Lumber Prices Hit Record Levels In 2018. Where Do We Go From Here?

MLB Annual General Meeting May 30th, 2018

Key Topics

• Lumber prices • Currently at record nominal levels. Why? • Near-term will likely remain elevated. • When they fall, they will fall precipitously.

• How long can prices remain “elevated”?

• Lumber consumption will grow slowly but steadily over the next several years.

• Supply side constraints will hamper the North American industry’s ability to keep pace with growing consumption.

Inflation Adjusted Lumber Prices Approach Record Levels

250

300

350

400

450

500

550

600

650

700 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/MBF

Canadian Lumber Shipments Lag Last Years Levels

80

90

100

110

120

130

140

150

J F M A M J J A S O N D

US-2018 US-2017 Canada-2017 Canada-2018

MMBF/Working Day

Average Train Speeds Are Rising And Dwell Times Falling, But Conditions Remain Worse Than Year-Ago Levels

18.0

19.0

20.0

21.0

22.0

23.0

24.0

25.0

26.0

27.0

CN CP

Miles/Hour

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

25.0

CN CP

Hours

Trucking Is Also An Issue

2.00

2.10

2.20

2.30

2.40

2.50

2.60

2.70

Aug Sep Oct Nov Dec Jan Feb Mar Apr

2016-17

$/Mile Spot Flatbed Truck Rates

Source: DAT Trendlines

Inventories Remain Low

Prices Are Likely To Fall When Transportation Issues Get Resolved And The Building Season Ends

200

250

300

350

400

450

500

550

600

650

700

750 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/MBF

Canadian Lumber Shipments Have Begun To Rebound

400

450

500

550

600

650

700

750

800

13-Jan 20 27 3-Feb 10 17 24 3-Mar 10 17 24 31 7-Apr 14 21 28

US Can US Q1 Avg Can Q1 Avg

MMBF/Week

Capacity Is Expanding

Source: Sawmill Profiles, Forest Economic Advisors

And More Will Come

Source: Sawmill Profiles, Forest Economic Advisors

High Profits Are Causing Production To Surge

0%

20%

40%

60%

80%

100%

120%

0

100

200

300

400

500

600

700

So Co Inl BC Ont Que Variable Cost Duty Profit Profit %

$/MBF

Profit Margin

Prices Will Slip In 2019, But Remain Elevated

100

150

200

250

300

350

400

450

500

550

600

650

700

750 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/MBF

North American Domestic Consumption Will Grow Steadily

20

30

40

50

60

70

80

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

US Canada

BBF

The 2017 Level of Housing Completions Was Typical of a Recessionary Low in Previous Economic Cycles

0.0

0.5

1.0

1.5

2.0

2.5

68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Annual Level of Housing Completions, Millions

• Economic growth has increased.

• The manufacturing sector is recovering.

• Small business confidence surged in late 2016.

• Wages and salaries are growing.

• Home inventory overhang has been worked off.

• Mortgage interest payments share of household disposable income is at generational lows.

There Are Many Positive Signs For Housing Markets

However, Supply-Side Constraints Will Slow The Housing Recovery

Builders Are Facing Shortages of Labor and Buildable Lots

Percent of Builders Reporting Problems

13% 21%

30% 34%

53% 46%

61% 55% 71%

58%

78%

60%

82% 67%

Cost/Labor Availability Cost/Land Availability

2011 2012 2013 2014 2015 2016 2017*

Source: NAHB HMI Survey

Residential Construction Employment Has Stalled Even as the Unemployment Rate for Construction Workers Plunged

0%

5%

10%

15%

20%

25%

30%

500

600

700

800

900

1000

1100

00 01 02 03 04 05 06 07 08 9 10 11 12 13 14 15 16 17 18

Employment in Residential Construction Thousands, SA

Unemployment Rate in Construction Sector, SA

Mexico’s Fertility Rate Has Declined Sharply

0

1

2

3

4

5

6

-200

0

200

400

600

800

1000

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Male Female Total fertility (children per woman)

Change in Mexican Population Aged 15-34 in Thousands

Children per women in Mexico

60

70

80

90

100

110

120

130

140

150

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

US Change in Labor Productivity Construction vs. Overall Economy

Source: McKinsey Global Institute, Reinventing Construction Through a Productivity Revolution

US Industry Overall

Real gross value added per hour worked, 2005$

Index:100 = 1995

US Construction Sector

Its Not Just A Lack of Labor: Productivity Declines Are Not Helping

22

• Credit conditions remain tight. • Regulatory burdens have increased.

– Environmental, erosion control – Energy codes – Sprinkler systems

• Many municipalities cut staff in permitting offices to save money during budget crunch. – Utility company delays – Hook-up fees – Inspection fees/delay

• Attenuated nature of the downturn knocked out many of the smaller builders giving the big players substantial market power in certain areas.

