The Economy in Graphs

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1 Newsletter by: David Haim, PhD, Forest Economist Inside This Issue International Trade...2 Prices...3 Supply...6 Demand...8 Housing...9 Announcements Background Reading...12 References...14 Highlights Canadian lumber shipments to the US decline in May by almost 20 percent month-over-month as Canadian producers assess countervailing duties in late April Whitewood export sawlog prices have breached US$700/mbf in the Puget Sound region Prices for softwood pulpwood roundwood in the Pacific Northwest and the US South are diverging again Housing affordability continues to slide, though still high in historical terms The Economy in Graphs Residential construction continues to lead job growth in the construction sector

2 2 International Trade Exchange Rates The Canadian Dollar strengthens against the US Dollar to levels last seen more than two years ago, making Canadian lumber less competitive in US Dollar terms Trade in Wood Products Brazil Forestry sector exports exceed US$4 billion in 2017H1¹ In 2017H1, pulp exports grew by 6.8 percent compared with 2016H1, reaching 6.8 million tons whereas wood panels increased 34.8 percent with 597 thousand m³ directed to the foreign market. Paper stocks rose one percent with almost 1.1 million tonnes traded. This positive performance led to export earnings in excess US$4 billion in 2017H1, a 7.3 percent increase over 2016H1, contributing to the sector s trade surplus of US$3.6 billion, an increase of 9.1 percent.

3 3 Trade Issues Canadian lumber shipments to the US decline in May by almost 20 percent month-over-month as Canadian producers assess countervailing duties in late April Prices US Lumber North American commodity lumber prices continue to move in opposite directions

4 4 Pacific Northwest Coastal Log Values Whitewood export sawlog prices have breached US$700/mbf in the Puget Sound region Pulpwood and Chips US West Prices for softwood pulpwood roundwood in the Pacific Northwest and the US South are diverging again

5 5 Global Wood Prices Europe Wood fiber costs for European pulpmills slide in early 2017 to lowest levels in over five years² Wood costs for the pulp industry in Europe were generally lower in 2017Q1 than in 2016Q4, continuing a downward trend that, depending on the country, has lasted for 4-6 years. Largest price declines for pulplogs and sawmill residues in early 2017 occurred in Germany and France, according to the Wood Resource Quarterly. Price reductions occurred mainly because of an oversupply of pulplogs, unchanged demand for wood fiber from the pulp industry, and reduced usage of rawmaterial by the competing wood pellet sector. In neighboring Austria, conifer pulplog prices have been very stable during most of 2015 and 2016 (in Euro terms) and prices did not change much in 2017Q1. However, the weakening of the Euro against the US dollar has resulted in Austrian pulplog prices falling seven percent in two years. In the Nordic countries, wood fiber costs in 2017Q1 were at their lowest levels since 2006 (in US dollars). This was mostly thanks to the weakening of the local currencies in both Sweden and Finland. Wood fiber costs currently account for about 60 percent of the manufacturing cost when manufacturing pulp in the region, according to Fisher International, so a reduction in prices for pulplogs and wood chips has a major impact in improving the competitiveness of the pulp and paper industry when competing in the global market place. The pulp sectors in Portugal and Spain, which are the third and fourth largest consumers of hardwood logs in Europe, have also enjoyed a period of declining wood costs with price levels in early 2017 being percent below the fiber costs five years ago. Brazil Sawlog prices in Brazil have gone up over the past 12 months after five years in decline 3 In 2017Q1, pine sawlog prices in Brazil increased in both US dollars and in the Brazilian Real quarterover-quarter. Over the last 12 months, sawlog prices have gone up by 26 percent, according to the Wood Resource Quarterly. Most of the rise in prices has been the result of a stronger Real, but there have also been smaller upward price adjustments in the local currency because of higher labor and energy costs. The recent price increases follow a downward price trend that lasted for much of It is expected that sawlog prices will continue to increase in the coming months because of improved opportunities for Brazilian exporters of lumber, plywood and value added products such as doors and moldings to increase shipments overseas. During 2017Q1, pine lumber exports reached an all-time high and were equal to the annual export volume just five years ago. The countries that have increased imports of Brazilian lumber the most in the past year are, in descending order, the US, Mexico, China and Saudi Arabia. New Zealand New Zealand dollar gain impacts export log prices 4 New Zealand export log prices generally declined over the past month as a gain in the New Zealand dollar made the country s products less competitive. Most grades of New Zealand unpruned logs weakened by between NZ$1- to-nz$3 per tonne, with A-grade logs falling to NZ$124 per tonne, from NZ$127 per tonne the previous month, according to AgriHQ. Export pruned logs bucked the trend, edging up to NZ$164 per tonne from NZ$163 per tonne. Nearly all the weakness stemmed from the exchange rate swinging out of exporters favor, with the New Zealand dollar firming about seven percent against the US dollar since mid-may.

