Atlantic Wood Export Market Study The Caribbean, Mexico and the Middle East Highlights, Findings, Recommendations Presented to

Maritime Lumber Bureau 74th Annual Convention by

Peter Milley, FCMC, Partner June 6th, 2013

Presentation Outline • Overview / Introduction of study • Context – why new market approaches are essential • Findings from regional market analyses • Conclusions and recommendations

Study Approach and Methodology •

Overall purpose – analyse / update existing studies; address potential for Atlantic wood products exports to the Middle East, Caribbean and Mexico

•

Specific objectives – – Identify constraints and barriers to entry of each identified market – Identify any competitive advantages for Atlantic producers – Identify viable, potential markets for Atlantic wood products – Understand export readiness of Atlantic producers – Investigate shipping costs to each market – Identify potential for improving market development efficiencies – Develop action steps for successful entry to each of the targeted export markets

Context – New Markets Essential

2.6 million more housing starts than households formed

Source: US Census Bureau, US Dep’t. of Commerce

Context – New Markets Essential Total -- > 25.3 million homes

2008 – 2011 14.2 million foreclosures 26.3 % sold 10.5 million unsold

Source: www.statisticbrain.com, Freddie Mac, Fannie Mae, US Federal Reserve, RealtyTrac

Context – New Markets Essential • Housing market characteristics point to continuing, fundamental changes … – ≅ 5 - 6 million homes on lender balance sheets • Some argue number significantly higher

• Roughly ten years’ sales at current sales rates

– > 180,000 - 200,000 new foreclosures monthly – Reduced average home size – both single family and multi-unit -- reported in 2010 for first time • Multi-unit homes representing increased share

Context – New Markets Essential • Housing demand changes most significant… – Household formations in US – 0.35 million in 2010 • Lowest level ever recorded • Some projections suggest formation rate may be increasing • Well below level of 1.5 – 1.75 million needed for ‘normal’ market

– US housing starts in 2011 up slightly from 2010 • 610,000 units still 70% below 2005 peak

– Owner-occupied housing 66.5% in US • Below 2004 peak of 69.2% and decline continues

Context – New Markets Essential • Paper markets in maturity or decline in North America; – Over the last five years, 81 pulp / paper mills have closed across North America (Jaakko Pöyry) • 18 newsprint mill closures – 12 in Canada (Jaakko Pöyry) Employment (person-years) in the forest industry, 2001 and 2011 Employment

2001

2011

Direct

343 800

233 900

Indirect and induceda

530 000

360 600

Total

873 800

594 500

Estimate calculated by the Canadian Forest Service based on data from Statistics Canada Labour Force Survey. Source: Statistics Canada, Labour Force Survey, March 2012 (special extraction)

a

Context – New Markets Essential

>43% production decline peak to trough

Context – New Markets Essential

Context – New Markets Essential

Context – New Markets Essential

Craigslist Begins Expansion Beyond Bay Area

Ebay buys Ibazar and Pay-Pal

Ebay launches Kijiji

Source: RISI, PPPC, NRCan, Halifax Global Estimates, American Assoc. of Newspaper Publishers, SEC

Context – New Markets Essential Direct employment in the forest industry, by forest-related subsector, 2011 Subsector

Employment Percentage change (person-years) from previous year a

Wood product manufacturing

112 300

0.0

-3.6

Pulp and paper manufacturing

75 100

1.6

-3,6

Forestry and logging

26 400

-17,3

-6.4

Forest industry support activities

20 000

-0.2

-1.1

Total c

233 900

-1.8

-3.8

Percentage change calculated based on raw data. The period 2001–2011 c Total differs due to rounding. Source: Statistics Canada, Labour Force Survey, March 2012 (special extraction) a

b

Average annual percentage change over previous 10 years b

32% Decline in Total

Context – New Markets Essential

Context – New Markets Essential Changing Source of Competition and Markets

Source: 4Front Atlantic, 2013

Market Study Findings • Caribbean • Mexico • Middle East

Findings – Caribbean Atlantic Wood Exports to Caribbean HS 4401 – Fuel wood; wood in chips or particles; sawdust, shavings, wood waste and scrap HS 4407 – Lumber (thickness >6mm) HS 4409 – Wood (lumber) continuously shaped HS 4411 – Fibreboard HS 4412 – Plywood (plies 6 MM, NES*

