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Coronavirus Case Study, Part III: Toilet Paper, Housing Starts and Forest Industry Implications

We do not have a toilet paper problem. As a forest industry analyst, I say this for three reasons.

  1. Many firms in this industry are Forisk clients or customers of clients and we can confirm that trees continue to grow, wood continues to flow, and mills continue to pulp fiber. For North America, these firms are number one at producing what we need for number two.
  2. The coronavirus does not increase the need of toilet paper, whether or not you contract it. Our use of toilet paper remains steady; on average we use about 100 rolls per year.
  3. In the U.S., over 92% of these rolls are manufactured in North America. So, our TP supply chain has little exposure to imports from anywhere, much less China.

 

Rather, for the forest industry, primary concerns are housing and “aggregate demand,” which is the three-dollar term referring to everything we buy at any given time. Prior to the coronavirus, industry capital investment and housing markets looked strong yet constrained, as builders grappled with scarce skilled labor and increasing costs for building materials.

Part II of this series introduced the role of scenarios to test disruptive implications on a given business or sector. The coronavirus consumes economic growth through delayed production and consumption. To the extent it slows people it slows the economy and eats time. Our scenarios reflect this idea that the coronavirus hit a massive “pause” button on the U.S. economy. The question is, “for how long?”

Our Scenarios

The Forisk Research Quarterly (FRQ) always includes at least three scenarios for timber and log price forecasts to help clients test and contemplate key assumptions. For this analysis, we include the Base and Slow Case scenarios from the Q1 2020 FRQ to provide our “pre-coronavirus” baselines and add three scenarios to evaluate three “shock levels” on GDP, housing starts and demand for softwood lumber in the U.S.

  • Shock One strips the equivalent of GDP growth for one quarter (3 months of 0% spread out over the rest of the year) and housing starts for one month from the 2020 Forisk Base Case.
  • Shock Two bakes in two quarters 0% GDP growth and two months of lost housing starts.
  • Shock Three pauses GDP growth for three quarters and reduces housing by three months.

 

2020 Macro Scenarios for U.S. Softwood Lumber Demand

It’s hard to make up for lost time. Consumption and production perish; months of inactivity translate to less economic growth and fewer housing starts and falling softwood lumber production. A one-month shock, from a U.S. softwood lumber standpoint, would mirror volumes consumed around 2015. However, we averaged 16.5% annual growth in housing starts from 2012 through 2015 to get there, along with the associated sawmill capital investments and employment. In the Shock scenarios contemplated here, we slow down and step back to regain our footing.

In Part IV, we share conclusions and recommendations for where to focus our attentions and energies as the coronavirus, and other economic headwinds, work through the system.

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