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Market Lumber Prices for the Government Forest Industry

Volume 50 No. 41 – October 13, 2000

Pointing the Finger

I’ve long been critical of B.C. forest industry executives for not speaking out against government actions that put their industry in jeopardy. Many times in this column I’ve lashed out at this apathy, but my rants seem always to fall on deaf ears. Last week, however, David Emerson, chief of the Canfor corporation, http://www.canfor.com/  the largest forestry company in the province, did the unthinkable. In a speech to the Vancouver Board of Trade, he bared the secrets of the boardroom and took on the provincial and federal governments to boot. It’s customary for forest industry executives to keep their mouths shut on forest policy, since government, as owner of most of the province’s timber resources, has a choke hold. But Emerson pointed out that since forest policies are narrow minded, short sighted, and completely out of touch with the realities of the larger world, it was time to speak out and he for one was crossing the floor.

Emerson said the provincial government uses the forest industry as a tool of social engineering. Industry is politically vulnerable and because it generates so much money for the province, government views it as a cash cow. To back up his statement, Emerson produced some figures from his own company. He said that in 1999, Canfor paid out $311 million in stumpage and another $172 million in taxes and levies. On top of that, Canfor employees paid $138 million in taxes. Summing it all up, Emerson said the one year take from Canfor totaled $621 million. Compare this to dividends paid to shareholders. They have been averaging around $21 million a year. In 1999, however, there were no dividends because the company lost money. Going quickly to the bottom line, Emerson said that in light of this situation, the company simply can’t carry on without public policy changes. This is a prophetic stand to say the least, for the head of the largest forest company in the province.

To further illustrate his point, Emerson singled out the softwood lumber agreement (SLA) as an example of policies that are harmful to the industry. He said B.C. lumber exports have dropped 8.5 per cent since the SLA came into effect in 1995. As a result ofthis decline, Emerson calculated provincial job losses at 20,700 and investment losses at more than $500 million. He emphasized that Ottawa must take a tough stand against continued trade restrictions in upcoming SLA negotiations.

In a later interview with Gordon Hamilton of the Vancouver Sun, Emerson expanded his views. He emphasized that B.C. is now united on its stand regarding the SLA and the B.C. industry’s preference is for free trade. If that can’t be achieved, government must strive to get rid ofquotas. Quotas are something out of the dark ages, he stated, and they are destroying the forest industry in this country. He singled out B.C. as an area particularly hard hit by quota restrictions. There isn’t enough quota to satisfy producers that are quota short, stated Emerson, and since some provinces don’t have quota restrictions, capital is flowing to these areas at this province’s expense. Emerson proposed that a transitional arrangement such as an export tax would be preferable to quota limitations.

He also lashed out at the B.C. government for the way it applies stumpage charges. Emerson said the B.C. government uses a collection method it calls ‘waterbedding’, which is a soft sell term for stumpage fee adjustments to maintain revenue targets. To illustrate his point, Emerson cited the bailout of Skeena Cellulose in 1997. He said part of the bailout package included lowering stumpage fees, but since government didn’t lower its revenue target, the shortfall was made up by increasing stumpage rates in other regions. Emerson said his company’s Prince George operations are paying an additional US$46 per thousand board feet towards making up stumpage revenue shortfalls. With lumber prices currently around US$200 per thousand, that’s about a 20 per cent increase. Emerson opined that by penalizing other operations in the same business, government props up weak competitors at the expense of other operations elsewhere.

I give Emerson full acclamation for having the guts to speak out on these issues. I’m sure he thought long and hard before taking such a step, since he may have jeopardized his company’s position. That’s one ofthe risks you accept, however, when you take a public position.

I suspect Emerson’s action is indicative of just how bad things really are in this province. Forest policy in B.C. is little more than one bad idea piled on another. The result is a mish-mash of rules and regulations that defy reason. Unfortunately, the situation doesn’t get better until somebody does something about it and Emerson may have just started the ball rolling. Pointing fingers is a risky business in this province, but without such drastic measures B.C. will surely sink farther and farther into the morass.

