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1 The Campbell Group, LLC December 2009 Timber Trends By: Bruce P. Glass, PhD., Forest Economist Local currency/us$ International Trade Exchange Rates The US dollar is approaching the recent lows of early US dollar exchange rates Inside This Issue Prices 4 Supply 12 Housing 13 Announcements 17 Timberlands Sales 17 Openings, Closings, Curtailments 17 Certification/Environmental/ Bioenergy 18 Conferences, Overview Studies, & Reports 18 Resources 19 References Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Canada Apr-07 Jul-07 Euro Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 So urce: F R B Exports US Softwood Lumber Exports Fall 12% in US softwood lumber exports have fallen 12% through the first nine months of 2009, according to Western Wood Products Association. The WWPA reported that 699 MMbf of lumber have been exported this year, compared with 794 MMbf through September of last year. Canada, Mexico and Japan continue to be the major consumers of US lumber. Canada, the chief purchaser of lumber from the US, has bought 184 MMbf so far this year, a drop of 24.1% from last year s 243 MMbf. Mexico s purchases have totaled 137 MMbf this year, compared with 158 MMbf last year, a decline of 13.1%. Japan, on the other hand, has increased its lumber purchases from the US, importing 80 MMbf this year, an increase of 18.7% over last year s 67 MMbf. Another 297 MMbf of lumber have been exported to other destinations this year. This is a drop of 8.8% from the 326 MMbf exported last year. Among key destinations have been the Middle East, especially Pakistan and Asia. US softwood log exports have totaled bbf through September, a decline of 2.9% from the bbf exported last year. Canada is the chief importer of softwood logs, with Japan in second place among global purchasers.

2 Timber Trends Page 2 Imports Imported softwood lumber is bearing the brunt of declining US lumber demand. 60 US Softwood Lumber: Comparison of Apparent Consumption with Demand on US Mills Source: Random Lengths 50 Billion Board Feet Year Ending September Apparent US consumption Demand on US mills 2009 Lumber Imports Off 2008 Pace 2 Lumber imports by the US through the first nine months of 2009 have fallen 33.2%, according to Western Wood Products Association (WWPA). For the year through September, billion board feet (bbf) of lumber have been imported, compared with bbf through the same period of Canadian lumber imports have totaled bbf through September, compared with bbf last year, a drop of 31.5%. Imports from British Columbia are down 28.3% from last year, and Eastern Canadian imports are off by 35.9%. Non-Canadian lumber imports have fared worse than Canadian imports, falling 51.7% through September. Lumber imports from Latin America, which are down 34.2%, have totaled 219 MMbf through September. European imports have dropped precipitously, by 66.4%, and total only 141 MMbf through September. The reduction of lumber imports from Latin America has tightened the supply of Radiata Pine to US re-manufacturers, helping to raise the price of both Radiata Pine lumber and domestic Ponderosa Pine in both Molding & Better and Shop grades. European imports have dwindled, reducing the availability of 4/4 boards, thus loosening the market for domestic producers of Eastern White Pine boards. Trade in Wood Products Japan Japan Expects Rising North American Imports of Timber and Logs Next Year but Higher Freight Costs are Pushing Up Prices 3 The flow of Russian logs to Japan has fallen sharply during 2009, while imports of North American timber products including Douglas-fir have remained stable. The number of North American timber products seen as in short supply in the Japanese market is increasing. Figures for Keihin ports showed shipments of 4,245 m 3 of American logs in October of which 875 m 3 were Hemlock and 1,256 m 3 were Douglas-fir. Total softwood lumber arrivals in that month were 100,190 m 3, of which 6,005 m 3 were Hemlock and 59,083 m 3 were SPF. Prices for North American timber are increasing slightly, and lumber factories in the US are expected to increase exports to Japan. Currently, Douglas-fir products are shipped in containers from the US to end-user companies such as home

