Sustainable Production in a Globalized Market

1
Sustainable Production in a Globalized Market
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Art Harwood
• Harwood Forest Products
• June 29th, 2004
• Briceland CA

2
About Harwood Forest Products
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Family owned
• Established in 1950
• 240 employees
• One of the largest private employers in
  Mendocino County.
• Largest lumber producer in Mendocino County
• 5th largest Redwood producer in the world.

3
GLOBAL MARKETPLACE
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• ISF State of Sustainability Report is accurate
  summary
• Wood coming from all over the world
• Result of the Spotted Owl / Spike in lumber
  prices.
• Global infrastructure
• Opened the door for wood to come from all over
  the world.

4
NEW REGIONS
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Russia / 23 of wood fiber on earth
• China
• Do not think of China as a wood supplier
• Dominating Siberia.
• Vast plantations coming on
• South Africa
• Eastern Europe
• Fall of the Iron Curtain
• Cheap labor
• Other Third world countries
• Brazil Hardwoods / FSC certified competing with
  Redwood

5
PLANTATION FORESTRY
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• South America
• Brazil, Chile, Argentina.
• Freight up the Mississippi River from Brazil
  cheaper / Western
• New Zealand
• Aggressively pursuing offshore markets at our
  expense.
• Japan, Korea.
• Israel, the United Kingdom, China and others.
• Have been and are planting forests.
• Significant impact on global market share and
  Wood Value.

6
EXPANDING PRODUCTION
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• North America
• US and Canadian sawmills expanding production.
• Labor costs down to compete globally.
• Record lumber production the past few years.
• Less sawmills.
• Europe
• Austria a net exporter.
• Japan, Germany and the UK increasing domestic
  production.
• Scandinavia
• Expanding Wood Supply.
• Being pushed out of Europe.
• Increasing Market Share in Japan.
• Backhauls on empty freighters.
• Selling wood in the US.

7
LONG and SHORT TERMOVER SUPPLY OF BUILDING
PRODUCTS.
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Substitutes another issue that add to the problem
• Steel,
• LVL,
• Glue-lams,
• Composites,
• STRAW

8
SHORT TERM / SILVER LINING
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• US weakness
• Making US producers more competitive.
• The weak dollar is making the ability to import
  wood into the US tougher.
• This along with the tariff on Canadian lumber is
  helping to put a floor under lumber prices.
• Freight
• But, this will not last forever.
• Pricing has already peaked.
• Price levels are artificial due to the , tariff,
  freight
• Longer term, pricing will stable to down.

9
OTHER OBSTACLES
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• All make it difficult for California producers to
  compete globally
• Cost of regulatory compliance
• Energy Costs
• Work-mans Compensation Insurance Costs
• Fuel Cost
• Taxation
• Labor

10
KEYS TO SURVIVAL?
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Pay Attention
• Global Marketplace / Influences every decision
  that we make.
• Watch Timber Supply Trends Pricing.
• Watch Lumber Demand Pricing.
• It all impacts our business and what happens on
  the ground.
• You need to run an efficient operation, but that
  is not enough
• Emphasis on Marketing.
• Harwood Market Niche / Timbers
• Differentiating ourselves through Product Line /
  Quality / Service
• Stay away from competing with commodity
  producers.
• Harwood has higher costs / higher return
• It does set us apart from other lumber producers.
• It works.

11
ANOTHER MARKETING OPPORTUNITY?
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Certification / A California Niche For all CA
  producers?
• Cal Poly SLO Study
• CA regulatory process / THP system broken /
  Prescriptive
• Needs to be replaced with a broader landscape
  approach.
• SFI, or FSC Certification would suffice.
• Either SFI, or FSC would benefit CA producers on
  the regulatory cost end.
• Need legislative / environmental support.
• FSC only at this time
• Only FSC could give CA producers a market
  advantage.
• CA / FPA makes most CA producers close to being
  FSC certified.
• Major environmental groups may do our marketing
  for us?
• Would the economics dictate CA going down the FSC
  path?
• Companies need to seriously look at this issue.
• My guess is YES.

12
WWPA ECONOMIC FORCAST
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Increased Capacity in Europe Russia announced
  through 2004
• Should keep lumber prices low / reasonable
• Easing in home construction in 04 and 05 will
  impact demand for Lumber.
• 56.7 bbf / 2003 Record
• 55.7 bbf / 2004
• 53.9 bbf / 2005 5 (2.8 bbf) decrease from 2003
• Somebody will sell less into the market
• 2.8 bbf reduction in lumber demand 22 sawmills
  the size of HP.

13
WWPA ECONOMIC FORCAST (cont.)
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• 4 bbf total / Equivalent of 32 sawmills the size
  of Harwood Products.
• 54 sawmills the size of HP may have to close to
  balance global supply demand.
• High cost sawmills will disappear first.
• US and especially California producers are high
  cost.
• Ironic / In an era of record demand for lumber
• US sawmills have been and will continue to
  disappear at a record rate.

14
WWPA ECONOMIC FORCAST (cont.)
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Wild cards are housing and the trade dispute.
• Housing should remain strong through 2004
• US Presidential Election / Low interest rates
• Look out in 2005 as interest rates rise.
• Trade Dispute
• Cap on imports will put a floor under pricing.
• No settlement will mean more production / lower
  lumber pricing.

15
THE REDWOOD FOREST FOUNDATION (RFFI) ANOTHER PART
OF THE SOLUTION
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• HISTORY
• Convened by Charles Peterson December 1997
• Diverse group of people including
• Activists, industry, resource politicians and
  financial professionals.
• Dream to purchase LP timberland
• Concept developed by USFC
• Non-profit owner
• Community Forestry Bonds

16
RFFI ADDRESSES ISSUES SUCH AS
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Economics of Forest Products
• Niche Marketing
• Regulatory Relief
• Stable supply of forest / /timber products
• Environmental Conservation
• Principles of sustainability
• Protect broad landscapes
• Long-term vision
• Social Fabric of the Community
• In a world where it seems that we have no control
  the RFFI model brings local control to issues
  that affect our livelihoods and sense of
  community.

17
TIMING IS RIGHT FOR THE RFFI MODEL
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Millions of acres of timberland on the market
• 500,000 sold in Mendocino County the past six
  years
• Much of this timberland is cut over / Adds to the
  high cost of timber production
• The highest value may be sub-division
• This will lead to the loss of jobs
• The loss of bio-diversity
• The loss of rural character on the North Coast
• Fewer public and private s available for
  preservation
• Conservation is the most cost effective way to
  protect fragile eco-systems

18
TIMING IS RIGHT FOR THE RFFI MODEL
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• RFFI / Community Forestry Bonds
• Leverage small amounts of s
• Protect large acreages
• Stabilize local economies
• RFFI model is right on target and is one of the
  solutions to making the North Coast and
  California competitive in the global forest
  products industry.

19
CAN CALIFORNIA PRODUCERS SURVIVE IN THE FUTURE?
Redwood and Douglas Fir Lumber Products A Proud
Family Tradition Since 1950

• Not if we continue down our present path.
• Yes, if we PAY ATTENTION to the issues that are
  coming at us.
• And we PROACTIVELY position ourselves to meet
  these CHALLENGES.