Investments Pay Off
Most portfolios are looking decidedly dicey nowadays given the subprime mess, credit crunch, falling consumption in the USA and the generally shaky market fundamentals in much of the developed world. Lenders and investors are generally looking askance at business opportunities and sure things. There is one portfolio however that we believe is paying dividends and building up equity for the future wealth generation: investments in overseas markets. Recently released export statistics for Canadian SPF lumber to overseas emerging markets are showing encouraging signs:

Despite a tough 2007 in our flagship market Japan due to construction industry difficulties in adjusting to the introduction of new design approval laws introduced to safeguard the public, overall SPF exports to major Asian markets showed excellent growth increasing 14% over 2006 shipments, which were themselves 20% over 2005 sales. In particular, both China and Korea are demonstrating strong growth. And in the UK target of market development efforts in the 1970s and 1980s shipments in 2007 were up 420% over 2006: showing that payoffs can be long-lasting.

Attributing the contribution to sales growth from any supporting market development program is always a tricky task. Certainly much of the increased sales come from the competitiveness of Canadian offerings and the industry's desire to move production out of North American markets. Even so, we believe that our programs have laid the foundation for success in these new destinations and eased the entry and acceptance of our products in the marketplace. Moreover, it makes sense to target funds to markets showing true growth potential and, in so doing, accelerate their development.

We are pleased, therefore, to advise that COFI/Canada Wood has been awarded $5.4 million in fiscal 2008-9 by Natural Resource Canada's CWEP program and BC's Forestry Innovation Investment Initiative. The funds will enable the continued delivery of key overseas programs through the strong network of Canada Wood offices and staff that have been positioned in our target markets.

We wish to thank CWEP and FII for their continued support and confidence in our efforts.

Economic Update-"Scandals, roller coasters & good bye deflation"
Led by growth in exports and capital spending, Japan's GDP finished 2007 with a growth rate of 2.1%. However, as the US economy moves closer to recession, Japan's GPD growth is expected to moderate to 1.5% in 2008. Currently, Japan ships less than a quarter of its exports to the US, however, collateral impacts to inter - Asian exports is expected as a result of the slowdown in America's economy. With this easing in export growth and stable consumer spending, Japan's economy is expected to post moderate growth in 2008.

The Japanese Yen

Japan's roller coaster yen and Nikkei index promises another year of change. Large exporters such as Sony and Toyota have adjusted their January to March exchange rate forecasts to 105 from 110/USD. Analysts expect a 100/USD scenario in the second half of 2008. The unwinding of the carry trade is underpinning the dramatic appreciation of the yen. As the Federal Reserve lowers interest rates, the narrowing spread with the BOJ rate is prompting a repatriation of investments to Japan. As the USD dipped below 103/USD in early March, the Nikkei stock index fell to 12,992, down a staggering 28% since July 2007. Some equity analysts now speculate that given low current valuations, emerging interest in Japanese blue chips from cash heavy sovereign wealth funds and an autumn bull market pre-cursing expected US economic recovery in 2009, the Nikkei may well surge back to the 18,000 level by year's end.

Fiscal or monetary policy stimulus to shore up easing exports and sideways consumer spending is unlikely in the cards. With the overnight call rate (OCR) of 0.5%, the Bank of Japan's Governor Fukui has little room for maneuver. With a public debt amounting to 179% of GDP, fiscal constraints and a divided parliament prevent Japan's government from meaningful spending stimulus.

Consumer spending under renewed pressure

From noodles to sheet metal, consumer and wholesale price increases are demonstrating signs of traction. In February, Japan's 4 leading steel producers confirmed iron ore contracts at 65% over 2007 prices. Starting in April, imported wholesale prices of wheat and coal are also rising 30% and 50%, respectively. Although consumer prices rose only 0.7% in 2007, inflationary pressures are accelerating in 2008. In this context and given the fact that nominal monthly wages fell 3.7% in 2007, consumer spending will come under renewed pressure. One potentially mitigating factor is the continued tightening of Japan's labour pool to near full employment levels.

Scandals

A series of recent food safety and labelling scandals is also shaping consumer behaviour and government regulatory environment. In February, a Frozen Gyoza scandal surfaced where imported frozen Gyoza dumplings from China were laced with pesticides, raising national media attention to food safety. A subsequent product labelling scandal involving falsification of recycled paper content by Japan's leading paper manufacturers is prompting the Fukuda government to introduce more stringent consumer protection legislation. Labelling or phyto-sanitary implications for Canadian forest products exporters have not materialized to date, however, close monitoring of the evolving situation will be vital.

Wood Frame Update

Rising 4.7% in January, wood frame construction began 2008 on a positive note. Improving results in the condominium sector also point to progress being made by builders and developers under the new Building Standards Law requirements. Some commentators argue that the December and January increases in wood frame housing starts are showing a trend of recapturing the pent up demand that failed to materialize in 2007 due to BSL regulatory issues.

