The Global Economy and It s Impact on Lumber Prices. Charles D. Ray The Pennsylvania State University January 16, 2012

Transcription

1 The Global Economy and It s Impact on Lumber Prices Charles D. Ray The Pennsylvania State University January 16, 2012

2 The End of the World and It s Impact on Lumber Prices Charles D. Ray The Pennsylvania State University January 16, 2012

3 No Trend is a Good Trend Will there be any change in industrial softwood markets in 2012? It s not likely. Will there be any big moves in low-grade hardwood markets in 2012? I don t see them on the horizon. - Jeff McBee, Pallet Enterprise, December 2011

4 Lumber Price Forecast Scenarios Base assumptions: Housing stays on current track; slight increase driven by apartment construction No lumber-specific trade/housing policies enacted this year International Paper continues to run Temple-Inland sawmills Wood-based energy demand slackens due to natural gas/oil development No massive natural cataclysms or international wars in 2012 Chinese growth continues at a slowing pace Russian lumber imports and exports increase slightly due to WTO admission

5 Lumber Price Forecast Baseline Assumptions Scenario Axis Title Oil Price US RL Comp Economy Coast 2x /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/01

6 Prosperity, Chinese Style An Update

7 Chinese Economy struggles to hang on Real estate bubble has burst

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11 Chinese Economy struggles to hang on Real estate bubble has burst Inflationary pressures mounting

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13 Chinese Economy struggles to hang on Real estate bubble has burst Inflationary pressures mounting High-speed rail turns into magnificent boondoggle

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15 Chinese Economy struggles to hang on Real estate bubble has burst Inflationary pressures mounting High-speed rail turns into magnificent boondoggle Credit crisis rising

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17 Chinese Economy struggles to hang on Real estate bubble has burst Inflationary pressures mounting High-speed rail turns into magnificent boondoggle Credit crisis rising (No) Smoke and mirrors

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20 So China s economy is flattening. The rest of the world is already there, and has been there for a while.

21 Guess how much the Italian economy has grown in the last 10 years? Zero net average wages in France have gone up since 1975? Zero net new employees the Japanese have added to the workforce in the last 20 years? Zero

22 Guess how much the average hourly wage in the US has gone up since 1975? Zero the real, private sector economy of the US has grown in the last decade? Zero US housing and household wealth has increased since the beginning of the 21st century? Zero

23 Inflation-adjusted wage growth

24 Forecast Scenarios, US Housing Starts 3000 New Residential Starts (000) Jan-59 Jan-63 Jan-67 Jan-71 Jan-75 Jan-79 Jan-83 Jan-87 Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11 Jan-15 Jan-19 Jan-23 Actual Worst Case Moderate Case Best Case PSU Wood Operations Laboratory, 2011

25 Lessons Learned: What happened in 2011 "Is there any point to which you would wish to draw my attention?" "To the curious incident of the dog in the night-time." "The dog did nothing in the night-time." "That was the curious incident," remarked Sherlock Holmes.

26 Lumber Price Forecast Scenarios Scenario 1 Assume optimistic housing upturn Prediction: Significantly higher lumber prices Result: Didn t happen Scenario 2 Assume housing starts stay depressed Prediction: Lumber prices slump Result: That s what happened

27 Lumber Price Baselines 400 Scenario 2 - Oil to $110 by 2012; US Housing Scenario Worst Case, Chinese Economy Stays Strong. RL Composite to $270, Coast 2x4 to $ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/01 Axis Title 2011/07/ /09/ /11/ /01/01 Oil Price US RL Comp Coast 2x4 US Comp CDR Worst Coast 2x4 CDR Worst

28 Scenario 2 - Oil to $110 by 2012; US Housing Scenario Worst Case, Chinese Economy Stays Strong. RL Composite to $270, Coast 2x4 to $ Chart Title Composite index follows oil price trends WC Economy grade doesn t /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/01 Axis Title Oil Price US RL Comp Coast 2x4 US Comp CDR Case 2 Coast 2x4 CDR Case 2

29 3000 Housing Starts vs Lumber Prices Housing Starts (000's) $/mbf Jan-59 Jan-63 Jan-67 Jan-71 Jan-75 Jan-79 Jan-83 Jan-87 Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11 Jan-15 Jan-19 Jan-23 Composite Lumber Prices at 2.5% annual inflation 2x4 Coast Economy at 2.5% annual inflation PSU Wood Operations Laboratory, 2011

30 A look at the world as we enter 2012 China s economy is still growing, but at a slowing rate. Equity bubble is now acknowledged, and non-food commodity consumption is being cut back.