C-Housing Starts Up

Canada Mortgage and Housing Corporation (CMHC) reports Canadian housing starts rose in September to an annualized rate of 156,400 units, a 7.1 per cent increase. August starts were pegged at 146,000 units. Urban multiples rose 20.5 per cent in September, to 63,000 units, while singles decreased 0.4 per cent to 72,400 units. September starts made a big jump in B.C. to 13,400 units, a whopping 50.6 per cent increase. Of this increase, singles were up 5.2 per cent, while multiples jumped 135.5 per cent. Elsewhere, starts rose 13.1 per cent for the Prairie provinces and 8.4 per cent in Ontario. Quebec recorded a decrease of 6.0 per cent and the Atlantic Region went down 14.1 per cent.

Lumber Deal Reached

A lumber trade dispute between Canada and the U.S. involving rougher headed lumber has now been resolved. Under the terms of the original Canada U.S. Softwood Lumber Agreement (SLA), Canada could ship unlimited volumes of rougher headed lumber into the U.S. without penalty. In early 1999, however, U.S. customs officials reclassified rougher headed lumber, making it subject to export permit fees. Canada launched an arbitration procedure against the U.S. for this action, but since an agreement was reached before this process concluded, the action has now been withdrawn.

Under the new agreement, Canada can now export 72.5 million board feet of rough lumber without incurring export permit fees. This allowance will be in effect until the current SLA expires at the end of March 2001.

West Fraser Acquires

West Fraser Timber Co. Ltd. of Vancouver, B.C., and Plum Creek Timber company, Inc., of Seattle, Washington, have reached agreement on Plum Creek’s Southern U.S. lumber manufacturing operations located in Joyce, Louisiana, and Hutting, Arkansas. The deal is worth US$60 million, plus working capital. The two Plum Creek mills have an annual output ofapproximately 300 million board feet. As part of the deal, Plum Creek has agreed to continue providing logs for the two facilities on a renewable 15 year fiber supply contract. West Fraser says it intends to retain all the 430 Plum Creek employees. There are also plans in the works to increase production to 400 million board feet annually. The deal is expected to be completed by the end of the year.

Logs Head South

Coastal B.C. forest companies without U.S. export lumber quota have become more active in exporting logs. Log exports through the Port of Vancouver have gone from 75,000 tonnes in 1995 to 770,000 tonnes in 1999, says a report commissioned by the International Longshore and Warehouse Union. Coincidentally, the increase in log exports parallels a similar decrease in lumber exports, which have been dropping at an annual rate of 6.2 per cent, the report says.

The increase in log exports is ringing warning bells in the labor movement, since it means job losses at B.C. sawmills. The situation has even come to the attention of Joe Foy of the Western Canada Wilderness Committee, whose organization is in favor oflocal processing. Each one thousand cubic meters of exported timber represents one local sawmill job. The increase in log exports is occurring mainly because coastal B.C. companies must export logs to maintain cash flow. Most of the B.C. logs are heading for mills in Washington State and Oregon, where they are converted into lumber for the U.S. market.

It is estimated about two-thirds of the log export volume comes from private land. Private land owners need only have their logs declared surplus to domestic use to obtain an export permit. The current over-supply in North American lumber markets, plus the absence of lumber quota for coastal operators, has made that designation relatively easy to obtain. Agreements to export large volumes of logs have been handed out to West Fraser Timber, Greystone Resources, Interfor, J.S. Jones, and Catermole Timber.

WSPF Smashed

A homely lumber cash market turned downright ugly on Thursday, with an abrupt drop in share prices on the NYSE market. Buyers with nebulous attitudes took the fast lane directly from uncertain to negative. The $200 psychological barrier was smashed as lack of demand plunged prices into the mid $190’s (KD R/L Std&Btr 2×4’s FOB mill). Stymied traders were unable to generate any interest from customers. The steady decline in KD R/L Std&Btr 2×4 hit $196 this week. This low mark was equaled only once in the last 10 years. That was in June 1995 when the number hit $190. The current price on KD R/L Std&Btr 2×4 is down $9 from the previous week to $196. In KD R/L #2&Btr, 2×6 slipped off $9 to $211; 2×8 drifted down $2 to $230; 2×10 trimmed $5 to $275; 2×12 held at $360 because of small supplies and long order files at the few producers.

