Introduction
During the March 2003 Wood Technology Clinic in Portland and the April 2003 WSU Wood Composite Symposium in Pullman, I attended a presentation provided by Al Schuler challenging our industry leaders to expand our wood products markets utilizing more human resources in the new product and marketing fields. The abstract and power point presentation noted below is a summary of the presentation. You are encouraged to review and discuss it with your associates in the industry. Specific actions are suggested. We are all encouraged to "grow the pie", not just consume a smaller one.
Carl Jansen
Search North America, Inc.
Albert Schuler
241 Mercer Springs Road
USDA Forest ServicePrinceton, WV 24740
Craig Adair
7011 S. 19th Street–PO Box 11700
APA – The Engineered Wood Association
Tacoma, WA 98411-0700
(For An Online Power Point Presentation - Click Here - High Speed Connection Only)
Abstract
The market for engineered wood products (EWP) is being driven by a number of factors: technology; availability of old growth timber; construction activity; and globalization to name a few. Specifically - technological developments have allowed the industry to “engineer or design” improved performance properties and to utilize former “weed species”; environmental concerns have all but eliminated the availability of old growth, and this has contributed to a decline in performance/serviceability of sawn lumber and plywood.
The key driver for EWP is construction markets, and specifically, single- family (SF) residential construction. For example, in 2001, single-family construction consumed 27% of softwood plywood consumed in the United States: 57% of the OSB; 36% of the softwood lumber; 73% of the I-Joists; 75% of the LVL (excluding volume used in I-Joists flanges); and 57% of the glulam (APA 2002). North America’s builders, however, are facing some challenging issues – good and bad - related to demographic trends. Labor shortages, particularly skilled labor, will continue for the rest of this decade. On the positive side, favorable demographics will help push the annual demand for housing to almost 2 million units (conventional plus HUD code) for the rest of this decade. To deal with these issues (and other challenges like construction site waste), builders are consolidating into larger companies and industrializing the construction site. This means more of the house is being built in a factory with engineered components like trusses, panelized wall systems, and I-Joists built under factory-controlled conditions, and then shipped to the construction site.
Current EWP capacity exceeds demand and this comes at a time when imports are threatening to gain a larger market share and practical steel and concrete home construction methods are emerging. The need for research and development to create new products that satisfy both old and new customers has never been greater. The good news is that EWP, with their superior performance properties and efficient use of wood fiber are well positioned to evolve and capture new markets in the future.
Introduction
Residential construction (new housing plus remodeling) is the key market for North American wood products, accounting for approximately 70% of structural panels and softwood lumber consumption (Fig. 1). Although the focus of this paper is structural softwood markets, we should mention that housing markets are also indirectly responsible for much of the demand for hardwoods, and for nonstructural composite products like MDF and particleboard, if we consider derived demand for furniture, kitchen cabinets, paneling and the like. Even our engineered wood products (EWPs) are heavily concentrated in residential construction with single family housing consuming almost 80% of the I-Joists and LVL, and approximately 60% of the OSB and glulam (APA 2002). There are important issues facing this market: (1) judging from recent price trends, some of the markets are oversupplied; (2) key products like lumber and plywood are mature, hence they are susceptible to substitution from other wood products such as EWPs, non wood products like steel and concrete, and imports ; (3) the key customer, the housing industry, is in transition, driven by demographic forces and globalization trends that are impacting its cost structure. Furthermore, the U.S. is losing traditional panel and lumber export markets in Europe as that region becomes more self-sufficient. The U.S. has lost lumber and plywood markets in Japan to competitors from Europe and Oceania. To add insult to injury, Europe is now exporting structural lumber and OSB to the United States. Sooner or later, Russia, with the world’s largest standing inventory of softwood sawtimber, will get its act together and become, once again, a formidable player in international softwood trade.
