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28 PalletCentral July-August 2014 U.S. HARDWOOD PRODUCTION & CONSUMPTION Projected to Reach Highest Levels in 8+ Years By Hardwood Publishing Company Production of U.S. hardwood lumber will rise 10% in 2014 to an eight-year high of 9.98 billion board feet (BBF), according to our updated estimates of production and consumption (Table 1). By comparison, we estimate that production rose just 5% in both 2012 and 2013 due primarily to weather and financial constraints. Year-to-date U.S. imports of hardwood lumber were up 9% through April to an annualized pace of 310 million board feet (MMBF), bringing total supply to 10.29 BBF for the year. A few new sawmills have opened— most focused on industrial lumber production—but additional operating hours at existing sawmills have been the main driver of higher production so far in 2014. Whereas many mills only operated 30-35 hours a week last year, most are now running 40 hours or more. Sawmills are also investing in new equipment, which will further expand production in the second half of 2014, and beyond. All told, production will be 38% higher in 2014 than when it bottomed out at 7.22 BBF in 2009. Production remained elevated in the early stages of the housing market crash, causing inventories to swell in 2007- 2008. Inventories steadily declined over the last several years and were as much as 1.1 BBF lower at the end of 2013 than at the end of 2009. Further inventory thinning is expected this year as total consumption exceeds total supply. We expect robust industrial lumber demand, record exports, and modest growth in domestic grade lumber sales to push consumption up 10% to 10.73 BBF in 2014. Notably, industrial lumber markets will account for 59% of consumption, as industrial items move higher in price and more sawmills look to maximize profits rather than grade lumber yield. In this article, we'll explain our estimates of consumption by individual industrial markets—where competition for raw material is fiercer than ever—and discuss the implications of expected consumption trends to the pallet industry. While consumption totals for several markets are difficult to determine, we've taken known shipment/sales data and applied some reasonable assumptions to calculate the best possible estimates. Importantly, our estimates of production and consumption for all years have been revised up based on additional research that showed much larger volumes going into industrial products like mats, board road and truck trailer flooring than previously thought. Our revised estimates are higher than past estimates by the federal government and other sources, but we believe them to be more accurate. Pallets and Crating The largest consumer of hardwood lumber by volume is the pallet industry. Pallet producers are trying to increase production to meet the demands of a growing economy, but raw material procurement remains a significant challenge. Forecasts for pallet production in 2014 vary widely. Given the shortage of hardwood and softwood material available for pallets, we've based our consumption estimate on a production level of 350 million pallets—the low end of forecasts. Typically, about 70% of pallets are made from hardwood, but we expect only 60% to be hardwood in 2014, or 210 million. Since the average pallet contains 17.3 board P MARKETS

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