1. GENERAL ECONOMIC SITUATION - 2002
After contracting during the first nine months of 2001, US GDP rose during the fourth quarter of that year and continued to expand uninterruptedly during 2002. However, the pace of the expansion has been much slower than the 3-4 percent growth normally seen during the first year of past economic recoveries. Moreover, the recovery's strength has varied widely by sector, with growth in manufacturing being particularly weak.
Manufacturing production declined in September and October of last year and again in December. Although the West Coast dock strike, which ended in early October, contributed to the backsliding, the major causes were a slowdown in inventory building, foreign competition, and lacklustre capital spending. At the same time, uncertainty over a potential war with Iraq, a volatile stock market, and corporate accounting scandals dissuaded companies from lifting capital spending.
The outlook for the economy and the manufacturing sector remains clouded. GDP growth slowed to just 0.7 percent in the fourth quarter of 2002 and some economists are talking of a double-dip recession. Much will depend on developments with respect to Iraq and oil prices.
Working in the economy's favour is the fact that the excesses of the late 1990s have been at least partly worked off during recent years. The more time that passes, the less detrimental past overspending on hi-tech and other capital projects becomes. Moreover, as of January 2003, the dollar has eased from the high level reached in early 2002 - more than 20 percent in relation to the euro and about 10 percent versus the yen, a development that may eventually help to repair US competitiveness.
So, growth will remain precarious through at least mid-year because capital spending isn't providing much impetus and consumer spending remains constrained by high debt levels and an uncertain job market.
We project 2003 GDP growth at 2.8 percent, versus 0.3 percent in 2001 and an estimated 2.4 percent last year. Manufacturing production will probably grow approximately 2-3 percent this year, after declining 5 percent in 2001 and by 1 percent in 2002.
2. PERFORMANCE OF THE PAPER INDUSTRY - 2002
US production of paper and paperboard, at an annual rate of 81 million tonnes, was down 0.3 percent in 2002. However, this small decline followed setbacks of 2.5 percent in 2000 and a steep 5.9 percent drop in 2001. The cumulative impact of the recent declines resulted in the most ground being lost by US paper and paperboard production since the mid-1970s, when the paper industry and the US economy as a whole suffered through a severe inventory cycle.
Inventory liquidation played a role in the recent production declines, as did the strong dollar. In fact, the US trade deficit with respect to paper, paperboard and converted products has consistently expanded during recent years, climbing from 5.7 million tonnes in 1999 to an estimated 6.9 million tonnes in 2002, an increase of 20 percent. Slowing long-term growth trends in paper and paperboard consumption associated with displacement by electronics and plastics may have been responsible for some of the recent production backsliding.
After reaching a cyclical high of approximately $10.5 billion a year in both 1999 and 2000, US paper industry profits plunged to $2.5 billion in 2001. The sharp decline mainly reflected weaker prices, but production declines also played a role. While not all of the numbers have been tallied, it appears likely that profits will be flat-to-further-down in 2002. However, the weakness was most pronounced during the early part of the year, suggesting that profits are likely to show some recovery in 2003, provided of course that the US economy does not slip back into recession.
Key grades:
Newsprint
The US newsprint market weakened further during 2002, as advertising lineage continued to soften. US newsprint demand declined an estimated 1.9 percent last year, after dropping 11.5 percent in 2001. However, total US shipments of newsprint declined approximately 8 percent in 2002 to 5.3 million tonnes, while shipments from US mills to the domestic market fell an estimated 8.3 percent. At the same time, Canadian newsprint shipments to the United States actually increased by an estimated 4.3 percent. These divergent trends reduced the US share of the domestic newsprint market.
Printing-writing
US printing-writing paper shipments declined an estimated 0.2 percent in 2002, to 22.2 million tonnes. This followed a 9.3 percent decline in 2001. However, the sector may be poised for recovery in that mill inventories for all major grades have been trimmed since early 2001 and advertising page counts are showing tentative signs of rebound.
US imports of printing-writing papers have been on the rise during recent years and rose by another 2 percent in 2002, as large increases in coated free sheet imports offset declines in coated groundwood paper and uncoated free sheet imports. Exports of printing-writing papers declined by approximately 16 percent last year, pulled down in large part by reduced uncoated free sheet exports.