Even though SPF lumber inventories remain at low levels in Japan, new orders for 2x4 housing continue to be weak this quarter compared to last. Consequently 2x4 component company inventories remained sufficient and SPF lumber shipments fell in January as reflected in the SPF shipments charts below. 

(Sources: MLIT, The Nikkei Weekly, The Economist, Nikkan Mokuzai Shimbun, TLT Lumber Statistics, The Japan Times)

In Japan, there is a growing interest in using SPF dimension lumber, especially in new post and beam structures. The new post and beam pre-cut method is based on using metal plate connectors to fasten post and beam joints, unlike the traditional post and beam method which uses the traditional mortise and tenon method. Based on preliminary market research conducted by COFI, it is estimated that close to 15,000 post and beam houses are being built each year using SPF dimension lumber as rafters in the roof.

Post and beam housing companies, such as Eyeful Homes, Tsuchiya Homes, Shelter Home, Juken Homes, ArchiVision21, Ueki House and Soken Homes, are already utilizing SPF dimension lumber for structural roofing material and, in some cases, in structural applications for wall and floor assemblies as well. These companies are reporting added benefits from using CLS in roof construction because of reduced material costs, longer and wider load spans, roof design flexibility, stable supplies of kiln dried dimension lumber, and reduced metal connector costs. Unfortunately, there is still some resistance from carpenters as they are less willing to accommodate for different sizes of lumber for the post and beam construction method. Furthermore, some companies reported that wider spans used in the home design are a safety concern for carpenters at the construction site. Nonetheless, it appears that a market exists for SPF use in post and beam structures, which can hopefully be further developed here in Japan.

In a unique example, Shelter Home built an elderly care facility and nursing home in Yokohama City, Kanagawa Prefecture. They utilized SPF dimension lumber in the roof, wall and floor assemblies.

Based on preliminary market research conducted by COFI, it is estimated that close to 15,000 post and beam houses are being built each year using SPF dimension lumber as rafters in the roof.

"Deregulation spurs market growth"
South Korea was a mere US$ 8.1 billion economy in 1970 but it expanded rapidly to reach US$ 64 billion in 1980, US$ 264 billion in 1990 and US$ 517 billion in 1996. Struck by the Asian financial crisis in the late 1990s, the country saw its GDP shrink to US$ 482 billion in 2001, but bounced back to US$ 548 billion in 2002, and has since been growing at a solid pace.

Korea's GDP in 2007 is estimated to be around US$ 970 billion and the Korean economy posted 4.9% GDP growth from a year earlier. Korea now ranks as the worlds 12th-largest economy in terms of GDP. Korea's GDP is likely to surpass US$ 1 trillion in 2008. Most of economists foresee the recent presidential election in December 19, 2007 in South Korea was a landmark event, turning the political landscape in favour of deregulation, markets and growth. Further, the Korean economy became more healthy and strong in 2007.

South Korea achieved US$ 20,000 of GDP per capita in 2007. And the new president, Lee Myung Bak, the nations first pesident from a corporate background, pledged to increase annual economic growth to 7%, aiming for 6% growth in 2008, and to double per capita income to US$ 40,000 by 2017 by encouraging big companies to boost spending and hiring. However, taking into account high oil prices and the US subprime mortgage crisis, the Bank of Korea (BOK) and the Finance Ministry lowered the 2008 GDP growth forecast to 4.7%. Due to the continuous high oil prices, consumer price inflation will accelerate to 3.3% in 2008, from an estimated 2.5% in 2007.

Korea earned US$ 371.8 billion from exports in 2007, a 14.2% increase from 2006. Last year, Korea also imported goods worth US$ 356.7 billion, resulting in a trade surplus of US$ 15.1 billion. Korea's major export items were mobile phones, ships, cars, steel, semiconductor chips and machinery, while import items were mainly raw materials like oil and agricultural products. According to the Commerce Ministry forecast, export growth will slow to 11.6% in 2008 from 14.2% last year while imports will gain 12.7% this year, compared with 15.3% in 2007.

The country's unemployment rate for 2007 was 3.2%, which is the lowest recorded between 2000 and 2007 according to the National Statistical Office. In comparison to 2006, the jobless rate decreased 0.7%.

Wood Market: "Canada #1 in wood exports to Korea"
Korean imports of logs for 2007 compared with 2006 increased 20.5% to US$ 910,323,000. Of this total, Canadian log imports rose to 24.6% to US$ 71,634,000 accounting for a 7.9% share in the total Korean log import market. New Zealand was marked as the biggest log import country in 2007. New Zealand log imports continuously increased to 23.7% to US$ 380,604,000 accounting for a 41.8% share in the total Korean log import market followed by United States and Russia. United States log imports for 2007 sharply increased to 27.5% to US$ 149,565,000 compare with 2006 owing to the weakened greenback against Korean won, while Russian log imports considerably decreased to 10.8% to US$ 145,692,000.

