International and Domestic Outlook for the Hardwood Industry

Lake States Lumber Association Winter Meeting Green Bay, WI

January 14, 2016

Urs Buehlmann Virginia Tech

Blacksburg, VA

Delton Alderman United States Forest Service

Princeton, WV

Matt Bumgardner United States Forest Service

Princeton, WV

Urs Buehlmann Professor, Virginia Tech Former General Manager Enkeboll Designs

Delton Alderman

Research Forest Products Technologists, U.S. Forest Service Focuses on the U.S. housing market

Matt Bumgardner

Research Forest Products Technologists, U.S. Forest Service Focuses on hardwood supply and demand

The Speakers

Acknowledgements

Al Schuler Research Economist, retired

Mark Barford

CEO NHLA

Mike Snow

CEO AHMI

WI DATCP

LSLA

Announcements

NHLA/VT "state of the industry" survey electronic survey from NHLA/VT out soon (February '16)

Wood Industry Week @ WERC future of our industry conference in Princeton, WV;; November 2 3, 2016

Housing report

free monthly housing report to sign up email: buehlmann@gmail.com

Innovation U.S. hardwood industry U.S. housing markets Opportunities Questions / Comments

Agenda

Innovation I

Source: http://www.fortinconstruction.com/blog/2015/10/21/solid-vs-engineered-hardwood-flooring; http://www.winwood-products.com/eng/timber-products/edge_glued_panels/european_oak.htm

Source: A. Finkral, The Forestland Group, LLC

Innovation II

The Challenge

Source: Forest Products Journal; own pictures

U .S. Hardwood Industry

Aggregate price index for green No. 1 Common Appalachian hardwood lumber

(inflation-­‐adjusted and indexed, 1970.1 = 100)

W. Luppold, U.S. Forest Service

(4th Qtr. 2015)

U.S. hardwood lumber production

W. Luppold, U.S. Forest Service

Pallets47%

Furniture5%

Exports15%

Millwork6%

Flooring9%

Cabinets6%

Railway ties/trans.

12%

Pallets35%

Furniture20%

Exports10%

Millwork10%

Cabinets10%

Flooring11%

Railway ties/trans.

4%

Where the hardwood lumber went,

2000

Industrial uses ~ 39% Appearance-­‐based uses ~ 61%

Where the hardwood lumber went,

2010

Industrial uses ~ 59% Appearance-­‐based uses ~ 41%

Data source: Hardwood Market Report

Data sources: U.S. Census Bureau; International Trade Admin.

Market share estimates of imports in the U.S.

Consumption = value of shipments + imports exports Import share = imports/consumption

Major U.S. Import Sources

Household & institutional furniture & cabinets (NAICS 3371)

Data source: International Trade Administration

31%

Made in the U.S. Production Cost: US$ 42.25

Made in India Sales Price in U.S.: US$ 4.50

Employment trends furniture vs. cabinets

Data source: Bureau of Labor Statistics

U.S. hardwood lumber exports (Top 5 destinations)

~ 75% of total

99 other trading partners account for the remaining 25% Japan and the UK were slightly higher than Italy starting

in 2012, dropping Italy to 7th Data: USDA Foreign Agricultural Service

U.S. hardwood lumber exports by species

Yellow-poplar increased by 535% from 1990 to 2013, rivaling the oaks

Walnut increased by 500%

Ash increased by 130% Data source: USDA Foreign Agricultural Service

Source: M. Snow, AHEC; China National Furniture Association

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Production Value 54.8 $69.40 $87.10 $100 $117 $137 $162 $171.40 $177.40 $193.50Export Value 13.767 17.465 22.617 27.583 25.958 33.723 38.882 49.96 53.1 53.416

0

50

100

150

200

250 China Furniture Production and Export Value 2005-­‐2014 (US$Billion）

Source: M. Barford, NHLA

$-­‐

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

Vietnam Japan Malaysia Thailand Indonesia South Korea

Millions (USD

)

US Hardwood Lumber Exports to Other Asian Markets

2008

2009

2010

2011

2012

2013

2014

Source: M. Snow, AHEC; USDA GATS

U.S. export of hardwood lumber to China 2014 $700 million+

Source: M. Snow, AHEC; USDA GATS

Sources of hardwood lumber (by volume) -­‐ Large firms 45

39

16

01020304050

Direct fromsawmills

Distributors &concentration

yards

Brokers / Other

Percen

t

28

59

13

010203040506070

Direct fromsawmills

Distributors &concentration

yards

Brokers / Other

Percen

t

Sources of hardwood lumber (by volume) -­‐ Small firms

Services requested from hardwood lumber suppliers

0 20 40 60 80

S2S

Width sorting

Break bundles

S4S

Imported species

Special grading

Just-­‐in-­‐time orders

Color sorting

Certified products

Double-­‐end trim

Percent

Large firmsSmall firms

S

S

S

Proportion of production volume associated with the single family housing construction market

23 24

26 27

25 24

30

21

27 27

24 22

23

27 25

26

21 21

35

23

0

5

10

15

20

25

30

35

40

0% 1-­‐20% 21-­‐60% 61-­‐100%

Percen

t

2009 2010 2011 2012 2013

I I . U .S. Housing

Housing Starts and Hardwood Prices

Source: M. Snow, AHEC; Census Bureau; Hardwood Weekly Review

Source: AU.S. Department of Commerce-Construction ; B National Association of Realtors® (NAR®)

