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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
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450
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550
600
650
700 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/MBF
Canadian Lumber Shipments Lag Last Years Levels
80
90
100
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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
$/Mile Spot Flatbed Truck Rates
Source: DAT Trendlines
Inventories Remain Low
Prices Are Likely To Fall When Transportation Issues Get Resolved And The Building Season Ends
200
250
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450
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650
700
750 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/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 %
$/MBF
Profit Margin
Prices Will Slip In 2019, But Remain Elevated
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150
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450
500
550
600
650
700
750 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/MBF
North American Domestic Consumption Will Grow Steadily
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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)
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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
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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
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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
$-
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$120
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$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