March-April 2019

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Page 34 of 43 PalletCentral • March-April 2019 35 Renewed softwood lumber demand and capacity The total number of operating southern yellow pine (SYP) sawmills in the U.S. South has decreased over the last decade as a result of a very lean, transitional period in the years following the Great Recession. But as housing starts have increased and demand has remained steady, lumber production has fully recovered to pre-recession levels and the segment is rapidly expanding; five new facilities were established in 2017 and several new sawmill projects are on track to begin construction in 2019 and beyond. Most of these facilities plan for annual capacities of 250 to 350 million board feet (MMBF) – roughly 2 to 3 times the size of the previous generation of mills. Existing mills are also expanding – adding drying capacity, running longer hours and upgrading equipment to take advantage of the lumber market and plentiful supplies of SYP timber. In the markets where these new facilities are breaking ground and existing facilities are adding capacity, mills that are smaller, less-efficient and unwilling to adapt to the market change may be unable to compete. When these new sawmills are operational, the supply of wood fiber residuals will increase between 0.32 and 0.44 million dry tons per year based upon the published capacity estimates. What's driving the increase in production specifically in the U.S. South? Pine supply Total pine sawtimber inventory and harvested volume have increased at similar rates in the South, but growth still outpaces removals by 82%. As a measure of overall sustainability of the timber resource, this is one of the contributing factors that makes the region an attractive investment opportunity and has led to numerous upgrades and expansions of existing sawmills. While timber supply is a major consideration for expansion projects, it is far from the only factor; labor pools/costs, competitive market dynamics, transportation conditions and haul distances are equally important concerns. As a result of the abundant pine sawtimber supply, prices have remained low and globally competitive with little volatility – all important criteria for investment decisions. U.S. South pine sawtimber growth vs. removals: Pine Prices The gap between growth and removals shows no sign of abating due to two independent decisions made by opposing stakeholders in the supply chain. In the aftermath of 2008's financial collapse, sawmills were forced into survival mode. The mills that survived invested in new technology that improved efficiency and lowered costs. It is not, in fact, an overstatement to say that the industry shifted its cost structure significantly. At the same time, as log prices collapsed, landowners simply chose not to sell timber, opting instead to wait out the down cycle. A strange thing happened as a result of this confluence. As landowners waited for a recovery, trees grew larger and mills, owing to their new-found efficiency, used fewer trees. The net result after 10 years was that forests in the U.S. South had more and larger trees, and sawtimber prices in the region are virtually unchanged since 2007. Percent of age class as a function of acreage – U.S. South Prices have reflected this change in the market. The oversupply of pine sawtimber and improved sawmill efficiencies are keeping sawlog prices low, even as demand for lumber and sawmill production increases as a result of an improving housing market. At the same time, the demand for pulpwood has remained strong, and the effect of the aging forest and decreasing acres of pine pulpwood has not been realized. U.S. South delivered pine sawtimber and pulpwood prices While sawtimber prices have been low, lumber prices skyrocketed in first half 2018, though they have decreased precipitously since peaking in June, 2018. A number of factors contributed to the sudden rise in prices, including U.S. tariffs on

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