North American Panel Markets: The Pain Continues

1. North American Panel Markets: The Pain Continues

2. Presentation Outline • US Woodbased Panel Markets • US Economic and Housing Outlook • Structural Panels (Softwood Plywood and OSB) • Nonstructural Panels (Particleboard and MDF) • Mexico Panel Market Outlook • Brief Comments on South American Markets

3. Sub-Par Recovery in US GDP: Housing A Brake Not a Booster Rocket! Sources: BEA & CFPA

4. US Housing Markets • Demographic Fundamentals Are Solid • Pent-up demand will be a factor … before the decade is over! • But Economic Fundamentals Are Weak • Household formations are being delayed by high unemployment, slow income growth and consumer uncertainty • Elements in Place for Recovery • Sales, production and prices appear to have hit bottom; inventories of unsold homes are in decline • Affordability is great … if you qualify for a mortgage! • Rental demand is strengthening; boost for multifamily construction

5. Post-1990 Surge in Home Ownership is Being Reversed: What is “normal”?

6. New and Existing Home Sales: Have They Bottomed?

7. Unsold Inventory of New Single-Family Homes and Months Supply: Historic Lows

8. Affordability at Very Attractive Levels Mortgage Payment as a % of Average Household Disposable Income

9. US Housing Production:RISI Base Case Outlook Through 2025 Million Units

10. Home Size and Mix Matter!! SINGLE-FAMILY HOMES ARE A LOT LARGER THAN OTHER TYPES OF HOME CONSTRUCTION • Average 2009 US Home Sizes (Square Feet): • SINGLES 2,382 • MULTIS 1,171 • MOBILES 1,594

11. Average Single-Family Home Sizes Thousand SF

12. Single-Family Home Share of Total Conventional Starts Share (%)

13. US Furniture Production Bottomed in 2009/2010: Will It Start to Recover in 2011? US Furniture and Related Production, 2002=1.00

14. What Will Happen to US Furniture Imports as Domestic Markets Recover? Billion, $2009

15. Slow Recovery in Housing Will Be Reflected in North American Structural Panel Demand BSF, 3/8-Inch Basis

16. Higher US OSB Consumption Needs Strong Single-Family Housing Starts BSF, 3/8-Inch

17. How Large is North American OSB Capacity? BSF, 3/8-Inch

18. Will Total NA Structural Panel Capacity Slip Further Before Climbing as Demand Recovers? BSF, 3/8-Inch Basis

19. Recovery in NA D/C Ratios a Matter of Timing of Demand Growth and Capacity Rebound

20. OSB Prices Climbed Above Cost After Mid-2009; Back to Cost Floors by Sep. 2010! $/MSF

21. Plywood More Profitable Than OSB: But Prices Have Recently Collapsed $/MSF

22. OSB Prices: Dependent on Recovery in Housing Demand and Pace/Timing of Capacity Restarts7/16-Inch OSB in the South (West) $/MSF

23. OSB Will Struggle to Stay Profitable in 2011Average Mill Realization/Average Total Cost

24. Forecast for SYP Plywood Prices1/2-Inch, 3-ply CDX (Westside) $/MSF

25. Plywood Profitability Rebounded in 2010, But Levels Will Not Be Sustained in 2011Average Mill Realization/Average Total Cost

26. Conclusions: Structural Panels • The strength and timing of housing’s recovery will largely determine the forecast outcome for wood products markets. • Remainder of 2010 and first half of 2011 will be very difficult for producers as demand generally lags behind year-ago levels. • No new total consumption records expected before late in the decade, although OSB should set new records around mid-decade. • Effective operating capacity is substantially lower than name-plate. As demand recovers, capacity will come back on-stream in lagged response. Current market conditions will postpone the re-start of capacity. • Ramp-up of currently operating mills to full capacity will largely meet the rebound in demand through 2012; mothballed capacity unlikely to be re-opened before 2013 at the earliest. • Average demand/capacity ratios rebounded in 2010, but are likely to move sideways to lower through much of 2011 before again climbing in 2012. • Prices and profitability will be under downward pressure in the first half of 2011 unless production runs consistently below year-ago levels.

