Pallet Lumber: Supply Issues and Outlook Western Pallet Association Don Haid Markets and Economic Research January 22, 2006.

Pallet Lumber: Supply Issues and Outlook

Western Pallet AssociationWestern Pallet Association

Don HaidDon HaidMarkets and Economic ResearchMarkets and Economic ResearchJanuary 22, 2006January 22, 2006

t:\prsntatn\wood\2004\pallet assoc

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January 2006

Supply Issues and OutlookSupply Issues and Outlook

Forward-Looking Statement

Information in this presentation is derived principally from publicly available Information in this presentation is derived principally from publicly available information, forest products and building industry publications and websites, information, forest products and building industry publications and websites, data compiled by market research firms, and similar sources. Although we data compiled by market research firms, and similar sources. Although we believe that this information is reliable, we have not independently verified believe that this information is reliable, we have not independently verified any of this information and we cannot assure you that it is accurate. This any of this information and we cannot assure you that it is accurate. This presentation also contains forecasts regarding future economic conditions, presentation also contains forecasts regarding future economic conditions, demand, commodity prices and similar matters. The accuracy of such demand, commodity prices and similar matters. The accuracy of such forecasts is subject to a number of risks, uncertainties and assumptions that forecasts is subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially from those projected, including, may cause actual results to differ materially from those projected, including, but not limited to, the effect of general economic conditions, including the but not limited to, the effect of general economic conditions, including the level of interest rates, housing starts and exchange rates; the relative strength level of interest rates, housing starts and exchange rates; the relative strength of various U.S. and global business segments; energy prices; raw material of various U.S. and global business segments; energy prices; raw material prices; transportation disruptions; the effect of governmental actions; natural prices; transportation disruptions; the effect of governmental actions; natural disasters; and the outbreak of terrorism, war and other hostilities. disasters; and the outbreak of terrorism, war and other hostilities.


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January 2006


Agenda

IntroductionIntroduction Supply IssuesSupply Issues

• Timber perspective• Lumber manufacturing perspective

Demand IssuesDemand Issues• Macro outlook• Linkages to framing lumber and industrial production

OutlookOutlook• Major take-aways


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January 2006


There is no supply shortage in North America

Offshore ExportsOffshore Exports

CanadianTimber

CanadianTimber

U.S. PublicTimber

U.S. PublicTimber

U.S. PrivateTimber

U.S. PrivateTimber

Sourced by:

U.S. SawmillsU.S. Sawmills Canadian SawmillsCanadian SawmillsOffshore SawmillsOffshore Sawmills

Supplied by:U.S. Lumber ExportsU.S. Lumber Exports

(39 BBF) (20 BBF)(2.5 BBF)

U.S. Trend Lumber DemandU.S. Trend Lumber Demand(61 BBF*)

*2004


5

January 2006


Canadian output has stepped up to meet demand

0

5

10

15

20

25

30

35

1998 1999 2000 2001 2002 2003 2004 2005 2006

Canadian Lumber Production (SAAR)Billion Board Feet

QuarterlyQWDCNLGP18A

OntarioQuebec

Prairies

B.C.Interior


6

January 2006


BC Harvest: Huge potential increase over midterm but…

0

10

20

30

40

50

60

2002-04 2005-12 2013-17 2018-50

Harvested Beetle KillAAC

Estimated Impacts of Mountain Pine Beetle Infestationon Timber Harvests in 20 Harvest Units in B.C.

Million Cubic MetersLog Volume per Year

AnnualATLG07B

InventoryAdjustment

Source: BCMOF


7

January 2006


Western harvest stable

0

2

4

6

8

10

12

14

1978 1983 1988 1993 1998 2003 2008

Public

Industrial

Nonindustrial

Forecast

Westside Washington and Oregon Harvestby OwnerBillion Board Feet

(Scribner)

AnnualATLG11D


8

January 2006


But output now surpasses early 1990’s

6

7

8

9

10

11

12

13

1988 1991 1994 1997 2000 2003

West Coast Lumber ProductionBillion Board Feet

AnnualAWDUSLGP01A

2005 YTD


9

January 2006


Total lumber supplies may be adequate but low grade proportion trending lower over time

0

20

40

60

80

100

120

1981 1994 2003

Better than #2

#2

#3 and Lower

38%

39%

23%

29%

52%

19%

23%

57%

20%

Southern Sawmill Grade MixPercent of Mix

AnnualAWDG140A

Source: SFPA


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January 2006


The Pallet Industry (30,000 ft view)

More than 3,000 new pallet manufacturersMore than 3,000 new pallet manufacturers Consumed 6.5 BBF of lumber per year, of which:Consumed 6.5 BBF of lumber per year, of which:

• 4.4 BBF was Hardwood and• 2.1 BBF was Softwood

91% of pallets are wood (5% plastic, 2% metal 2% fiber 91% of pallets are wood (5% plastic, 2% metal 2% fiber based)based)

Source: Pallet and Container Research Lab, Dept of Wood Science & Forest Products, Virginia Tech


