Globalization Trends and Housing: Impact on the U.S. Forest Products Industry. Globalization Issues

Transcription

1 Globalization Trends and Housing: Impact on the U.S. Forest Products Industry Forest Products Industry Conference September 7 8, 27 Virginia Tech Blacksburg, VA Al Schuler USDA Forest Service ( aschuler@fs.fed.us ) VT_Industry_Conference Global ization Trends and Housing - September 27 Globalization Issues We are evolving toward a single world market For labor, capital, goods, and services why communication and transportation technologies Have lowered the cost of moving information, goods, and services across distance Significance: Distance is less of an obstacle to competing e.g., promotes outsourcing and other competitive strategies that were not previously Feasible exposes companies/industries to more Intense competition

2 Paradigm Shift Required As More Wood Product Markets Go Global Competition we have new global competitors the cheese has moved Forestry shift in comparative advantage from Northern hemisphere to Southern hemisphere ( cheaper factors of production; faster growing trees) Economic activity shifting to Asia Strategic renewal needed new business model (s) Challenge today Forest products industry must adapt to change because our customers are adapting with or without us!! Skills, education, marketing, and flexible manufacturing, supply chaining, become increasingly important for success and don t forget the customer - make sure you know what your key customers want and are willing to pay for!!! Housing Issues (1) Current market what went wrong (2) Why things will get better (3) Subprime mess should not derail the economy ( i.e., don t panic about the credit markets) credit is important, but jobs are more important

3 (1) Impact of global competition Domestically-produced shares* of U.S. consumption declined for most wood products from 199 to 25 1% 8% % 4% 2% % Paper & Board OSB & Plywood Softwood Lumber *Consumption Value = P + I E Import share = I / C Domestic share = 1. ( I / C) HH Furniture Hardwood Lumber Hardwod flooring Hwd & softwd molding Sources: Shipments : Dept Commerce, Bureau Census, ASM Imports & Exports : FAS Forest Products Trade $2 $18 $16 $14 $12 $1 $8 $6 $4 $2 $ Billion US$ U.S. = 17% World Trade Imbalance, Billion $ $ -$ $4 -$6 -$8 -$1 Imports $31.9 billion -$12 Exports 16.8 billion -$14 Deficit $15.1 billion -$16 -$18

4 Hardwood market trends why are kitchen cabinets bucking the trend?? 6% 5% 4% 3% 2% 1% % 1992 U.S. Import Market Shares Household furniture Office & upholstered furniture Moldings 23 Hardwood flooring Kitchen cabinets 25 *These market shares are conservative because some imported components and finished furniture is included in the domestic shipments Consumption = shipments + imports exports. Import share = imports/consumption Source: Census, ASM; ITA ( Wood HH Furniture Imports (Billion US$) $12 $1 $8 $6 $4 Mexico Indonesia Viet Nam Canada Malaysia Taiwan CHINA Total $2 $ 26(E) Sources: U.S. Commerce, Bur. Census, Intl. Trade Adm., Wash., DC

5 U.S. Hardwood Lumber Consumption Trends BBF 5 Residential markets are now 2.5 times the size of furniture markets Furniture Industrial Construction & Remodeling* Exports * flooring, millwork, trusses, cabinets, & fabricated wood members Source: Bill Luppold, USDA FS U.S. Softwood Lumber Market Imports absorbed almost all the growth in demand* as production remains flat BBF U.S. Production Demand Imports are 39% of demand Other South West Demand* = domestic consumption plus exports Source: Russ Taylor, SFPA

6 Softwood lumber imports from Canada are huge, but non-canadian imports are growing... 3 BBF Softwood Lumber Imports Canadian Non-Canadian Big shifts in framing lumber trade with Europe (in wides and narrows) began in the late 199s... (a quality issue) Million BF EC to US US to EC Source: RISI, USDA FAS Similarly, in structural panel markets, imports absorbed almost all the growth in demand...as production remains flat BSF U.S. Demand* U.S. OSB + Plywood Production Imports (~3% of Demand) *Demand = domestic consumption plus exports Source: RISI, R. Taylor

