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Cedar Down – Market Added Value to Lumber Prices

Volume 50 No. 43 – October27, 2000

The Gurgle of a Flush

Acouple of weeks ago, Canfor President David Emerson, http://www.international.gc.ca/international/minister-ministre.aspx  announced his company was closing its value added operation in Prince George, B.C. According to Emerson, the plant has been losing money since the day it opened three years ago and the company can no longer afford to keep it going. Emerson homed in on high operating costs and stumpage as the main culprits for the decision to shut the plant down. The value added plant is expected to wind up operations at the end of this month and Emerson says his company could close two additional primary sawmills there if costs can’t be trimmed down.

Closure of the Canfor value added operation isn’t especially significant for the production it will take out of the system or for the jobs that will be lost. The plant produces glued laminated posts for the Japanese market and employs about 30 workers who, promises Emerson, will be transferred to other Canfor mills in the area. But it does dash the hopes of those who believe value added processing might one day supplant at least some of the socio-economic impacts resulting from a diminishing forest industry in this province.

In elaborating on his company’s mill closure, Emerson nailed down the lid on the value added coffin. He said there was a lot of ballyhoo surrounding the actual running of a value added facility. For instance, people get paid less in a value added operation, and dimension lumber produced for high end markets is not a value added product. The second point speaks for itself, but the wage part is a little trickier: Some value added non-union operations, especially family ones, do get away with paying lower wages, and special wage concessions can be negotiated for others. But if I’m reading between the lines correctly, Emerson was trying to point out that neither possibility is realistic for the majors, which ultimately puts them out of the value added game.

Eliminating all the fancy words and executive politics that are regurgitated over issues such as this, the real problem is that operating costs for B.C. forestry companies are too high. I have been concentrating on this aspect of the business recently, and if you want a refresher, look back to Madison’s Volume 50 Number 37 and Number 38 (September 15 and September 22, 2000). Data in these two issues shows that labor is a significant component of overall production costs. As I understand it, this is due at least in part to our high IWA starting wage rate of just over C$21 per hour. If we look south into Washington state, the starting IWA wage rate is equivalent to approximately C$14 per hour. The net effect of this discrepancy between these two analogous areas is that our labor rates overall are approximately 20 per cent higher than those of Washington state, one of our fiercest competitors. This is a difficult problem to tackle and one which has yet to be resolved. It would be nice to get some IWA feedback on this situation. How about it, you guys?

Labor, however, isn’t the only expense making B.C. the highest cost producer in the world. Other crucial factors are our stumpage, environmental regulations, and taxes. Government is the wolf in sheep’s clothing in these issues, but, much as I’d like to, I can’t blame only government. We, the people of this province, of this industry, are just as much to blame for this situation. I’m not defending government. Regular readers of my column know I have nothing but contempt for politicians, but in this case, we have mainly ourselves to blame. They say people get the government they deserve and this province is certainly testimony to the validity of that cliche. We have been so nice, so accommodating, so obliging to ridiculous demands by the international community and other outside organizations, there isn’t much governments can do without incurring retaliation.

Try going back on Forest Practices Code requirements for instance, and see how quickly environmental organizations raise living hell; or lower stumpage rates and see how quickly the U.S. retaliates with increased import levies on our lumber or an additional countervail duty. See what I mean? We’ve been so busy trying to placate everybody else in the world, that we’ve placated ourselves right out of business.

At every turn we stupid Canadians allow ourselves to be jerked around like puppets on a string by every kooky interest group that gets a mind to do so. That includes other governments, foreign environmental organizations, and even large foreign retail operations. We are so nice, so accommodating, we lack the guts to stand up for ourselves and tell these people where to get off. Instead, like a bunch of cattle, we allow ourselves to be pushed in any direction anyone wants to send us.

As an example, look at our provincial environmentalist requirements. We now have such a plethora of environmental rules and regulations, we are buried under them. My spies tell me engineering costs alone are over $7 a cubic meter just to prepare the documentation for a cutting permit application. $7 a cubic meter—can you believe it?

Another big obstacle is the good old Softwood Lumber Agreement. The Americans have such a big stick over our heads with this one, we can’t even fart without first asking them. How can this be? How have we allowed ourselves to be so dictated by external forces that we no longer control our own resource? It is still ours, isn’t it?

I might be more understanding of this situation if we were achieving something, but we’re not. We give in to the environmentalists—do they leave us alone, allow us to go about our business? No. They move the goal posts a few yards down the field and start the fight all over again.