3 Timber Trends Page 3 improvement centers. Canadian mills have also started processing Douglas-fir lumber and sending trial shipments. North American log inventories are becoming extremely low in producing areas and shortages are expected to continue until April or May. Freight cost increases are pushing up log prices. Although log inventories are low in Japan, the movement of goods is also slow as more factories close down. China China Increases Imports of Softwood Logs by Over 50% in 2009Q2 4 As a sign of improved operating rates in the sawmilling and plywood industry in China, imports of both softwood and hardwood logs were up in 2009Q2. Softwood imports were 51% higher than the previous quarter and 27% higher than 2008Q2. The biggest increases were in shipments from Russia and New Zealand. Although Russia is still the largest supplier of logs, New Zealand has increased its market share from 10% in 2008Q2 to 23% in 2009Q2. Total softwood log imports the first six months this year were 9.7 million m 3 compared with 9.9 million m 3 in the first half of The average import value for softwood logs have been in decline for three consecutive quarters and were down again in 2009Q2. So far this year, Russian logs have cost substantially more than have logs from New Zealand and Australia. Analysts Speculate on Importance of Canadian Lumber Exports to China 5 More attention has been put on China as an increasing destination for Western Canadian lumber as the possibility of increased exports has fueled speculation lumber could help boost the value of the Canadian dollar. The BC lumber sector is expected to ship 1.5 billion board feet of lumber to China this year, about the production of five sawmills and double last year s level. An estimated 80% of that lumber remains low grade, used in concrete forming, scaffolding and secondary manufacturing. Forest industry analysts remain cautious on China s lumber potential. Paul Quinn, a forest industry analyst with RBC Capital Markets, says there is certainly opportunity in China. But Quinn wonders whether the Chinese will be as interested in buying higher-value lumber when the prices start to climb. Because prices are low now--due, in part, to a collapse in the massive US housing market--the price differentials between grades of lumber have narrowed. When the prices increase, those premiums will widen, noted Quinn. It s why the move to push lumber into housing in China--which requires higher quality lumber--is a good one, said Quinn. Russ Taylor, president of International Wood Markets Group, is even more cautious about China, stressing it remains largely a market for low-grade lumber. Taylor said it will take a least a generation to build a market for woodframe housing in China. He said recent increases in lumber exports to China have more to do with coincidence than design. There s the fact the US market is so weak that any export market looks strong, and a recent earthquake in China that has peaked interest in wood-framing, he said. Taylor also noted that BC is producing more low-grade lumber than normal because of the pine beetle epidemic, and the province benefits from an advantage over Russia because of that country s 25% export tax on wood. China s New Building Codes a Breakthrough for the Canadian Lumber Industry 6 Shares in some of Canada s largest lumber exporters have shot up over the last two months after China s new building codes opened a market that the industry had previously been unable to access, the Financial Post reported. The increases are directly related to the implementation in September of new timber frame construction codes in Shanghai. Canada s Minister of Natural Resources Lisa Raitt has said the government is confident that the Shanghai Local Code provides a framework that will be easily adaptable to other cities and provinces across China. RBC Capital Markets currency strategist David Watt sees the development as a breakthrough for both the lumber industry and the Canadian dollar, describing it as an opportunity the Canadian lumber industry has been dreaming about for years. He added: this gives us a chance to take advantage of a huge market that has suddenly overcome an aversion to your product. Canadian lumber exporters have historically found it difficult to convince the Chinese that wood-frame buildings can be as stable as concrete buildings. Watt speculated that recent earthquakes in the country had helped the government to see the benefits of using wood. It was clear some of the buildings made of wood held up a lot better, he said. Watt also suggested that lumber could be the oil of the next decade in terms of lifting the Canadian currency. But industry players have warned that, while greater access to the Chinese market will help fix the supply-demand balance, it is unlikely to be a huge driver in the next 1-2 years as construction companies will need to be educated about wood frames.

4 Timber Trends Page 4 New Zealand Export Market Report from New Zealand 7 The year is starting to draw to a close and there are some encouraging signs coming out of the markets which should put things in good shape for the next few months. The changes identified since last month s report are the increased demand coming from China for imported softwood logs, and the continued slowdown of Russian supply to the markets, notably China. These two issues are linked and the movement of sawmilling capacity out of northern China into the eastern coastal areas is very encouraging. The Russian softwood supply appears to be down 40-50% with hundreds of sawmill lines being closed down and either relocating, or already moved to imported softwood regions which are basically on the east coast. Radiata pine now appears to have processing capacity of over 500,000 m 3 /month. The autumn building season is traditionally a busy time in Asia and this year is no exception with consumption data coming through suggesting that included in the seasonal lift, is also an underlying recovery in demand. This is probably approximately 5% at this early stage which is consistent with consumption trends globally as the construction sector recovery gets underway, albeit at a slow pace. The number of Chinese saw millers heading to the coastal regions to saw imported logs is a sign that the Chinese sawmilling industry is starting to structurally change softwood log sourcing patterns. Once this capacity shifts to the eastern sea board of China it is going to be quite difficult for Russian supply to increase by land quickly, as the logs will need to travel by rail down to the Chinese coast to get processed which will drive up marginal prices. India Indian Consumption Grows 8 Wood consumption in India is growing fast and although the country has over 250 commercial timbers (including some of the most highly prized tropical hardwoods like teak, rosewood, and sandalwood) a strict conservation policy limits harvesting. This means India is a net importer of wood and wood-based panel products. Indian industrial demand for wood jumped from 58 million m 3 in 2000 to 85 million m 3 in 2008 and expected to cross 150 million m 3 by Prices North American Lumber Prices for commodity grades of lumber in North America show a welcome uptick. 700 Key Softwood Lumber Real Price Indicators for the US West Coast (Douglas-fir, DF), the US South (Southern Yellow Pine, SYP), and Canada (Spruce-Pine-Fir, SPF, in Interior British Columbia) $/Mbf Source: Random Lengths DF 2x4, green Portland, std & btr SYP 2x4, Westside, KD, #2 SPF 2x4, Western, KD, #2 & btr