7 Plywood is coming from Brazil, and OSB from Canada... Billion Square Feet (3/8 ) 3. Softwood Plywood 12 OSB Canada Brazil Chile China Other Canada 21 Other Source: APA In the last decade, global growth in pulp production shifted to low cost regions -- low-income countries in Asia, Eastern Europe, or countries in Latin America with low wood costs Bleached hardwood Kraft Market Pulp Manufacturing costs : US$/ADMT $35 $3 $25 Number of mills $2 2 $15 $1 $5 $ 1 9 Latin America Asia Other Canada Europe USA Source: Peter Ince, USDA Forest Service

8 (2) Fiber/Forestry Issues Demand for fiber is changing from pulp & paper to engineered wood products and biofuels??? Plantation acreage increasing - Lots of wood becoming available world wide - With more EWPs, fiber requirements are less quality based and more quantity based Land sales from Industry to TIMOs/REITS - Impact on U.S. forest products industry?? Bioenergy opportunity for low grade hardwood fiber?? Impact on sustainable forestry in USA???? With EWPs, fiber requirements are less quality based and more quantity based plantations are now 4% of global industrial roundwood supply in <2 years, +5%

9 Fiber grows faster outside North America Source: Klabin Source: Klabin

10 U.S. Timberland Ownership by Integrated* Companies ( acres) Company 26 27p LP Boise Cascade Bowater MeadWestvaco Temple-Inland IP Potlatch Rayonier Weyerhaeuser GP stimber Co.* Total 945 2,34 1,8 3,4 2,2 12,25 1,545 2,1 5,7 4, 36, , ,14 2,2 9,185 1,15 2,5 7,3 28,8 2, ,15 2,5 6,8 1,455 2,3 6,4 23, ,118 1,99 6 1,46 2,18 5,64 13,238???? 2 1,5 2,4 5,64 ~1, * I included GP s Timber Co. as an integrated Co. ( A. Schuler USDA) Source: RISI (3) Center of Economic Activity Shifting to Asia Food for thought By 225: U.S. population will equal 36 million China s middle class will equal 8 million India s middle class equal 6 million i.e., the combined middle class in India and China Will be almost five times the U.S. population

11 World Economies in 3 years (in 237) 6 5 $ trillion 4 China 3 2 USA 1 Germany & UK Source: NAR GDP at Market Exchange Rates and PPP Billion US$ On a PPP basis, China is almost as large as USA!!! $14, PPP* $14, Market Exchange Rate $12, $12, $1, $1, $8, $8, $6, $4, $2, $ China India USA $6, $4, $2, $ PPP exchange rates adjusted to equalize cost of goods in different countries 26 China India USA Source: IMF

12 Per Capita Wood Consumption Lots of potential to export more wood products to China Affluent population today ~13 million - ~$4, income (PPP) By 211, lower middle class ~ 29 million people with income ~ $16, By 225, upper middle class ~ 52 million people cubic meters per capita China World OECD USA Source: China Timber Import Export Co/Hardwoodmarkets.com 23 China and US Consumption of Wood Products in 23 World Consumption Share 35% 3% 25% 2% 15% 1% 5% % China Roundwood Wood based panels Paper & Paperboard Sawnwood Pulp U.S. Source: FAO

13 (4) Housing Market Comments (1) Critical for softwood products lumber & panel prices have followed housing downward (2) Becoming increasingly important for hardwood industry (3) What went wrong with housing demand? (4) Why the next decade will be even better than the past decade Note: The credit crunch is a current problem - it will delay the housing recovery, but will not derail the economy subprime ~ 1% of overall real estate market 65% of the economy is consumer spending which is driven by the job market i.e., jobs = incomes = spending Key trend to watch consumer confidence Components of a Housing Recovery* Positives: Household growth of 15 million during , an increase of 27% with the 11.8 million during Employment growth still strong 2 million net payroll gain in past 12 months Income growth remains strong Mortgage rates still very attractive by historical standards the average rate during - 26 was 6.5% - today it is 6.7% ( in 1981, it was 16.63%) Negatives: Inventory of homes a problem at 7.5 months for new homes and 9.6 months for existing homes; compared with the 199 s, this is 3% higher for new homes and 45% higher for existing homes Credit issues tighter standards will add to inventories and delay the recovery Home prices a two edged sword lower prices will improve affordability thereby increasing demand will also reduce refi activity thereby reducing consumer spending * Source: RISI and USDA Forest Service, August 27

