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1NWH Business Presentation
Western Hardwood AssociationWorld Forestry Center – Portland, OregonAugust 10, 2016
Northwest Hardwoods Insights into China’s Hardwood Lumber Demand
Presented By: T.J. Rosengarth - President & CEO ofNorthwest Hardwoods
2NWH Business Presentation
Northwest Hardwoods Insights into China’s Hardwood Demand
Topics
Brief Overview of Northwest Hardwoods
Global Demand / Chinese Market Overview
NWH’s View of China’s Hardwood Lumber Demand
Conclusions
3NWH Business Presentation
Northwest Hardwoods Company Overview
Company Highlights
Headquarters: Tacoma, Washington$800MM in Sales (8% NA market share)
30 locations – 1900 EmployeesSales: Domestic 55% / Export 45%
Sawmills - 670MMbfKilns - 400MMbf
1980 Purchased by Weyerhaeuser
2011 – Purchased by AIP
1969
1969 Pioneered Alder Lumber
1975 P ioneered Proprietary Grades
2016
2014 – Purchased by Littlejohn
Executed ElevenAcquisitions 2011-2016
1995 Established Sales Offices in China/ Japan
4NWH Business Presentation
WesternRegion
AppalachianRegion
GlacialRegionQuiet Valley, OR
Coos Bay, OR
Kinsale, VA
Garibaldi, OR
Eugene, OR
Mt. Vernon, WACentralia, WA
Longview, WA
Tuscumbia, AL
Onalaska, WI
Elkhart, IN
Dorchester, WI
Lewiston, MI
Grand Rapids, MI
Titusville, PA
Hopwood, PA
Dailey, WV
Mill Creek, WV
Hacker Valley, WV
Currie, NC
Los Angeles, CA
Beachwood, OH
Marlinton, WV
Endeavor, PA
Buena Vista, VAFairfield, VA
Loudonville, OH
Marienville, PA
Marion, NC
Hamden, OH
Ridgway, PA
Houston, TX
Ft. Worth, TX
San Antonio, TX
Savannah, GASawmill
Exotic Imports
Sales Office
Inventory
Remanufacturing
Concentration Yard
Key
Erie, PA
Beaverton, OR
Offices
Tacoma, WA
Northwest Hardwoods Company Overview – Operating Locations
5NWH Business Presentation
African Mahogany
BubingaAsh
“From Alder to Zebrawood
There’s Power in Choice”
Basswood
Hickory
Poplar
White OakMeranti
OSB & Comp. Parts
Chinese Plywood
Ipe
Makore
Jatoba
Sapele
Alder
Walnut
Red Oak
Hard Maple
Cherry
82%North American
Hardwood Lumber
20 Species
3%Tropical
Hardwood Lumber
50 Species
16%Imported HardwoodPanels / Components
One-Stop Shop for all Your Hardwoods Needs
Northwest Hardwoods Company Overview
Product Offering
Soft Maple
Pacific Maple
Russian Birch
6NWH Business Presentation
Northwest Hardwoods Company Overview
= NWH Sales Offices
NWH SALES & PROCUREMENT OFFICES IN ASIA(21 employees)
= Hardwood PlywoodExport Points
= DistributionWarehousesChina
69%
Netherlands1%
Malaysia0%
Italy1%
Taiwan5%
Indonesia2%
Thailand2%
Korea3%
Vietnam3%
Japan8% Other
6%
2015 KD Lumber Sales by Channel ($)NWH 2015 KD Export Sales
China – 70%
7NWH Business Presentation
Global Demand / Chinese Market Overview
8NWH Business Presentation
Global Demand for Wood Products
Forecast Global Demand for Wood Products
0
200
400
600
800
1,000
1,200
1,400
1,60020
16
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
Mill
ion
Cubi
c M
eter
s
Global Outlook for Timber Production
Hardwood Softwood
Note: Forecast assumes UN outlook on population growth and per capita timber consumption remains stable at 2014 levels
US would have to double production of timber over the next 30 years to meet anticipated global demand.
