Forest Industry Trends and Outlook
Second Butler/Cunningham Conference
on Agriculture and the Environment
Presented By: Ken Muehlenfeld
November 3, 2003
Discussion Topics

Alabama’s Forest Industry
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Economic Impact
Economic Conditions
Industry Capacity/Production
Export/Import Imbalance
Forest Products Trends & Outlook



Industry Profile
Forest Products Business Conditions




November 3, 2003
Forest Industry Trends & Outlook
Industry Actions
Product Outlook
Conclusions & Questions
1
Alabama’s Forest Industry Profile

Alabama Pulp & Paper Production
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2nd largest pulp & paper producing state
180+ sawmills & panel plants
6th largest lumber & panel producing state
Alabama’s Secondary Wood Production
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14 pulp & paper operations
Alabama Wood Products Production
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November 3, 2003
Forest Industry Trends & Outlook
700+ manufacturing operations
Alabama’s Timberland Base
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22 million acres
2nd largest timberland base in the U.S.
94% privately owned
2
Economic Impact of Ala. Forest Industry

November 3, 2003
Forest Industry Trends & Outlook
$13.2 billion in annual shipments (2001)
 Pulp & Paper = $8.20 billion
 Wood Products = $3.75 billion
 Furniture & Fixtures = $1.19 billion

$2.1 billion in annual payroll (2001)
 65,000 direct employees
 143,000 indirect employees

$812 million in exports (2001)

$516 million in capital investments (‘92-’01 ave.)
3
Discussion Topics

Alabama’s Forest Industry



Economic Impact
Economic Conditions
Industry Capacity/Production
Export/Import Imbalance
Forest Products Outlook



Industry Profile
Forest Products Business Conditions




November 3, 2003
Forest Industry Trends & Outlook
Industry Actions
Product Outlook
Conclusions & Questions
4
Forest Products Business Conditions

November 3, 2003
Forest Industry Trends & Outlook
Poor Forest Products Market Conditions in Recent
Years
 U.S. and world economic decline
 Excess capacity and production worldwide
 Strong dollar has hurt export/import balance

Forest Products Markets Have Improved in Last Six
Months
 U.S. economic rebound
 Capacity reductions in some product areas
 Weaker dollar
5
Forest Products Business Conditions

November 3, 2003
Forest Industry Trends & Outlook
Poor Forest Products Market Conditions in Recent
Years
 U.S. and world economic decline

Recession caused by collapse of capital investment
» Stock market bubble
» Worsened by Sept. 11 events
» Global economies simultaneously bad

On the whole, a mild recession
» Service, trade & housing held up well
» Manufacturing sectors hit hard

Recovery has been sluggish, but now gaining momentum
» Corporate scandals
» World political turmoil
» Threat of oil supply disruptions
6
Forest Products Business Conditions

November 3, 2003
Forest Industry Trends & Outlook
Poor Forest Products Market Conditions in Recent
Years
 Excess capacity and production worldwide

N.A. capacity too high and too quick to expand
» Only recently has capacity problem been addressed in pulp
& paper
» Solid wood products capacity continues to expand
» Production levels were too high for demand (price pressure)
» Operating rates dropped to very low levels
7
Forest Products Business Conditions

November 3, 2003
Forest Industry Trends & Outlook
Poor Forest Products Market Conditions in Recent
Years
 Excess capacity and production worldwide

Worldwide capacity too high and increasing
» Other pulp & paper producing regions have advantages in
fiber, operating costs & capital costs
• South America
• Southeast Asia
• China
» Other regions have wood products industries dependent on
U.S. market
• Canada
• South America
8
Forest Products Business Conditions

November 3, 2003
Forest Industry Trends & Outlook
Poor Forest Products Market Conditions in Recent
Years
 Strong dollar has hurt export/import balance

U.S. forest products exports down sharply
» Pulp & paper exports down
» Lumber & panel exports down

U.S. forest products imports up sharply
» Pulp & paper imports up
• South America
• Southeast Asia
• Europe
» Lumber & panel imports up
• Canada
• South America
• Europe
9
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
Pulp price up 22% in last year, but still 44% below the 1995 peak.
10
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
Linerboard price down 12% versus year ago, and 33% below 1995 peak.
11
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
Newsprint price up 10% versus year ago, but 26% below 1995 peak.
12
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
Offset printing paper price down 14% versus year ago, and 43% below 1995 peak.
13
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
10/03
Lumber & panel prices rebounding from 10-year lows.
14
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
Housing starts at modern historic highs.
15
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
Mortgage rates at modern historic lows.
16
Forest Products Business Conditions
Poor Forest Products Market Conditions in Recent Years
November 3, 2003
Forest Industry Trends & Outlook
Strong dollar has hurt export/import balance
Softwood lumber trade deficit is approximately $6 billion.
17
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
Softwood lumber trade deficit is approximately $6 billion.
18
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
Structural panel trade deficit is approximately $1 billion.
19
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
Structural panel trade deficit is approximately $1 billion.
20
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
U.S. lumber supply is up 39% in ten years.
21
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
U.S. structural panel supply is up 57% in ten years.
22
Forest Products Business Conditions
November 3, 2003
Forest Industry Trends & Outlook
 Soft Timber Market Conditions in Recent Years
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Reduced demand due to capacity reductions and downtime
Reduced competition in some local markets
Increasing timber supplies
Increased use of recycled fiber
Weak pricing
 Recent Market Strengthening
 Partly weather related
 Partly improved demand
23
Forest Products Business Conditions