Korean lumber imports for 2007 compared with 2006 rose 21.9% to US$ 305,249,000. Despite the unstable supply of Canadian lumber imports caused by the prolonged industry strike and price weakness of Canadian lumber with the soaring Canadian loonie, Canada continues to lead as the number one lumber import country.

With the presence of the Canada Wood Group office in Korea, Canadian softwood lumber imports for 2007 increased considerably to 34.3% to US$ 47,269,000, accounting for a 30.2% share in the total Korean softwood lumber import market. SPF shipments to Korea fell in January because distributors are trying to decrease inventories at their fiscal year end for taxation considerations (this also happens in Korea in May of each year). Furthermore, the housing construction market slows considerably during the winter months in Korea.

Housing Market: "Housing to rebound thanks to cuts"
The construction industry will rebound from the slump last year as the new administration is set to ease the multi-layered regulations. Korean experts forecast that the new president will take measures to soften rules on housing developments and cut property taxes. This will help revive a depressed housing demand and improve the bottom lines of builders. They expect an upbeat mood in the construction sector due to the upcoming package of deregulations. The government forecasts consumer spending and construction investment will take over from exports as the main driver of economic growth in 2008, helping maintain last years rate of expansion at 4.9%.

The new president affirmed his pledge to construct an inland canal between Seoul and Busan from 2009. Local construction industry forecast that the US$ 21 billion project will be a boon to the construction firms. This project is aimed at building a 3,100-kilometer-long network of waterways that links major northern and southern rivers in South Korea, and links to major cities in North Korea. It will consist of 17 routes, including a 540-kilometer Seoul-Busan waterway.

The new government is also pledging to ease a pair of the governments real estate taxes the comprehensive real estate tax on expensive land and the capital gain tax, by proposing pushing upward the minimum threshold for the comprehensive real estate tax from the current Korean won 600 million to 900 million or 1 billion.

As per the reorganization plan by the new president, the Ministry of Construction and Transportation (MOCT) has been paired with port functions of the Maritime Ministry, parts of the Agriculture Ministry, and parts of the Government Affairs Ministry to become the Ministry of Land, Transport and Maritime Affairs (MOLTMA). The Korea Forest Service (KFS) which was the part of the Agriculture Ministry has been merged into the MOLTMA.

Due to the data base system upgrade by the MOLTMA, no updated data on housing starts and building permit numbers are available since October, 2007. The MOLTMA announced that the official data on housing starts and building permit numbers will not be available until October 2008 at the earliest date.

Both building permits and starts for wood frame construction during the January-September period of 2007 dramatically rose to 85.4% and 86%, respectively to 6,491 buildings and 5,044 buildings, compared with the same period of 2006. This may be the only available official data until the MOLTMA completes their system upgrade.

Evelyn has been working with Tai Jeong since April, 2006 with the establishment of CWK office in Seoul assisting the early settlement and the success of CWK.

Evelyn graduated from Myeongji University in Seoul with Bachelor of Arts in English and English Literature and Arabic Language and Literature and previously worked as an English teacher, interpreter and model. While she has been teaching students from kindergarteners to adults for years, she feels that God has called her to her new current job at Canada Wood Korea.

Evelyn or Evie believes that one of the reasons that she seldom tires from her work is because of the good sense of humour of her Korean and Canadian colleagues.

Evelyn spends her days at Canada Wood working on accounting and offering management support for seminars and other programs. She recognizes the challenges within the forest industry but shes up to it! She tries to emulate the tireless and committed professionalism of her esteemed Canada Wood and COFI colleagues and feels a great deal of admiration and respect for them because of their relentless dedication to their job. She believes that one of the reasons that she seldom tires from her work is because of the good sense of humour of her Korean and Canadian colleagues.

Evelyn is a quick study and has been able to learn the inner workings of the Korean and Canadian lumber industries. Evelyn or Evie as we all know her is very enthusiastic about the upcoming program year starting April 1 and vows she will dedicate herself to making a difference in developing the wood market in Korea for Canadian companies.

"SK Engineering and Construction get help from Canada Wood experts"
SK Engineering and Construction (SK E&C*), a $3 billion US/year company, has just completed the 1st phase of Dongbaek ApelBaum Project, a development of exclusive gated community of 123 units of single detached houses in the vicinity of Seoul, and now 42 units of wood frame houses have been completed and are ready to be occupied by the owners.

The 2nd Phase, which consists of 81 units of wood frame houses, has started with the construction of a sample house at the site. Once completed, the community will be the largest gated community of single detached houses in Korea.