Looking more closely at housing fundamentals, demographic forces are providing a foundation for the continuation of a very vibrant and healthy housing market. Demand for housing in the decade ahead, in terms of square feet floor area, will match or even eclipse records set recently, as homes continue to get bigger, single family share stays high, baby boomers buy second homes for retirement, and immigration supports strong household formation. However, despite this rosy prognosis, the wood products industry has too many eggs in one basket, and other domestic building material industries like concrete and steel, as well as foreign producers, are looking at that basket, and that makes our wood products industry vulnerable. The authors feel that the industry must realize it has competition in key markets and it must diversify. Some opportunities exist in North America – nonresidential building construction and nonstructural applications. One can look at wood use in Europe and Japan for clues in nonstructural applications in addition to analyzing international trade flows for potential opportunities. Maybe the industry needs to adopt new business models/paradigms to make them more competitive? And last, but not least, the industry must do a better job in promoting consumption of wood products in North America.
Too Many Eggs in One Oversupplied Basket
One only has to look at lumber and OSB prices to see evidence of oversupply today (Fig. 2 and 3). Some reasons: Canada produced a record 30 BBF of softwood lumber in 2002; we saw significant increase in European lumber delivered to the U.S. southeast in recent years; log and lumber exports are way down from historical highs; international panel exports are less than ½ of what they were in the mid 90’s; and EWPs saw production records in 2002. EWPs prices are also impacted by oversupply in commodity markets via substitution. For example, as 2X10 prices fell in 2002, some builders switched back to large dimension lumber floor systems from I-Joists engineered floor systems. To compete and hold market share, EWP prices had to come down. Further evidence of concentration can be seen in Fig. 4, which shows that existing markets for OSB are becoming saturated. There are opportunities for OSB in “new markets”, including exterior siding, lumber framing, furniture frames, molding/millwork, and other applications, but we probably will not get there with existing products (Fig. 5). We need more R&D.
Substitution Pressures
Exacerbating the industry’s problems is the fact that some key products are either mature or in decline (Fig. 6). EWPs will certainly help open new markets, but, currently, they represent only about 5% of structural lumber supply, and even some EWPs are maturing (Fig. 7). As products mature, they become more susceptible to substitution pressures and wood products are no exception. During the past decade, softwood lumber has lost over 8 BBF of its markets to EWPs, steel, and plastic in both structural and nonstructural applications (Fig. 8).
Transition in Residential Construction
The home building industry is facing some important issues that are forcing them to consider changing the way they build houses. The main driver is demographics and it is having both positive and negative impacts. The positive is that demographic forces will support strong housing demand for the next decade. A strong and growing immigrant population, including 1st generation immigrants, and wealthy aging baby boomers buying vacation and retirement homes will help drive household formations and therefore, housing demand. On the negative side, those same demographic trends suggest that the current labor shortage will get worse and that means that labor intensive industries like housing (and furniture) will be forced to find ways to reduce labor content (Fig. 9,10 & 11). With housing, this means industrialization, or heavier use of components like engineered floor systems, LVL headers, panelized wall systems, roof trusses, and maybe SIPS (structural insulated panels). The industrialization process is expected to speed up as the homebuilding industry consolidates to take advantage of economies of scale and the perceived need to become national builders who can tap into customer/brand loyalty themes (sell starter home, move up homes, and retirement home to the same customer). According to the latest Builder 100 survey, the top 100-market share (homes closed by largest builders) is now 35%, compared with less than 20% a decade ago.
EWP Outlook
The outlook for EWPs is good, but these products suffer from some of the same problems facing other wood products – too much concentration in residential markets (fig. 12). Both LVL and I-Joist demand is expected to slow down in the next 4-5 years simply because existing markets are becoming saturated (Fig. 13,14, &15). Even NA glulam demand is 65% residential applications whereas in Europe, which consumes more glulam than NA, demand is growing more rapidly by focusing on nonresidential construction. There is no question that EWPs will continue to grow – they now represent about 5% of structural lumber demand, but most of the growth is at the expense of conventional lumber products – cannibalizing 2x10’s and other large dimension lumber products. This is a similar scenario to OSB capturing market share from plywood, after plywood took sheathing markets from lumber boards. An example of how EWP could further “cannibalize” lumber markets is potential for OSL (oriented strand lumber) in capturing a share of the lumber framing market (Fig. 16).