November 3, 2003
Forest Industry Trends & Outlook
U.S. Wood Demand Is Down
 Pulpwood production in 2001 dropped to a 15-year low
Production up slightly in 2002
21 pulp mill closures in last 3 years
 Sawtimber
production was down in 2001, but bounced back
somewhat in 2002
South’s production up about 3% in 2002

Alabama’s Wood Demand Is Down
 Total roundwood demand in 2001 was 1.08 billion cubic feet
Down about 10% from peak
About the same level as 1992
Improved slightly in 2002
24
Alabama Timber Prices
November 3, 2003
Forest Industry Trends & Outlook
Prices up sharply since 1991, except pine pulpwood.
25
Discussion Topics

Alabama’s Forest Industry



Economic Impact
Economic Conditions
Industry Capacity/Production
Export/Import Imbalance
Forest Products Outlook



Industry Profile
Forest Products Business Conditions




November 3, 2003
Forest Industry Trends & Outlook
Industry Actions
Product Outlook
Conclusions & Questions
26
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
Forest Industry Under Pressure
27
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
Strong Actions Taken by Forest Products Industry
 Increased merger and acquisition activity
 Permanent closure of high-cost operations
 Market-related downtime at production operations
 Divestiture of timberland assets
 Increased raw material utilization efficiency
28
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
Consolidation Has Eliminated Many Companies
Approximately $250
billion in M&A
activity since 1990.
Half of the top 20
companies from
1979 are gone.
Shareholder’s value
maximized by
selling in many
cases.
29
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
Top 10 Pulp & Paper Companies … Then and Now
1979
2001
International Paper (New York)
International Paper (New York)
Bowater (London)
Georgia-Pacific (Atlanta)
Champion Intl. (New York)
Weyerhaeuser (Tacoma)
Weyerhaeuser (Tacoma)
Stora Enso (Helsinki)
Georgia-Pacific (Portland, OR)
Oji (Tokyo)
Reed International (London)
Kimberly-Clark (Dallas)
Crown Zellerbach (San Fran.)
UPM-Kymmene (Helsinki)
Mead (Dayton)
Smurfit-Stone CC (Chicago)
St. Regis (New York)
Nippon Paper (Tokyo)
Boise Cascade (Boise, ID)
Svenska Cellulosa (Stockholm)
Only 3 of the top 10 pulp & paper companies from 1979 remain.
U.S. membership in top 10 has declined from 8 to 5.
30
Forest Products Outlook