Containerboard
US containerboard production rose 3.3 percent in 2002, after declining in the previous two years. Some of the strength derived from export-related production, which rebounded 5.7 percent in 2002 after declining 9 percent in 2001. Inventories of containerboard at mills and box plants edged slightly higher in 2002. Corrugated box shipments, which have been hurt by continued weakness in US manufacturing activity, were flat in 2002, after declining during the two prior years.
Boxboard
Total US boxboard production declined 1 percent in 2002 to 12.9 million tonnes. This sector of the industry has been facing inroads by plastics and slow growth of its end-use markets. Export-related production of boxboard rose 4.5 percent in 2002, with much of the growth accounted for by bleached and unbleached kraft folding boxboard.
Folding boxboard output for domestic use declined one percent in 2002. Milk carton and food service is another important boxboard category. US production of these grades for the domestic market held stable at about 1.7 million tonnes. However, export-related production declined 11 percent in 2002 to 376 000 tonnes.
Market pulp
The US market pulp sector improved in 2002 due mainly to a 7.1 percent increase in exports. US total shipments of chemical paper grade market pulp increased by 4.2 percent in 2002, after dropping by 3 percent in 2001. Exports were the biggest contributor to last year's gain as domestic demand remained essentially flat. Shipments to Asia surged last year due principally to booming consumption and consumer inventory building in China. Exports to Western Europe were up 8.6 percent in 2002.
3. PERFORMANCE OF THE WOOD PRODUCTS INDUSTRY - 2002
A strong US housing market throughout 2002 contributed to an equally strong demand for wood products. US consumption of conifer sawnwood totalled an estimated 130 million cubic meters in 2002, up about 4 percent compared with 2001. However, despite high demand, the US wood industry suffered through a third year of historically weak product prices.
US residential construction, the main driver of wood products demand, outperformed most other sectors of the US economy. Construction and sales were buoyed by mortgage loan rates that dipped to some of the lowest levels in at least 35 years. Both new and existing home sales set several monthly records during the year. At the end of 2002, the average mortgage loan rate was just 5.6 percent. Housing starts during the full year totalled an estimated 1.7 million units, 6 percent above 2001. The average size of single family homes in the United States also continues to increase. Single-family homes comprise over three-quarters of new homes constructed in the US Housing starts during 2003 are projected to remain as strong as in 2002, or only slightly lower.
Other new construction, including commercial buildings and publicly funded projects, was less robust than housing, but still strong by historic standards. The value of all new construction totalled approximately $846 billion during 2002. The new construction market is only part of the story. Refinancing of existing mortgages has been giving homeowners cash to spend which, in turn, has spurred consumer purchases along with growth in repair and remodelling and other non-residential construction.
Despite all of the robust construction activity, wood product prices have been extraordinarily soft for about three years. A combination of factors has contributed to soft product markets including excess capacity from improved efficiencies, lower exports, and higher imports. The value of all US wood exports during the first ten months of 2002 was down nearly 5 percent compared to 2001. The decline was felt mainly in coniferous roundwood, sawnwood and structural panel exports. Non-coniferous products managed a significant gain in volume, although a smaller gain in value. US imports of wood products increased about 5.0 percent in value during the first ten months of the year; the volume of coniferous sawnwood imports rose 4.2 percent.
The prolonged dispute over Canadian imports entered a new phase in May 2002 when the US government imposed countervailing and anti-dumping duties totalling 27.2 percent on imports of Canadian coniferous sawnwood. Canadian imports declined only slightly in the ensuing months, but imports from other countries including Germany, Sweden, and Austria have increased. Recently, there have been renewed efforts at reaching a negotiated solution to this long-standing trade dispute between the two countries.
Domestic production of conifer sawnwood totalled an estimated 87 million cubic meters in 2002, up about 5 percent compared with 2001. Production and consumption of non-coniferous sawnwood, in contrast, has fared less well. US imports of wood furniture and wood furniture components have increased as a growing share of capacity for manufacturing furniture has moved offshore. As a result, US consumption of non-coniferous sawnwood has declined since peaking in 1999. Statistics on non-conifer sawnwood production lag, but US Census Bureau reports 2001 production at 26.7 million cubic meters and production in 2002 likely remained flat. Total domestic demand for structural panels during 2002 was estimated at 32 million cubic meters, up about one percent. Shipments of particleboard and MDF were up approximately 19 percent and one percent respectively.