5 Timber Trends Page 5 US Lumber US Lumber Market Showing Signs of Rebound, Say Industry Experts in Pacific Northwest 9 US lumber producers are seeing the first indications of a slow and likely recovery coming in 2010, after the worst homebuilding year since the end of World War II, according to industry experts in the Pacific Northwest. Representatives from Weyerhaeuser Co., based in WA; the Western Wood Products Association (WWPA), based in OR; and WA-based Simpson Timber Co. agreed the lumber market appears to be improving. The WWPA said recovery will be slow and contingent on gains on home sales, which have risen over the past few months. Demand for softwood lumber will be relatively low, but enough to allow most sawmills to continue operations and perhaps build their core customer base, said David Jackson, an economist for the trade group. Lumber demand is expected to rise 11% next year to 34.5 billion board feet (bbf), and housing starts will jump 21% to just under 670,000, according to the WWPA. However, the trade group has noted that the number of starts is still down two-thirds from the peak of the homebuilding boom in Logs Global Global Sawlog Prices Up Almost 8% in 2009Q3 10 Global sawlog prices started to move up in the fall after having reached a bottom in many markets earlier this year. The recent upswing has been the result of a tighter log supply but also because of improved operating rates at many sawmills in both the US and Europe. The US, the Nordic countries, Central Europe the Baltic States and Russia have experienced the largest price increases (in the local currencies) over the past six months. The Global Sawlog Price Index (GSPI), based on conifer sawlog prices in 19 key regions worldwide, was US$73.30/ m3 in 2009Q3, up 7.6% from the previous quarter. Much of the increase was because the US dollar weakened against most currencies in the various regions, but there were also higher log prices in Europe in local currencies. Despite the recent increase in the GSPI Index, it is still 15% lower than a year ago and 20.3% below the all-time-high in 2007Q4. The biggest declines in log prices (in US dollar terms) since the peak in early 2008 have occurred in the Baltic States, the Nordic countries and in Western North America. In these regions, prices are now more than 25% below their all-time highs. Log prices in the US South, Central Europe, Latin America and Oceania have fallen relatively less and are currently 5-10% below their peak about 18 months ago. Log prices probably reached their bottom in this cycle last spring and it can be expected that they will continue the recent upswing in 2010 because of increased demand for lumber in the US, Europe, Asia and Latin America. So far this year, Europe, Northern Africa and China have been some of the most rapidly growing markets for lumber exporters and this trend is likely to continue into next year. There is also some good news coming out of Russia. Lumber exports increased slightly in 2009 compared with 2008 and might reach the third highest level on record. This is mostly thanks to the high demand for lumber in China. Softwood lumber shipments to China have been up almost 60% this year. The strong export lumber market has mostly benefited sawmills in Siberia and the Russian Far East.

6 Timber Trends Page Pacific Northwest Coastal Log Values Price differentials between the major species have narrowed with declining log prices. Real Delivered Prices for #2 Sawlogs Received by Oregon Department of Forestry, Region 1 (Northwest OR) 1, $/Mbf Scribner, long log scale 1,400 1,200 1, Source: ODF Douglas-fir Western hemlock Real Delivered Prices for #2 Sawlogs Received by Oregon Department of Forestry, Regions 2 & 3 (Coos Bay & Roseburg) 1, $/Mbf Scribner, long log scale 1,400 1,200 1, Source: ODF Douglas-fir Fir Whitewoods

7 Timber Trends Page 7 Overview of October Prices in the Pacific Northwest 11 Continuing the upward trend from last quarter, October prices for Douglas-fir logs destined for sawmill-plywood production in the Westside of Oregon and Washington were up more than 5%. Increases have been the most pronounced in the Southern Willamette Valley. Washington prices for small Douglas-fir moved upward as well. Export buyers continued to be very competitive, aggressively pursuing volume. Timber Investment Management Organizations and other log sellers have ratcheted back logging operations, resulting in the lowest harvest levels in recent times. Log price increases are being driven by limited log volumes and a desire to stimulate more production in anticipation of firming product prices and improved future demand. There was little change in PNW wood chip prices for October. Pending pulp and paper mill closures and the expiration of black liquor tax credits will likely put downward pressure on chips in coming months. Pulpwood and whole log chips in western Oregon will be most subject to surpluses as a result of slowed demand. US South Log price adjustment follows similar trajectories across the south. 90 Pine Sawtimber: Comparison of Stumpage and Delivered Prices with Indicator Southern Yellow Pine Lumber Price (2x4, #2 kd, Westside), West South Central Region $/ton $/Mbf lumber Sources: Timber Mart-South, Random Lengths 0 Stumpage Delivered Logs SYP 2x4, kd, Westside (RHS)

8 Timber Trends Page 8 80 Pine Sawtimber: Comparison of Stumpage and Delivered Prices with Indicator Southern Yellow Pine Lumber Price (2x4, #2 kd, Westside), East South Central Region $/ton $/Mbf lumber Sources: Timber Mart-South, Random Lengths 0 Stumpage Delivered Logs SYP 2x4, kd, Westside (RHS) 80 Pine Sawtimber: Comparison of Stumpage and Delivered Prices with Indicator Southern Yellow Pine Lumber Price (2x4, #2 kd, Westside), Atlantic Region $/ton $/Mbf lumber Sources: Timber Mart-South, Random Lengths 0 Stumpage Delivered Logs SYP 2x4, kd, Westside (RHS)