6 6 Wharfgate log values took a slight backwards step on last month, but as far as exporters are concerned, there s little to be worried about, AgriHQ analyst Reece Brick said in his report. Fortunately, the exchange rate is where the negative vibes end, Brick said, noting that overseas demand, shipping rates and oil prices remained favorable. All factors considered, sentiment through the log export sector is optimistic, Brick said. Wharfgate values are anticipated to stabilize or strengthen a little as the year progresses, with only currency movements casting a little doubt over medium-term prospects. Brick said there appeared to be no slowing in Chinese demand for New Zealand logs. In-market prices in China firmed through June and July to their highest level in more than three years, and the usual decline in activity during the summer months hadn t been noted this year, he said. Meanwhile in India, the implementation of a goods and service tax on July 1 temporarily hurt demand, but Indian ports appeared to be short on log volumes and the market is expected to settle back to its normal routine after a period of adjustment. In the New Zealand domestic market, values for all log grades reported by AgriHQ were either steady or slightly firmer. The pull of export markets is still too strong for mills to be able to bargain the market lower, Brick said. Many sellers are still finding a premium selling logs through the wharfgate, and it ll take a solid correction in this area for any reprieve to come to the market. Supply US Lumber US softwood lumber production 4.3 percent higher in 2017 through May compared with US sawmills produced billion board feet (bbf) of softwood lumber in the first five months of 2017, up 4.3 percent from bbf in the same period last year, according to the Western Wood Products Association (WWPA). Western US sawmills contributed bbf to the five-month total, up 0.4 percent from bbf a year earlier, while production at southern US sawmills was up 7.3 percent to bbf from bbf. Output 2017 through May 2016 through May US sawmills bbf bbf Western US sawmills bbf bbf Southern US sawmills bbf bbf In May alone, US sawmills produced bbf, up 9.8 percent from bbf in the previous year, and up 8.5 percent from bbf in April Western US sawmills accounted for of May s production volume, up 7.5 percent year-over-year from bbf, and up 13.3 percent from bbf in April Southern US sawmills contributed bbf to the monthly total, an increase of 11.7 percent from bbf a year earlier, and up five percent from bbf in April Output May 17 April 17 May 16 US sawmills bbf bbf bbf Western US sawmills bbf bbf bbf Southern US sawmills bbf bbf bbf

7 7 Apparent US softwood lumber consumption was bbf in the first five months, a four percent increase from bbf for the same period a year earlier. In May 2017, consumption was bbf- -up 1.2 percent from bbf in May 2016, and almost level with consumption in April 2017 of bbf. Source: WWPA via IndustryIntel, 8/10/2017. Western Lumber Production Western lumber production rises in June; year-to-date output slightly higher than Western lumber production in June totaled billion board feet (bbf), according to WWPA, up 1.4 percent over May and 4.2 percent over June Production in the Coast region of the West totaled 766 million board feet (MMbf), almost the same as in May but up 3.5 percent year-over-year. Inland production was 438 MMbf, up 4.2 percent from May and 4.7 percent over June of last year. Output June 17 May 17 June 16 Western US sawmills bbf bbf bbf Coastal sawmills 766 MMbf 765 MMbf 740 MMbf Inland sawmills 438 MMbf 418 MMbf 418 MMbf Year-to-date through June, Western lumber production totaled bbf, an increase of 1.1 percent over the same period last year. Coast production increased 1.8 percent while Inland production edged 1.4 percent higher. California Redwood production dropped 11.6 percent. Canadian Lumber Canadian softwood lumber production up 2.6 percent in 2017 through May compared with In the first five months of 2017, Canadian sawmills produced bbf of softwood lumber, up 2.6 percent from bbf for the same period a year earlier. British Columbia sawmills accounted for bbf of the five-month total, down 2.1 percent from bbf last year, while sawmills east of the Rockies produced bbf--a gain of seven percent from bbf a year ago. Output 2017 through May 2016 through May Canadian sawmills bbf bbf BC sawmills bbf bbf East of the Rockies sawmills bbf bbf Production volumes in May were bbf in Canada, up 6.4 percent year-over-year from bbf in May 2016, and up 5.3 percent from the previous month s output of bbf. Sawmills in British Columbia contributed bbf to May s production volume, up 1.3 percent from bbf in May 2016, and 3.4 percent higher than output in April 2017 of bbf. Sawmills east of the Rockies in May produced bbf, up 11.2 percent from bbf in May 2016, and up seven percent from production in April 2017 of bbf. Output May 17 April 17 May 16 Canadian sawmills bbf bbf bbf BC sawmills bbf bbf bbf East of the Rockies sawmills bbf bbf bbf

