83$ 0.88$ 0.94$ 0.94$ 0.88$ 0.97$ 1.00$ 1.00$ 1.00$ 1.00$ WSPF Lumber Pricing (US$/mfbm) 394$ 354$ 296$ 250$ 221$ 182$ 255$ 275$ 290$ 350$ 500$

$0

$100

$200

$300

$400

$500

$600

2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E+

C$/

mfb

m

0%

20%

40%

60%

80%

100%

120%

WSPF 2x4 Lumber Prices Shipments to Capacity (%) Right Axis

21!

Peak vs Peak Comparison

2004 2014E+DemandU.S. Total Housing Starts (mlns) 1.95 1.40 North American Demand (bln fbm) 73.1 61.0

Net Exports (bln fbm) 3.1 10.0Total Demand for NA Lumber 76.2 71.0SupplyNA Shipments 76.2 71.0NA Lumber Capacity 79.8 75.0

NA Shipments to Capacity (%) 95% 95%WSPF Lumber Pricing (C$/mfbm) 511 500

US$/C$ 0.77 1.00WSPF Lumber Pricing (US$/mfbm) 394 500

North American Lumber Supply/Demand (bln fbm)