Forest Industry Trends and Outlook Second Butler/Cunningham Conference on Agriculture and the...

Forest Industry Trends and Outlook

Second Butler/Cunningham Conference on Agriculture and the Environment

Presented By: Ken MuehlenfeldNovember 3, 2003

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November 3, 2003Forest Industry Trends & OutlookDiscussion Topics

Alabama’s Forest Industry

Industry Profile

Economic Impact

Forest Products Business Conditions

Economic Conditions

Industry Capacity/Production

Export/Import Imbalance

Forest Products Trends & Outlook

Industry Actions

Product Outlook

Conclusions & Questions

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November 3, 2003Forest Industry Trends & OutlookAlabama’s Forest Industry Profile

Alabama Pulp & Paper Production 14 pulp & paper operations

2nd largest pulp & paper producing state

Alabama Wood Products Production

180+ sawmills & panel plants

6th largest lumber & panel producing state

Alabama’s Secondary Wood Production

700+ manufacturing operations

Alabama’s Timberland Base

22 million acres

2nd largest timberland base in the U.S.

94% privately owned

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November 3, 2003Forest Industry Trends & OutlookEconomic Impact of Ala. Forest Industry

$13.2 billion in annual shipments (2001)

Pulp & Paper = $8.20 billion

Wood Products = $3.75 billion

Furniture & Fixtures = $1.19 billion

$2.1 billion in annual payroll (2001)

65,000 direct employees

143,000 indirect employees

$812 million in exports (2001)

$516 million in capital investments (‘92-’01 ave.)

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Industry Profile

Economic Impact


Economic Conditions



Forest Products Outlook

Industry Actions

Product Outlook


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November 3, 2003Forest Industry Trends & OutlookForest Products Business Conditions

Poor Forest Products Market Conditions in Recent Years

U.S. and world economic decline

Excess capacity and production worldwide

Strong dollar has hurt export/import balance

Forest Products Markets Have Improved in Last Six Months

U.S. economic rebound

Capacity reductions in some product areas

Weaker dollar

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U.S. and world economic decline

Recession caused by collapse of capital investment» Stock market bubble » Worsened by Sept. 11 events» Global economies simultaneously bad

On the whole, a mild recession» Service, trade & housing held up well » Manufacturing sectors hit hard

Recovery has been sluggish, but now gaining momentum» Corporate scandals» World political turmoil» Threat of oil supply disruptions

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N.A. capacity too high and too quick to expand

» Only recently has capacity problem been addressed in pulp & paper

» Solid wood products capacity continues to expand

» Production levels were too high for demand (price pressure)

» Operating rates dropped to very low levels

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Worldwide capacity too high and increasing

» Other pulp & paper producing regions have advantages in fiber, operating costs & capital costs

• South America

• Southeast Asia

• China

» Other regions have wood products industries dependent on U.S. market

• Canada

• South America

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Strong dollar has hurt export/import balance

U.S. forest products exports down sharply» Pulp & paper exports down» Lumber & panel exports down

U.S. forest products imports up sharply» Pulp & paper imports up

• South America• Southeast Asia• Europe

» Lumber & panel imports up• Canada• South America• Europe

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Pulp price up 22% in last year, but still 44% below the 1995 peak.

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Linerboard price down 12% versus year ago, and 33% below 1995 peak.

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Newsprint price up 10% versus year ago, but 26% below 1995 peak.

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Offset printing paper price down 14% versus year ago, and 43% below 1995 peak.

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Lumber & panel prices rebounding from 10-year lows.

10/03

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Housing starts at modern historic highs.

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Mortgage rates at modern historic lows.

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Softwood lumber trade deficit is approximately $6 billion.

Poor Forest Products Market Conditions in Recent YearsStrong dollar has hurt export/import balance

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Softwood lumber trade deficit is approximately $6 billion.

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Structural panel trade deficit is approximately $1 billion.