9 Timber Trends Page 9 Pulp and Paper Forestweb North American Pulp Index Continues to Gain Ground 12 The Forestweb North American Pulp Index rose 4.58% in November, the seventh consecutive month-to-month increase. For 11 months, the index has moved upward by 14.73% and is now 5.72% higher than last year s level. The Forestweb Pulp Index represents North American demand and prices for the five principal chemical paper grade market pulps. Pulpwood and Chips Prices in the US Northeast are bucking trends observed elsewhere. 65 Selected North American softwood roundwood real prices 2008 US $/green ton equivalent (delivered) Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 South Atlantic South Central US Northeast US PNW British Columbia Source: International Wood Fiber Report

10 Timber Trends Page Selected North American softwood chip real prices 2008 US $/green ton equivalent (delivered) Mar-03 Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 South Atlantic South Central US Northeast US PNW British Columbia Source: International Wood Fiber Report Biomass and Residuals Price relativities between biomass and other fiber sources appear to be fairly consistent Delivered Softwood Fiber Prices in South Central Region $/green ton Sources: IWR, WBMR Wood chip Pulpwood Pellet-grade wood chip In-woods biomass Mill residue biomass

11 Timber Trends Page 11 Delivered Hardwood Fiber Prices in South Central Region $/green ton Sources: IWR, WBMR Wood chip Pulpwood Pellet-grade wood chip Rapidly Expanding Pellet Capacity Drives Up North American Sawdust and Wood Chip Prices 13 There has been a rapid expansion in wood pellet capacity in North America the past five years, from just over one million tons in 2004 to over six million tons in 2009, according to a recent report from the USDA Forest Service. British Columbia was the first region to take advantage of inexpensive sawmill residues and to produce wood pellets for the fast growing European market. Capacity in the western province of Canada has not grown much the past few years, so in 2009, it is likely that the US South will take over as the leading pellet-producing region in North America. Much of the investment in pellet capacity in the US South has been driven by the export market in Europe. On the other hand, the second largest producing region in North America, the Western US, has so far only sold pellets into the domestic market. In 2004, the pellet industry was practically non-existent in the US South and this sector has now grown and will reach a capacity of almost two million tons in These capacity numbers may sound impressive, but the actual operating rates have been surprisingly low in both the US and Canada. In 2008, production was about 66% of capacity in the US and 81% of capacity in Canada, according the US Forest Service. Major reasons for the low rates include start-up problems for newly built plants, financial difficulties for some companies and a lack of affordable wood fiber supply. With increased demand for wood fiber, pellet manufacturers have increasingly had to accept higher-cost wood fiber sources than the commonly used sawdust from local sawmills. More pellet companies are now using wood chips that traditionally have been used by the pulp industry. Partly as a result of the expansion of the biomass sector, wood chip prices, sawdust prices and woody biomass prices have moved up in the US this fall. In the US Northwest, sawdust prices have gone up substantially the past five years. In 2004, average sawdust prices were US$28/odmt as reported by the North American Wood Fiber Review. These prices reached a peak of US$74/odmt in late 2008 and have since fallen, averaging US$64/odmt in the 3Q/09. The price increases that have occurred in Western US are likely to be seen in other regions experiencing rapid expansion of their pellet industries.

12 Timber Trends Page 12 Supply US Lumber Production Western Lumber Output Down 23.5% Through October 14 Western lumber production totaled billion board feet through October, down 23.5% compared with the first 10 months of 2008, according to the Western Wood Products Association. Production in the Coast region was off 19.0%, while Inland output was down 29.2% and production in the California Redwood region was down 37.9%. October production in the West totaled 990 million feet, up 4.8% from September and off 13.0% compared with the October 2008 total. Canadian Lumber Canadian Lumber Output Climbs 15 Canadian lumber production in October totaled 1.8 billion board feet, up 4% from September and the highest mark since last November, according to Statistics Canada. The British Columbia Southern Interior gained 20% month-tomonth; all of BC, as well as Nova Scotia, gained 10%. Only Quebec decreased from September. With a second straight monthly increase, year-to-date production reached 15.7 bbf, down 23% from last year. Output in British Columbia reached 8.1 bbf through October, down 22%. Alberta output declined just 10%, to 2.4 bbf. Logs Structural Panels APA Forecasts 2010 Rebound in Production 16 The APA-Engineered Wood Association is forecasting plywood production to increase 4% in OSB production is forecast to increase 14%, glulam timbers 8%, wood I-joists 35%, and LVL 25%. US and Canadian structural wood panel exports are expected to finish 2009 down 45% from Demand for structural panels from the residential construction, remodeling, and industrial markets are expected to see 2010 increases of 24%, 7%, and 5%, respectively. APA forecasts US housing starts to reach 665,000 units in Pulp and Paper US Paper, Board Output Reaches 2009 High but Still Down 6% Year-Over-Year 17 Showing slow yet steady signs of improvement, US paper and board output in October increased 2.5% and 170,000 tons sequentially from September yet was still down 6.4% and nearly 470,000 tons compared with October 2008 output, according to the American Forest & Paper Association. While October s output of 6.9 million tons was the highest monthly output so far this year and showed month-to-month improvement, the overall results for 2009 are down. Through the first ten months of 2009, production is off 12.9% compared with the first ten months of In terms of year-over-year percentage declines, paper grades fared worse than paperboard grades for the month. Total US paper output was down 15.6% year-to-date through October, and paperboard output was down 10.8% year-to-date. Pulpwood and Chips Some Southern US Mills Close to Running Out of Wood Due to Heavy Rainfall 18 Heavy rainfall in the US South is halting logging and drawing down wood inventory levels at some pulp and paper mills to dangerously low levels. Some mills are close to running out of wood, one contact said. The only factor taking some pressure off wood supply is mill maintenance shutdowns scheduled around the holiday period. Some southern market pulp producers are said to be having difficulty obtaining enough hardwood, which tends to grow in more rain-soaked lower topography. We have our fingers crossed we won t run out of wood, one containerboard contact said, noting more rain is forecast in what has been an unusually wet year with a series of storms moving across the South Central region since earlier last fall. Wood fiber prices are moving higher in the South Central region due to the near crisis conditions, according to the International Woodfiber Report. One contact in the Westside (Louisiana/Texas/Arkansas) said prices had recently moved up by as much as $4 to $6/ton. However, one contact Eastside (Mississippi/Alabama) told IWR, We re not throwing that kind of money at the mud, even though admitting the mill only had only a few days of wood inventory. Mills are hauling wood longer distances to get enough supply and in some cases setting up portable chipping operations in remote locations where wood is available. Demand Construction Spending to Drop 12.2% in 2009, 5.6% in Total construction spending in the US on an annual basis is forecast to fall 12.2% this year and 5.6% in 2010 before growing 7.6% in 2011 and achieving double-digit growth in 2012, according to IHS Global Insight. While the construction industry has been showing pockets of resurgence, particularly in the residential sector, nonresidential construction will continue declining for many quarters to come. Commercial construction, in particular, is forecast to post sharp year-on-year declines through 2010, overwhelming the developing strength in the residential