“Grow the Pie”
The authors are suggesting that perhaps, now is as good a time as ever, to consider “growing the pie”, or find new and innovative markets for wood products outside of residential construction. There are alternatives to residential construction. Nonresidential building construction in North America is almost as large as residential sector in terms of value of construction. Nonstructural or appearance markets offer significant opportunities as evidenced by such applications in Europe and Japan. Another source of ideas/opportunities comes from an analysis of import/export statistics. We are losing the international trade battle in wood products, and the logical question is - are we missing some opportunities? And last but not least, we need to reexamine our promotion efforts. Contrary to popular belief, most wood products don’t sell themselves, and furthermore, we need to remember that we have competition. Promotion works as evidenced by the fact that Finland has doubled per capita consumption of wood products through a decade long cooperative promotion effort involving primary manufacturers, distributors, and associations. In the U.S., we have the Woodworks – USA effort to increase wood use in nonresidential construction.
We need R&D to create new and innovative products that satisfy both old and new customers. The good news is that EWPs, with superior performance properties, efficient use of wood fiber in its manufacture, and international trends in building codes, are well positioned to evolve and capture new markets in nonresidential and nonstructural end uses in North America and international markets.
Nonresidential Building Construction Opportunities
There are real opportunities when one considers the following observations: expenditures on nonresidential buildings are almost equal to residential expenditures, yet we have a very small market share (Fig. 17&18). Opportunities for OSB are enormous – a recent WPC study suggests 6 BSF(3/8”) potential assuming steel & concrete is replaced by wood where allowed by the codes. But, we have to do our homework to penetrate this market – we have to make architects and engineers feel more comfortable with wood; we have to reduce variability of performance properties; we need to promote wood systems; and we need a more coordinated promotion effort. EWPs have a real advantage in going after nonresidential markets – predictable performance vis a vis conventional wood products plus the world wide adoption of performance based building codes.
Nonstructural Opportunities
We can look toward Europe and Japan for clues regarding opportunities in appearance markets like furniture, molding/millwork, paneling, flooring, etc. Europe consumes over 100 million cubic meters (42 BBF) of sawn wood (hardwood and softwood lumber) annually, despite building 90 % of their homes using steel or concrete framing. North America consumed 180 million cubic meters (77BBF), much of it due to the fact that 90% of our houses are wood framed. With respect to EWP, Europe consumes large amounts of Glulam while Japan consumes large amounts of LVL, much of it nonstructural applications.
Look at Trade Flows for Opportunities
The U.S. appears to be losing the international battle for wood product markets. Our trade balance worsens each year, not only with solid wood products (Fig. 19), but also with manufactured products like furniture. The trade imbalance last year for wood household furniture reached 7 billion dollars, up from less than 2 billion a decade ago (Schuler and Buehlmann 2003). One problem may be lack of R&D. Last year, the entire forest products industry in the U.S. spent less than 2 billion dollars on Forest Products R&D[1]. Yet, some companies spend more than the entire forest products industry. E.g., last year Merck spent $2.5 billion on R&D; Intel spent $3.76 billion; IBM spent $5.29 billion; Pfizer spent $4.35 billion. Figure 20 shows an interesting correlation between R&D and trade balances – those industries that spend more on R&D generally have more favorable trade balances.
Need to Promote Wood Products
In the past, the wood products industry did not need to market itself because it was viewed as a logical construction necessity, but that perception is facing serious challenges (Gleason 2001). In a nutshell, the industry needs to realize it has competition, and it needs to promote itself. Promotion works as evidenced by the success the Finns have had in the past decade. As a result of 15 years of promotion by the sawmilling industry and distribution channels, per capita consumption of softwood lumber has doubled in the past decade (Fig. 21). We have promotion programs in the U.S., but they have not been as successful to date – we need to determine why. A good example of a recent promotion program with potential is WPC’s “Woodworks – USA” effort to increase wood use in nonresidential construction.
