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Canadian Government Mills over Logging Industry Market Prices

Volume 52 No. 17, April 26, 2002

The Stupid Canadian Mills

There is probably no more daunting task in the forestry business than logging. It isn’t difficult in the physical sense anymore because of advances in mechanization, but instead of being a burly six footer, you now have to have an iron clad constitution. Imagine having to keep feeding logs to that insatiable monster in the mill yard, while contending with such uncontrollable adversities as the weather, mechanical breakdowns, labor disruptions, forest fires, insect attacks, bureaucracy, and, of course, government regulations. If you think bank heads have nightmares, try asking the logging manager how well he sleeps sometimes.

One of the most onerous and exacting requirements is a B.C. government regulation fondly known as the “use it or lose it” clause. In

simple terms, this proviso compels every B.C. company with quota to harvest within plus or minus 10 per cent of its collective annual allotment over a five-year period. The mill’s insatiable appetite aside, this sole requirement not only drives production, but directs planning and operational activities as well. It is always at the back of every logging manager’s mind, and every logging manager sweats it out every time logging is interrupted for reasons beyond his control. It could be wet weather, an early snowfall, a severe cold spell, a late spring, a forest fire or something else, but invariably, there is the concern that the operation is falling behind on the quota requirement. It can also go the other way when markets are good and the mill is outputting as much as it can.

It’s not hard to imagine the significance of this regulation if you put it in perspective: Picture yourself telling your shareholders, for instance, that the company will have to downsize because it failed to meet the use it or lose it requirement and lost some of its quota? Or that you are in the bank manager’s office asking for a loan to upgrade the plant, then having to explain that there is less collateral this time because your quota was cut back? Scary prospects, eh?

Aside from the external implications, the use it or lose it clause impacts directly on the financial well-being of the operation. One of the most imposing is that the company must operate come hell or high water. Good markets, bad markets, profitability or loss, the operation must continue since it is answering to a higher authority at the end of the five-year period. In virtually every situation, preserving quota supersedes all other considerations, since quota, not assets as is the case in other disciplines, is the stock in trade of the forest industry.

From a government perspective, the use it or lose it clause is the cat’s meow. Not only does it ensure continuous employment, but it also facilitates a consistent and direct flow of revenue to government coffers. At first one might be tempted to think government has the concern of the worker in mind, but that’s merely a side benefit. Any way you scratch it, revenue is at the heart of the matter. Government collects stumpage and royalties from the company, and income tax from the workers.

I’m not knocking the proviso because government is the ultimate beneficiary—a lot of others benefit along the way as well. But from both a management and marketing perspective, the lose it or use it requirement has significant long term disadvantages that impact on how the industry operates and ultimately its financial health.

A significant reflection of the use it or lose it clause is that it has given the B.C. industry an international black eye. This is particularly applicable in theU.S.where the Americans are unable to understand why Canadian mills continue operating in the face of poor market conditions. What’s the matter with those stupid Canadian mills, they ask? Why in hell do they keep operating when the market is down? Continuing to put out wood only adds to the problem and prolongs the market downturn. If they would just stop producing for a while the market would get hungry again, demand would go up, and prices would follow. We could all get back on track! This is a bonafide remark because many American plants shut down when the market sinks too low. It’s not surprising they wonder why we continue operating.

It must be understood that the phrase “use it or lose it” means just that. Fear of losing quota at the end of the five year period drives Canadian operators to continue logging, sawing, and marketing, even though markets are down and they are perhaps losing money doing it. Strange world, isn’t it?

Were I an angry American mill owner— and there are apparently quite a few of them— I’d be agitating to get rid of the B.C. use it or lose it proviso. Eliminating just this requirement has the potential to significantly alter markets and marketing strategies and impact profit and loss trends for North American operations. It just so happens that now might be a good time, since at present, the B.C. government appears amenable to altering this requirement in hopes of providing B.C. operators with more marketing flexibility.

Likely among the first to resist such a change are B.C. mill workers, who see their annual hours being cut. That may not be the case, however, since over the long term, having the flexibility to stop operating when it is unprofitable could mean more financial stability for the company and better levels of profitability. In this situation, employment may not actually be overly affected. Increased profitability will result in more job security, more upgrades and investment in technological change, and more financial benefits. What may at first seem like a bad deal, could ultimately be more beneficial than maintaining the status quo.

So while Americans think Canadian operators are stupid for continuing to produce irrespective of market conditions, it’s not quite that simple. The government’s carrot and stick approach to quota management has served government and employee expectations in the past, but change is the one constant in today’s world. If I were an angry American, I’d say to hell with the rest of theU.S.demands, let’s just tackle this one issue and if we can get rid of it, the other problems will probably sort out themselves. If nothing else, getting rid of the use it or lose it requirement would certainly change the operating parameters for those stupid Canadian mills.

Home Sales Down

The commerce department reports new home sales in theU.S.dropped 3.1 per cent in March, to a seasonally adjusted annual rate of 878,000. This follows a 6.2 per cent upward revision in February figures to 906,000 units from the 875,000 originally reported for the month. Housing starts also fell in March, but despite these decreases, both home sales and starts remain at historical highs. TheU.S.housing market has continued strong through the recession and economists now believe theU.S.recession is over. New home sales fell in all regions but the West. Sales were down 4.4 per cent in the Northeast, 19.3 per cent in theMidwest, and down 0.2 per cent in the South. The West reported an increase of 3.3 per cent.