13 Timber Trends Page 13 sector and dragging annual total construction growth down into negative territory. The residential sector posted the first quarter-to-quarter increase since the beginning of 2006 and is forecast to grow 9.6% in 2010 on the strength of the single-family sector. The recent success in the single-family sector can be attributed to the first-time homebuyers tax credit which mainly affected existing home sales, helped stabilize home prices and boosted housing starts earlier in the year. The single-family sector is on the mend and expected to grow 4.1% in the fourth quarter compared with a quarter ago, though, on an annual basis, spending levels will be 22.1% lower. In 2010, single-family construction spending is forecast to grow at a recovery pace of 32.6%. Multi-family construction will fall 30.5% in 2009 and 47.0% in 2010 because of low prices in the single-family sector and tight credit in the commercial market. The commercial sector is forecast to drop 30.3% in 2009 and 28.2% in 2010, and return to positive annual growth in the second quarter Commercial activity is heavily encumbered by unemployment, which means lower occupancy rates, despite falling rents. All five components of commercial construction--office, lodging, automotive, retail, and warehousing- -will weaken in Office construction will continue to contract through the beginning of 2011 when vacant space is repopulated and employment growth gains momentum. Real construction spending on lodging is projected to fall 26.4% in 2009 and 33.9% in 2010 on an annual basis, the result of weak consumer spending and business investment. Housing US Prices of Existing Homes Post Fifth Consecutive Gain in October 20 US prices of existing homes rose 0.4% in October, posting a fifth consecutive monthly gain, according to the S&P/Case- Shiller home price index. The index was up 0.2% in September. The index was down 7.3% from October 2008, the smallest year-over-year decline since October Analysts said the index was one more sign that the housing market is stabilizing. 7.0 Comparison of Existing Single-Family Home Sales in the US with Changes in Existing Home Prices 25.0% Sales volume (millions, SAAR) % 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Change compared with one year ago Jan-95 Aug-95 Sources: NAR, Standard & Poors Mar-96 Oct-96 May-97 Dec-97 Jul-98 Feb-99 Sep-99 Apr-00 Nov-00 Jun-01 Jan-02 Aug-02 Mar-03 Oct-03 May-04 Dec-04 Jul-05 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08 Jan-09 Aug-09 SF home sales Case-Schiller index: 10 city composite (RHS) -15.0% -20.0% -25.0%

14 Timber Trends Page 14 New Home Sales Drop in November 21 New residential sales in the US totaled 355,000 in November, according to a release by the Census Bureau. This is 11.3% below the October rate of 400,000 and 9.0% below the November 2008 estimate of 390,000. The median price of a new home in November was $217,400, and the average price was $280,300. At the end of November, an estimated 235,000 homes were for sale, representing an inventory of 7.4 months at current sales rates. 1,400 Comparison of New Single-Family Home Sales in the US with Changes in the Median Real Price 0.07 Sales volume (thousands, SAAR) 1,200 1, Change compared with one year ago Sources: US Census Bureau, BLS Jan-95 Aug-95 Mar-96 Oct-96 May-97 Dec-97 Jul-98 Feb-99 SF house sales Sep-99 Apr-00 Nov-00 Jun-01 Jan-02 Aug-02 Mar-03 Oct-03 Median price change (RHS) May-04 Dec-04 Jul-05 Feb-06 Sep-06 Apr-07 Nov-07 Jun-08 Jan-09 Aug

