Lumber Prices Hit Record Levels In Where Do We Go From Here? MLB Annual General Meeting May 30 th, 2018

Transcription

1 Lumber Prices Hit Record Levels In Where Do We Go From Here? MLB Annual General Meeting May 30 th, 2018

2 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.

3 Inflation Adjusted Lumber Prices Approach Record Levels 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/MBF

4 Canadian Lumber Shipments Lag Last Years Levels MMBF/Working Day US-2018 US-2017 Canada-2017 Canada J F M A M J J A S O N D

5 Average Train Speeds Are Rising And Dwell Times Falling, But Conditions Remain Worse Than Year-Ago Levels Miles/Hour Hours CN CP CN CP

6 Trucking Is Also An Issue $/Mile Spot Flatbed Truck Rates Aug Sep Oct Nov Dec Jan Feb Mar Apr Source: DAT Trendlines

7 Inventories Remain Low

8 Prices Are Likely To Fall When Transportation Issues Get Resolved And The Building Season Ends 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/MBF

9 Canadian Lumber Shipments Have Begun To Rebound MMBF/Week US Can US Q1 Avg Can Q1 Avg 13-Jan Feb Mar Apr

10 Capacity Is Expanding Source: Sawmill Profiles, Forest Economic Advisors

11 And More Will Come Source: Sawmill Profiles, Forest Economic Advisors

12 High Profits Are Causing Production To Surge $/MBF 700 Profit Margin 120% % % 60% 40% % 0 So Co Inl BC Ont Que Variable Cost Duty Profit Profit % 0%

13 Prices Will Slip In 2019, But Remain Elevated 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/MBF

14 North American Domestic Consumption Will Grow Steadily BBF US Canada

15 The 2017 Level of Housing Completions Was Typical of a Recessionary Low in Previous Economic Cycles 2.5 Annual Level of Housing Completions, Millions

16 There Are Many Positive Signs For Housing Markets Economic growth has increased. The manufacturing sector is recovering. Small business confidence surged in late Wages and salaries are growing. Home inventory overhang has been worked off. Mortgage interest payments share of household disposable income is at generational lows.

17 However, Supply-Side Constraints Will Slow The Housing Recovery

18 Builders Are Facing Shortages of Labor and Buildable Lots Percent of Builders Reporting Problems 13% 30% 53% 61% 71% 78% 82% 21% 34% 46% 55% 58% 60% 67% Cost/Labor Availability Cost/Land Availability * Source: NAHB HMI Survey

19 Residential Construction Employment Has Stalled Even as the Unemployment Rate for Construction Workers Plunged 1100 Employment in Residential Construction Thousands, SA Unemployment Rate in Construction Sector, SA 30% % % % % 600 5% %

20 Mexico s Fertility Rate Has Declined Sharply Change in Mexican Population Aged in Thousands 1000 Children per women in Mexico Male Female Total fertility (children per woman) 0

21 Its Not Just A Lack of Labor: Productivity Declines Are Not Helping US Change in Labor Productivity Construction vs. Overall Economy Real gross value added per hour worked, 2005$ Index:100 = 1995 US Industry Overall US Construction Sector Source: McKinsey Global Institute, Reinventing Construction Through a Productivity Revolution

22 22

23 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.

24 Our Favorite Indicator for Near-Term Housing Demand is Flashing Green 1,400 1,300 1,200 1,100 1, Year-over-Year % Change New Single-Family Home Sales Mapping New Single-Family Home Sales to Housing Starts New Single-Family Home Sales Owner Build Share Single-Family Starts Needed to Replenish Sales Not All Starts Completed Single-Family Starts Needed to Replenish Sales Single-Family Share Total Housing Starts Needed to Keep Inventories Flat 25% 25% % 98% % 70% 1,299 1,328

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

26 Irish Text Message Mary, I m just having one more pint with the lads. If I m not home in 20 minutes read this message again

27 Millions US Has Been Dramatically Under-Building For Nearly A Decade Housing Starts Underlying Demand Pent-Up Demand

28 US Demographics Are Favorable Headship Rate (Households per Person) Under

29 Seven Of The Ten Most Populous Age Groups Are In Their 20s US Population by Age (as of July 1, 2018) 6.0 Million Peak Age Groups in 2018: 27- and 28-Year-Olds

30 In Five Years, Many Will Be In Their Early 30s US Population by Age (as of July 1, 2023) 6 Million 5 4 Peak Age Groups in 2023: 32- and 33-Year-Olds

31 US Housing Starts Continue Grinding Recovery Housing Starts in Millions US Recession Housing Starts Trend from

32 The Single-Family Share Should Remain Elevated

33 US Housing Stock is Old Total US Housing Units in 2015 by Year Structure Built, % 25 Total = 134.8M units Before s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s Source: US Census Bureau 2015 American Housing Survey

34 Rapid Increase in Home Equity Should Boost Improvements Owners Equity in Household Real Estate - Net Worth in $Bil. $15,000 $12,000 $9,000 Trend Since 1980 $6,000 $3,000 $0

35 Total Home Equity Cashed Out Well Below Bubble Levels Total Home Equity Cashed Out, Billions $90 $80 $70 $60 $50 $40 $30 $20 $10 $0

36 Improvement Expenditures Should Remain Above Trend For Several Years $170 Billions of 2009 USD $160 $ Trend $140 $130 $120 $110 $100 $90 $80 $70

37 Consumption Is Growing, Where Will The Lumber Come From? Supply Side Constraints Will Vex Lumber Buyers For Several More Years

38 The Decline in British Columbia s AAC Has Begun TSA Year Previous AAC, CM New AAC Difference Lumber Tally BBF Mackenzie Morice (0.24) Williams Lake (2.73) Kamloops (1.70) Merritt (0.90) Lakes (0.33) Quesnel (1.40) Prince George (4.15) Source: BC Ministry of Forests, Lands, and Natural Resource Operations; FEA estimates

39 And Its Showing Up In Production 2017 Increase/Decrease in Production, BBF US So Ont US Wt Co Que US Wt Inl Alb US Oth CA Oth BC Co BC Int

40 Eastern Canadian Provinces Can Increase Production In the Short Run, But Longer Run Their Ability to Ramp Up Harvests Levels is Constrained MMCM QC ON AB NB NS MB SK NL PE Note: AAC includes both Current Crown AAC lands 2016 and Estimated private timber, Harvests except in Ontario

41 Sawmill Employment Has Stalled Even as the Unemployment Rate for Wood Products Workers Plunged US Sawmill Employment, Thousands 80 16% 70 14% 60 12% 50 10% 40 8% 30 6% 20 4% 10 0 Employment Unemployment Rate (R) % 0%

42 Opioid Use Contributing to Decline in Labor Force Participation Source: Alan Krueger, Princeton University

43 British Columbia s AAC Will Take Another Step Lower in the Mid-20s Million Cubic Meters Total Coast Interior Source: Ministry of Forests, Lands, Natural Resource Operations, and Rural Development

44 Supply Side Constraints Will Tighten Operating Rates As Consumption Rises BBF Capacity Demand D/C Ratio (R)

45 $US2016/MBF 1,100 1, Operating Rates of 90% Have Historically Meant Pricing Around $450

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

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

48 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.

49 $1.10 $1.00 $0.90 The Canadian Dollar Has Historically Tracked Real Oil Prices. It Will Eventually Gravitate Toward Its PPP Level USD per CAD IMF s Purchasing-Power-Parity Exchange Rate 2017 USD per Barrel $160 $140 $120 $100 $80 $0.80 $0.70 $0.60 $60 $40 $20 $-