I have a favorite metaphor: a camel is a horse designed by a committee. When I think of the B.C. forest industry, this is the image that springs immediately to mind. We can’t go on this way. Things aren’t improving, they’re getting worse. We must regain control of our resource and our forestry operations if we hope to continue as a forest products producer. There’s no future for the highest cost producer in the world. Customers are unforgiving. They aren’t now, nor are they ever likely to be, willing to part with more money just to do business with B.C. and you know where that leaves us.

Here’s the way I see it: Environmentalists are making progress, American lumber producers are making progress, other producers around the world are definitely making progress, but B.C. lumber producers? Swirling down the toilet to the gurgle of a flush.

Remanners Organize

Lumber remanufacturers from across Canada have joined forces to form a new affiliation called the Canadian Lumber Remanufacturers Alliance (CLRA). Their objective is to seek federal support for protecting and promoting their interests in international trade agreements—particularly concerning the Canada-U.S. Softwood Lumber Agreement—and raise public awareness of their importance and distinctness. The immediate hope is that CLRA members will be excluded from any future countervailing duties or other restriction on exports to the U.S., but ultimately, they want to ensure their survival and growth. This sector provides approximately 40,000 Canadian jobs and contributes approximately $4 billion to the economy annually. It presently includes 350 value added facilities across the country. For more information, call Francis Schiller at (613)232-1421.

Anthony-Domtar Expands

Anthony-Domtar Inc., announces it is building a new $20 million joint venture manufacturing facility in Sault Ste Marie, Ontario, to produce its Power JoIst solid sawn flange. This product complements the company’s Power Beam I-Joist compatible glulam. The project brings together Anthony Forest Products Company and Domtar Inc., in a new manufacturing and distribution partnership. The new plant is scheduled to open in the summer of 2001.

Pulp Mills Slow Down

Fletcher Challenge Canada says it will curtail production at its three B.C. pulp mills to reduce capacity by 25,000 metric tonnes in the fourth quarter of this year. The Mackenzie pulp mill in northern B.C. will reduce capacity by approximately 6,000 metric tonnes; the Crofton pulp mill on Vancouver Island will reduce output by more than 10,000 metric tonnes; and the Elk Falls operation, also on Vancouver Island, will cut back by more than 9,000 tonnes.

International Paper has also announced production curtailments at three of its pulp and paper operations. The objective is to reduce capacity by 18 per cent or 820,000 tons in its uncoated papers; 120,000 tons or seven per cent in market pulp; 230,000 tons or five per cent at the company’s containerboard operations; and 50,000 tons in unbleached Kraft paper output. About 2,500 workers at the Mobile and Courtland, AL, Lock Haven, PA, and Camden, AR, mills, along with employees in accompanying forestry operations will be laid off or transferred.

WSPF Bobbing

With no support and autumn cooling toward winter, the western spruce market is like a fishing bobber in slack water, wobbling and bumping against that $200 barrier (KD R/L Std&Btr 2×4). Halloween next week can’t be any scarier than the precipitous position of spruce dimension producers. Prices are well below the profit point and just above the pain threshold for many mills. Traders quoted numbers between $200 and $205, with most sales on the lower end. It is expected next week will see the market drift down even farther.

Oversupply continues to plague prospects for improvement. Customers aren’t buying ahead or in quantity, assuming they can get whatever they need on a moment’s notice. Overproduction does nothing to discourage that just-in-time buying strategy.

Prices on KD R/L Std&Btr 2×4 hovered close to the level of the previous week, losing approximately $2 to a low of $200 with some sales recorded within $2 on either side. In KD R/L #2&Btr, 2×6 found a few takers with a tangible benefit of rising $7 to $215. There was no help for 2×8, which is on the way down the toilet, losing $4 to $200. A decline in buyers for 2×10 is expected at this late point in the building season; it recorded a reasonable $5 decline to $270. Even in a weakening market with few producers supplying 2×12, the price is relatively stable. This week the price rose $1 to $356. Utility dimension followed #2&Btr downward $5-$12 across the board. Even Economy, which has been a solid seller in Canada to local customers, took a $5 to $10 hit on all but 2×12, which remained firm at C$115 f.o.b. mill.

Studs Eroding

Studs racked up orders in ‘onesy twosy’  lots this week, in the quiet end of a buying  cycle. No one was rushing to buy in quantity.  While production continues to pour  out of the mills, customers are stepping  back to evaluate what they need for the  coming winter months. Order files are not  maintaining themselves against production  output, but are gradually slipping back into the week of November 6 or sooner.