8 8 Brazil Productivity of sawnwood industry rises 8 There was a sharp slowdown in national sawnwood production in 2006, well-above the declines seen in other sectors. Most of the decline in output was due to falls in production from Amazon based mills. In the period there was a peak in sawnwood exports due to firm demand in international markets and the favorable exchange rate. The latest data indicate that productivity in the sawmilling sector (measured by ratio of production and number of workers) has increased gradually since 2015 which indicates those companies still operating are more competitive through optimizing their production capacity. It has been estimated that by the end of 2017, Brazil s production of sawnwood could be three percent higher than in Although modest, this represents marked change for a sector that has lagged in terms of raising productivity and competitiveness. Logs British Columbia Wildfires will have deep impacts on British Columbia forest industry according to a Professor from the University of Northern BC 9 A UNBC Professor fears the wildfires raging across BC will have significant impacts on forestry operators, especially smaller ones focusing on localized areas. That includes things like the community forests, First Nation tenures, the woodlot operators, some of those might be completely wiped out, says Professor of the Ecosystem and Science Management program Philip Burton. For others, it s a question of what proportion of both their timber that s immediately ready to cut, scheduled for cutting is affected and how much it will affect some of these future timber supplies; the growth we were counting on the next several decades that now has to be replanned and reinvested in. This year s fire season is already being called the worst in 60 years. Over 646,000 hectares have been consumed since April 1 st, which is more than double the size of the Greater Vancouver area. Burton believes this year s extensive fire season can t be blamed on the mountain pine beetle outbreak. This is mostly a function of the combination of the overall forest condition in terms of how dense forests are near communities, that s really what stands out this year, but also the prolonged drought that we ve been having. He says most of the evidence from research across North America indicates beetle-killed forests don t necessarily burn more frequently or extensively than those raging through green timber, although there is more severe fire behavior and burn intensities a decade later following the red-dead stage. As for recovery, Burton says it has to be taken in the context of the existing age class structure of the forest. Most of our natural, old growth forest started from fire and are well adapted to recover, but in fact many of our managed forests, and planted cut blocks from the past have burned as well too so this is a real setback for the forest industry where by the natural recovery processes will have to supplemented by replanting areas that great expense had gone into planting in the first place. Demand US construction spending falls as government outlays tumble 10 US construction spending unexpectedly fell in June as investment in public projects recorded its biggest drop since March 2002, suggesting a downward revision to 2017Q2 economic growth estimate. The Commerce Department reported that construction spending tumbled 1.3 percent to $1.21 trillion, the lowest level since September Spending in May was revised to show it rising 0.3 percent.

9 9 Housing US Housing affordability continues to slide, though still high in historical terms US housing starts slowed in July 11 US home building unexpectedly fell in July as the construction of single- and multi-family homes declined, which could temper expectations of a rebound in housing market activity in 2017Q3. Housing starts declined 4.8 percent to a seasonally adjusted annual rate of 1.16 million units, the Commerce Department reported. June s sales pace was revised down to 1.21 million units from the previously reported 1.22 million units. The report also showed a decline in building permits, suggesting that residential construction could struggle to regain momentum after contracting in 2017Q2 at its steepest pace since 2010Q3.