15 Timber Trends Page 15 November Existing Home Sales Jump 22 US sales of pre-owned homes were at a seasonally adjusted annual rate of 6.54 million units in November, up 7.4% from October and up 44.1% from November 2008, according to the National Association of Realtors. The November pace was the strongest since February 2007, when sales hit 6.55 million units. The national median existing home price was $172,600 in November, 4.3% below the November 2008 median. The inventory of unsold pre-owned homes at the end of November was 3.52 million units, representing a 6.5-month supply at the current sales pace. 4,500 Inventory of new single-family and existing houses for sale 4,000 3,500 Houses for sale (SAAR, thousands) 3,000 2,500 2,000 1,500 1, New single family Existing Mar-09 Jun-09 Sep-09 Nov-09 Sources: US Census Bureau, National Association of Realtors US Household Formation is Down Sharply 23 The household formation rate in the United States is down. According to the 2009 Annual Social and Economic Supplement to the Current Population Survey (CPS), the number of households increased by 398,000 between March 2008 and March This was the smallest increase since 1983, and the second-smallest increase in the history of this statistic, which dates back to This sharp decline in the household formation rate explains why we have a housing glut despite the sharp contraction in housing starts during the past-three-and-a-half years. Indeed, the gross vacancy rate (the proportion of vacant housing units as a share of the housing stock) stood at 14.5% at the end of the third quarter, just below the 14.6% record high set in the first quarter of This despite housing starts setting record lows in 2008 and then again in 2009 (the 2009 number is a projection, since December s figures are yet to be determined). The recession is behind the slowdown in household formation. Hard times have forced many of those who have lost their jobs, their homes, or both to move in with family or friends. In addition to this, immigration is down. As a result, the number of persons per household, which had been dropping in recent decades, increased in both 2007 and The decline in household formation suggests that once the economy gets back on track, and job growth resumes, housing markets could tighten quickly as the formation rate increases, and housing starts could take off. In 2010, job growth, low inventory levels of new homes (currently at their lowest point since May 1971), and improving household formation should result in sustained increases in housing starts.

16 Timber Trends Page 16 Moody s Raises Outlook for US Homebuilding Industry to Stable from Negative 24 Moody s Investors Service raised the outlook for the US homebuilding industry to stable, saying it believes the sector will neither worsen nor improve significantly over the next 12 to 18 months. Although housing starts, existing-home sales and affordability are on the rise, the high number of foreclosures will continue to affect prices, according to Moody s. The sector s outlook could revert to negative if the government scales back on its support of the market, Moody s cautioned. Housing Starts Regain Some Ground in November 25 Nationwide housing production rose 8.9% to a seasonally adjusted annual rate of 574,000 units in November, according to figures released by the US Commerce Department. The gain represented a partial bounce-back from an exceptionally slow month for housing activity in October, and was largely attributed to a big increase on the multifamily side. Home builders remain very cautious about starting new homes, and overall housing production is still down on a threemonth average basis, noted NAHB Chief Economist David Crowe. Understandably, it will take some time for the newly extended and expanded home buyer tax credit to start boosting sales in individual markets just as it did the last time such an incentive was enacted. However, the fact that permits increased in November is a hopeful indication that the desired impact of the tax credit on housing demand may be forthcoming early in In the meantime, credit for new housing production remains extremely difficult to come by, posing significant obstacles to builders with viable projects. Single-family housing starts made up some of the ground they lost in October, posting a modest 2.1% gain to a seasonally adjusted annual rate of 482,000 units in November. Meanwhile, multifamily starts rebounded from an all-time record low in the previous month with a 67.3% gain to a seasonally adjusted annual rate of 92,000 units in November US Housing Starts Starts (thousands) Source: US Census Bureau