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Structural panel trade deficit is approximately $1 billion.

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U.S. lumber supply is up 39% in ten years.

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U.S. structural panel supply is up 57% in ten years.

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Soft Timber Market Conditions in Recent Years Reduced demand due to capacity reductions and downtime Reduced competition in some local markets Increasing timber supplies Increased use of recycled fiber Weak pricing

Recent Market Strengthening Partly weather related Partly improved demand

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U.S. Wood Demand Is Down

Pulpwood production in 2001 dropped to a 15-year lowProduction up slightly in 2002 21 pulp mill closures in last 3 years

Sawtimber production was down in 2001, but bounced back somewhat in 2002

South’s production up about 3% in 2002

Alabama’s Wood Demand Is Down

Total roundwood demand in 2001 was 1.08 billion cubic feetDown about 10% from peakAbout the same level as 1992Improved slightly in 2002

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November 3, 2003Forest Industry Trends & OutlookAlabama Timber Prices

Prices up sharply since 1991, except pine pulpwood.

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Industry Profile

Economic Impact


Economic Conditions




Industry Actions

Product Outlook


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November 3, 2003Forest Industry Trends & OutlookForest Products Outlook

Forest Industry Under Pressure

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Strong Actions Taken by Forest Products Industry Increased merger and acquisition activity Permanent closure of high-cost operations Market-related downtime at production operations Divestiture of timberland assets Increased raw material utilization efficiency

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Approximately $250 billion in M&A activity since 1990.

Half of the top 20 companies from 1979 are gone.

Shareholder’s value maximized by selling in many cases.

Consolidation Has Eliminated Many Companies

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1979

International Paper (New York)

Bowater (London)

Champion Intl. (New York)

Weyerhaeuser (Tacoma)

Georgia-Pacific (Portland, OR)

Reed International (London)

Crown Zellerbach (San Fran.)

Mead (Dayton)

St. Regis (New York)

Boise Cascade (Boise, ID)

2001

International Paper (New York)

Georgia-Pacific (Atlanta)

Weyerhaeuser (Tacoma)

Stora Enso (Helsinki)

Oji (Tokyo)

Kimberly-Clark (Dallas)

UPM-Kymmene (Helsinki)

Smurfit-Stone CC (Chicago)

Nippon Paper (Tokyo)

Svenska Cellulosa (Stockholm)

Only 3 of the top 10 pulp & paper companies from 1979 remain. U.S. membership in top 10 has declined from 8 to 5.

Top 10 Pulp & Paper Companies … Then and Now

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Merger & Acquisition Activity Affecting Alabama Companies

• Mead & Westvaco• Weyerhaeuser & Willamette• Bowater & Alliance Forest Products• Georgia-Pacific & Fort James• Plum Creek & The Timber Company• International Paper & Champion International• Weyerhaeuser & Trus Joist International• Weyerhaeuser & MacMillan Bloedel• International Paper & Union Camp• Stone Container & Jefferson Smurfit• Bowater & Avenor• James River & Fort Howard• Kimberly-Clark & Scott Paper

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Over the last 5 years, the NA pulp and paper industry has shut down over 250 paper machines and pulp dryers, with a total capacity of nearly 16.0 million metric tons.

Shutdowns in North America, 1998 - 2003

Pulp & Paper Markets

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Southern U.S. Pulp Mill Closures/Downsizing: 1999-2001

Company Location Closure PulpwoodDate Consumption

(000 tons) (000 cords)

Kimberly-Clark Mobile, Al. 4Q, '99 2,950 1,103International Paper Mobile, Al. 4Q, '00 1,660 621International Paper Savannah, Ga. * 3Q, '01 1,300 486International Paper Moss Point, Ms. 3Q, '01 1,200 449Donahue Ind. Sheldon, Tx. 2Q, '00 1,150 430International Paper Camden, Ar. 4Q, '00 1,150 430Florida Coast Paper Port St. Joe, Fl. 4Q, '99 1,100 411Smurfit-Stone Cont. Jacksonville, Fl. 1Q, '99 970 363International Paper Courtland, Al. * 4Q, '00 925 346Pasadena Paper Pasadena, Tx. 1Q, '99 900 336U.S. Alliance Coosa Pines, Al. * 3Q, '01 800 299Smurfit-Stone Cont. Port Wentworth, Ga. * 1Q, '99 500 187TOTAL 14,605 5,460

