T I the wood Cume from?

Elobal 0veruiew

By Hikan Ekstriim Wood Resources International Ltd. Seattle, Wa.

plantations. In addition to the fiber plantations, there are short rotation plantations in some countries, namely Brazil, China, India and South Africa. These plantations, which were originally planted for fuelwood production, will increasingly be used as fiber sources for the forest industry.

Brazil, Chile, China, Indonesia, New Zealand and South Africa had the largest areas of wood fiber plantations in 1995. Most of these plantations were either eucalyptus or pine with rotation ages of less than l5 and 30 years respectively.

Tree plantations in the world are likely to more than double over the next 30 years. The largest expansions will probably be eucalyptus plantations in Latin America and Asia. With the increase of available plantation fiber in Asia and Latin America, there continue to be opportunities for expansion of the forest industry in those regions.

'I growth in demand for pulp, paper, lumber and wood-based panels is expected to increase demand for industrial roundwood on a global basis, from 1.6 billion cu. meters in 1995, to approximately 2.9 billion cu. meters by 2030. This represents an annual increase of l.7l%o, well above the increase in wood supply over the same period.

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The world's available timber supply is expected to increase by less than 0.57o per year over the same forecast period, as a result of the continued loss of productive forestland to alternative uses such as agriculture, urban development and ecosystem preservation. Nearly all of the projected increase in supply can be attributed to fast-growing plantations (including pine forests in the U.S. South), which are expected to account for as much as 40Vo ofavailable global supply in 2030, up substantially from only 16%o today.

Wood fiber from plantations will become increasingly important as a fiber source to the forest industry in the future. By 2030, plantation fiber from short/medium (S/M) rotation plantations will account for 38Vo of the total probable supply, compared to only lTVo today. (Short rotations are 15 years or less; medium rotation between l5 and 50 years rotation age.)

There are currently an estimated 37 million hectares of S/M fiber plantations in the world. On a volume basis, conifer plantations account for about 60% of the total supply from

Asia will probably be less dependent on imports of nonconifer fiber in the future since probable supply is estimated to grow faster than demand over the next 30 years. With an expected surplus of non-conifer and a deficit of conifer fiber in the future, it is likely that the pulp and paper industry will continue its substitution process from long fiber to short fiber.

With a surplus of non-conifer plantation fiber in Latin America and a deficit of non-conifer fiber in Europe, exports of roundwood to Europe likely will continue in the long-term.

Roundwood from S/M plantations will increasingly be used, not only for pulp production, but also for solid wood products in the future. There is strong interest in the use of plantation eucalyptus for high-value products such as door and window components, mouldings and veneer.

The cost structure for plantation fiber will be a driving force behind fiber prices in several world regions. Wood fiber from plantations is expected to be both cheaper and more stable than either natural timber or residual chips.

The global surplus of wood fiber, defined as the balance between probable supply and industrial demand, will decline from 1995 to 2030. With a tighter supply it is possible there will be changes in the trade flow of both raw material and primary forest products.

North America, a traditional exporter of forest products, is expected to become a net importer due to increased demand and relatively static supply. Conversely, Latin America could become a major exporter of both raw material, logs, wood chips and manufactured products as supply from a maturing plantation resource far exceeds anticipated regional demand.

In 1995, North America had a negative wood fiber balance due to higher demand than probable supply of conifer wood fiber. Japan is the only other region with an imbalance of wood fiber demand and supply. Over the next 35 years North America and Japan will increase their wood fiber deficits. By 2030, our analysis also shows that West Europe, East Europe, Southeast Asia and Africa will be forced to change from net exporters of forest products into net importers.

The surplus regions at 2030 are Latin America (mainly non-conifer), Russia (both conifer and non-conifer) and China (non-conifer). These regions will likely become major exporters of both raw material and primary forest products to North America, Europe and Asia.

With the tightening global conifer supply/demand situation, there could be a shift in conifer-based products toward niche and specialty products and away from traditional commodity products that would compete with those based on generally more abundant and lower cost non-conifer raw materials.

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Hr. La hlont b p&nt ol Besource Econunbs, at hbrffiofrg#A conpany prov*ling resource gcnt* adysis ad tnber/lintffibaFaffi fi rvbes. A lading aulhufly d, wnd d suply, he recently conflew sewral najor studies. "Pacific Bin |foad Supply & Denand,' "Analyxs ol Badrata Phn Prodrcls rn Markets" and the RLSI/EE|Eouthsn Study.

