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[New Content Page]Mary Ellen
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Timber Market Outlook
August 23, 2012. Forest Landowners Association
Regional Meeting Charlotte


§Founded in 1985; subsidiary of Manulife Financial Corporation

§Global portfolio: USD 10.8 billion / 6.6 million acres*

 –   US, Canada, Australia, New Zealand,     and Brazil
 –   World’s largest timberland investment     manager
 –    Managing assets outside the US since   1992

§Diversified workforce: Foresters, Investment Management , Finance/Accounting

 –   Over 450 employees worldwide



Exposure to US, Pacific Rim, South America, and Europe

- * As of July 2012




§ Although the US South only holds 2 percent of the global forests, the region provides 19 percent of the pulpwood and 12 percent of the industrial timber for the world (FAO 2012).

§ The US South has produced approximately 72% of the annual volume of pulpwood and 53% of the sawlog and veneer products for the U.S. (Brandeis et al. 2012).













Global Softwood Log and Lumber Demand


Global Demand Drivers


Recovery of the US economy and housing market

European credit crisis and developing economic recession

China’s significant wood deficit supports continued growth in export logs and lumber

Increased wood fiber use for bio-energy and wood pellets








Global Softwood Log and Lumber Supply


Global Supply Issues


Declining economic timber from the MPB in Western Canada, as well as reduced harvests in Eastern Canada

Russian log export tax and Russia’s declining competitive position

Tight log supply in much of Europe

Ownership changes. Manager -directed harvest deferrals








Timber Market Outlook


§ U.S. Timber Markets The U.S. Solid Wood Sector Depends on U.S. Housing Demand

§ U.S. Housing Demand is Constrained by a lack of demand drivers, unemployment, and uncertainty














North America Timber Markets – Near-term Macro Drivers



§Current US Data shows:

 –   US Economy Fails to Build Forward Momentum

 –   Stubbornly High Unemployment Rate


§Unknowns looming:

 –   Possible Federal Spending Cuts and Tax Increase (Fiscal Cliff)


 –   Negative Impacts of European Fiscal Crisis and Economic Recession


§The value of the US Dollar against trading partners




U.S. Economy Loses Forward Momentum

Growth in US GDP Slips to a Lackluster 1.5% annual rate in 2012:Q2


U.S Job Growth Still Not Sufficient To Absorb The Large Pool of Unemployed

High unemployment continues to constrain US demand





U.S. Demand – no turn-around yet, as demand drivers are lacking

US Houshold net worth has dropped by about 50 percent from the peak

Source: Federal Reserve Flow of Funds data






US Household Steadily Paying Down Debt

Source: Federal Reserve Flow of Funds data, FEA July 2012








Implications of European Recession for U.S. Timber and Wood Product Markets


Implications of European Recession for U.S. Timber and Wood Product Markets


§Europe Will Exert a Continuing Drag on US Economy

 –   Reduced export demand from Europe

 –   Weaker Euro/stronger US$ increases competitive pressures on US producers in     international markets

 –   Weaker corporate profits for US multinational firms with European presence

§ Negative impact on economic growth in China (Europe is #1 destination for China’s exports), dampening demand in China for imported logs and lumber


European Output Contracting


GDP not expected to expand above 1.6 through 2017


Traditional Heavy Users of North American Wood for Home Building Have Seen Housing Starts Crash

Housing starts trailing 30-70% behind the levels of early 2000



§ Housing Starts in the first-half are up 25% year-over-year, supported by:

 –   Record levels of affordability – extremely low mortgage rates and reduced home prices

 –   Significant pent-up demand for housing

§ Declining inventories of vacant homes and distressed properties:

 –   Investor groups convert foreclosures to rentals

 –   Inventory of existing homes approaching pre-bubble levels

 –   Inventory of new homes at historic lows




 US Housing Starts



US Home Prices



  Existing Home Inventory


Leading Indicator of Remodeling Activity – Second Quarter 2012




 Source: Forest2Market


Sawmill capacity is the limiting factor in lumber price response to any increases in demand

North America Softwood Lumber Operating Rates




              Source: Random Lengths – Lumber Index = RL composite lumber index. $/MBF
                                Southern Plywood =CDX/S.W. 15/32 3ply R/L, $/MSF
                                OSB = N. Central 7/16 R/L, $/MSF


Softwood Lumber:

§ Responds to Increasing U.S. Domestic Demand

§ Responds to Increasing U.S. Domestic Demand


§ Production restraints on Eastern Canadian lumber production (reduced markets for chips)

Plywood & OSB:

§ Acquisitions and mill closures result in a more concentrated industry

§ OSB resist adding additional shifts and delay bringing mothballed capacity online.

Outlook for North America Sawtimber Markets Depends Heavily on Timing and Strength of U.S. Residential Construction

Recovery of US housing sector will lead a rebound in US lumber and timber markets

Annual US Housing Starts (1000 units) and Lumber Consumption (BBF)



 China Must Import Wood Fiber To Meet Domestic Demand


China Fiber Deficit

Source: Wood Markets International & Chinese Society of Forestry


US PNW has gained substantial share of expanding Chinese softwood log market,                  while Russia  and Canada have gained lumber market share 








Mountain Pine Beetle Effects Interior British Columbia Resource



Pacific Rim Prices Boosted by Asian Demand

Differential access to export markets has created a large gap in regional sawtimber prices

Regional Composite Prices for Softwood Sawtimber Stumpage (US$ per cubic meter)


Pulp and Paper Markets Lose Ground in a Weaker Global Economy


Domestic Markets:

§ Newsprint and printing and writing papers continue to lose markets to electronic media

§ Demand for paperboard and packaging papers slows with sluggish growth in the overall economy

Overseas Markets:

§ Slower growth in emerging economies undercuts export demand

§ Stronger US$ coupled with European recession increases competitive pressures in global pulp and paper markets




Investment in Biomass-Energy Production Has the Potential to Bolster Pulpwood Markets


Domestic Biomass Markets Slow to Develop

§ Still no federal mandatory targets for renewable power

§ The carbon neutrality of biomass energy continues to be debated

European commitment to biomass power production remains robust

§ Renewable energy goal of 20% by 2020

§ Clear acceptance of bio-mass as qualifying energy source

U.S. South is becoming a major supplier of fuel to Europe

§ Pellets and coal-substitutes


EU Wood Pellet Imports
from North American Sources


Timber prices will follow housing market recovery and increase substantially from current levels


Has the the bid-ask spread for timberland finally narrowed?

Appraised Values of US Timberland, Cropland, and Commercial Properties (2007 = 100)

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