Forestry developments
Forests cover some 302 million hectares, an area equivalent to one-third of the US land base. Of the total forestland, 204 million hectares are defined as timberland, i.e. productive non-reserved forests. Of this acreage, 71 percent is privately owned, predominantly by small non-industrial landowners. Consistent with an expanding population into suburban and rural areas, the number of timberland owners has been increasing while the average size of holdings has been declining.
The forest products industry has undergone tremendous consolidation. One result of this has been a decline in forest industry landholdings. In the past 25 years, over 14 million hectares of forest industry land has changed ownership through mergers and acquisitions or dispositions of various kinds. Timber Investment Management Organizations (TIMOs) that manage timberland on behalf of pension fund and other investors have become significant timberland owners. In addition, millions of hectares have transferred to conservation-related trusts or have been placed under conservation easements that preclude specified uses.
4. ISSUES OF PARTICULAR INTEREST
a. Progress in sustainable forest management and certification
AF&PA's Sustainable Forestry Initiative (SFI®) program, adopted in 1994 by the US forest products industry continues to earn recognition from forestry stakeholders, communities and customers. The SFI® program is a comprehensive system of principles, objectives and performance measures that integrates the perpetual growing and harvesting of trees with the protection of wildlife, plants, soil and water quality. There are currently over 46.5 million hectares of forestland in North America enrolled in the SFI program, making it the world's largest sustainable forestry program. Several developments are worth noting. During 2002, the Sustainable Forestry Board released new standard and verification procedures. A new consumer website was launched (www.aboutsfi.org) and on-product labelling became an option for producers.
AF&PA added a third party certification component to the program in the autumn of 1998, in response to the market needs of SFI program participants. To date, more than 40 companies managing over 28.6 million hectares of forestland under the SFI program have completed or publicly committed to third party certification of their forestry operations. Several of the companies have also chosen to undergo certification to the ISO 14001 Environmental Management Standard in addition to their SFI certification. AF&PA also added a licensing option to the SFI program in 1998. Eighty-three non-AF&PA members are participating in the SFI licensing program representing state, public, private, and recreational lands. The licensing program has brought an additional 12 million hectares into the program.
A worldwide proliferation of forest certification schemes is causing some confusion and misinformation in the marketplace about characteristics and merits of the different programs. Clearly, no one certification scheme fits every situation. Every country is uniquely equipped to design effective approaches to forest management that allow them to balance development and conservation of the resource. The US industry has endorsed mutual recognition of national certification schemes as a way to meet varying needs and situations. One of the hallmarks of the SFI program is recognition of other certification programs, including the American Tree Farm® System, Pan European Certification and the Forest Stewardship Council (FSC).
New SFI standards, adopted in 2002, address illegal logging concerns. The standards are designed to help identify and protect imperilled species and sites on industry-managed lands in North America, combat illegal logging internationally, and promote natural forest conservation in the biodiversity hotspots and major wilderness areas. Companies participating in the SFI program will implement international wood procurement policies to help prevent illegal logging and promote conservation of biodiversity hotspots and major tropical wilderness areas. Participants will work with governments, conservation organizations and others in alliances to stop illegal logging and promote the conservation of biodiversity hotspots and major tropical wilderness areas. These new commitments present major opportunities for partnership between the business and conservation communities.
While 70 percent of US timberland is privately owned, the remaining 30 percent controlled by public agencies remains an important source of raw material for some companies and for some local areas. However, the volume of fibre available from public lands has declined dramatically due to changes in the way public forests are being managed. The National Forest System, administered by the US Forest Service, at one time provided as much as 20 percent of US industrial roundwood supply, but currently provides a small fraction of US requirements. Nearly 30 million hectares of national forests and grasslands are at risk from catastrophic fires, and about 13 million hectares are at risk from insect and disease infestation. To address these problems, the Bush Administration launched the Healthy Forest Initiative (HFI). The HFI is intended to streamline procedures for undertaking projects on public lands, including thinnings to reduce fuel loads, and make it easier for conflicts to be resolved.