2008

2009

2010

2011

2012

29,320

80,650

136,030

19,521

--

HS 440710 - LUMBER (THICKNESS >6MM) - CONIFEROUS WOOD

--

--

--

4,100

--

HS 442190 - WOOD ARTICLES NES (INCL LADDERS, SIGNS, TRELISSES, FENCING PANELS, PICKETS, COFFINS AND CASKETS)

--

333

--

--

--

29,320

80,983

136,030

23,621

--

Total

Findings - Mexico • Competitive positioning presents significant challenges. Producers in other areas advantaged by -– Closer proximity, access to established shipping routes, reduced shipping costs and time; – Spanish language commonality; – Ability to provide the sizes, specifications and quality wanted by the Mexican market; – Access to low cost species; – Permanent representation in the market; and – Ability to offer longer payment terms with stable pricing.

Findings - Mexico • Trade constraints – Importers pay 15% value added tax and must have appropriate license – Green lumber (not heat treated or KD) requires phytosanitation certification – Regulations subject to frequent change – Wood products shipped by truck must be offloaded after customs – reloaded to Mexican owned equipment

Findings - Mexico • Ocean freight good option for non-U.S. origin lumber – Rates competitive for annual container volumes

Destination Vera Cruz

Country Mexico

Rate USD/container

$ 2,565

Type 40ft DV/HC

Port of Exit Halifax

Transit 15 days

Findings – Middle East • Atlantic wood exports dominated by hardwood chips; very limited exports of other products ( CAD)

HS 4401 – Fuel wood; wood in chips or particles; sawdust, shavings, wood waste and scrap* HS 4407 – Lumber (thickness >6mm) HS 4411 – Fibreboard HS 4415 – Cases, Boxes, Crates, Drums, Pallets, Load Boards and Similar Packing Articles of Wood HS 4421 – Other Articles NES of wood Total

2008

10,497,518

306,084

2009

2010

2011

2012

3,380,518

2,821,236

16,744,837

30,967,142

42,000

10,600

136,952

323,652

113,491

93,295

356,377

3,020 103 10,803,602

3,536,009

2,925,131

17,238,269

31,293,814

* The high values in category HS 4401 are due to large shipments to Turkey from Nova Scotia and New Brunswick of HS 440122 – Wood in chips or particles – non-coniferous.

Findings – Middle East • Competitive positioning presents significant challenges for Atlantic producers – Market dominated by network of trading agencies and merchants • Most deal in many products – knowledge of wood products low • Price sensitivity extreme

– Successful exporters to region must develop close working relationship with trading agency – Common end uses for wood imports include: concrete forming, scaffolding, pallet, wire cabling/spool manufacturing, prefabricated housing, flooring, outdoor decking (cedar)

Findings – Middle East • Shipping costs and time can be constraints – Project lead times often do not allow for shipping time from Atlantic Canada – Documentation requirements often result in extra charges Destination

Country

Rate USD/container

Type

Port of Exit

Transit

Aqaba

Jordan

$ 2,335

40ft DV/HC

Halifax

30 days

Jeddah

Saudi Arabia

$ 2,410

40ft DV/HC

Halifax

14 days

Shuwaikh

Kuwait

$ 2,842

40ft DV/HC

Halifax

34 days

Doha

Qatar

$ 3,242

40ft DV/HC

Halifax

30 days

Izmir Jebel Ali

Turkey

$ 2,395

40ft DV/HC

Halifax

35 days

United Arab Emirates

$ 2,472

40ft DV/HC

Halifax

23 days

Findings – Exporter Readiness • Consultation process explored five themes – – Export market experience to non-US markets – Sales organisation and capabilities – Manufacturing / production flexibility and capabilities – Export focused financial and administrative capacities – Overall interest / capabilities to pursue new export sales

Findings – Exporter Readiness • Unstructured consultations / interviews completed with four respondents – – Hardwood producer of pallets, hardwood flooring, cut-to-size cabinet and furniture components, quality hardwood lumber and pallet lumber, with precision end-trimming and machining capability – Random length, mixed softwood, (Pine and SPF), sawmill; – SPF stud mill – Eastern White Pine / hardwood sawmill and cut stock producer manufacturing cut-to-size components, millwork, clear cut stock, and finger-jointed blanks, with precision end trimming and machining

Findings – Exporter Readiness • Export market experience – – All respondents reported export sales to non-US markets • Much of that activity predates 2008 Great Recession • Wide range of country markets involved including United Kingdom, Ireland, Iraq, China, India, Pakistan, Mexico, several Caribbean nations, Israel, and Ukraine

– Hardwood producer actively pursues wide range of export markets – Pine / hardwood producer focused on Northeastern US and Central Canada only – SPF producers sell lower grade pallet stock and lower grade framing lumber to Middle East and UK • Primarily interested in export sales of products currently manufactured

Findings – Exporter Readiness • Sales organisation and capacities – – Hardwood manufacturer reports well-established, export focused export sales organisation that includes a mix of employees and agents in-market – Softwood producers report limited sales capacity generally one person responsible for sales • Expressed interest in responding to incoming enquiries, rather than active outward seeking of new opportunities

Findings – Exporter Readiness • Manufacturing / production flexibility and capabilities – – Cut stock producers report high level of manufacturing flexibility / capability to meet wide range of product demands from markets

• Softwood producers focused on commodity products -- less manufacturing flexibility – Large volume orders required to justify product change

Findings – Exporter Readiness • Export focused financial and administrative capabilities – – All respondents reported experience with EDC insurance • Expected no major challenges addressing incremental export sales requirements

– One respondent expressed concern that paper work for exports to non-U.S. markets somewhat daunting

Findings – Exporter Readiness • Overall interest / capabilities to pursue new export sales in non-US markets -– All respondents report some interest • Softwood producers interest limited to larger volume orders • Active exporter hardwood producer strategically focused on such markets – Has invested in export focused sales staff and participates regularly in trade missions

Conclusions • Caribbean region a viable market for Atlantic wood products – Particularly products focused on tourism-focused resort and residential construction • Wide range of product needs -- commodity building products to cabinetry and architectural mouldings and furniture

– Larger, wealthier countries, (eg. The Bahamas, Cayman Islands, Bermuda, Trinidad and Tobago), represent good opportunities • Smaller countries, (eg. Sint Maarten) experiencing significant new development investment have potential

– Recognise demand will fluctuate significantly year-to-year

Conclusions • Selected areas of Mexico appear to have potential for non-commodity products – Cabinetry, architectural mouldings, furniture and possibly flooring – Producers must be willing to invest in development of essential ‘in-market’ sales and distribution relationships

• Middle East holds relatively limited potential – Exception will be for producers able to forge solid relationship with ‘in market’ agent

Conclusions • A note regarding Cuba – – May have potential as country evolves towards more open markets – Companies interested must work closely with Canadian Government officials to gain access – Must be prepared for lengthier sales cycles and related increased market development investment

Recommendations • Five key recommendations – – Market focused sales training program for potential exporters • Program should be combined with in-market support from provincial and / or federal trade officials

– Develop and compile market intelligence and research to understand tourism-focused resort and residential development / construction – Seek funding support for targeted, outbound trade missions • Missions could be combined with ‘in market’ product usage seminars

– Consider inbound trade mission for buyers from targeted markets

Recommendations • Most importantly – – Maritime Lumber Bureau and its government and industry partners commit to a sustained, long-term effort to bring about the change in export market focus needed to ensure the industry’s longer term viability

Questions

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