I HE QUESTION of supply shortages seems to be less an issue today than in the 1980s. Currently the question to be answered is "Who will supply it and what will be the new price equilibrium?" The two key U.S. supply and market regions are the Pacific Northwest and the 12 Southern states. During the 1960s and '70s, these two regions enjoyed supply surpluses. These surpluses included the Northwest's old growth reserves and the South's rapid expansion of its third generation forest. By the mid-1980s, the Southern forest inventory had reached 100 million cu. ft. of softwood, a 357c increase. In the '80s and early '90s, each of these regions shifted from surplus to tighter supply. The reduction of federal timber caused the Pacific Northwest to experience dramatic losses in supply, over 7 billion bd. ft. since the 1980s. The 12 Southern states shifted away from a supply surplus because of large increases in manufacturing capacity and the resulting softwood harvest in excess of growth. These changes in supply explain many of their resulting actions in the forest products market during the 1990s.

In the 1990s, the Pacific Northwest saw historic price increases, $460/vee in 1990 to the peak of $825/r'asp in 1993 for Douglas fir #2 Sawmill logs. With these 507o-80Vo pice increases, the Northwest experienced large-scale timberland sales. The sellers' motivation was to monetize their assets to capture the high stumpage prices. The majority of the timberland buyers were interested in securing timber supply for manufacturing. Corporate timberland is now a strategic resource used to navigate the stumpage and business cycles.

The U.S. South also experienced dramatic price changes-

75Vc-lO0Vo increases-in the '90s due to the supply reduction in the Pacific Northwest. The price increases coincided with reductions in softwood resources. l57c since 1985, consequently the buyer can no longer dictate the price. The market saw the softwood sawtimber resource of the past 20 years become limited. The pulp market cycle peak of the mid-1990s also showed weakness in the pulpwood supply, a 20Vo pulpwood price increase since 1990. The Southem forest products industry responded by consolidating and continuing its investment in softwood plantations.

Nationally, lumber consumption is at a high level. over 50 billion bd. ft. The pulp industry is positive, with 5%-8Vc growth in pulp demand in the next two years. Private timberland harvest levels are strong with western softwood harvest at nearly 9 billion bd. ft., and southern softwood harvest over l5 billion bd. ft. The overall outlook for forest products production worldwide is to remain stable at 16O0 million cu. meters (industrial roundwood), with the total U.S. share over 25%. While the U.S. is still a significant importer of its lumber products (357c), domestic resources will continue to be highly utilized. Key resource species like Douglas fir and southern pine will increase in value and remain dominant for their unique uses. Forest products companies will continue to acquire timberland in order to support their manufacturing base. The ownership trends of timberlands will shift even more towards forest industry and away from other private owners.

Trees are a resource which take eight years (hardwood pulp), 20 years (pine pulp and sawtimber), and 45-50 years (fir sawtimber) to mature while manufacturing can deplete them in much shorter cycles. The forest products industry will face future supply constraints in peak cycles, as long as capacity exceeds long-term resource growth rates. While these mends hold, resource prices will continue to escalate as they have over the last three decades.

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flFIER STRONG demand and exceptional prices in 194, 1996 and most of 1997. the Western Canadian lumb€r sector will be facing some much tougher times in 1998. Although North American lumber demand should be only slightly lower in 1998 than 1997, the fundamentals of global supply and demand coupled with the provincial government ownenhip of timber will create quite different operating scenarios within Western Canada's lumber industry.

For B.C. lumber producers, a series of compounding issues has confronted the industry: It has gone from one of the lowest cost producing regions in North America to the highest in three years. With the B.C. government providing over 90%, of the industry's timber, lumber producers have been held hostage to numerous government policy initiatives, including:

(l) The Forest Practices Code. In response to increasing environmental pressures, the B.C. government has dramatically increased the cost of timber harvesting.

(2) Reduced harvesting levels. The review of all timber producing regions has led to lower timber supplies (AAC's), especially in coastal B.C.

(3) Increased timber stumpage costs. Government revenue targets rather than adoption of pure market prices have caused stumpage rates to soar while market prices plummet.

(4) Commitment to create more jobs in value-added wood processing. The Jobs & Timber Accord compels the industry to meet the government's politically-driven targets for jobs. Market-related issues have further strangled the industry: softwood lumber as Interior B.C.

