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© Copyright 2016 RISI, Inc. | Proprietary Information

The North American Softwood Lumber MarketAnother Year of Cautious Optimism

David FortinDirector, Wood Products

RISI North American Conference, 2016

Quick Bio

• Bachelor’s Degree in Economics and Master’s Degree in Economics and Finance

• More than 10 years covering the forest products industry as part of the RISI economic analysis team

• Co‐Author of the Lumber Commentary, North American Lumber 5‐Year and 15‐Year Forecasts

© Copyright 2016 RISI, Inc. | Proprietary Information 2

3© Copyright 2016 RISI, Inc. | Proprietary Information

Overview

• Recap of 2016

• Update on the Softwood Lumber Agreement

• Softwood lumber outlook• Demand follows US housing related markets higher

• Supply‐side constraints in Canada and expansion in the US South

• Improving demand tests the industry supply base

• Industry cost curve remains steep


Recap of 2016: Demand Growth Keeps Pace with Supply

• US lumber supply jumped higher• Canadian production up on the weak loonie

• Offshore imports continued their meteoric rise

• Demand continued to improve cyclically • Solid growth in residential construction and R&R

• Prices moved steadily higher• Cyclical demand growth + lean inventories = increased order frequency at the mill

Recap of 2016: Drop in Canadian Dollar Stimulates Increased Production in Canada


$0.64$0.66$0.68$0.70$0.72$0.74$0.76$0.78$0.80$0.82$0.84

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Apr‐15 Jul‐15 Oct‐15 Jan‐16 Apr‐16

USD

/CAD

Chan

ge in

Produ

ction, BBF

(Year A

go)

British Columbia ProductionEastern Canada ProductionCandian Dollar

Recap of 2016: US Imports on the Rise


2015 (BBF)

2016 (BBF) %Ch

Change (BBF)

USA Imports (July YTD)Canada 7.22 9.87 38% 2.65Western Europe 0.1 0.24 141% 0.13Latin America 0.19 0.25 31% 0.07Other 0.09 0.12 25% 0.03Total 7.61 10.48 38% 2.87

Recap of 2016: Limited Anticipatory Buying + Cyclical Demand Growth = Increased Order Frequency

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan‐15 Apr‐15 Jul‐15 Oct‐15 Jan‐16 Apr‐16

Monthly Supply to the US Market and Domestic Demand, BBF

Domestic Shipments Imports Domestic Demand


Recap of 2016: Lumber Prices Improved Steadily Through August


$220

$240

$260

$280

$300

$320

$340

$360

$380

$400

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

Mon

thly

Lum

ber P

rices

($/M

BF)

CROWSCOMPSPF 2& Btr 2x4


US and Canadian Trade Agreement: Tariff and/or Quota or No Agreement• Negotiations are ongoing…

• No agreement Adds to the uncertainty in the market

• Tariff Affects the lower end of the supply curve

• Quota Depending on the mechanism, could make the supply curve infinitely steep


US and Canadian Trade Agreement: Food for Thought…• US domestic consumption is improving• Canadian supply is constrained

• British Columbia is approaching AAC limits

• Eastern Canada challenged by lack of demand for residuals

• Loonie should strengthen (slightly) along with oil• Canadian producers claim to have moved toward market based stumpage pricing

• Assumption in the model• An agreement is eventually reached similar to expired SLA


Outlook for Softwood Lumber

US Softwood Lumber Consumption: Growth in All End‐Use Markets Drives Consumption Higher

0

10

20

30

40

50

60

70

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Billion

Boa

rd Feet

ConsumptionCycle Floor


US Softwood Lumber Consumption: R&R Remains the Largest End‐Use Market for LumberMarket Share and Volume BBF


13.330%

10.724%

19.042%

1.74%

2015

Residential Industrial R&R Nonresidential

19.535%

11.220%

23.141%

2.04%

2018

Canadian Softwood Lumber Consumption: Recent Strength in Housing Starts Difficult to Maintain

0

2

4

6

8

10

12

14

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Bill

ion

Boa

rd F

eet


Net Exports Fall as Domestic Markets Improve and Competition in Offshore Markets Increases

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

-1

0

1

2

3

4

5

6

7

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

BB

F

Net Exports

Percent of Demand on NorthAmerican Mills (R)


Demand for North American Softwood Lumber: Growth in Domestic Demand More Than Offsets Decline in Net Exports

-100

1020304050607080

BB

F

US Canadian Net Export


North American Softwood Lumber Supply: Industry Supply Base Will Be Tested as Demand Accelerates• Capacity has kept pace with modest demand growth Mill restarts Optimization projects

• Market recovery offers data points to more accurately estimate supply Six years from cycle floor, how many viable mills are still idle?