9NWH Business Presentation
Global Sources of Hardwood Timber
9
Source: 2012-2013 UNECE Forest Products Market Review 2012-2013, FAO 2010 Country Reports, International Tropical Timber Organization 2012 Annual Review and Assessment, industry commentary
Brazil Poor infrastructure for
certainty of supply Legality still quite mixed Limited certification Wide range of species
United States Wide range of species Affordable Highly preferred worldwide FSC/PEFC Certified 99% legal
Canada Too far North for significant volumes
and diversity of hardwood species Tight grain / small diameter
China Lacking internal production Log export restrictions from Russia Logs from China’s plantations are largely
softwood / poor hardwood
Russia Legality uncertain Limited certification Infrastructure prohibits meaningful
exports Primary hardwood species is Birch
Australia Australian production & export of
hardwood lumber has declined 2008-2012
Recent reduction in forest area
Malaysia Legality uncertain Limited certification & species Sustainability issues - forests conversion to
agriculture Rising domestic demand for housing
Indonesia Government policy constrains
resource availability Forest area has declined from
1990-2010 by about 20%
North America is uniquely positioned as global source for rising worldw ide use of hardwood lumber
Central Africa• Legality still quite uncertain• Limited certification• Corrupt governments and hugely deficient
infrastructure
20%20%
40%
10NWH Business Presentation
Global Demand for Wood Products
0
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
2004 2010 2020E
Domestic Natural Forest Timber SupplyDomestic Plantation Timber ProductionDomestic Timber ProductionTotal Timber Demand
Domestic Supply Deficit of ~40,000
MMBF
Domestic Supply
Deficit of ~65,000 MMBF
Domestic Supply
Deficit of ~70,000 MMBF
China Wood Supply Deficit
China’s forest coverage ratio is 22% *(global average is 31%)
Productivity of Chinese Forests are poor
50% of China’s timber is imported
China has initiated logging bans
Chinese plantations of Eucalyptus don’t substitute for North American hardwood or softwood
(Equal to Canada’s total wood production in 2014)
11NWH Business Presentation
Chinese Market Overview
2005 2016
China Before & After
12NWH Business Presentation
Chinese Market Overview
0%
2%
4%
6%
8%
10%
12%
14%
16%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24
China: Real GDP Growth Rate
China’s economy is stepping down to sustainable levels
13NWH Business Presentation
Chinese Market Overview
During 2010 to 2013 China’s housing exceeded demand by 40%
0
200
400
600
800
1,000
1,200
1,400
1,600
2004 2006 2008 2010 2012 2014
Mill
ion
Squa
re M
eter
s
China: Residential Housing Starts and Sales
Starts
Sales
14NWH Business Presentation
Chinese Market Overview
Urbanization will continue to drop but it is still massive
0
20
40
60
80
100
120
1986-90 1991-95 1996-00 2001-05 2006-10 2011-15 2016-20 2021-25 2026-30
Mill
ion
New
Urb
an R
esid
ents
China: Increase in Urban Residents170MM people
in 9 years!
15NWH Business Presentation
Chinese Market Overview
China will remain the “big dog” in driving export demand
16NWH Business Presentation
Chinese Market Overview
The Dramatic Rise in China’s Standard of Living
17NWH Business Presentation
Chinese Market Overview
China’s Shift to Internal Consumption of Furniture$6 $7 $8 $9 $8 $8 $9 $9 $1
1
$12
$14
$15
$17
$18
$20$6 $7 $9 $1
3 $21
$27 $3
3 $40 $4
6 $51 $5
6 $61 $6
6 $71 $7
7
$11
$14 $1
7 $22 $2
9 $35 $4
2 $49 $5
7 $63 $7
0 $76 $8
3 $90 $9
6
'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14E '15E '16E '17E '18E
$US
in B
illio
ns
Exports Internal ConsumptionInternal Consumption vs Export moved from 50-50 in 2005 to 80-20 in 2015
18NWH Business Presentation
NWH’s View of China’s Hardwood Lumber Demand
19NWH Business Presentation
NWH’s Recent Efforts to Better Understand China
Objective: Meet with Builders/Designers to understand current markets - Economy and building activity- Hardwood demand
Met with 5 of our major customers Visited 3 housing developments Interviewed 6 major developers and interior design firms Visited retail furniture outlets
Note: Simply NWH views based on ourdiscussions and experience in China
NWH’s View of China’s Hardwood Lumber Demand
20NWH Business Presentation
Market Dynamics
- Everyone still quite positive despite the Housing Bust.
- Average laborer wages still rising. Now at $600-700/month
- Tier 1 (large) cities still growing at frantic pace.- Tier II cities: 50% rapid growth / 50% over built.- Tier III cities and below – generally over built.
- Major developers moving towards in-house designers / architects.- General contractor specifies and sources materials (not the Developer).- Residential Consumers are “takers” – little influence on design / content.- Pre fit of housing is heavily encouraged by government.- Mid to high end development forced to subsidize low end residential.
NWH’s View of China’s Hardwood Lumber Demand
21NWH Business Presentation
Typical Residential Development(Shanghai, Beijing, Etc.)