(1) Implementation of the U.S/Canada Lumber Agreement. The Quota has effectively shut out the coastal B.C. lumber industry from any real U.S. market penetration; SPF producers are largely unaffected.

(2) Japan market collapse. B.C.'s second largest market was shut down by fourth quarter 1997 and no real recovery is expected until the middle of 1998.

(3) Asian economy and currency crisis. This major uncertainty will further cripple B.C.'s export opportunities which, in turn, will exert downward pressure on U.S. lumber prices.

The net result is a very sick coastal lumber industry with the interior's SPF sector in trouble for 1998. Declining U.S. shipments of just under 9 billion bd. ft. from B.C. are expected in 1997; these should be further reduced in 1998 to remain well below 9 billion bd. ft.

A completely different situation exists in the other westem producing provinces. Although Alberta is also subject to the Quota, the favorable cost structure of the SPF industry should not impair its lumber output in 1998. Increases in capacity are expected in both Saskatchewan and Manitoba also due to low timber costs but particularly due to their exclusion from the Quota. In total, Prairie region shipments should be similar in 1998 to 1997's estimated shipments of 1.6 billion bd. ft.

This combination of issues will leave parts of the B.C. lumber industry uncompetitive and/or below capacity for at least the first half of 1998. The coastal industry's hemlock output, in particular, could be constrained for most of 1998. This factor will limit the availability of western red cedar since its timber supply is sourced from stands mixed with hemlock.

The SPF sector will need to find new replacement markets for its excess Japanese lumber in 1998. This will likely mean that with reduced North American demand in 1998, there will be an excess of Western Canadian SPF capacity as compared to 1997. Consequently, excess supply is expected to contribute to soft U.S. lumber prices throughout 1998 as the B.C. industry grapples with high costs and weakening markets.

Since 1992, production in the four leading eastern provinces has increased by almost 5OVo. The bulk of this production is in Quebec. Incremental production in the East is coming from three sources:

. new or expanded mills, most using very small, costly logs; improved conversion ratios at existing mills, and o shifts of small wood once used for pulping into lumber.

Expansion potential from these three sources has not yet been fully achieved.

New mill investments and major expansions have been stunning. There are now several Quebec mills with capacities exceeding 300 million bd. ft. per year, sizes formerly seen only in Interior B.C. and unheard of in the U.S. Though of high quality (often slow-growth, straight-grained black spruce), the logs are small. Conversion ratios are rising due to investments in scanning, curve sawing, and improved trimming and drying technology. Also, in some mills, they are using logs as small as 4" and the large end to make studs. Not long ago, logs of this size would not even have been cut for pulp.

The eastern Canadian softwood industry is now tightly integrated into the paper industry, which needs the sawmill chips. As a result, the industry is likely to maintain production in slow lumber markets to a greater extent than might have been true even l0 years ago.

High North American prices and other factors have caused a major reduction in exports to the U.K. and other overseas markets. Canadian housing production has recovered only modestly from recent all-time lows, so that domestic consumption is low. As a result of all these shifts, Quebec mills ship 677o of their wood to the U.S. compared to 40Vo in 1992.

A number of factors will affect production in eastern Canada in the coming years: o The Softwood Lumber Quota Agreement. As markets slow down in 1998, lower lumber prices will mean that the effects of the Quota's provincial allocations and taxes will weigh more heavily on mill operating decisions. o Pulp and paper markets are strengthening. This will increase the incentive to put fiber into pulp instead of lumber, and will further tighten the squeeze on sawmills. o Environmental priorities on Crown lands could begin to change, as they have in B.C. At present, it appears that efforts to move toward "ecosystem management" forestry methods are being accepted by the public, but this could change.

./ANADA EAST of the Rockies is an important source for U. S. softwood lumber. As a result of cutbacks in log supplies from Crown lands and higher stumpage costs, B.C. output has peaked. In the East, however, high prices have sparked a major increase in investment in sawmill capacity. As a result, Canada east of the Rockies now produces roughly as much o Finally, the industry is attempting to revive sagging export markets, though no home runs in the near term are likely.

Eastern Canada mills are considering upgrading the value added to their lumber. The Quota creates an incentive to export high value grades and retain the lower grades at home. This has depressed prices oflow grades in Canada and created