14 Softwood Markets 26 U.S. Softwood Lumber 62.3 BBF (144 million Cubic Meters) 26 U.S. Structural Panels 4. BSF(3/8) (36 million Cubic Meters) R&A 31% NR 3% Industrial 22% New Residential* 43% Export 1.5% R&A 21% NR. 4% Industrial 2% Export 1.5% New Residential* 53% *New Residential incl. SF, MF, and Mobile Homes Source: RISI, 27 U.S. Hardwood Lumber Consumption Trends BBF 5 Residential markets are now 2.5 times the size of furniture markets Furniture Industrial Construction & Remodeling* Exports * flooring, millwork, trusses, cabinets, & fabricated wood members Source: Bill Luppold, USDA FS

15 U.S. Economy in 26 Non residential investment 1.6% Government spending 19% Net Exports (- 6)% Consumer spending 7% Residential Investment ( incl R&A) 5.8% Source: BEA ( ) Jobs and Incomes Drive U.S. economy Both are Solid 12-month payroll job changes in millions Income Growth Remains Strong Jan Jul 21 - Jan 21 - Jul - Jan - Jul 23 - Jan 23 - Jul - Jan - Jul 25 - Jan 25 - Jul 26 - Jan 26 - Jul 27 - Jan 27 - Jul $12, $11,5 DPI, Qtr, SAAR, Billion $ $11, $1,5 $1, $9,5 $9, $8,5 $8, $7,5 $7, Source: BLS, BEA

16 Mortgage Rates Have Never Been Better Thanks to Low Inflation Driven by Globalization and Demographics (Aging Population) 18% 16% 14% 12% 1% 197s 9% average 198s 13% average 199s 8% average s 6.5% average 8% 6% 4% 2% % year fixed mortgage CPI annual rate Source: Mortgage - Freddie Mac, CPI - Bureau Census Home prices and incomes must trend together - when price outstrip ability to pay ( incomes) house prices must come down Income and Price set to Index of 1 in 199 HPI*, Qtr, year over year (YOY) Not sustainable Sustainable % 14% 12% 1% 8% 6% 4% 2% New home price Existing home price Incomes % *HPI house price changes in repeat sales or refinancing Of the same single family properties OFHEO ( )

17 Since the 195 s, U.S. house prices have tracked inflation, but, since 1995, prices have risen 7% Over and above inflation why? Cheap money; speculation; sub prime lending; lack of regulations;.. International Home Price Growth (1997 to 25) U.S. price growth 74% Spain 14% U.K. 15% RISKIER MORTGAGE PRODUCTS Ireland 18%

18 Inventory Problems Months supply new homes Dec. '3 Dec. '4 Existing home inventory, millions 4.6 month supply Dec. '5 Dec. '6 Jan. '7 Feb. '7 9 month supply Mar. '7 Apr. '7 May '7 June '7 July '7 Source: U.S. Census Bureau, New Residential Sales, CB6, Table 1. Lumber and Panel Prices Follow Housing and, stumpage prices track lumber prices Starts ( Million units) Price, $/M $7 $6 $5 $4 $3 $ Starts Lumber ( FLC) PanelPanels ( SPC)

19 Building Material Price Trends: % PPI, Year over year percent changes 3% 2% 1% % -1% "3/4" "4/5" "5/6" -2% -3% -4% Softwood Lumber Hardwood Lumber Plywood OSB Housing Demand Drivers this decade will be better than last decade 25 Thousand units '76 - '85 '86 - '95 '96 - '5 '6 - '15 Demographics & Immigration Removals* *Removals replacing homes That are beyond their economic life Vacancies, 2nd Homes & Speculation Source: NAHB ( Sept 6)

