Transitions in the Global Forest Industry and their Domestic Implications

1. Transitions in the Global Forest Industry and their Domestic Implications Andy White, Augusta Molnar, Justin Bull

2. Outline: Transitions Shaping US Industry • Background: The Three Forest Industries • The Growth of Emerging Economies, Asia Driving • Increased Supply and Production from Plantations • Declining Prices, Declining Competitiveness of US “Commodity” Production • Changing Constituencies/Demands on Forest Industry/Agencies • Technology and Substitution: A Threat or Opportunity?

3. (1) Background: The Three Forest Industries • Timber Production: • ~ 3.5 – 4 billion m3 of wood harvested annually • < ½ is IRW (1.7 billion) • majority is fuel, household, local use • Employment: (ILO 2002) • ~ 47 million: 17.4 in “formal” wood sector; • Majority (~ 29.6) in informal, “invisible” • Trade: • ~ 80% of total IRW is domestically consumed (~ 130 US$ billion/year is internationally traded (wood); • At least 19 US$ billion/year in internationally traded NTFPs • Which “Industry”? Three Different Worlds (simplification) • International: increasingly focused on plantations - commodities • Small, Medium Size: domestically oriented, rely more on natural forests (NFTPs, niche, often backbone of rural communities) • EU: 90,000 furniture makers • EU: 90% of all firms < 20 employees • Informal: fuel harvesters, headloaders, furniture makers

4. Growth Rates 2000-2015 Forecast Rest of the World Latin America Emerging markets CAGR 3.9% Rest of Asia China Japan Eastern Europe Western Europe Mature markets CAGR 1.3% North America (2) Growth in Asia and Emerging Markets Source: Jaakko Poyry

5. Finland USA Austria Sweden Belgium Canada Denmark Netherlands Germany New Zealand Australia UK Japan 1980-2000 Italy France Singapore Rep. of Korea Spain Portugal Ireland Greece Malaysia South Africa Mexico China Argentina Brazil Turkey Venezuela Russia India Massive Room for Growth in China: A Major Driver of Demand GDP per capita and Paper Consumption, JP 2000 US China

6. Growth in China’s Imports Projected imports at current annual growth rates (16% per year) By 2015, would equal 1/3 of global IRW production 2006: 140 million m3 Source: Chinese Customs Data.

7. Growth in China’s Exports Source: Chinese Customs Data.

8. Who’s Buying From China? US +800% Japan +200% Others +600% ** EU +700% Hong Kong 20% Source: Chinese Customs Data.

9. (3) Industrial Plantations: Growing Impact • Plantations currently provide 25% of industrial roundwood • By 2050 IRW demand projected to be between 2 and 3 billion m3 providing 50% or more of total supply. Sources: Chris Brown, FAO. 2004. – Weiner and Victor, 2000.

10. Top Ten Plantations Countries - % Value Global Market: 1961-2003 1961: top plantation countries accounted for 9.6% of global market value. 2003: these same countries accounted for 35.6% of global market value. Source: FAOSTAT 2003

11. (4) Declining Prices: Trends in Global Forest Products Exports Prices 1990-2003: All Downhill Source: Jaakko Poyry Consulting

12. Trends in Softwood Pulpwood Costs: 1980-2004 Source: Jaakko Poyry Consulting

13. U.S. South East Canada Chile Brazil Eastern Europe European Russia Declining Competitiveness: Softwood Sawlog Cost in 2002 - US with Some of Highest Costs in World

14. Cost Plus Freight to Baltimore: USD/MBF, 2001 Source: Jim DeCosmo: Temple-Inland

15. (5) Changing Constituencies: Growth of Forest Certification Indicating Expectations for SFM Less than 1% total Forested Area. Source: sustainablewood.org

16. The Growth of Forest Certification - Geographic Distribution: Most Important in the “North” Source: sustainablewood.org

17. Changing Constituencies: Urbanization and Fragmentation – New Rural America • 62 percent of U.S. forest land is within 150 meters (492 feet) of the forest edge. (2004) • Since 1970, 84 percent of U.S. population growth has occurred in the South and the West (correlation with location of public forest lands). • The degree of urbanization in the US will increase from 78% today to 82.5% in 2020, a slow down from the pace in recent years. • An urban constituency will have different expectations and uses of public lands, an increased demand for recreational opportunities. Sources: Kurt Riitters, USFS. - Newsweek, 2006. - World Urbanization, UN.

18. Changing Constituencies: Large timberland holders selling assets, investors going South Total of 21.3 Million Acres sold between 1997 and 2003. • Financial investors own roughly $37 billion worth of timberland in N.A. – up from around 5 billion in mid 1990s. • REITs and TIMO investments small in comparison with the annual $8-10 billion in forestry FDI to the developing world. Sources: Hancock Timber Resource Group. CIBC World Markets. PROFOR.

19. (6) Rising Commodities and Energy Costs: Wood Products Can Remain Competitive Higher Energy Prices present opportunities and challenges for the forest sector: - Fuels from Biomass - Less competitive wood product substitutes (e.g. Steel 2x4s) Source: Energy Information Administration

20. Transformative Technology: How Important? • GMO’s • Genetically modified trees present a political challenge, but also an opportunity for pest-resistant and more productive tree crops • Cellulosics • Wood scientists see the inevitable simplification of the product chain, as new technologies allow a single input (wood fiber) to create numerous outputs (structural wood to sheet wood to paper products)

21. (Some) Implications for Producers and Processors: A Mixed Bag of Opportunities and Challenges

22. The Changing Face of the Market: New Opportunities for US Producers • China now 3rd largest export market for USA • up 31% from ’03 • ’04 value: $531 M ($306 (78%) was HW) • ↑# HW Exporters: • logs: 70 (’99) – 200 (’04) • lumber: 208 (’99) – 350 (’04) • veneer: 75 (’99) – 200 (’04 Source: FAS 2004.

23. A Growing Role of Small Forest Business in the United States • Firms with 19 or less employees provide 54.5% ($1.26 Billion) of total salaries paid and represent 94% of all firms (2004 data) • Niche market, hardwood dependent firms growing in employment and contributions to payroll. Un-upholstered Furniture Manufacturers with 19 Employees or Less • Growth in wages relative to employment is demonstrative of high-value, small scale niche businesses that present best opportunity for US processors Source: US Census Data.

24. Key Questions: What Future for US Industry? • What portion of “big” industry will go south? • Will there be a “bounce” back to the north? (research needed) • What is the scope of the “other 50%”? • Will SMEs, NTFPs, medicinals and “niche” markets be enough (and viable) to finance forest management? (research needed) • What will be the constituency for forest restoration and management? • Can the new urban community be mobilized to care (and pay)? • Need to sustain engagement of rural communities, “new rural” • What is the optimal role for the USFS in growing the “other” 50%? • Strategic market information? • Regular/predictable supply from NFS? • An advocate for local, legal and sustainable products? • An advocate for forestry’s role in poverty reduction?