MSR Ahead Slow

Truss plants are buying small quantities  of MSR, while the rest of the market is  at a virtual standstill. Sales are slow but  steady, with orders mainly in mixed truckloads.  Buyers are playing their game close  to their vest. Although MSR is somewhat  oversupplied, the specifications customers  need might be difficult to fill without  scrounging around to assemble a load.  Prices remain firm on 2x4s in all grades  and slightly up in 2×6 high grades. Order  files are approximately one week.

ESPF Flashes

It would be easy to miss the flash in  the pan in eastern spruce sales if you are  not watching carefully. Wholesalers are  buying in small quantities. On 2×6, wholesalers  have been putting a small amount  into speculative truckloads for delivery to  their own eastern reloads. These buyers  are in a hurry—they want prompt shipment  for delivery before U.S. Thanksgiving  in anticipation of retail business before  the Christmas holidays. This is a good sign  for after-Christmas mill business. ESPF  traders are definitely encouraged that there  will be life after New Year’s. Order files are  minimal except on 2×6, which is growing  toward two weeks.

Cedar Hanging

The big cedar guys are hanging around  at this time of year waiting for the good  word from NAWLA. The North American  Wholesale Lumber Association conference  may be the weekend of November 4th, but  the drift toward the big Dallas, TX show has  already started. Getting anyone to commit  to anything, particularly in cedar, during  the week before the show would take an act  of Congress. Hobnobbing at NAWLA gives  everyone a feel for the way the wind is  blowing for next year. One trader remarked  that this year’s market has demonstrated  why he chose stable cedar over the more  exciting spruce dimension market.

OSB & Plywood

The curtailment announcements made  a week ago by L-P and G-P had little lasting  power. After a quick surge upward, OSB  prices in most of North America have  stalled, and this week  prices are barely  holding at levels near those of a week ago.  Ontario, where the fall weather is warm  and sunny, is an exception. Construction  activity in central Canada is strong and  OSB prices have held firm. This week, 7/16”  Toronto is priced as C$230, right where it  was a week ago. Prompt delivery is difficult  to arrange and will cost a little more, say  traders. Order files have declined from a  week ago and are now almost through the  week of November 6.  In western Canada, OSB prices are  not enjoying the firmness of a week ago.  Traders say that California, the engine  which drives the OSB market in western  Canada and the U.S., is not running on all  cylinders. Selective buying has returned.  OSB producers are looking for orders, while  at the same time trying to hold last week’s  prices. They are doing little business. With  7/16” Vancouver still pegged at C$234,  counters of at least $4 are required to make  a deal. Order files are still not through the  week of November 6.

Cargo & Reload

Lumber activity in the U.S. northeast  was better than a week ago. Buyers were  waiting for lower prices, but found instead  that their inventories had become too low.  Replenishment was required. Stocking  wholesalers were happy to comply, taking  a steady stream of small orders from buyers  reluctant to buy carload direct. Other  wholesalers reported customers quite willing  to buy carload. All in all, a decent week.  Green fir selling prices firmed higher  for most items. Fir 2×6 and 2×10 are scarce.  Green hemlock selling prices are unchanged.  Replacement prices from west  coast fir mills moved higher for 2×4, 2×10  and 2×12.

Announcements

The Western Red Cedar Lumber Association’s Cedar School in Vancouver, B.C., says that 17 attendees from its fall class of 51 students received gold medal grading certificates for scoring 85 per cent or higher on the final exam. These results are equal to those of a year ago, when the school set a record for the number of students achieving such high test scores. The WRCLA runs the Cedar School twice a year: in the spring and in the fall. Next Cedar School will run April 1-5, 2001, in Vancouver, B.C. (604)684-0266 Weyerhaeuser Building Materials announces that Harold Sheepwash, Jr. has been appointed general manager for Quebec. Sheepwash, who is located at the company’s Montreal Customer Service Center, has more than 30 years experience in the building materials industry. He was recently general manager of industrial and engineered wood products at Goodfellow, Inc. Weyerhaeuser has also appointed three new general managers: Tor Driflot, GM Cincinnati Customer Service Center; Jim Jenkins, GM Oklahoma City Customer Service Center; and Mike Henry, GM Gulfport Miss. Customer Service Center. Charles Snavely and Parag Bhansali have been elected Vice Presidents of Rayonier. Snavely, 45, is vice president of finance and taxes; Bhansali, 39, is vice president of investor relations.

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

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