M/M = month-­over-­month;; Y/Y = year-­over-­year

June/July 2014 Housing Scorecard

M/M Y/Y

Housing Starts 10.5% 16.5%

Single-­Family Starts 7.6% 14.6%

Housing Permits 11.o% 19.5%

Housing Completions 3.2% 9.2%

New Single-­Family House Sales 4.3% 9.1%

Existing House Sales (NAR®) 10.5% 3.8%

Private Residential Construction Spending 0.3% 10.8%

Single-­Family Construction Spending 0.6% 9.3%

United States Housing

Source: https://www.census.gov/housing/hvs/files/currenthvspress.pdf

Home ownership rate: 63.7%

United States Housing

Source: http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jchs-sonhr-2015-full.pdf; 6/29/15

for Most Age G roups A re Wel l Below That Point.

C hange in Homeownership Rate (percentage points

Multifamily

Source: http://eyeonhousing.org/wp-content/uploads/2015/10/MF-unit-distributions.jpg; 10/5/15

increasing number of newly-built multifamily units are found in larger buildings, as measured by the number of apartments per building. According to Census Bureau data of multifamily completions, the share of new multifamily units in buildings with 50 or more units reached a data series high of 48% during 2014 .

The share of new units in large buildings (50+ units or more) has been rising steadily since 1996, after reaching a data series low of 8% during 1994 and 1995, albeit with one exception. The share declined to 28% in 2011 after recording a 43% mark for 2010 -- Robert Dietz, Ph.D., Vice-President, Tax and Market Analysis, NAHB

Rising Share of New Multifamily Units in Large Buildings

Demographics & Economics

Source: https://www.jpmorganfunds.com/blobcontentheader/202/900/1158474868049_jp-littlebook.pdf; 9/30/15 Return to T O C

Source: http://research.stlouisfed.org/fred2/series/MEHOINUSA672N

United States Housing

$66,632 1/1/2014

$65,570 1/1/1997

U.S. Housing: Income and Sales

Note: 2000 2014 Federal Reserve Bank of St. Louis (not adjusted for inflation); Jan 2015 to Sep 2015 Sentier Research LLC ©

50

51

52

53

54

55

56

57

58

59

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jan2015

Feb2015

Mar2015

Apr2015

May2015

Jun2015

Jul2015

Aug2015

Sep2015

Real Median Income New SF Sales

LHS: New SF RHS: Real Median Income in thousand $/year

Sources: http://research.stlouisfed.org; http://www.sentierresearch.com/

United States Housing

Source: https://www.kansascityfed.org/publicat/econrev/pdf/13q4Rappaport.pdf

-family starts peak at 1.35 million in 2021, nearly identical to their level at the start of the housing boom in 2002. Thereafter, starts contract. Their projected annual level in 2030, at 950,000, would be the lowest since 1991, a year in which starts reached a trough following a steep downturn. From 2031 onward, starts follow the downward contours of the trend change in occupied single-family units (blue line Joel Rappaport, Economist, The Federal Reserve Bank of Kansas City

United States Housing Starts

Source: US DOC

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jan2015

Feb2015

Mar2015

Apr2015

May2015

Jun2015

Jul2015

Aug2015

Sep2015

Oct2015

Nov2015

Total Starts SF Starts 2-4 MF Starts

SAAR = Seasonally adjusted annual rate; in thousands SF & MF Starts: LHS Total Starts: RHS

Source: US DOC

United States New SF House Sales

0

200

400

600

800

1,000

1,200

1,400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jan2015

Feb2015

Mar2015

Apr2015

May2015

Jun2015

Jul2015

Aug2015

Sep2015

Oct2015

Nov2015

Total SF Sales

in thousands; SAAR

United States Existing House Sales

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

-

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

US NE MW S W

in thousands; SAAR Total Sales: RHS Region sales: LHS

Source: NAR® www.realtor.org/topics/existing-home-sales; 12/22/15

United States Construction Spending

Source: US DOC

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

Residential SF MF RR

in thousands of dollars; SAAR Total $: RHS SF, MF, RR $: LHS

Opportunities

Bigger homes for those who can afford them

We may see smaller homes why?

Affordability for the average American Stock houses with limited amenities?

If this occurs how will producers position their products?

What products will be offered? Manufactured housing could possibly make a comeback

The U.S. Economy

Strong employment numbers, but lack of high paying jobs with benefits. Mostly positive housing numbers, however, at levels far below "normal." Not so favorable household income numbers (non-existent wage growth). Challenges with our debt (national, student). Political gridlock, no common sense present anymore. What will the rising Dollar exchange rate do to our exports?

The World Economy

China's potential fiber supply gap (difference between demand and domestic supply) is estimated to be 150*106 m3., yet China is slowing and demand is cooling. Japan's 2011 triple disaster created replacement demand, but Japan is still stuck in its "lost decade." Europe is a "mixed" bag:

The Euro and the migrant crises Scandinavia, Germany, Benelux and France are doing OK Spain, Portugal, Greece, and some Easter European countries are facing challenges

South America is struggling, Brazil is in a deep recession Australia is, due to lackluster commodity markets, facing challenges

Thank you

Urs Buehlmann Virginia Tech

Blacksburg, VA

Delton Alderman United States Forest Service

Princeton, WV

Matt Bumgardner United States Forest Service

Princeton, WV