Our Favorite Indicator for Near-Term Housing Demand is Flashing Green

Year-over-Year % Change

New Single-Family Home Sales Mapping New Single-Family Home Sales to Housing Starts

0 100 200 300 400 500 600 700 800 900

1,000 1,100 1,200 1,300 1,400

New Single-Family Home Sales 662 683

Owner Build Share 25% 25%

Single-Family Starts Needed to Replenish Sales 896 911

Not All Starts Completed 98% 98%

Single-Family Starts Needed to Replenish Sales 910 929

Single-Family Share 70% 70%

Total Housing Starts Needed to Keep Inventories Flat

1,299 1,328

Longer run, we are very optimistic: The United States is due for a

construction boom

“Mary, I’m just having one more pint with the lads. If I’m not home in 20 minutes read this message again”

Irish Text Message

US Has Been Dramatically Under-Building For Nearly A Decade

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Housing Starts Underlying Demand Pent-Up Demand

Millions

US Demographics Are Favorable

Headship Rate (Households per Person)

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

Under 25 25-29 30-34 35-44 45-54 55-64 65-74 75+

1960 1970 1980 1990 2000 2010 2020

Seven Of The Ten Most Populous Age Groups Are In Their 20s US Population by Age (as of July 1, 2018)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

00 05 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Peak Age Groups in 2018: 27- and 28-Year-Olds

Million

In Five Years, Many Will Be In Their Early 30s US Population by Age (as of July 1, 2023)

0

1

2

3

4

5

6

00 05 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Peak Age Groups in 2023: 32- and 33-Year-Olds

Million

US Housing Starts Continue Grinding Recovery

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

US Recession Housing Starts Trend from 2011-2017

Housing Starts in Millions

The Single-Family Share Should Remain Elevated

US Housing Stock is Old

9.5 8.0 9.9

4.4

18.7 17.5

18.8

9.5

5.3 4.4

6.9

14.5 14.7

20.1

0

5

10

15

20

25

Before 1920

1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s

Total = 134.8M units

Total US Housing Units in 2015 by Year Structure Built, %

Source: US Census Bureau 2015 American Housing Survey

Rapid Increase in Home Equity Should Boost Improvements

$0

$3,000

$6,000

$9,000

$12,000

$15,000

Trend Since 1980

Owners’ Equity in Household Real Estate - Net Worth in $Bil.

Total Home Equity Cashed Out Well Below Bubble Levels

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Total Home Equity Cashed Out, Billions

Improvement Expenditures Should Remain Above Trend For Several Years

$70

$80

$90

$100

$110

$120

$130

$140

$150

$160

$170

1993-2002 Trend

Billions of 2009 USD

Consumption Is Growing, Where Will The Lumber Come From? Supply Side Constraints Will Vex

Lumber Buyers For Several More Years

The Decline in British Columbia’s AAC Has Begun

Source: BC Ministry of Forests, Lands, and Natural Resource Operations; FEA estimates

TSA Year Previous AAC, CM New AAC Difference

Lumber Tally BBF

Mackenzie 2014 3.02 4.50 1.48 0.430

Morice 2015 2.14 1.90 (0.24) -0.070

Williams Lake 2015 5.73 3.00 (2.73) -0.794

Kamloops 2016 4.00 2.30 (1.70) -0.494

Merritt 2016 2.40 1.50 (0.90) -0.262

Lakes 2016 1.98 1.65 (0.33) -0.096

Quesnel 2017 4.00 2.60 (1.40) -0.407

Prince George 2017 12.50 8.35 (4.15) -1.206

And Its Showing Up In Production

-0.60

-0.40

-0.20

0.00

0.20

0.40

0.60

0.80

1.00

1.20

US So Ont US Wt Co

Que US Wt Inl

Alb US Oth CA Oth BC Co BC Int

2017 Increase/Decrease in Production, BBF

Eastern Canadian Provinces Can Increase Production In the Short Run, But Longer Run Their Ability to Ramp Up

Harvests Levels is Constrained MMCM

Note: AAC includes both Crown lands and private timber, except in Ontario

0

5

10

15

20

25

30

QC ON AB NB NS MB SK NL PE

Current AAC 2016 Estimated Harvests

Sawmill Employment Has Stalled Even as the Unemployment Rate for Wood Products Workers Plunged

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

10

20

30

40

50

60

70

80

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Employment Unemployment Rate (R)

US Sawmill Employment, Thousands

Opioid Use Contributing to Decline in Labor Force Participation

Source: Alan Krueger, Princeton University

British Columbia’s AAC Will Take Another Step Lower in the Mid-20s

Million Cubic Meters

0

10

20

30

40

50

60

70

80

90

2010 2015 2020 2025 2030 2035 2040 2045 2050

Total

Coast

Interior

Source: Ministry of Forests, Lands, Natural Resource Operations, and Rural Development

Supply Side Constraints Will Tighten Operating Rates As Consumption Rises

0.60

0.70

0.80

0.90

1.00

10

20

30

40

50

60

70

80

90

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Capacity Demand D/C Ratio (R)

BBF

Operating Rates of 90% Have Historically Meant Pricing Around $450

100

200

300

400

500

600

700

800

900

1,000

1,100 $US2016/MBF

Given Lumber Prices, There Is No Urgency To Reach A Deal

We’ll Eventually Have A Deal, It’s Just Going To Take A While To Get There

Take Home Points

• Lumber prices are at record levels. They are likely to remain there into the summer before dropping sharply.

• Construction growth will continue albeit slowly as supply-side constraints limit housing production.

• Lumber prices will remain elevated but fall from current highs.

The Canadian Dollar Has Historically Tracked Real Oil Prices. It Will Eventually

Gravitate Toward Its PPP Level

$-

$20

$40

$60

$80

$100

$120

$140

$160

$0.60

$0.70

$0.80

$0.90

$1.00

$1.10 IMF’s Purchasing-Power-Parity Exchange Rate

2017 USD per Barrel USD per CAD