Canadian Lumber Market Sales for Timber

Volume 50 No. 39 – September29, 2000

A Chat with J.R.

espite receiving only passing interest from the public, you’d be hard pressed to find anyone in the forest industry who doesn’t know the current Canada-U.S. Softwood Lumber Agreement (SLA) is in its death throes. March 31, 2001 will see the end of the first Memorandum of Understanding (MOU) defining our lumber trade relationship with the U.S. But while some may breathe a sigh of relief over what has turned out to be an unsavory arrangement, others are looking to the future with trepidation.

At present, Canadians and Americans are both in turmoil regarding the conditions of another agreement, with opposing views being fronted on both sides of the border. Some want a continuation of the status quo with or without modification, while others seek a return to unencumbered free trade. Since everybody is clinging passionately to their own opinions, the possibility of an easy round of negotiations and a quick resolution is fast fading.

Over the last several months, Canadians have been voicing their opinions—albeit contradictory ones—and we’ve heard from the U.S. lobby that wants to rid the world of the SLA once and for all. Reports on preparations by the Coalition for Fair Lumber Imports, however, have been hard come by—at least in Canada. As a reporter, I’ve learned you can find out just about anything if you just ask, so I phoned up John Ragosta to pose some questions to him. Following is a paraphrased version of our conversation.

Americans have a reputation for pursuing an aggressive approach where international trade is concerned and I can tell you Ragosta hasn’t mellowed with the years. He is a fortification in the effort to maintain the lumber trade status quo between Canada and the U.S. and his opinions are directed at perpetuating that agenda.

My first question to Ragosta was to ask what his group was up to and his response was short and terse: Encouraging our government to negotiate and preparing for litigation. He softened a bit after that, but still maintained a terse demeanor. Ragosta explained his group is looking for a better long term solution to the long lived lumber dispute between the two countries and they believe that solution is an open and competitive Canadian timber market.

I picked up on his response and started talking about the price Canadian lumber producers pay for their wood. In support of his stance, Ragosta cited complaints about Canadian timber pricing on both sides of the border. American objections were easy to come by, but Ragosta also cited complaints from Canadian lumbermen. He said one eastern group has complained government pricing for timber is undervalued, while in B.C., producers routinely complain about high stumpage fees. Focusing directly on the industry’s solar plexus, Ragosta said a competitive log market would eradicate these inequities and put everyone on an equally competitive base. It is ironical, he retorted, that Canadian producers complain on the one hand they are paying too much for their timber, yet they don’t support a competitive timber system.

Inquiring about Americans who support unrestricted lumber trade to keep house prices down drew a curt response from Ragosta. He said it was hard to claim lumber manufacturers are destroying housing costs when the price of lumber is around $200. Asked if current low market prices were being reflected in the price of lumber at the retail level, Ragosta replied that was a good question.

I asked Ragosta what he thought about the infighting going on between Canadian lumber producers. He said it was up to the Canadian government to resolve that problem, but he pointed that out such infighting isn’t in anyone’s best interest. Taking the opportunity to clarify a point, he said there is an impression that the Coalition is in favor of this fight, but that’s not the case. If there is infighting between Canadian groups, Ragosta said, the problem is that much more difficult to resolve.

I couldn’t resist asking Ragosta to speculate on the outcome of the negotiations. Ragosta responded that he didn’t know, butone outcome that isn’t on the table is that the lumber agreement will end and there will be unlimited imports of subsidized Canadian lumber with no action from the U.S. industry. Terminating the MOU isn’t an option, he said, but beyond that, we’ll just have to see how things go. Hopefully, the two governments can reach some kind of long term settlement that involves competition, since that would be the best end result.

I asked Ragosta to comment on the response ofAmerican companies with Canadian divisions. He said it is likely the Canadian side of these companies doesn’t want their product penalized, while the American side is probably saying it has a problem with the price of Canadian lumber. Some companies have elected not to be members of the Coalition and maintain a neutral position in the negotiations, although most believe it is better to negotiate than litigate.

