the global economy and it’s impact on lumber prices charles d. ray the pennsylvania state...

The Global Economy and It’s Impact on Lumber Prices

Charles D. RayThe Pennsylvania State UniversityJanuary 16, 2012

The End of the World and It’s Impact on Lumber Prices

Charles D. RayThe Pennsylvania State UniversityJanuary 16, 2012

No Trend is a Good Trend

“Will there be any change in industrial softwood markets in 2012? It’s not likely. Will there be any big moves in low-grade hardwood markets in 2012? I don’t see them on the horizon.”

- Jeff McBee, Pallet Enterprise, December 2011

C.D. Ray: Western Pallet Association, January 16, 2012

Lumber Price Forecast Scenarios

• Housing stays on current track; slight increase driven by apartment construction

• No lumber-specific trade/housing policies enacted this year• International Paper continues to run Temple-Inland

sawmills• Wood-based energy demand slackens due to natural

gas/oil development• No massive natural cataclysms or international wars in

2012• Chinese growth continues at a slowing pace• Russian lumber imports and exports increase slightly due to

WTO admission

Base assumptions:


Lumber Price Forecast 2012


Prosperity, Chinese Style – An Update

Chinese Economy struggles to hang on

• Real estate bubble has burst



• Real estate bubble has burst• Inflationary pressures mounting



• Real estate bubble has burst• Inflationary pressures mounting• High-speed rail turns into magnificent

boondoggle




boondoggle• Credit crisis rising




boondoggle• Credit crisis rising• (No) Smoke and mirrors


So China’s economy is flattening.

The rest of the world is already there, and has been there for a while.


Guess how much…

• …the Italian economy has grown in the last 10 years?– Zero

• …net average wages in France have gone up since 1975?– Zero

• …net new employees the Japanese have added to the workforce in the last 20 years?– Zero


Guess how much…

• …the average hourly wage in the US has gone up since 1975?– Zero

• …the real, private sector economy of the US has grown in the last decade?– Zero

• … US housing – and household wealth – has increased since the beginning of the 21st century?– Zero


Inflation-adjusted wage growth


PSU Wood Operations Laboratory, 2011


Lessons Learned: What happened in 2011

• "Is there any point to which you would wish to draw my attention?" "To the curious incident of the dog in the night-time." "The dog did nothing in the night-time." "That was the curious incident," remarked Sherlock Holmes.


Lumber Price Forecast Scenarios

• Scenario 1 – Assume optimistic housing upturn– Prediction: Significantly higher lumber prices– Result: Didn’t happen

• Scenario 2 – Assume housing starts stay depressed– Prediction: Lumber prices slump– Result: That’s what happened


Lumber Price Baselines


Scenario 2 - Oil to $110 by 2012; US Housing Scenario Worst Case, Chinese Economy Stays Strong. RL Composite to $270, Coast 2x4 to $200

Composite index follows oil price trends

WC Economy grade doesn’t


Composite Lumber Prices at 2.5% annual inflation2x4 Coast Economy at 2.5% annual inflation



A look at the world as we enter 2012…

• China’s economy is still growing, but at a slowing rate. Equity bubble is now acknowledged, and non-food commodity consumption is being cut back.


And industry expectations are that the current Chinese lumber buying spree will continue

Chinese total lumber imports, actual and forecasted





• The ECB is weakening the Euro through monetary policy, forced to do so to prop up EU banks, unsustainable countries, and social programs


“As the European banking crisis deepens, the deleveraging of the European global banks will have far-reaching implications not only for the Eurozone, but also for credit supply conditions in the US and capital flows to the emerging economies. Just as the expansion stage of the global banking glut relaxed credit conditions in the US and elsewhere, its reversal will tighten US credit conditions.”

- Shin, H.S., “Global Banking Glut and Loan Risk Premium”, Princeton University, 2011 IMF Annual Research Conference, November 10-11, 2011





• US housing market still stuck on the bottom


Currently, there is an upbeat mood in the media about “recovery”. But optimism seems to based on higher numbers in retail spending and the stock market, not on durable goods.

Housing remains mired in a seemingly endless swamp.


National Association of Home Builders, www.nahb.org, 12/29/11

http://www.nahb.org/

Actual home sales numbers tell the story of an economy on life support

PSU Wood Operations Laboratory, 2011 data source: http://www.census.gov/construction/nrs/historical_data/


http://www.census.gov/construction/nrs/historical_data/




• US housing market still stuck on the bottom• Canadian and U.S. timber and lumber prices are

continuing to be propped up by Chinese demand


China Is A Shining Light In The Global Economy--UpUntil Now, Perhaps

“One of the only hopes left is China so if its economy suffersa severe downturn we should all start worrying about ourjobs. Perhaps because China is one of the few hopesremaining as the US and Europe face renewed recessions,it is hard to separate the fear from the facts. The propertysector is the source of most of the anxiety becauseof its importance to the overall economy. Everythingseems to depend on the success of China’s governmentin transforming this investment-focused growth modelwithout causing major disruptions, such as a collapse inthe property market. To call this task difficult would be anunderstatement.”

-Timber Trends, October 2011The Campbell Group





• US housing market still stuck on the bottom• Canadian and U.S. timber and lumber prices are

continuing to be propped up by Chinese demand• Oil impacts everything, and is on the rise again


In a low demand world, is oil becoming a leading indicator of

lumber?



In a low demand world, oil seems to hold its price longer than other commodities



“Spike” factors

• Military attack affects Iraqi, Iranian, Saudi, or Russian oil supply - oil price shoots up


“Spike” factors


• EU banks collapse, trigger world-wide recession


“Spike” factors



• Internet terrorism results in financial turmoil


“Spike” factors



• Internet terrorism results in financial turmoil• Chinese inflation, slowing economy leads to

civil unrest and government response that flattens its economy Short-term

Long-termC.D. Ray: Western Pallet Association, January 16, 2012

“Spike” factors



• Internet terrorism results in financial turmoil• Chinese inflation, slowing economy leads to

civil unrest and government response that flattens its economy

• Natural catastrophe Short-term

Long-termC.D. Ray: Western Pallet Association, January 16, 2012

Lumber Price Forecast 2012


Conclusions for 2012• Barring “seismic” events, lumber prices will remain

fairly stable• World economies and industries are in “consolidation”

mode, as governments struggle to prop each other up• Will the Chinese, Russians, Iranians play along?• World debt levels point toward global “reset” in near

future, with corresponding increase in world violence, and world-wide recession

• Credit markets will get even tighter• But pallets will still be needed, and wood, steel, and

labor are all headed for historic lows

THE END.

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the global economy and it’s impact on lumber prices charles d. ray the pennsylvania state...

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