Summary and Conclusions
Residential construction (new housing plus remodeling) is the key market for North American wood products, accounting for approximately 70% of structural panels and softwood lumber consumption. Even our engineered wood products (EWPs) are heavily concentrated in residential construction with single family housing consuming most of the I-Joists and LVL, and over half of the OSB and glulam. There are important issues facing this market: (1) they are oversupplied and with the oncoming glut of timber in the world, commodity prices will suffer; (2) key products are mature, hence they are susceptible to substitution from other wood products such as EWPs, non wood products like steel and concrete, and imports ; (3) the key customer, the housing industry, is in transition, and is hanging the way they build homes. Furthermore, the U.S. is losing the battle for international trade in wood products. In essence, we have too many eggs in one basket – residential construction – and other players/competitors, both domestic and offshore, are looking at that basket as a potential home for some of their surplus capacity in steel, concrete, and wood products.
The authors are suggesting that perhaps, now is as good a time as ever, to consider “growing the pie”. There are alternatives to residential construction - nonresidential building construction in North America; nonstructural or appearance markets offer significant opportunities; another opportunity comes from an analysis of import/export statistics. We are losing the international trade battle in wood products, and the logical question is - are we missing some opportunities? And last but not least, we need to reexamine our promotion efforts. Contrary to popular belief, most wood products don’t sell themselves, and furthermore, we need to remember that we have formidable competition.
Finally, we need R&D to create new and innovative products that satisfy both old and new customers. The good news is that EWPs, with superior performance properties, efficient use of wood fiber in its manufacture, and international trends in building codes, are well positioned to evolve and capture new markets in nonresidential and nonstructural end uses in North America and international markets.
References Cited
APA – The Engineered wood Association. 2002. Market Outlook – Lumber, structural panels, and engineered wood products. Prepared by Craig Adair (APA) and Wade Camp (SFPA). Tacoma, WA.
Gleason, Jerry. 2001. Out of the woodwork. Forest Products Journal. 51(5):8-14. Madison, WI.
Grundahl, Kirk. 2001. Knowledge is power. Woodwords (now called Structural Building Components). August. P.8-23. Wood Truss Council of America, Madison, WI.
Random Lengths 2003. Random Lengths Yearbook – 2002. Eugene, OR.
Resource Information Systems Inc. (RISI) 2002. North American Lumber Forecast. Vol. 2, No. 3. Bedford, MA.
Schuler, A. and C. Adair. 2001. Supply and Demand – the outlook for NA structural panels. Engineered Wood Journal. 4(1): 16-20, 38. APA-the Engineered Wood Association, Tacoma, WA.
Schuler, A. and U. Buehlmann. 2003. Identifying future competitive business strategies for the U.S. residential wood furniture industry : Benchmarking and paradigm shifts. USDA Forest Service, GTR Report – NE XXX (in press).
Taylor, Russ. 2001. Wood Markets – the monthly international solid wood report. Vol.6 : (6). International Wood Markets Research Inc., Vancouver, Canada.
United States Census Bureau. 2002 Annual value of construction put in place. Report C-30. available at: (www.census.gov/const/c30) Washington, DC.
USDA 2002. Wood Products: International Trade and Foreign Markets. Third Quarte Trade Edition, Circular Series, WP-5 –02, and WP-1 – 98. available at: (www.fas.usda.gov//ffpd/wood-circulars ) Foreign Agricultural Service, Washington, DC.
UNECE/FAO. 2003. Timber Data Base – 1964-2000. Timber Section, United Nations Economic Commission for Europe, Food and Agricultural Organization of the United Nations. available at: ( www.unece.org/trade/timber/mis ). Geneva, Switzerland.
[1] Forintek Canada Corporation. 2002. Personal communication with Dr. Chris Gaston.