Studs Plodding

Mills continued producing studs but that didn’t mean they were making money. One trader said: “All we can do is keep plodding.” Mills will eventually hit a point where they cannot continue operating. Shutdowns are both a financial consideration and a social one. In small, one-employer towns, even a brief shutdown can push valued employees to leave the area in search of new opportunities. Closing for a few weeks can have a profound effect on a mill’s re-start. Studs this week were a hard sell. Prices on WSPF KD 2×4 92-5/8” PET studs slid by $5 to $210 on good stock. Bargain studs were available in the $165 price range. Fingerjoint studs continued to be desirable. Order files lengthened as supplies shrank due to material shortages.

Cedar Rough ‘n Ready

Good business in rough dimension  and timbers motivated makers to increase  prices. Customers are looking long at  price adjustments before stepping back  in. Meanwhile orders and inquiry are  flying. Counter offers are few. Prices are  of less concern than filling specified orders  and providing prompt delivery.

Fir Pushed Too Hard

Over the last week, customers were  pushed away from the table by rising fir  prices. Levels are now back into the bargain  basement, but customers don’t care.  Mills have to consider shutting down at  these levels. As a further incentive to  shut down, pulp prices are now falling.  That removes the incentive for mills that  have been operating simply to produce  chips. Prompt shipment is required on all  orders. Shipments are highly specified  and tallies are mixed. Hem/fir 2×6-2×12  in 22 and 24 foot long lengths have dried  up; nothing is in stock or in production.  Prices for green Douglas fir logs are  rising, making replacement of materials  a complicated process. Traders agree this  has to be the bottom with nobody buying  or selling. One source remarked: “Youngsters  (in this market) are getting an  education, and oldsters are just getting  their asses kicked.” The retail lumber business is healthy.

OSB & Plywood

The eastern OSB market is flat as  pee on a platter, traders said when contacted  Thursday. They explained the big  retail boys got hit hard on the stock  market and  were more  interested in licking their wounds than  buying stock that wasn’t about to walk  out the door right away. The market was  excellent for people who were shorting,  but for everyone else it was a bust. When  asked about order files, traders just  laughed. The U.S. market was in a similar  state and traders reported it was ugly  and going to zero.  A flurry in the western OSB market  last week got everybody excited, but the  expected follow-through this week didn’t  materialize. Traders stood firm in the  face of ridiculous counters grinding for a  buck or two. Inventory levels are dropping,  which may spawn action in the  weeks to come. Look for companies to  carry a bit more inventory later this  fall—perhaps 10 to 14 days rather than  prompt as is now the case.  Domestic plywood held its own this  week, but traders expect it too is now  dropping off. Mills will likely hold tight  for a couple more weeks, then lower  prices if demand doesn’t pick up. The  best activity this week was in good-oneside.  Order files were out to the end of the  month with inquiry from abroad holding  firm. Only complaint was the U.S. market,  which was still soft.

Cargo and Reload

Heaps of bargains were looking for  homes in green fir and hemlock. It was a  week where players could appropriately  have been singing Neil Sedaka’s chorus  “Down, doobie, doo, down, down”. There  is nothing to reverse the direction of this  market or prevent it from heading down  even further. While, for the time of year,  northeast building activity is decent, lumber  sales totals are not as high as a  traditional October. Large stocking  wholesalers are holding the line on delivered  prices, simply because less expensive  wood will not reach them for several  weeks.  A few wholesalers have on-theground  inventory and are beginning to  move it below mill replacement costs.  Mills are selling just enough to stay alive  at $5-$10 counters off their asking prices.  Some northeastern traders venture that  there could be more room at the bottom  on prices, as demand droops toward the  winter holidays and large quantities of  wood are offered. One must assume the  numbers will go lower. Traders expressed  their desperation by faxing price sheets,  followed by personal phone calls that  were nothing short of pleas for help.

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

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