17 Timber Trends Page 17 Announcements Mendocino Redwood Assumes Ownership of PALCO 26 Mendocino Redwood will assume control of the PALCO lumber production site in Scotia, as well as its 210,000 acres of timber, most of which is prime redwood. Mendocino has said it will reduce timber harvest for at least years. Weyerhaeuser Announces Intent to Convert to REIT; Timing Under Consideration 27 Weyerhaeuser Company today announced that its board of directors has determined that conversion to a real estate investment trust (REIT) would best support the company s strategic direction. Our company will be enhanced by the REIT structure, said Dan Fulton, president and chief executive officer. This conversion will position us to be more competitive in our timberlands business. In addition, we are able to convert with our existing business mix of Timberlands, Wood Products, Cellulose Fibers and Real Estate. Chuck Williamson, chairman, said The board has not set a date for the conversion, but the earliest and most likely date would be for the year 2010 based on circumstances as we know them today. Factors the board will consider in determining the timing of converting to a REIT include the state of the economic recovery, changes in tax policy including shareholder tax rates and the distribution of earnings and profits required under tax laws for REIT election. By the end of the year of conversion, Weyerhaeuser must issue a special, taxable dividend to stockholders of its undistributed earnings and profits. As of the beginning of 2010, Weyerhaeuser expects earnings and profits to total just under $6 billion. Weyerhaeuser said it intends to pay a significant portion of the dividend in stock. This will require shareholder approval to increase the authorized number of shares at the annual shareholder meeting in April. Murphy to Buy Panel Products Shuttered Plywood Plant in Rogue River, OR 28 Murphy Co. of Eugene, OR, has signed an agreement to purchase Panel Products shuttered plywood plant in Rogue River for US$3.6 million. The sale still needs the approval of Jackson County Circuit Judge Mark Schiveley. Hampton Purchases Oregon Sawmill from Weyerhaeuser 29 Timberlands Sales Phaunos Timber Fund to Invest NZ$167M in Matariki Forestry Group in New Zealand 30 Phaunos Timber Fund Limited has signed an agreement to invest in Matariki Forestry Group, a private New Zealand company. The aggregate investment, by way of consideration for a share subscription and an investor loan, is NZ$167 million (US$117.6 m), and constitutes a significant stake in Matariki. Upon completion Phaunos will be the largest shareholder in Matariki. Completion of the purchase is conditional upon the approval of New Zealand s Overseas Investment Office and is expected to take place in the first quarter of Matariki is New Zealand s third largest forestry company, managing over 132,000 hectares of productive timberland (183,000 total hectares). The forests are comprised of six estates spread across the North and South Islands. The majority of the forests are radiata pine, sold to both the export and domestic log markets. Hancock Sells 22,000 Acres in Louisiana for $29 Million 31 Hancock Timber reportedly closed the sale of 22,000 acres of plantations in Louisiana for about $28.8 million, or $1,310 per acre. TNC Acquires 2,186 Acres of Alabama Forestland for US$3.6 Million 32 The Nature Conservancy has acquired 2,186 acres of vital forestland atop Lookout Mountain and adjacent to the Little River Canyon National Preserve in Cherokee County, AL. The $3.6 million purchase from Hancock Timber Resource Group is part of an on-going regional effort to protect sensitive freshwater and forest habitat in the Coosa River basin of northeast Alabama, northwest Georgia and southern Tennessee. Openings, Closings, Curtailments Arkansas Plywood Mill to Close Permanently 33 Georgia-Pacific Corp. s plywood mill in Fordyce, AR, will close permanently, according to the Associated Press. About a third of the plant s 340 workers could be rehired to help start up a plywood line at the company s Crossett, AR, operation. Hampton Affiliates, Portland, OR, has agreed to purchase Weyerhaeuser s sawmill in Warrenton, OR. The transaction includes the mill and its land. Terms of the transaction were not disclosed. The deal is expected to close in January. Hampton said the mill will be idled for nine to 12 months while machinery upgrades are made.

18 Timber Trends Page 18 Certification/Environmental/Bioenergy Forecast of Double-Digit Growth in Wood Pellet Markets in Next Five Years 34 Wood pellets are underpinning the emergence of a new commodities business in biomass. The key driver is bioenergy and Pöyry expects double digit growth in pellet markets over the next five years. These are the main findings of the study Wood Pellets The Bioenergy Feedstock Solution? Global market, players and trade to 2015 published by Pöyry Forest Industry Consulting, a leading global expert in bioenergy and biomass procurement strategies. The wood pellet market is immature and the reliability of data on trade, prices, production capacity and actual production varies considerably between countries. Through this study Pöyry hopes to establish an authoritative base of reliable data and analysis which can be used for strategic decision-making by existing or prospective market participants. The global wood pellet market is and will continue to be a growth area. The current and future demand for wood pellets is strongly driven by the world s need to develop renewable forms of energy and reduce greenhouse gas emissions. Global demand for wood pellets reached nearly 12 million tonnes in 2008 and is worth approximately 2 billion. Europe and North America accounted for 97% of global demand. The market has grown rapidly (CAGR 27% in Europe and 17% in North America from 2005 to 2008). However, these growth rates will slow as markets mature. Pöyry predicts that by 2015, global pellet demand will almost double, reaching approximately 24 million tonnes (CAGR of 10.5%). Development of the European wood pellet market has been largely driven by political targets to increase renewable energy usage. Such policy will continue to play a crucial role in the development of pellet markets in EU countries, and is expected to become a similarly important driver in North America. There are two main end-use segments: residential and industrial. The residential pellet business is local with regional trade, while industrial pellets are traded globally. Future trade flows will include industrial pellet shipments from Australia, South America and South Africa. Increasing demand for pellets in Europe and this year s decrease in ocean freight costs have created new opportunities for producers to export pellets from the US South East and recently Australia. However, prices for industrial pellets (which are considerably lower than residential pellets) have not risen greatly, and margins for many producers are under pressure because their raw material costs (sawdust, woodchips or in some cases logs) have risen. Logistical costs remain a threat, and are one reason for the recent closure of Dixie Pellets in the US (550,000 tonnes per annum capacity). An interesting development to watch will be torrefied pellets, which deliver significant logistical benefits compared with conventional wood pellets. Hannes Lechner, UK Head of Bioenergy, says: Compared with other forms of biomass, such as woodchips, the main advantage that wood pellets offer is the significantly higher energy content per unit of volume. This allows for greater transport efficiency over longer shipping distances, an advantage which could increase in importance as the sustainability or carbon footprint of such long distance trade routes comes under the spotlight. Another key advantage is the ease with which pellets can be incorporated into the existing coal-based power generation infrastructure. Pellets can typically be burned alongside coal with relatively minor modifications or capital outlay. Conferences, Overview Studies, & Reports Forest Nutrient Levels Using Satellite Technology 35 Advances in the use of satellite technology are allowing researchers to measure nutrient levels in Australia s forestry plantations more accurately. The use of remote sensing could also prove faster, cheaper and better from an occupational health and safety perspective than traditional methods, according to the findings of research on some Radiata pine plantations on the South Australian--Victorian border. We ve moved a step closer to being able to provide forestry managers with practical tools to help them plan more effective fertilizer applications and research programs, says Dr Neil Sims, CSIRO remote sensing research scientist and co-author of the project report. Radiata pine growth in southern Australia is often restricted by low soil fertility. Currently, forestry companies spend more than $10m annually checking nutrient levels and applying fertilizers. However, field samples may not adequately represent the range and distribution of nutrient concentrations across the wider plantation. If fertilizer is applied where it is not required, valuable nutrients can be lost through run-off and other natural processes and can find their way into local waterways where they can lead to environmental problems, such as undesirable algal growth.