27. Structural and Cyclical Pressures Persist in North American PB & MDF Panel Markets BSF, ¾-Inch

28. Furniture and Residential Construction Dominate North American Particleboard Consumption BSF, ¾-Inch

29. Furniture and Residential Construction Also Key to N. American MDF/HDF Consumption(94%-95% of Total Domestic Consumption) BSF, ¾-Inch

30. Will MDF/HDF Consumption Overtake PB? Largely Depends on Furniture … BSF, ¾-Inch Basis

31. How Should We Measure North American Particleboard Capacity? BSF, 3/4-Inch

32. Forecast for PB Effective Operating Capacity NA Particleboard Capacity Still Too High Even With These Lower Estimates? BSF, ¾-Inch

33. PB Demand/Capacity Ratios Will Remain Very Low; MDF/HDF Ratios Average Higher (Depends on Import Levels)

34. Weak Dollar and Increased North American HDF Capacity Have Reduced MDF/HDF Imports: How Far Will They Rebound? BSF, ¾-Inch – Offshore Imports

35. N. American Particleboard Inflation-Adjusted Prices: The 1990s Were the Golden Years! $2009/MSF, ¾-Inch Industrial Prices

36. Particleboard Profitability Will Be Hard to Detect Over the Next Few YearsMill Realization/Avg. Total Cost

37. North American MDF Inflation-Adjusted Prices: Nothing Like the Early to Mid-1990s Again! $2009/MSF, ¾-Inch Prices

38. MDF Profitability Recovered in 2010, But Uncertainty Surrounds 2011Mill Realization/Avg. Total Cost

39. Conclusions: Nonstructural Panel Markets March to Different Drummers • Particleboard’s outlook is a lot less positive than that for MDF/HDF • Even with an optimistic forecast for North American furniture production, in-place particleboard capacity is excessive • Without aggressive capacity closures, it will be difficult for particleboard producers to gain pricing power over the next few years • Production costs are worrisomely high relative to history, especially outside the South; this could threaten industry’s competitive position • MDF/HDF seem better positioned than particleboard but with 30%+ of that market served by off-shore imports, North American producers are vulnerable to added off-shore competition particularly if North American pricing proves attractive enough to offset a weak US dollar.

40. Mexico’s Wood Panel Markets

41. Mexico’s Panel Markets Tumbled in 2009, But Rebounded in 2010 • Strong growth in fiberboard consumption has offset weakness in particleboard • 2011 – Prognosis is positive providing Mexico’s domestic economic growth remains healthy • Export opportunities will be limited by slow US recovery and weakening US dollar • Mexico’s plywood and particleboard producers most at risk; growing import threats and loss of market share (also to other types of panels)? • Fiberboard and OSB imports represent major growth opportunities • Will Mexican particleboard production recover to match past peaks?

42. Mexico and ABC Countries: A Generally Short and Shallow Recession … Except for Mexico Sources: IMF & CFPA

43. Mexico: Recovery in 2010 Supported By Healthy Domestic Markets Even as US Languishes % Change2006200720082009201020112012 GDP 4.9 3.3 1.5 -6.5 4.8 3.8 4.2 Industrial Production 5.9 1.7 -0.6 -10.2 8.3 4.8 5.0 Consumer Prices 4.1 3.8 6.5 3.6 4.4 3.8 3.7

44. Mexican Panel Consumption Rebounded in 2010: New Records in 2011-2012? Thousand M3

45. Mexico’s Plywood Market Remains an Import Story Thousand M3

46. Mexico’s Fiberboard Markets Shrugged Off the Recession: Further New Records To Be Set Thousand M3

47. Mexico’s Particleboard Producers Struggle to Recover As Market Share is Lost to MDF Thousand M3

48. Panel Consumption in MexicoThousand M3 2006200720082009201020112012 Plywood 660 668 713 578 653 689 711 Particleboard 641 691 523 386 489 566 619 Fiberboard 347 351 331 312 373 412 450 OSB 67 35 85 74 86 94 101 TOTAL 1,715 1,745 1,652 1,350 1,601 1,761 1,881

49. Miscellaneous Considerations: Brazil and Chile

50. Brazil and Chile Have Enjoyed Healthy Growth Despite Recession and Earthquakes … • Fiscal stimulus and the run-up to an election boosted Brazil’s economy strongly, especially in the first half of 2010 • Chile has been quick to recover from the February earthquake; growth in 2011 will outpace 2010 as rebuilding provides significant economic stimulus to the whole economy • Ramp-up of new MDP and MDF capacity in Brazil has been controlled; consequently pricing held up well, at least through mid-year • Further industry shakeout and consolidation? Slower economic growth in 2011 could result in another wave of M&A