Second Butler/Cunningham Conference on Agriculture and the Environment

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 • Industry Profile • Economic Impact • Forest Products Business Conditions • Economic Conditions • Industry Capacity/Production • Export/Import Imbalance • Forest Products Trends & Outlook • Industry Actions • Product Outlook • Conclusions & Questions

Alabama’s Forest Industry Profile • Alabama Pulp & Paper Production • 14 pulp & paper operations • 2nd largest pulp & paper producing state • Alabama Wood Products Production • 180+ sawmills & panel plants • 6th largest lumber & panel producing state • Alabama’s Secondary Wood Production • 700+ manufacturing operations • Alabama’s Timberland Base • 22 million acres • 2nd largest timberland base in the U.S. • 94% privately owned

Economic Impact of Ala. Forest Industry • $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.)

Discussion Topics • Alabama’s Forest Industry • Industry Profile • Economic Impact • Forest Products Business Conditions • Economic Conditions • Industry Capacity/Production • Export/Import Imbalance • Forest Products Outlook • Industry Actions • Product Outlook • Conclusions & Questions

Forest Products Business Conditions • 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

Forest Products Business Conditions • 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

Forest Products Business Conditions • 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

Forest Products Business Conditions • 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

Forest Products Business Conditions • 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

Forest Products Business Conditions Pulp price up 22% in last year, but still 44% below the 1995 peak.

Forest Products Business Conditions Linerboard price down 12% versus year ago, and 33% below 1995 peak.

Forest Products Business Conditions Newsprint price up 10% versus year ago, but 26% below 1995 peak.

Forest Products Business Conditions Offset printing paper price down 14% versus year ago, and 43% below 1995 peak.

Forest Products Business Conditions 10/03 Lumber & panel prices rebounding from 10-year lows.

Forest Products Business Conditions Housing starts at modern historic highs.

Forest Products Business Conditions Mortgage rates at modern historic lows.

Forest Products Business Conditions • Poor Forest Products Market Conditions in Recent Years • Strong dollar has hurt export/import balance Softwood lumber trade deficit is approximately $6 billion.

Forest Products Business Conditions Softwood lumber trade deficit is approximately $6 billion.

Forest Products Business Conditions Structural panel trade deficit is approximately $1 billion.

Forest Products Business Conditions U.S. lumber supply is up 39% in ten years.

Forest Products Business Conditions U.S. structural panel supply is up 57% in ten years.

Forest Products Business Conditions • Soft Timber Market Conditions in Recent Years • 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

Forest Products Business Conditions • 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

Alabama Timber Prices Prices up sharply since 1991, except pine pulpwood.

Forest Products Outlook Forest Industry Under Pressure

Forest Products 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

Forest Products 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.

Forest Products Outlook Top 10 Pulp & Paper Companies … Then and Now 2001 International Paper (New York) Georgia-Pacific (Atlanta) Weyerhaeuser (Tacoma) Stora Enso (Helsinki) Oji (Tokyo) Kimberly-Clark (Dallas) UPM-Kymmene (Helsinki) Smurfit-Stone CC (Chicago) Nippon Paper (Tokyo) Svenska Cellulosa (Stockholm) 1979 International Paper (New York) Bowater (London) Champion Intl. (New York) Weyerhaeuser (Tacoma) Georgia-Pacific (Portland, OR) Reed International (London) Crown Zellerbach (San Fran.) Mead (Dayton) St. Regis (New York) Boise Cascade (Boise, ID) Only 3 of the top 10 pulp & paper companies from 1979 remain. U.S. membership in top 10 has declined from 8 to 5.

Forest Products 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

Forest Products 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.

Forest Products Outlook

Forest Products 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.

Forest Products Outlook Per capita, kg World North America Western Europe China 2000 54 325 207 30 2015 63 320 264 51 Demand growth %/a Eastern Europe China Asia excl.Japan & China Latin America Africa Average 2.2 %/a Oceania Western Europe Japan North America N.A. Paper Demand and Production Outlook N.A. Production Growth by Grade to 2015 Global Demand Growth 2000-2015 Source: Jaakko Poyry Consulting U.S. paper production will experience only modest growth in output to 2015.

Forest Products Outlook U.S. South Pulp Production Outlook - million metric tons - 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). - % share of production - Source: Jaakko Poyry Consulting

Forest Products 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

Forest Products 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

Conclusions • 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.

Questions? Ken Muehlenfeld Forest Products Development Center School of Forestry & Wildlife Sciences Auburn University (334) 844-1094 muehlkj@auburn.edu

Second Butler/Cunningham Conference on Agriculture and the Environment