31 And industry expectations are that the current Chinese lumber buying spree will continue Chinese total lumber imports, actual and forecasted 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 10,000,000 5,000,000 5,000, History (m^3) Forecast(m^3) PSU Wood Operations Laboratory, 2010

32 U.S. Diesel Fuel and Crude Oil Prices dollars per gallon Price difference Retail diesel fuel Crude oil Forecast 0.00 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Crude oil price is average refiner acquisition cost. Retail prices include State and Federal taxes. Source: Short-Term Energy Outlook, December 2011

33 Galv vs. #1 Busheling $1, $1, $1, $ $ $ $ $0.00 Pmag - Galv AMM - Galv CRU Galv AMM #1 Busheling

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35 Typical Pallet Recycler Costs, per Pallet Trip Total Pallet Cost - $5.03 per Pallet Trip Other non-overhead cost per pallet trip, $0.11, 2% Facility/Overhead cost per pallet trip, $0.92, 18% Raw material cost per pallet trip, $1.96, 39% Supplies/Fuel per pallet trip, $0.43, 9% Equipment Depreciation/Rental per pallet trip, $0.20, 4% Total labor cost per pallet trip, $1.42, 28%

36 A look at the world as we enter 2012 China s economy is still growing, but at a slowing rate. Equity bubble is now acknowledged, and non-food commodity consumption is being cut back. The ECB is weakening the Euro through monetary policy, forced to do so to prop up EU banks, unsustainable countries, and social programs

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41 As the European banking crisis deepens, the deleveraging of the European global banks will have far-reaching implications not only for the Eurozone, but also for credit supply conditions in the US and capital flows to the emerging economies. Just as the expansion stage of the global banking glut relaxed credit conditions in the US and elsewhere, its reversal will tighten US credit conditions. - Shin, H.S., Global Banking Glut and Loan Risk Premium, Princeton University, 2011 IMF Annual Research Conference, November 10-11, 2011

42 A look at the world as we enter 2012 China s economy is still growing, but at a slowing rate. Equity bubble is now acknowledged, and non-food commodity consumption is being cut back. The ECB is weakening the Euro through monetary policy, forced to do so to prop up EU banks, unsustainable countries, and social programs US housing market still stuck on the bottom

43 Currently, there is an upbeat mood in the media about recovery. But optimism seems to based on higher numbers in retail spending and the stock market, not on durable goods. Housing remains mired in a seemingly endless swamp.

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46 National Association of Home Builders, 12/29/11

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48 Actual home sales numbers tell the story of an economy on life support Home Sales per Month (thousands) West South Midwest Northeast 20 0 Jan 1973 Feb 1974 Mar 1975 Apr 1976 May 1977 Jun 1978 Jul 1979 Aug 1980 Sep 1981 Oct 1982 Nov 1983 Dec 1984 Jan 1986 Feb 1987 Mar 1988 Apr 1989 May 1990 Jun 1991 Jul 1992 Aug 1993 Sep 1994 Oct 1995 Nov 1996 Dec 1997 Jan 1999 Feb 2000 Mar 2001 Apr 2002 May 2003 Jun 2004 Jul 2005 Aug 2006 Sep 2007 Oct 2008 Nov 2009 Dec 2010 PSU Wood Operations Laboratory, 2011 data source:

49 A look at the world as we enter 2012 China s economy is still growing, but at a slowing rate. Equity bubble is now acknowledged, and non-food commodity consumption is being cut back. The ECB is weakening the Euro through monetary policy, forced to do so to prop up EU banks, unsustainable countries, and social programs US housing market still stuck on the bottom Canadian and U.S. timber and lumber prices are continuing to be propped up by Chinese demand