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January 2006


Lumber Production: Framing grades dominate sawmill output

0 20 40 60 80 100

SS & DSS

No. 1

No. 1 & No. 2 Dense

Dimension & No. 2

High Grade Boards

No. 3

No. 4

Other

Southern Sawmill Dimension Grade Mix 2003

% of Mix

AWDUSLGD29A

Framing and

Specialty 77%

Source: Southern Forest Products Association, 2003 Mill Survey

Low Grade 23%


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January 2006


The Role of Lumber Manufacturing Economics

The joint product problemThe joint product problem Manufacturing seeks the highest possible return for its Manufacturing seeks the highest possible return for its

outputoutput Technological change is constantly increasing the Technological change is constantly increasing the

recovery of higher grade material from logsrecovery of higher grade material from logs


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January 2006


The Role of Lumber Manufacturing Economics

The joint product problemThe joint product problem Manufacturing seeks the highest possible return for its Manufacturing seeks the highest possible return for its

outputoutput Technological change is constantly increasing the Technological change is constantly increasing the

recovery of higher grade material from logs and reducing recovery of higher grade material from logs and reducing residuals residuals

Mills are getting fewer and biggerMills are getting fewer and bigger


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January 2006


Trend to fewer, larger, high efficiency mills

0

50

100

150

200

250

300

350

400

450

Coast Inland South

1987

2004

-32%*-41%*

-45%*

Number of U.S. Sawmills1987 vs. 2004

Number

AWDUSLGD24A* % change from 1987


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January 2006


Regional shifts, but total US production stable to increasing

0

4

8

12

16

20

Coast Inland South

19872004

Lumber Output, 1987 vs. 2004Billion Board Feet

AWDUSLGD25A Source: WWPA


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January 2006


Changes in production of hardwood lumber have been driven by change in industrial manufacturing

Domestic furniture manufacturing has seen a steady Domestic furniture manufacturing has seen a steady decline as off-shore imports climbdecline as off-shore imports climb

Sector is a significant user of high grade hardwood lumberSector is a significant user of high grade hardwood lumber


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January 2006


Consumption continues to grow but domestic manufacturing is shrinking

-2

0

2

4

6

8

1992-1997 1998-2003 2004-2005

ConsumptionIndustrial Prod

Growth in U.S. Consumption of Furniture and Beddingvs. Household Furniture Production Index

Percent Change

AnnualAMDOT100C Source: FRB, BEA


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January 2006


0

5

10

15

20

25

30

1997 1998 1999 2000 2001 2002 2003 2004 2005

Latin America

Europe

Other Asia

Canada

China/Hong Kong

Source: U.S. Department of Commerce

U.S. Furniture Imports by OriginBillion $

AnnualAWDG136A

Growth is being met by imports


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January 2006


0

1

2

3

4

1995 1997 1999 2001 2003 2005

Source: Hardwood Review

N.A. Hardwood Lumber Consumption for FurnitureBillion Board Feet

AnnualAWDUSLGD27B

Trend

Result has been lower lumber use by domestic furniture industry


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January 2006


10

11

12

13

14

15

1995 1997 1999 2001 2003 2005

North American Hardwood ProductionBillion Board Feet

Source: Hardwood ReviewAnnual

AWDUSLGD26C

And explains most of the decline in hardwood lumber production


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January 2006


Changes in the production of hardwood lumber have been driven by change in industrial manufacturing

Domestic furniture manufacturing has seen a steady Domestic furniture manufacturing has seen a steady decline as off-shore imports climbdecline as off-shore imports climb

Sector is a significant user of high grade hardwood lumberSector is a significant user of high grade hardwood lumber Lower overall hardwood lumber production reduces Lower overall hardwood lumber production reduces

supply of available pallet lumbersupply of available pallet lumber


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January 2006


1

2

3

4

5

1995 1997 1999 2001 2003 2005

Source: Hardwood Review

Billion Board Feet

AnnualAWDUSLGD27C

N.A. Hardwood Lumber Consumption for Pallet/Crating

Pallet consumption forced to adjust to shifting production/consumption pattern


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January 2006


Supply Summary

Harvestable timber supply not a problemHarvestable timber supply not a problem Softwood driven by framing lumberSoftwood driven by framing lumber In hardwoods ― Changes in furniture industry and In hardwoods ― Changes in furniture industry and

increased competition from other segments impact pallet increased competition from other segments impact pallet supplysupply


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January 2006


Demand Issues: Macro Outlook

Housing drivers have peakedHousing drivers have peaked


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January 2006


Inflation Now Firmly Above “Deflation” Level

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1999 2000 2001 2002 2003 2004 2005 2006

Total

Core (excl Food + Energy)

Growth in U.S. Consumer Price Index% Change Year Ago

QuarterlyQMDIF31A


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January 2006


Approaching Early 1980s Experience

10

20

30

40

50

60

1970 1975 1980 1985 1990 1995 2000 2005

U.S. Refiner Acquisition Costof Crude Oil (Composite)