10 10 Homeownership rate bottomed out? 12 According to the Census Bureau s Housing Vacancy Survey (HVS), the US homeownership rate was 63.7 percent in 2017Q2, which is statistically no different from its reading of 63.6 percent in 2017Q1. The rate of homeownership appears to be stabilizing after reaching a cycle low of 62.9 percent in 2016Q2. It was 1.3 percent higher than a year ago and follows the first annual gains since the Great Recession recorded in 2017Q1 (0.2 percent increase). This may be a sign that the homeownership rate has bottomed out. million, the largest gain since However, the number of renter households declined by 700,000 last year, the first time decline since the Great Recession. Homeownership Rate (% NSA) Mar-90 May-91 Jul-92 Sep-93 Nov-94 National Homeownership Rate Jan-96 Mar-97 May-98 Jul-99 Sep-00 Nov-01 Jan-03 Compared to a year ago, homeownership increased among all age groups, with the largest gains recorded by millennials. The millennial homeownership rates increased 1.2 percent, followed by the households aged rose by 0.7 percent. This suggests that households, especially younger and middle-age homebuyers, are gradually returning to the housing market after the Great Recession. The nonseasonally adjusted homeowner vacancy rate remained low at 1.5 percent in 2017Q2, down by 0.2 percent from 2017Q1. At the same time, the national rental vacancy rate increased to 7.3 percent, compared to only 6.7 percent in 2016Q2. The housing stock-based HVS revealed that the number of households a key driver of housing demand--increased to million during 2017Q2. This is 0.6 million higher than a year ago. Indeed, the number of homeowner households rose by 1.3 Mar-04 May-05 Jul-06 Sep-07 Nov-08 Jan-10 Mar-11 May-12 Jul-13 Sep-14 Nov-15 Jan-17 Case-Shiller Home Price Index at new all-time high 13 The S&P CoreLogic Case-Shiller US National Home Price NSA Index, covering all nine US census divisions, reported a 5.6 percent annual gain in May, the same as the prior month. The 10-City Composite annual increase came in at 4.9 percent, down from five percent the previous month. The 20-City Composite posted a 5.7 percent year-overyear gain, down from 5.8 percent in April. Home prices continue to climb and outpace both inflation and wages, said David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices. Housing is not repeating the bubble period of : price increases vary across the country unlike the earlier period when rising prices were almost universal; the number of homes sold annually is 20 percent less today than in the earlier period and the months supply is declining, not surging. The small supply of homes for sale, at only about four months worth, is one cause of rising prices. New home construction, higher than during the recession but still low, is another factor in rising prices.

11 11 China Real estate development still heading upwards 14 Real estate investment growth increased in June after slowing in May according to data in a press release from China s National Bureau of Statistics (NBS). Investment proved unstoppable despite government measures to slow the pace of increases in property prices. The NBS reports total investment in real estate in 2017H1 was RMB 5,061.0 billion up 8.5 percent yearover-year of which investment in residential buildings was RMB 3,431.8 billion up 10.2 percent. In 2017H1 the area of land purchased by real estate development enterprises totaled million square meters, up 8.8 percent year-over-year and total transactions were worth RMB billion, 38.5 percent higher than in 2016H1. Mortgage lending conditions are still rather easy and analysts comment that it seems the recent bit of tightening of credit urged by the government is over. While the government worries about the housing bubble it is also concerned about maintaining growth, the housing market is a cornerstone of economic growth. Announcements West Fraser to purchase six more southern yellow pine sawmills 15 West Fraser Timber Co. Ltd. announced that it has entered into an agreement to acquire the operations of the Gilman Companies from the Howard Gilman Foundation and other shareholders for approximately US$430 million, subject to certain post-closing adjustments. The Gilman Companies are comprised of six sawmills and a finger-joint mill in Florida and Georgia. The transaction, which is also subject to US regulatory approvals and customary conditions, is anticipated to close in 2017Q3. The operations employ approximately 900 people and have a combined annual production capacity of 700 million board feet of lumber. All of the mills produce lumber from southern yellow pine.

12 12 Bioenergy Fiber costs for pellet plants in North America have trended downward over the past year 16 Wood pellet manufacturers in North America consume wood fiber from a variety of sources with different price levels, trends and cost drivers. The WRI pellet feedstock price indices for Canada and the US (PFPI-US and PFPI-CA) have trended downward the past few years and reached record lows in both countries in 2017Q2. The PFPI-US has fallen 15 percent from its peak in 2013Q3 to 2017Q2. Slightly declining roundwood prices, plummeting sawdust costs, and a change in the feedstock mix towards lower cost residuals in both the Gulf States and the Atlantic States were the major reasons behind the decline in the PFPI-US Index the past year. A snapshot of the various feedstocks currently being used by the US export pellet sector shows 50 percent was roundwood in 2017Q2, followed by significant volumes of sawdust and shavings, and an increasing supply of forest microchips. The Canadian price index, PFPI-CA has fallen more than the US index (in US dollar terms), mostly because of the weaker Canadian dollar. However, wood fiber costs for pellet manufacturers have also fallen slightly in Canadian dollar terms because of lower costs for logs the past few years. From its record high in early 2013 to the 2017Q2, the PFPI- CA declined 26 percent. The lower indexed price in 2017Q2 primarily reflected the falling costs of sawdust and shavings and incremental increases in the usage of these feedstock forms over higher cost roundwood. Background Reading New standard for plantation forestry in New Zealand 17 A new nationwide set of environmental rules for managing New Zealand s 1.7 million hectares of plantation forestry will better protect the environment and deliver significant savings in compliance costs, Minister for the Environment Dr. Nick Smith and Associate Minister for Primary Industries Louise Upston say. Forestry is New Zealand s third largest primary industry but its efficiency is hampered by the confusing mix of planning rules across New Zealand s 86 councils. The strength of this national approach is that it will better protect the environment while also improving the productivity of the forestry sector by applying consistent environmental standards to reduce operational costs, Dr. Smith says. A major change with these new regulations is the development of three new tools for managing the environmental impacts from forestry, covering the issues of erosion, wilding pines and fish spawning. The benefit of these tools is that the restrictions on forestry activities are related to the environmental risk rather than which council area a forestry operation is in. This change is particularly important as 80 percent of forest owners manage forests in multiple council areas. This new national forestry standard is part of the Government s broader Resource Management Act reforms, facilitated by amendments passed in May this year. Ms. Upston says the forestry industry will benefit from having a set of consistent regulations to operate under. Planning rules at local government level are subject to regular reviews and there could be as many as three sets of regional or district plan rules. Some large forests also cross local government boundaries, resulting in different rules for the same forest. Removing this uncertainty will encourage greater investment in a significant contributor to our economy, especially at regional level. Forestry employs more than 26,000 people and exports total more than NZ$5 billion a year. The standard will come into force on 1 May, 2018.

13 13 NCREIF Timberland index returned 0.70 percent in 2017Q2, down from 0.98 percent a year ago 18 The NCREIF Timberland Index returned 0.70 percent for 2017Q2, down from 0.76 percent in 2017Q1 and 0.98 percent in 2016Q2. The EBITDDA return, at 0.62 percent, was essentially flat in comparison to 0.63 percent in 2017Q1 and 0.61 percent in 2016Q2. After a flat year for appreciation in 2016, timberland has only had marginal appreciation in 2017H1, at 0.13 percent in 2017Q1 and 0.08 percent in 2017Q2. The Northwest led regional returns in 2017Q2 by a wide margin with a 1.47 percent total return, followed by the Lake States at 0.57 percent. The South and Northeast total returns, at 0.48 percent and negative 0.32 percent respectively, were limited by depreciation in 2017Q2 Timberland market value per acre rose to $1,824 in 2017Q2, which is the highest valuation since 2009Q3. The Northwest supported the increase with a jump to $2,778 per acre in 2017Q2 from $2,678 in 2017Q1 and $2,586 in 2016Q2. South market value per acre has been relatively steady at about $1,780 since The Northeast ($1,181) and Lake States ($711) saw little movement in values in 2017Q2, but regional values per acre were down 5.1 percent and 2.4 percent, respectively, over 2016Q2.

14 References 1. Ibá via IndustryIntel, 7/31/ WRI, 8/15/ WRI, 8/3/ Scoop via Friday Offcuts, 7/28/ WWPA via IndustryIntel, 8/10/ WWPA via RISI, 8/9/ WWPA via IndustryIntel, 8/10/ ITTO, 1-15 August, myprincegeorgenow.com via Tree Frog News, 8/14/ Random Lengths, 8/1/ Random Lengths, 8/16/ NAHB, 7/27/ S & P CoreLogic via Builder Pulse, 7/25/ ITTO, July, Press release via IndustryIntel, 7/26/ WRI, 7/27/ WoodWeek, 8/8/ NCREIF via IndustryInel, 7/27/2017 Disclosures The information in this document is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. No representation, warranty or undertaking is given as to the accuracy or completeness of the information and opinions contained herein. No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness and nothing contained herein shall be relied upon as a promise or representation as to future performance. Certain information in this document has been derived from materials furnished by outside sources. Although that information has been obtained from sources reasonably believed to be reliable, Campbell Global, LLC does not guarantee its accuracy, completeness, or fairness. Any forecasted timber growth, timber harvest activity, timber consumption patterns, timber prices, future macroeconomic measurements, opinions, and estimates set forth herein are presented for informational purposes only and involve a number of assumptions that may not prove to be valid and may change without notice. Certain information contained in this document constitutes forward-looking statements, which can be identified by the use of forward-looking terminology such as "may," "will," "should," "expect," "anticipate," "target," "project," "estimate," "intend," "continue," or "believe," or the negatives thereof or other variations thereon or comparable terminology. The projections and forward-looking statements included herein are subject to risks, uncertainties, and assumptions. Some important factors that could cause actual results to differ materially from those in any forward-looking statements include the following: changes in financial, market, and economic or legal conditions, among others.