50 China Is A Shining Light In The Global Economy--Up Until Now, Perhaps One of the only hopes left is China so if its economy suffers a severe downturn we should all start worrying about our jobs. Perhaps because China is one of the few hopes remaining as the US and Europe face renewed recessions, it is hard to separate the fear from the facts. The property sector is the source of most of the anxiety because of its importance to the overall economy. Everything seems to depend on the success of China s government in transforming this investment-focused growth model without causing major disruptions, such as a collapse in the property market. To call this task difficult would be an understatement. -Timber Trends, October 2011 The Campbell Group

51 A look at the world as we enter 2012 China s economy is still growing, but at a slowing rate. Equity bubble is now acknowledged, and non-food commodity consumption is being cut back. The ECB is weakening the Euro through monetary policy, forced to do so to prop up EU banks, unsustainable countries, and social programs US housing market still stuck on the bottom Canadian and U.S. timber and lumber prices are continuing to be propped up by Chinese demand Oil impacts everything, and is on the rise again

52 In a low demand world, is oil becoming a leading indicator of lumber? 600 US Lumber Price vs World Oil Price Lumber Composite Price ($/mbf) Weighted Average Oil Price ($/bl 0 1/1/96 6/1/96 11/1/96 4/1/97 9/1/97 2/1/98 7/1/98 12/1/98 5/1/99 10/1/99 3/1/00 8/1/00 1/1/01 6/1/01 11/1/01 4/1/02 9/1/02 2/1/03 7/1/03 12/1/03 5/1/04 10/1/04 3/1/05 8/1/05 1/1/06 6/1/06 11/1/06 4/1/07 9/1/07 2/1/08 7/1/08 12/1/08 5/1/09 10/1/09 3/1/10 8/1/10 0 Lumber Composite Price World Average Oil Price PSU Wood Operations Laboratory, 2010

53 In a low demand world, oil seems to hold its price longer than other commodities 600 US Lumber Price vs World Oil Price Lumber Composite Price ($/mbf) Weighted Average Oil Price ($/bl 0 1/1/96 7/1/96 1/1/97 7/1/97 1/1/98 7/1/98 1/1/99 7/1/99 1/1/00 7/1/00 1/1/01 7/1/01 1/1/02 7/1/02 1/1/03 7/1/03 1/1/04 7/1/04 1/1/05 7/1/05 1/1/06 7/1/06 1/1/07 7/1/07 1/1/08 7/1/08 1/1/09 7/1/09 1/1/10 7/1/10 1/1/11 7/1/11 0 Lumber Composite Price World Average Oil Price PSU Wood Operations Laboratory, 2011

54 Spike factors Military attack affects Iraqi, Iranian, Saudi, or Russian oil supply - oil price shoots up

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58 Spike factors Military attack affects Iraqi, Iranian, Saudi, or Russian oil supply - oil price shoots up EU banks collapse, trigger world-wide recession

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60 Spike factors Military attack affects Iraqi, Iranian, Saudi, or Russian oil supply - oil price shoots up EU banks collapse, trigger world-wide recession Internet terrorism results in financial turmoil

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62 Spike factors Military attack affects Iraqi, Iranian, Saudi, or Russian oil supply - oil price shoots up EU banks collapse, trigger world-wide recession Internet terrorism results in financial turmoil Chinese inflation, slowing economy leads to civil unrest and government response that flattens its economy Short-term Long-term

63 Spike factors Military attack affects Iraqi, Iranian, Saudi, or Russian oil supply - oil price shoots up EU banks collapse, trigger world-wide recession Internet terrorism results in financial turmoil Chinese inflation, slowing economy leads to civil unrest and government response that flattens its economy Short-term Natural catastrophe Long-term

64 Lumber Price Forecast Spike Series Scenario Axis Title Oil Price US RL Comp Economy Coast 2x /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/ /01/ /03/ /05/ /07/ /09/ /11/01

65 Conclusions for 2012 Barring seismic events, lumber prices will remain fairly stable World economies and industries are in consolidation mode, as governments struggle to prop each other up Will the Chinese, Russians, Iranians play along? World debt levels point toward global reset in near future, with corresponding increase in world violence, and world-wide recession Credit markets will get even tighter But pallets will still be needed, and wood, steel, and labor are all headed for historic lows

66 THE END.