• Ample fiber available in the US South and E. Canada • Demand typically increases faster than capital stock at this point in the cycle


0

20

40

60

80

100

120

2003 2006 2009 2012 2015 2018

Mill

ion

Cub

ic M

eter

s

Eastern Canada


18

0

20

40

60

80

100

120

2003 2006 2009 2012 2015 2018

Mill

ion

Cub

ic M

eter

s

British ColumbiaTotal HarvestOperable Sustainable*Annual Allowable Cut

BC Runs Up Against Fiber Constraints, While E Canada Seems to Have Room to ExpandRoundwood Harvest Demand, Million Cubic Meters, All Species


* Forecasted AAC generated by RISI. Operable sustainable is defined as RISI's estimate of AAC, adjusted for forest resources that are too remote to access or not merchantable.

Capital Investment Flows to Regions with Available Fiber Total North American Softwood Lumber Capacity, BBF

2005 2015 %Ch 2018 %ChUSAWest 20.0 16.3 -18.5% 16.8 3.5%South 19.4 19.9 2.8% 21.7 8.9%Other 3.9 2.5 -37.3% 2.6 4.0%Total 43.3 38.7 -10.6% 41.1 6.3%

CanadaBC 18.6 15.3 -17.6% 14.7 -3.9%EOR 20.1 15.8 -21.4% 16.5 4.4%Total 38.7 31.1 -19.6% 31.2 0.3%

North America 82.0 71.1 -13.2% 73.6 3.5%


North American Softwood Lumber Market Tightens Significantly

40%

50%

60%

70%

80%

90%

100%

30

40

50

60

70

80

90

D/C Ratio

BBF

Demand for North American Lumber

Demand Capacity Demand/Capacity (R)


Lumber Prices More Volatile and Prices Trend Higher as Demand/Capacity Exceeds 80%Scatter Plot of Price/AVC and Demand/Capacity Ratio

0.85

1.05

1.25

1.45

1.65

1.85

2.05

0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95

Price/AV

C

Demand/Capacity


Industry Cost Profile: US South Maintains Its Low Cost Position Despite the Weak Canadian Dollar

125

150

175

200

225

250

275

300

325

350

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

US

Dol

lars

per

MB

F

US Softwood Lumber Average Variable Costs

Quebec Coast South


North American Softwood Lumber Prices and Profits• Prices and profits will move higher through 2018 Demand improves and ultimately tests the industry capacity

base Supply response will lag demand and supply chain will be tested Cautious market expectations, modest inventory strategies and

cyclical demand growth place upward pressure on prices in 2017‐2018

• Profits over the cycle will accrue to the converter Timber supplies will remain adequate Conversion capacity and supply chain will be the limiting factors

of supply West Coast timber markets less challenging for domestic

producers as export market slows



Lumber Prices Likely to Move Higher and Become More Volatile• In the near term… Supply chain inventories are extremely thin Historically large spreads between species and dimensions Global economic uncertainty

• Medium to longer term… Demand outpaces supply and supply chain tested Industry moves to steeper part of the supply curve D/C ratio approaches 90%

North American Softwood Lumber: Forecast Summary

Capacity

Demand

D/C Ratio

Prices

Demand for lumber produced in the USA and Canada will continue to improve through 2018, driven higher mainly by domestic growth in the USA.

Softwood lumber capacity in the USA and Canada will grow slightly more than creep as investment flows to regions with low‐cost available fiber, while the industry runs up against fiber supply issues due to beetle kill in British Columbia.

Demand/Capacity approaches 90% in 2018, as demand growth outpaces capacity growth, pushing the industry to the steeper part of the supply curve.

Prices will trend higher with increased volatility. Margins will vary by producing region (i.e., West Coast producers will remain challenged by higher fiber costs).



North American Lumber 5‐ and 15‐Year Forecastwww.risi.com/forecasts

Lumber Commentarywww.risi.com/lumber

Contact Info:David FortinEmail: [email protected]: 781‐734‐8974

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