19 Timber Trends Page 19 A FWPA funded project compared satellite image data with field measurements obtained from the same plantations. The project used hyperspectral satellite images to map concentrations of nitrogen, phosphorus, potassium, iron, zinc, copper and boron in radiata pine foliage and found the images could potentially provide accurate information across entire plantations. There is no other way to get data of this kind, says Sims. You still need to collect and test some field samples to calibrate the satellite data, but the satellite data can be used to direct the field sampling to the most undernourished areas and will also tell you about any problem areas in between your sampling points. Potential cost savings are substantial: images used in the project cost around $0.09 per hectare of plantation compared with $2 to $5 per hectare for airborne images taken from a plane. HVP Plantations manager Stephen Elms concludes: Remote sensing techniques have the potential to offer quicker and more comprehensive results than our standard field sampling practices. Study Quantifies the Economic Impact of Private, Working Forests in the US 36 A new study, commissioned by the National Alliance of Forest Owners (NAFO) and conducted by Forest2Market, quantifies the economic impact of private, working forests on the US economy. The study found a significant gap between the contributions made by privately-owned forests over other ownership types. On average, they generate $277,000 in state GDP per 1,000 acres, while public forests generate just $41,000 per acre. The study also concludes that every 1,000 acres of private, working forest creates 8 jobs, $270,000 in payroll, $9,850 in state taxes (income and severance taxes only) and $733,000 in annual sales. The study completes the picture of the contributions that working forests make, says David P. Tenny, President and CEO of NAFO. We all know that private, working forests provide clean water and air, open space, wildlife habitat, recreation, and other environmental benefits. This study demonstrates the significant economic benefits these forests provide: family waged jobs, a strong tax base, and the economic foundation of the forest products industry. They are fundamental to both the economic and environmental infrastructure of our nation. Results of the study are available using the interactive map on NAFO s website. The full study is available forest2market.com/f2m/export/sites/default/articles/economic-impact-of-working-forests.pdf. Resources RISI Launches North America Wood Biomass Website 37 RISI announced the launch of a new website-- to providing solutions to North America s emerging wood biomass industry. Woodbiomass.com provides a consolidated view of RISI s wood biomass knowledge and information, including market analysis and information, wood biomass feedstock pricing and information on newly announced wood biomass projects.

20 Timber Trends Page 20 References 1. WWPA via RISI, 12/10/ WWPA via RISI, 12/9/ Japan Lumber Journal via ForestWeb, 12/30/ WRI via ForestWeb, 12/7/ Prince George Citizen via ForestWeb, 12/4/ The Financial Post via ForestWeb, 12/3/ WoodWeek, 12/8/ ITTO, November 16-30, The Daily News via Jones Stevedoring, 12/28/ WRI, 12/30/ Forest2Mill News, 12/7/ ForestWeb, 2/12/ WRI, 12/11/ Random Lengths, 12/7/ Random Lengths, 12/28/ Random Lengths, 12/4/ AF&PA via RISI, 12/1/ RISI, 12/23/ IHS Global Insight, 12/15/ Random Lengths, 12/29/ US Census Bureau via RISI, 12/23/ Random Lengths, 12/22/ IHS Global Insight, 12/19/ Dow Jones Newswires via IndustryIntel, 12/17/ NAHB via Jones Stevedoring, 12/16/ RISI, 12/2/ Press release via Jones Stevedoring, 12/15/ Mail Tribune via ForestWeb, 12/10/ Random Lengths, 12/7/ Press release via ForestWeb, 12/24/ RISI, 12/17/ The Nature Conservancy via ForestWeb, 12/14/ Random Lengths, 12/10/ Press release via ForestWeb, 12/8/ Friday Offcuts, 12/11/ Forest2Mill News, 12/7/ RISI, 12/3/2009 One SW Columbia Street Suite 1700 Portland, OR Phone: Fax: