Construction Value Pathways: The Future of the Construction Industry and Wood-Based Building Maritime Lumber Bureau Annual Convention Charlottetown, PEI June 5, 2013

Agenda • Background • Overview • Canadian Forest Industry Response Options – 3 Pathways – Global Commodity Supplier – Innovator of New Materials – Integrated Solutions Delivery

• Next Steps

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Background

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@FPAC_APFC @BioPathPartner

2020 Vision “Canada’s Natural Advantage” “By 2020, the Canadian forest products industry will power Canada’s new economy by being green, innovative and open to the world. It is a place to grow and prosper.” 2020 Stretch Goals: Performance -- Deliver a further 35% improvement in the sector’s environmental footprint Products -- Generate an additional $20 billion in economic activity from new innovations and new markets People -- Renew the workforce with at least 60,000 new recruits including women, Aboriginals and immigrants

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FPAC Pathways Program Initiative #1: Bio Pathways Project (2009-2011) Initiative #2: Construction Value Pathways (2012-2013) Goal: •

How to produce innovative bio-products and extract more value from the wood fibre of every tree.

Research: •

•

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Examined economic, social and environmental benefits of integrating new bio-technologies within the traditional forest products industry Led by FPAC with FPInnovations, Natural Resources Canada, 6 provincial governments and scores of economic and scientific technical experts. External project leader

Construction Value Pathways: Overview

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@FPAC_APFC @BioPathPartner

The Case for Change • Tremendous growth opportunity – Global construction is a $8 trillion industry, growing at 8% p.a. – Tremendous potential even after discounting for different building cultures – Conventional wisdom CAGR of 1-1.5% for softwood lumber – Cyclical commodity markets and corresponding volatility

• Status quo is vulnerable to some threats – Erosion in higher value residential applications already taking hold • E.g. Decking; foam for insulated sheathing; concrete homes, siding

– Structural decline in traditional chip consumption • Need to find high value alternative uses 7

Canada is Missing a Lot of Opportunity 2025 Ranking

Residential

Commercial

Infrastructure

1

China

China

China

2

India

India

India

3

United States

United States

Indonesia

4

Japan

Russia

Venezuela

5

United Kingdom

Indonesia

Brazil

6

Venezuela

United Kingdom

Russia

7

France

Venezuela

Japan

8

Germany

Japan

United States

9

Mexico

France

Mexico

10

Russia

UAE

Iran

11

Canada Canada

Canada

18

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• Canada sells primarily to 4 residential markets • Tremendous opportunity to expand our presence in other geographic and market segments

The Global Construction Market is Changing • Change is happening across all markets – North America, Europe and Asia • Multi-residential, renovation/retrofit are becoming more important • Specifiers focus on performance not materials; wood perceived to be inferior • Industry is moving towards more integrated, global model – as are our competitors • Skilled labour shortage, green building, demographics, and densification are all changing how we build

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Voice of the Construction Industry MEGA TRENDS • Structural (fundamental) changes in the industry

– Changing demographics are leading to densification - multi-family v single family – and reduced building footprints – Growth in the renovation market and designing for future conversion (flexible spaces)

• Increasing pre-fabrication

– Prefabrication and modular systems are an integral part of keeping costs low and addressing a growing skilled labour shortage – Emphasis on simplicity of design, systems, materials, construction techniques

• Green becoming a ‘defacto’ element of construction – – – –

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Regulatory environment instrumental in dictating change Life cycle approaches to building Growing role for low-carbon and net-zero energy designs Potential opportunity for bio-based products – composites, engineered wood, energy – considered “new high tech” products

Implications for Building Materials “There is huge potential for improvement in the forest products industry as the move is made from on-site construction to prefab automation.” “Life cycle costs of wood are extremely competitive when compared with steel and concrete.”

• No premium for green products; greater value for solutions • Performance is critical, particularly durability, energy and carbon • Code compliance is a must; precision building needed • Specifiers’ (builders, developers, architects, engineers) needs related to products but also linked to suppliers, technology, practices • Etc… 11

Product Adoption Issues • Building codes – Fire resistance is a critical issue – Code revision process on fixed timeframe and slow – Product specific evaluations costly – Alternative solutions approach for projects costly and time consuming

• Non-regulatory market acceptance – Perception of inferiority (durability) of wood materials – Lack of skilled trades to install product / system and lack of training to develop skills 12

Residential Markets Summary • United States has historically been the largest residential market in the world – that position has been lost. • Beyond the three top markets (China, U.S. and India), there are 10 countries that spend greater than $50 billion in residential construction. • Multi-family buildings types are strong on a global level. • Geographic markets vary in level of business risk. “….when looking at global opportunities there are regions with significant growth but also significant risk. The nature of the residential construction also impacts the approach to market (single family/multi-family).”

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Non-Residential - Commercial Summary • This sector of the construction industry is very diverse with the Industrial segment being the strongest (40%), Commercial and Institutional following (21% and 19% respectively), and Offices being the smallest at 14% of the total sector. • This sector was impacted by the recession although not to the degree of the residential market - developing/emerging economies continued to dramatically invest in this area. • Future growth coming from regions like Russia, Indonesia, and Venezuela.

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Non-Residential - Infrastructure Summary • The non-residential infrastructure market faired the best of the three sectors. It grew at a regular pace without the dip. – Government Stimulus and Energy Demand • The non-residential infrastructure market is made up of projects mainly in Transportation and Energy (46-47% each), and Public Health (6%). • Annual growth rate around 4-5% before 2006 that grew to 11-13% during 2006-2008 and is now progressing at 7-9% per annum • This is a strong market for anyone looking for growth now. • Driven in the future by oil-based economies.

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3 Pathway Response Options

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@FPAC_APFC @BioPathPartner

Response: Three Pathways • Global Commodity Supplier Canadian Forest Products Industry

• Innovator of new building materials • More integrated solution delivery

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Innovator

Stora Enso

Status Quo

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Metsa

Nordic

Tolko

Global Commodity Supplier

SCA

Most of the Canadian Forest Products Industry

Weyerhaeuser

SODRA UPM

Integrated

LP

Value added

Global Response – Forest and Paper Industry

Response Options for Canadian Forest Products Industry: Pathway #1 – Global Commodity Supplier

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@FPAC_APFC @BioPathPartner

Pathway 1: Global Commodity Supplier • Not the status quo • Going global through geographic diversification

– Target future demand spots beyond China and the United States

• Product portfolio matching global building approaches • At the scale of the Canadian forest industry – Product volumes consistent with scale of existing operations

• Strong manager of currency and risk • Sawmills still dependent on chip market for additional revenue

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Response Options for Canadian Forest Industry: Pathway #2 – Innovator of New Materials

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@FPAC_APFC @BioPathPartner

Pathway 2: Innovation with New Building Materials – Product diversification • Diversify beyond conventional to new building materials provider • Generate a significant % of revenue from new products – E.g. products or systems that lower installed costs for builders

• Closely connect with builders and architects to identify new opportunities • Skilled at moving from concept through trials, through codes to implementation • Sales and marketing designed to introduce new products

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Pathway 2: Products/Systems Opportunities CATEGORIES

Commercially available now Huber R Sheathing, closed prefabricated wall panels

Upcoming in the mid-term Multifunctional panel developed at FPInnovations

Next generation engineered wood products

Engineered studs

Scrimtech, Magnesia core and inorganic panels, EXPAN

Composite panels and EWPs reinforced with cellulose filaments

Fiber based insulation

Knauf, Gutex, AgePan, Pavatex, Isonat, Dascanova…

Ultra-low density developed at FPInnovations

Rigid insulation boards with structural properties

Wooden floor decks in Introducing wood based solutions into steel and steel structures concrete structures (floor decks, partitions, roof (Nordic, Modulam, Tecolam, X-LVL…) systems, etc.)

Engineered studs, tall walls, roof systems

Prefabricated solutions for nonresidential construction

Exterior applications

Woodn, Accoya wood

Super critical CO2 modified wood products

Multifunctional panels

Wall panels combining several functions including sheathing, thermal insulation, water barrier, and in some case structural capacity

Engineered wood products lowering the ratio of cost or weight per MOE Insulation products based on wood fiber, either from a dry stream (MDF, for instance) or wet stream (pulp and paper).

Hybrid building solutions

Next generation of durable products which can withstand the test of time. Low maintenance, long 23 durability.

Siding: Trespa, Parklex Outdoor living:

Long term Nextgen CLT (lightweight, insulated, interlocking, including mechanical, etc.)

Response Options for Canadian Forest Industry:

Pathway #3 – Integrated Solution Delivery

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@FPAC_APFC @BioPathPartner

Pathway 3: More Integrated Solution Delivery • Capable of delivering installed solutions direct to a builder (residential/non-residential) • Sales and marketing integrated with builders/developers/ architects • Project management is the key to success • Capable of managing whole lifecycle including call-backs

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Pathway 3: Integrated Delivery Highlights • Most comprehensive and ambitious pathway – Future oriented to stay ahead of the curve – Maximizes value from all fibre sources

• Business model changes drive these opportunities – Sales and marketing will be key but so too are distribution and order fulfillment – Project management will also be key – just in time delivery

• Products and systems with low labour components, low carbon, high energy efficiency, and no increase in installed cost will create advantages • Some cases of smaller volumes but more value-added

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Next Steps

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@FPAC_APFC @BioPathPartner

Forest Company Action • Strong consideration of how they can work with the mega trends to realize the opportunities and safeguard against threats – 3 pathways • Super Commodity Supplier • Innovator of New Building Materials • Integrated Solution Delivery

• Support industry level actions

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Industry Level Action • Position forest industry as serious construction industry player • Vision 2020

• Building Codes and Standards – Clearly support Building Code revision process • 6 stories for 2015; “tall buildings” (up to 30 stories) for 2020

– Demonstration is needed in parallel

• Outreach and Communications – Coordinate with provincial associations and other partners on lobbying items – Expand dialogue with construction community based on results

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Government Action • Federal – Support for demonstration projects – Market development support, export and domestic – Support for innovation and transformation

• Canadian Commission on Building and Fire Codes – Revise National Model Construction Codes • 2015 to allow 6-storey wooden buildings • 2020 to allow “tall” wooden buildings

• Provincial – Implement the 2015 National Model Construction Codes – Support market development, demonstration and innovation

• Municipal – Non-discriminatory policies and supportive of demonstration projects 30

For More Information… Visit: http://www.fpac.ca/index.php/en/value-pathways/ Public Documents: Executive Summary Voice of the Construction Industry Report Factsheets: Market Leader Report: The Voice of the Construction Industry Evolving Construction Markets – Implications for Forest Products* New Business Models to Capitalize on Growing Opportunities in Construction* * Detailed report confidential to FPAC/FPInnovations member companies

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FPAC Members

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