* Partial shut-down or conversion to recycle

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World demand will grow at an average annual rate of 2.6% from 2000-2010. Asia and Latin America will fuel global growth. Europe and N.A. are mature markets.

Global Paper & Paperboard Production

Source: Jaakko Poyry Consulting

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U.S. paper production will experience only modest growth in output to 2015.

Global Demand Growth 2000-2015N.A. Production Growth by Grade to 2015

0

1

2

3

4

5

0 20 40 60 80 100Share of consumption in 2000 (325 million tons), %

Eastern Europe

Africa

Asia excl. Japan & China

China

JapanNorth America

Western EuropeOceania

Average 2.2 %/a

Per capita, kg

WorldNorth AmericaWestern EuropeChina

2015

63320264

51

2000

54325207

30

Demand growth %/a

Latin America

N.A. Paper Demand and Production Outlook


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0

5

10

15

20

25

30

35

40

45

50

1991 1995 2001 2005 2010

DissolvingSWD sulphateHWD sulphateUnbl. SulphateSemichemicalMechanicalOther

- million metric tons -

0%

20%

40%

60%

80%

100%

1991 1995 2001 2005 2010

HardwoodSoftwood

US South pulp production will remain relatively flat to 2010 with no new significant virgin fiber based capacity additions projected. Production of hardwood pulps will continue to grow somewhat faster than softwood pulps, due to faster growth of grades that use hardwood furnish and increased hardwood component in paper products to improve surface and printing qualities (the smaller hardwood fibers create a more uniform/smooth paper surface).

- % share of production -

U.S. South Pulp Production Outlook


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Housing Sector To Remain Strong• Demographics are solid• Mortgage rates remain low• Starts staying strong

Repair & Alteration Sector to Improve• Consumer confidence to improve• Interest rates to remain low

Industrial Markets to Strengthen• Growth in general economy will expand sector

Export/Import Balance is Questionable• Weakening dollar should be helpful• Further resolution of Canadian lumber issue

could be important

Lumber & Panel Markets

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Pine Sawtimber Markets Should Improve • Supplies reasonably stable• Demand improving with better lumber & panel markets

Hardwood Sawtimber Markets Should Improve• Supplies stable at best• Growing demand for quality raw material for flooring, furniture

& other secondary products

Pine Pulpwood Markets Will Remain Weak• Supplies will likely overwhelm gains in pulpwood demand• Low end of market will suffer

Hardwood Pulpwood Markets Should Improve• Apparent excess supplies are illusory due to availability issues• Increasing demand• Imported fiber could cap price increases

Timber Markets

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Industry Profile

Economic Impact


Economic Conditions




Industry Actions

Product Outlook


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November 3, 2003Forest Industry Trends & OutlookConclusions

Forest products markets have been hurt by a weak economy, high production, and a very unfavorable import/export balance.

The forest industry has taken strong actions through mill closures, market downtime, and consolidation.

Market fundamentals for pulp, paper, and especially wood products appear to be improving, but outlook is somewhat guarded due to continuing oversupply issues.

The overall outlook for timber markets appears to be improving. Pine pulpwood will continue to lag due to significant excess growth due to age distribution of inventory.

Alabama’s forest industry is an important economic engine for the state and remains the state’s largest manufacturing industry.

Questions?Questions?

Ken Muehlenfeld

Forest Products Development Center

School of Forestry & Wildlife Sciences

Auburn University

(334) 844-1094

[email protected]

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