November 3, 2003
Forest Industry Trends & Outlook
Merger & Acquisition Activity Affecting Alabama
Companies
•
•
•
•
•
•
•
•
•
•
•
•
•
Mead & Westvaco
Weyerhaeuser & Willamette
Bowater & Alliance Forest Products
Georgia-Pacific & Fort James
Plum Creek & The Timber Company
International Paper & Champion International
Weyerhaeuser & Trus Joist International
Weyerhaeuser & MacMillan Bloedel
International Paper & Union Camp
Stone Container & Jefferson Smurfit
Bowater & Avenor
James River & Fort Howard
Kimberly-Clark & Scott Paper
31
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
Pulp & Paper Markets
Shutdowns in North America, 1998 - 2003
Over the last 5 years, the NA pulp and paper industry has shut down over 250 paper
machines and pulp dryers, with a total capacity of nearly 16.0 million metric tons.
32
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
Southern U.S. Pulp Mill Closures/Downsizing: 1999-2001
Company
Location
Kimberly-Clark
International Paper
International Paper
International Paper
Donahue Ind.
International Paper
Florida Coast Paper
Smurfit-Stone Cont.
International Paper
Pasadena Paper
U.S. Alliance
Smurfit-Stone Cont.
TOTAL
Mobile, Al.
Mobile, Al.
Savannah, Ga. *
Moss Point, Ms.
Sheldon, Tx.
Camden, Ar.
Port St. Joe, Fl.
Jacksonville, Fl.
Courtland, Al. *
Pasadena, Tx.
Coosa Pines, Al. *
Port Wentworth, Ga. *
*
Closure
Date
4Q, '99
4Q, '00
3Q, '01
3Q, '01
2Q, '00
4Q, '00
4Q, '99
1Q, '99
4Q, '00
1Q, '99
3Q, '01
1Q, '99
Pulpwood
Consumption
(000 tons)
(000 cords)
2,950
1,660
1,300
1,200
1,150
1,150
1,100
970
925
900
800
500
14,605
1,103
621
486
449
430
430
411
363
346
336
299
187
5,460
Partial shut-down or conversion to recycle
33
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
Global Paper & Paperboard Production
Source: Jaakko Poyry Consulting
World demand will grow at an average annual rate of 2.6% from 2000-2010. Asia and
Latin America will fuel global growth. Europe and N.A. are mature markets.
34
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
N.A. Paper Demand and Production Outlook
N.A. Production Growth by Grade to 2015
Global Demand Growth 2000-2015
Total paper &
board
Demand growth %/a
5
Eastern Europe
China
4
Asia excl.
Japan & China
Latin America
Per capita, kg
World
North America
Western Europe
China
2000
2015
54
325
207
30
63
320
264
51
Newsprint
Printing &
writing paper
Africa
3
Tissue
Average 2.2 %/a
2
Corrugating
materials
Oceania Western Europe
Japan
1
2015
2010
2005
2000
Cartonboards
North America
Other paper &
board
0
0
20
40
60
Share of consumption in 2000 (325 million tons), %
80
100
0
20
40
60
80
100
120
Source: Jaakko Poyry Consulting
U.S. paper production will experience only modest growth in output to 2015.
35
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
U.S. South Pulp Production Outlook
50
- million metric tons -
45
40
Dissolving
SWD sulphate
HWD sulphate
Unbl. Sulphate
Semichemical
Mechanical
Other
35
30
25
20
15
10
5
0
1991
1995
2001
2005
2010
- % share of production -
100%
80%
60%
Hardwood
Softwood
40%
US South pulp production will
remain relatively flat to 2010
with no new significant virgin
fiber based capacity additions
projected. Production of
hardwood pulps will continue
to grow somewhat faster than
softwood pulps, due to faster
growth of grades that use
hardwood furnish and
increased hardwood
component in paper products
to improve surface and
printing qualities (the smaller
hardwood fibers create a
more uniform/smooth paper
surface).
20%
0%
1991
1995
2001
2005
2010
Source: Jaakko Poyry Consulting
36
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
Lumber & Panel Markets

Housing Sector To Remain Strong
• Demographics are solid
• Mortgage rates remain low
• Starts staying strong

Repair & Alteration Sector to Improve
• Consumer confidence to improve
• Interest rates to remain low

Industrial Markets to Strengthen
• Growth in general economy will expand sector

Export/Import Balance is Questionable
• Weakening dollar should be helpful
• Further resolution of Canadian lumber issue
could be important
37
Forest Products Outlook
November 3, 2003
Forest Industry Trends & Outlook
Timber Markets

Pine Sawtimber Markets Should Improve
• Supplies reasonably stable
• Demand improving with better lumber & panel markets

Hardwood Sawtimber Markets Should Improve
• Supplies stable at best
• Growing demand for quality raw material for flooring, furniture
& other secondary products

Pine Pulpwood Markets Will Remain Weak
• Supplies will likely overwhelm gains in pulpwood demand
• Low end of market will suffer

Hardwood Pulpwood Markets Should Improve
• Apparent excess supplies are illusory due to availability issues
• Increasing demand
• Imported fiber could cap price increases
38
Discussion Topics

Alabama’s Forest Industry



Economic Impact
Economic Conditions
Industry Capacity/Production
Export/Import Imbalance
Forest Products Outlook



Industry Profile
Forest Products Business Conditions




November 3, 2003
Forest Industry Trends & Outlook
Industry Actions
Product Outlook
Conclusions & Questions
39
Conclusions
November 3, 2003
Forest Industry Trends & Outlook

Forest products markets have been hurt by a weak economy, high
production, and a very unfavorable import/export balance.

The forest industry has taken strong actions through mill closures,
market downtime, and consolidation.

Market fundamentals for pulp, paper, and especially wood products
appear to be improving, but outlook is somewhat guarded due to
continuing oversupply issues.

The overall outlook for timber markets appears to be improving. Pine
pulpwood will continue to lag due to significant excess growth due to age
distribution of inventory.

Alabama’s forest industry is an important economic engine for the state
and remains the state’s largest manufacturing industry.
40
Questions?
Ken Muehlenfeld
Forest Products Development Center
School of Forestry & Wildlife Sciences
Auburn University
(334) 844-1094
muehlkj@auburn.edu