To wrap things up, I asked Ragosta ifhe thought, given the long history of lumber trade disputes between the two nations, there would ever be lumber peace. Sure, he replied, it’s absolutely going to occur. It’s just a question of when Canada is going to modify its timber system. The Canadian timber pricing system is not stable. As the environmental movement gets stronger, as budgets get tighter, as companies are forced to operate in an increasingly global environment, timber will be sold competitively in Canada. It’s just a question of whether we will do that any time soon in a rational manner, or keep fighting for the next 15 years or 20 years until the inevitable becomes reality.

Paul Creek Expands

Paul Creek Slicing Ltd., a privately owned veneer slicing operation based in Kamloops, B.C., has opened a new plant in Sumas, Washington. Called Sumas Veneers Inc., the operation is starting with 15 employees, but there are plans to eventually expand to 60 employees. Founded in 1991, Paul Creek employs 170 people in B.C. and is the largest producer of sliced veneer in the province. Company president Richard Rhodes says the reason for the new Washington state plant is that it is closer to the company’s major market and B.C. is unfriendly to small businesses. Paul Creek produces hemlock, fir, cedar and white pine veneer, which is used mainly for facing andjoinery in furniture manufacturing.

New Value Added Mill

Quebec based Tembec Inc., http://www.tembec.com/public/language.do has opened a new $10.7 million value added plant at its Cranbrook, B.C. operation, formerly known as Crestbrook Forest Industries. The new plant is designed to produce high value products and finger jointed lumber from low grade lumber supplied from its other three sawmills in the area.

The Cranbrook Value Added Centre, as it is called, is replacing an old Crestbrook mill which was shut down two years ago due to a reduction in the East Kootenay wood supply. The new plant will operate on a three shift basis, providing jobs for 41 people. It will start with an annual production of 37 million board feet, but that figure is expected to rise to 50 million board feet in two years. A consideration in building this new value added mill is its ability to cope with the added costs of the Softwood Lumber Agreement. Tembec says it plans to spend $70 million in B.C., including $50 million on a co-generation plant presently under construction at the company’s Skookumchuk pulp mill, north of Cranbrook. Tembec purchased Crestbrook Forest Industries in March 1999.

Home Sales Up

August sales of previously owned homes in the U.S. rose 9.3 per cent to a seasonally adjusted annual rate of 5.27 million. This was up from July, when sales were at 4.82 million units. The increase is being attributed to a drop in interest rates, which peaked at 8.64 per cent in May, but by August were down to 7.90 per cent. Economists are divided over what sales will do in the coming months. Some say the trend is not sustainable, since mortgage rates are likely to rise again; others say everyone who wants one has a job and investors are less worried about the currently more stable stock market.

WSPF Rocks

Western spruce producers are between a rock and a hard place: They are damned to oversupply and continue low prices if they keep running, or damned to not meeting fixed costs or cash in on chip dollars if they shut down. What to do?

Over the last several weeks, optimists have thought that this market was beginning to turn toward the positive. Prevailing conditions, however, that recently caused prices to dip close to $200 (Madison’s printed WSPF KD R/L Std&Btr 2×4 at $203 on September 8, 2000) threaten to reassert themselves. Although several large forest product manufacturers have curtailed production, outtake has not been sufficient to reduce the vast oversupply. Even though the cost of production exceeds the sticker price per thousand, as recently detailed in Madison’s editorials, mills are under bottom-line incentives to keep running, if only to partially support their fixed costs. Payback from pulp mills for chips that are a by-product of the lumber manufacturing process is also a motivator. With the abundance of lumber on the ground, customers don’t perceive the need to keep inventories topped up. Just-in-time buying appears to be an effective practice in this oversupplied environment.

This week, nobody wanted to commit to buying more than they could use immediately. October is certainly not the end of building season-quite the opposite in fact.

Traditionally, October is one of the highest volume building months of the year. This year’s higher interest rates, however, have discouraged home building and buying. Overall, the building season has been a disappointment to lumber producers. Order files on all dimensions have shrunk to under a week. Inquiry is extremely light and traders are doing all they can to stimulate interest among uncaring buyers. Counter offers of $10 to $15 are common, although mill traders have yet to stoop that low. Price changes occurred from attrition, a type of monetary shrinkage caused by a lack of sales at any level, rather than from purposeful price reductions. In KD R/L Std&Btr, 2×4 slipped $9 to $215. On the wider dimensions, KD R/L #2&Btr 2×6 slid $10 to $220. 2×8 was described as ‘a howling dog’, but held at $240 simply because of a lack of sales to document lower numbers. Wides were under pressure but hanging close to previous levels. KD R/L #2&Btr 2×10 shifted down $5 to $280; 2×12 remained at $340 because of scarce supplies.