NWH’s View of China’s Hardwood Lumber Demand
22NWH Business Presentation
Interior of US Home3500 – 5000 square feet / $.80MM to $1.5MM
NWH’s View of China’s Hardwood Lumber Demand
23NWH Business Presentation
Interior of Chinese Home1600 – 2400 square feet / $3.0MM to $6.5MM
“China Consumer Preferences Are Not The Same as the US”
NWH’s View of China’s Hardwood Lumber Demand
Kitchen
24NWH Business Presentation
Interior of Chinese Home1600 – 2400 square feet / $3.0MM to $6.5MM
“China Consumer Preferences Are Not The Same as the US”
NWH’s View of China’s Hardwood Lumber Demand
Bedroom
25NWH Business Presentation
Interior of Chinese Home1600 – 2400 square feet / $3.0MM to $6.5MM
“China Consumer Preferences Are Not The Same as the US”
NWH’s View of China’s Hardwood Lumber Demand
BathRoom
26NWH Business Presentation
Interior of Chinese Home1600 – 2400 square feet / $3.0MM to $6.5MM
“China Consumer Preferences Are Not The Same as the US”
NWH’s View of China’s Hardwood Lumber Demand
LivingRoom
27NWH Business Presentation
Interior of Chinese Home1600 – 2400 square feet / $3.0MM to $6.5MM
“China Consumer Preferences Are Not The Same as the US”
NWH’s View of China’s Hardwood Lumber Demand
MasterBedroom
28NWH Business Presentation
US definition of luxury is different than theirs Very little hardwood on fit-out
They pay cash up front for big ticket items. Often use family money – not credit
On-line purchasing is taking off.
Not uncommon to spend up to $300K for furnishings on high end home.
Real hardwood is heavily preferred for furniture – thus the strong growth.
NWH’s View of China’s Hardwood Lumber Demand
29NWH Business Presentation
E-commerce transactions were over 500 billion in 2010 (CNNIC) 3.2% of total retail sales and growing at 30% a year.
B2C in furniture and interior decoration was USD$1.2 billion in 2013 Growing 15% a year.
OEM’s desire to shift towards online sales still has it’s challenges
Retail is still traditional with many small shops
Difficult for smaller companies to establish brand identity and trust online
Larger producers however are growing B2C rapidly: A-Zenith, OPPIEN, Kuka Sofa, etc.
Business to Customer (B2C) - Online
30NWH Business Presentation
Chinese economy is slowing but still a major force for us.
Don’t have their own wood to support the demand. North America will be the supplier.
“Standard of living change” is THE major driver for hardwood demand, not the houses themselves. Taking place elsewhere as well.
Easy to misunderstand the market. Information isn’t always reliable. Time on the ground allows you to really understand.
On-line purchasing (B2C) will represent a dynamic market changeto take advantage of.
Conclusions
31NWH Business Presentation
Questions?????
32NWH Business Presentation
Appendix
33NWH Business Presentation
Chinese Market Overview – 10 years of Dynamic Change
-46%
-38%-35%
-31%
-20%-18%
-4%
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
RussianRuble
Brazilian Real NZ Dollar AustralianDollar
Euro CanadianDollar
Chinese RMB
Loss in Value Against the US Dollar Since July 2014
The Ruble and Real Are Suddenly Much More Competitive
34NWH Business Presentation
Appendix II
35NWH Business Presentation
Chinese Market Overview
Unlikely the boom will be repeated due to tighter government controls
0
100
200
300
400
500
600
700
800
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Mill
ion
Boa
rd F
eet
US Exports of Hardwood Lumber to China
1999 - 2006US Furniture
Manufacturing Shift to
2006 - 2009US Housing
Bust and Worldwide Economic Turmoil
2010-2014China’s
Housing Boom
2009 - 2015+ 242.1%
Source: USDA FAS Graph:HMR Executive®
2015 & BeyondChina's Growing
Middle/Upper Class
Consuming US Hardwoods
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
Billi
ons
($U
SD)
World’s Top 10 Hardwood Lumber Exporters 2011-2015
20112012201320142015
Source: Global Trade Atlas
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
Billi
ons
($U
SD)
World's 10 Largest Hardwood Lumber Importers 2011-2015
2011
2012
2013
2014
2015
Source: Global Trade Atlas
$-
$100
$200
$300
$400
$500
$600
Mill
ions
($U
SD)
World Hardwood Lumber Importers (Without China) 2011-2015
2011
2012
2013
2014
2015
Source: Global Trade Atlas