Model of First Phase of Construction	Completed First Phase Houses

Completed First Phase House	Group Photo with SK E&C, Setzer, Morning Bridge and CW Representatives

This scale of wood frame single detached housing development is rare in Korea and the significance of this SK Dongbaek Apelbaum project in the wood frame construction market cannot be over emphasized. This project will serve as a test case of a new construction market segment for many other large construction companies and developers and they will follow suit contingent on the overall success of this SK pioneering project.

In order to ensure the success of the project, Canada Wood had set up a meeting with SK, Setzer and Morning Bridge on February 16th at the SK E&C Headquarters and Canada Wood representatives including Paul Newman (Director of CWG/Executive Director of Market Access and Trade, COFI ), Tai Jeong (In-Country/Technical Director of CW Korea) and Greg Hoing (Deputy Managing Director of CW China) met with Mr. Kwang Seok Lee (Head of Housing Business Department of SK) and Jung Park (President of Setzer Construction), and Duk-Soo Lee (Director of Morning Bridge, the developer).

Various topics, ranging from current wood frame construction market, the prospect of low-rise wood frame multi-family construction market, the necessary conditions for the expansion of the wood frame construction market in Korea to technical and quality assurance support for the 2nd phase of construction were discussed.

The meeting has resulted in an agreement for CW to provide technical support for the 2nd phase for SK and CW Korea and China are currently working on the plan review of the sample house and are planning to provide on and off-site training and consultation.

Also, further discussion on the signing of Memorandum of Understanding for technical support and further cooperation between CW and SK will be held in a near future.

As of March 1, 2008, Canada Wood Korea has passed all 10 fire tests of various interior and exterior wall assemblies for the revision of Korea Standard KS F 1611-1 which stipulates the fire resistance performance for elements of building construction (Wall and floor/ceiling assemblies of light-frame wood structures) and accreditation of one hour fire resistant wood frame wall assemblies.

These successful fire tests laid a major stepping stone towards the development of wood frame multi-storey multi-family construction and non-residential construction market in Korea which requires fire resistant construction. For MSMF construction market application, further acoustical tests of wall and floor assemblies will be developed and tested in order to meet the Korean sound insulation requirements.

The data collected from the tests will be used to amend KS F 1611-1 for the addition of more interior and exterior wall assemblies tested to the existing ones in the standard and to reflect the common construction practices of using glass fibre insulation and various exterior claddings.

Once the amendment is completed, all the assemblies listed in the standard can be applied for the accreditation of fire resistant construction without fire performance tests according to the Enforcement Ordinance on the standards of fire escape and fire resistance constructions which exempt the test for the assemblies listed in KS F 1611-1 for accreditation.

The tests resulted in the accreditation of 3 wood frame party wall assemblies, which are designed for the acoustical tests in mind, and the certificates of accreditation are due to be issued in mid-March with 3 year validity by Korea Institute of Construction Technology (KICT).

Also, one wood frame floor/ceiling assemblies in the KS F 1611-1 has been issued with one hour fire resistant construction certificate by KICT without fire performance test according to the Enforcement Ordinance mentioned above. The cooperation and contribution of the Korea Wood Construction Association (KWCA) and its member companies such as NSHome and Samik and building products manufacturers, Lafarge and Haniso and importers, Owens Corning, made these fire tests possible and the results all the more meaningful.

Also, Jim Mehaffey, PhD, Research Scientist & Group Leader, Fire Program at FPInnovations (Forintek Division), Trevor Nightingale, PhD, Senior Research Officer, Indoor Environment Program, Acoustics at National Research Council, and Korean Technical Group, Leader Professor Sangsik Jang, PhD, Department of Forestry Product Technology, Chungnam University have worked together in planning and execution of the tests.

Fire Test Preparation at KICT (2 ply 12.5mm Fire Rated Gypsum Board fastened on resilient channels)	Fire Exposed Side after One Hour Test. (Face layer gypsum board is partially fallen off and Base layer is still intact.

A Close examination of the Assembly: Studs are carbonized very shallowly only on the fire exposed edge and also only surface glass fibre beneath the gypsum board is blackened.	Certificate of Accreditation of Fire Resistant Construction for Light Wood Frame Floor Assembly. (3 more certificate will be issued for 3 party wall assemblies in Mid-March 2008.)

Evie Oh & Tamara Byrnes-Ma at the Housing Brand Fair Feb 2008

COFI Terrace constructed with SPF lumber.

In February, I embarked on a trip to Korea to attend and work at the Housing Brand Fair in Seoul, Korea from Feb 13-17, 2008. The hustle and bustle of people around in my first international tradeshow had my nervous energy working overtime!

The Canada Wood / COFI terrace was constructed with various widths of SPF no.2 & better. Also represented in the Canada Wood area were eight Canada Wood member companies, namely, Winton Global, Tolko, Standard Building Supplies, The Teal Jones Group, SJI Canada Lumber, Snowcap and Silva Panel.