20 U.S. Immigration Trends Legal* Immigrants per year 1,2, 1,, * It is estimated that there are 1 15 million illegal immigrants in the U.S. today and they buy homes too 8, 6, 4, 2, Source: Immigration & naturalization service Expect Strong Remodeling Market for Decades 126,, housing units with median age of 35 years Average annual spending per unit, 25 ( 25 $) $2,6 $2,4 $2,2 $2, $1,8 $1, "12-16" "6-11" $1,4 $1,2 $1,

21 Market size - New Construction vs Remodeling Remodeling becoming increasingly important & is the key market for hardwood components Billions 25 dollars Remodeling share of residential investment $5 $ % 46% 45% 45% 47% $ % 42% 42% $ % 4% $ Remodeling New constrcution 38% 36% Source: Harvard JCHS 27 (5) New business models should add value, (customize) by focusing on the customer U.S. is a high wage country and Globalization is making it increasingly difficult to make money selling only product have to add value via customization, services, installation goal is happy (and profitable) customers Many wood product industries are production oriented we produce what is right for the plant domestic auto industry is perfect example of what can go wrong when you forget the customer Look at homebuilding industry for clues how they are responding to labor shortages how the supply chain is responding to need for new products by the homebuilders - goal is happy (and profitable) customers Future for hardwood and softwood industry is adding value throughout the supply chain?

22 4 Labor Demographics forcing changes in Residential construction Annual demand for selected occupations ( net replacement plus growth) in thousands ( 214) How does impact my business??? Net Replacement Demand Growth Carpenters Plumbers/pipefitters Electricians laborers Masons (brick, stone) Painters Roofers Drywall installers Source: U.S. Bureau of Labor Statistics, Occupational Projections and Training Data ( ). Homebuilding Methods Based on Wall Structure How does impact demand for my products? 1, Units Stick Built 1,146 78% 1,365 7% 1,413 68% Panelized 115 8% 26 13% 27 13% Masonry 145 1% 26 13% % Modular 45 3% 43 2% 43 2% Steel Frame 1 1% 9.5% 17.8% SIPs 5.3% 9.5% 1.5% Other 8.5% 1.5% 2 1% Total 1,474 1% 1,956 1% 2,68 1% Manufactured % 13 6% 147 7% Grand Total 1,828 1% 2,86 1% 2,215 1% Source: Estimates by APA-The Engineered Wood Association. Based on wall construction. Percentages may not add to 1% due to rounding. Other includes post & beam, logs and other. July, 26

23 Using more factory built to reduce waste, labor cost, & cycle time less lumber per SF for each house Factory Built Walls and Glulam Beams LVL(Laminated Veneer Lumber) and OSB factory built wall panels Source: APA Implications of skilled labor shortages Builders demand supplier installation services including complete framing The use of prefabricated components and systems is increasing Supply chain management is increasing ( value added service, price smoothing, information systems) Same story in non residential construction Trusses Engineered wall panels

24 Engineered wood plants doubled in past 15 years.. They can use smaller trees and some hardwoods # Plants Growth: Environmental pressure. Consistent quality. Fewer callbacks. More consistent price. Less jobsite waste Glulam LVL I-Joist PSL OSL/LSL Source: APA, April 7. Increasing Scale Economies for North American OSB and Lumber If you re staying in commodities, better get bigger 45 OSB Average mill capacity, million SF(3/8 ) 9 Sawmills Average capacity, million BF Source: APA Source: H. Spelter, USDA

25 Conclusion - - Add Value by Coupling Customized Products & Services while Diversifying Geographically Wood products industry needs to diversify from current heavy emphasis on domestic commodity markets Housing will bounce back, offering excellent opportunities in new construction and remodeling Globalization is lifting many boats --growing middle class in China and India is substantial over 3 million in China and India combined ( = U.S. population) opportunity to export quality wood products Competitive strategies no silver bullet different strokes for different folks add customized services to products (1) vertical integration; (2) fragmented companies and value chains (some outsourcing); consolidation/cost cutting for the commodity crowd; and (3) cluster economies Your strategy should be based on what you can do better than anyone else!!!!!