2004$/BBL

AnnualAMDOT40C

estimate


27

January 2006


Expect Fed to continue to increase rates

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007

U.S. Interest Rates vs.Effective Mortgage Rate for New Homes

Percent

QuarterlyQMDIR51A

3-monthCommercial Paper

Moody BAA

Effective Mortgage Rate on New Homes

Forecast*

Source: FRB, FHFB, Weyerhaeuser*


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January 2006


Rising rates moves housing off of peak levels

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1975 1980 1985 1990 1995 2000 2005

Forecast*

DemographicTrend*

Source: Census, Weyerhaeuser*

U.S. Single-family Housing StartsMillion Units

AnnualAMDHO19E


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January 2006


Has been a major boost to repair and remodeling

0

30

60

90

120

150

180

1995 1997 1999 2001 2003 2005

Total Home Equity Cashed OutBillion $

AnnualAMDIR25A

Forecast

Source: Freddie Mac


30

January 2006



Housing drivers at peak levelsHousing drivers at peak levels Lumber market driven by housing and repair and remodel Lumber market driven by housing and repair and remodel

segmentssegments


31

January 2006


Single family and repair and remodel are biggest demand components

0

10

20

30

40

50

60

70

80

2004

Repair & Remodel

Industrial & Other

Single Family

Multi Family & Mobiles

Residential

North America Lumber DemandBillion Board Feet

AWDUSLGD06C

Canada

Net Trade


32

January 2006


Capacity has grown to meet peak demand

30

40

50

60

70

80

1988 1991 1994 1997 2000 2003 2006

Demand

Capacity

Demand on North American Lumber Millsvs. Capacity

Billion Board Feet

AnnualAWDNALGD01K

Forecast


33

January 2006



Housing drivers at peak levelsHousing drivers at peak levels Lumber market driven by housing and repair and remodel Lumber market driven by housing and repair and remodel

segmentssegments Industrial production and pallet demandIndustrial production and pallet demand


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January 2006


Industrial Production provides an indicator of pallet demand

-10

-5

0

5

10

2001 2002 2003 2004 2005 2006

U.S. Industrial Production,Manufacturing

% Change Year Ago

MonthlyMMDIP04A

Durables

Nondurables

Source: FRB


35

January 2006


Look at Component Sectors with products which move on pallets

Components of Durable Manufacturing Growth

Average Annual Growth

Annual % Change Proportion (%) 2000-2004 2005

Manufacturing 100 0.4 3.8 Durable Goods 56 1.1 6.2 Fabricated Metal Products 7 (1.9) 3.2 Machinery 7 (1.7) 4.7 Computers & Electronics 10 6.3 19.3 Transportation Equipment 14 1.5 4.7 Furniture 2 0.3 (0.6)


36

January 2006


Durable goods growth strongest, and continues in 2006

Components of Durable Manufacturing Growth


Annual % Change Proportion (%) 2000-2004 2005 2006

Manufacturing 100 0.4 3.8 3.7 Durable Goods 56 1.1 6.2 5.6 Fabricated Metal Products 7 (1.9) 3.2 -- Machinery 7 (1.7) 4.7 -- Computers & Electronics 10 6.3 19.3 -- Transportation Equipment 14 1.5 4.7 -- Furniture 2 0.3 (0.6) --


37

January 2006


Nondurables: Declining growth until 2005

Components of Nondurable Manufacturing Growth


Annual % Change Proportion (%) 2000-2004 2005

Manufacturing 100 0.4 3.8 Nondurable Goods 44 (0.3) 0.7 Food, Beverages & Tobacco 14 0.3 1.7 Paper 4 (1.7) 0.2 Chemicals 14 1.7 (0.1) Plastics & Rubber Products 5 (0.3) 1.9


38

January 2006


Components of Nondurable Manufacturing Growth


Annual % Change Proportion (%) 2000-2004 2005 2006

Manufacturing 100 0.4 3.8 3.7 Nondurable Goods 44 (0.3) 0.7 1.1 Food, Beverages & Tobacco 14 0.3 1.7 -- Paper 4 (1.7) 0.2 -- Chemicals 14 1.7 (0.1) -- Plastics & Rubber Products 5 (0.3) 1.9 --

Nondurables: growing around 1% in 2006


39

January 2006


Industrial production outlook: Steady around 4%

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007

ConsumptionIndustrial Production

Growth in U.S. Real Consumer Spending vs.Industrial Production Manufacturing Index

% Change Year Ago

QuarterlyQMDOT82A

Forecast*

Source: BEA, FRB, Weyerhaeuser*


40

January 2006


Outlook / Major take aways

Timber is not constraining lumber supply over long termTimber is not constraining lumber supply over long term Changes in other industrial lumber sectors impacting Changes in other industrial lumber sectors impacting

pallet and low grade supplypallet and low grade supply Demand for housing at a peak, lumber demand slowing in Demand for housing at a peak, lumber demand slowing in

2006, improving availability of industrial lumber2006, improving availability of industrial lumber Industrial production growth continues, favoring pallet Industrial production growth continues, favoring pallet

makersmakers


41

January 2006


What Questions Do You Have?What Questions Do You Have?

Pallet Lumber: Supply Issues and Outlook Western Pallet Association Don Haid Markets and Economic Research January 22, 2006.

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