Studs Day to Day

Traders are trying to come up with creative ways to stimulate sales. Under current conditions, order files for commodity studs are taking a dive to under a week. Sales of trims and shorts exceeded those of pre-cuts. KD 2×4-92-5/8″ PET studs dropped $10 to $220 ($220 for premium studs to $165 for lower quality studs), while most other items held close to the previous week’s levels.

MSR Here & There

Volumes in the machine stress rated lumber were ‘not all that bad’ according to unenthusiastic traders. While sales lagged and prices remained flat, incredible price increases recorded the previous week made the month of September. Cracks have begun showing in those new levels and mills have started listening to counteroffers of $2 to $5. High grades 2100f and 2400f in 2×6 are in tight supply and holding their value well. Order files have drifted to under a week.

Cedar Shivers Timbers

After lagging badly through the spring and early summer, timbers are finally coming into their own. Rough timbers were the light of cedar makers’ lives this week. Larger dimensions, 6×6 to 12×12, were most popular. Sales were strong and steady in timbers, while the rest of the cedar pile took a back seat.

Cargo & Reload

Whether mill representatives or wholesalers, there was little dissension about this week’s market conditions among traders. The overwhelming impression was one of unvarying flatness from horizon to horizon. Mills are fighting the pressure, but will likely be unable to resist the inevitable as the downward trend continues over the next week. Customers are shelving their order books until further notice. Reports of measurable mill order files were called “just so much ballyhoo”. The general feeling was one of deflation. One large east coast wholesaler remarked: “You sell one, then you buy another one. We used to sell one, then buy two to replace it.” The appearance of unsold rolling cars in Chicago was a dangerously negative indicator. Buyers are responding to the lack of positive movement by fence-sitting and waiting until prices go lower again before taking significant positions. No one is in an urgent need to buy. Demand is substantially less than supply, although retail business is sustaining well. On-the-ground inventories are thin on the east coast, as no one wants to be stuck with more than the minimum. In Green Douglas Fir, the beginning of this week saw two large west coast producers rolling back sticker prices they had jacked up too quickly. The result was prices pegged at virtually identical levels printed at the end of the previous week.

OSB & Plywood

“Spruce sheathing extremely strong; OSB rolling along,” was the market response garnered from one trader in Toronto. Another reported demand was sporadic, with buyers in both the U.S. and Canada ordering to fill their needs. Prices aren’t setting the world on fire, but markets are relatively strong. Weather in much of eastern Canada has turned for the better and builders are making up for lost time. Traders still complain about inventories, but with order files out to 10/9, mills are poking it out and trucks are hauling it away. OSB demand in western Canada sat upright about mid week, but by week’s end, it was snooze time again. The U.S.remains the active market, California in particular, although numbers are low. Mills are in the driver’s seat for the time being, but are not showing off their driving skills. Traders feel there is little downside risk in the market now, but say production is still too high and inventories are keeping appetites at bay. In Fir G1S plywood, production curtailments stimulated local demand, which edged slightly upward. This response was capped off by the odd phone call from Japan, although the need was not large. Europe is still quiet, continuing to feed from cupboards stocked up last year. Overall, G1S business is steady, giving everyone cause to count their blessings.

Announcements

Fletcher Challenge Canada Limited (FCCL) has announced that Russell J. Horner, formerly president and COO, has been appointed president and CEO. Horner, 50, is also president of Norske Skog, North American Region, the new 50.8 per cent majority owner of Fletcher Challenge Canada. A Canadian by birth, Horner came to FCCL last December from Sydney, Australia, where he was COO for the parent company’s Australia region. A graduate of UBC, Horner was originally with Crown Zellerbach and was President of the Elk Falls Division. The Cedar Shake & Shingle Bureau announces that Pat Nugent, formerly of Mission, B.C. has been appointed District Manager for Alberta. Nugent has an extensive background in building code, government policy, and lobbying work.

Refer to Madison’s Lumber Reporter for the latest news in the lumber industry.