Existing home sales are also reported down in March. They fell 8.3 per cent to an annualized rate of 5.40 million compared to February’s revised level of 5.89 million. Resalers were down 0.7 per cent compared to year ago figures. Resale homes sold at a breakneck pace during January and February, so the March decline was not unexpected.

Our Readers Respond

Nice work on your April 19 editorial. It gives the proper context for the fictitious wall of wood story. You accurately point out that it is an artifact of the general media sensationalizing their own conjecture based on a poor understanding of the lumber market and how it adjusts to US demand. You also put in place the follow up stories about rail rolling stock being in short supply, which the media then used to support its first array of factoids.

Unfortunately, the outcome of all this bad coverage is the wrong and confusing impression it creates in the public perceptions of an already complicated and intractable situation. Worse, the Americans capitalized nicely on it. I heard last week the CBC Radio Vancouver afternoon show host interview a prominent American lawyer representing the US Coalition. He convincingly undermined the Canadian position. However, his argument was based on the false wall of wood story. Unfortunately, the interviewer was clearly unable to recognize the US political cant.

In fact, the US spokesman was so completely in charge of the interview, he even alleged Dr. Peter Pearse’s report on the West Coast forest industry supported the US position that Canadian mills were subsidized. The host was so flat-footed she couldn’t even

call the lawyer on his narrow, self-serving interpretation of the report. She might have pointed out that Pearse was actually saying that government meddling in the industry had made the mills inefficient. If the mills and government followed Pearse’s advice, they would become more efficient and better able to sell cheaply into the US market. I wish she had the understanding, or had at least read Pearse enough, to have asked what the US response would be if mills in Canada become even more efficient through freer log markets and other proposed reforms. It has been kind of a humiliating week at the hands of our own media. With you the only exception of course.

John Betts, Western Silvicultural Contractors’ Association, Executive Director  ~via e-mail

WSPF Living Large

A couple of huge volume mid-week days were bracketed by a so-so beginning and end. Good follow-through after Wednesday contributed to prices inching upward. Producers filled order files, but did not sell out. There were offerings in all categories at prices under levels from the previous week. Prices slid $5 to $10 with mills taking deep counters off those levels early in the week. By the end of the week, prices had pushed up and mills were still listening to counters, but getting within a couple of dollars of asking levels. To finish the week, KD R/L Std&Btr 2×4 chipped off $1 to $264. In KD R/L #2&Btr, 2×4 gained $3 to $276; 2×6 held at $262; 2×8 poured on $10 to $250; 2×10 tacked on $8 to $268; and 2×12 minused $7 to $293. Order files were into the week of May 6 at most mills.

Cedar Frustrated

Cedar manufacturers ran flat out all week, producing as much as possible for shipment into theU.S.before a new duty goes into effect in May. Orders from nervousU.S.customers multiplied on the basis that everything they could get now would unquestionably increase in value after May 15. Planning was put on hold for the next few weeks while shippers made the most of the duty-free window. However, no one knew what was in the future. If the price doesn’t rise by 20 percent when the duty goes into effect, many producers may go permanently off the market. Unfortunately, buyers don’t care about the impact on the manufacturer as long as their needs are met. If cedar isn’t available at an attractive price, alternate products such as plastic composite decking will fill the gap.

KD Fir Toned Up

Temporary closure of the Simpson Timber mill atTacoma,WA, last week gave this market a shot in the arm. Immediate effects were a better tone to prices and improved demand. Prices on KD R/L Std&Btr 2×4 recovered to $325 within $5 of the previous week’s level of $330. Wider dimensions did not fare as well with 2×6 off $20 to $305 and 2×12 off $15 to $325.

Green Fir Played Off

New selling levels were established after a deep dip early in the week. However, the little bits of activity did little to remedy the notable absence of energy and optimism that are keys to maintaining momentum in this volatile market. Buyers brooded over the softness of prices. Although no one doubted this market had hit bottom the previous week, they were unwilling to be the first to run it up again.

OSB & Plywood

After a dismal start to the week, the central Canadian OSB market recovered some lost ground on Thursday. Construction on the Canadian side is still active, but it was the return of moderate buying from theU.S.that turned prices toward the upside. Traders say that prompt wood was not hard to find from secondary sources, but the supply is shrinking. Mills were pleased to report order files were into the early part of the week of May 6. 7/16”Torontoended the week at C$280, down $20 from last week.

The news was also better from westernCanada, where prices also began firming up late in the week. The weather is still on the cool side inAlbertaand B.C., but construction activity is humming along nicely in theVancouverlower mainland market. The trouble, say traders, is that builders are using OSB they purchased three or four months ago. When the warm weather arrives and the building season gets into high gear, inventories will be consumed and demand is expected to increase. Mills report increased buying from the U.S. Pacific Northwest, Colorado andUtah, althoughCaliforniais not back in a big way. Producers adjusted prices upward toward the end of the week, but are reported to be listening to counters. 7/16”Vancouversold for C$260 this week, off $15 from a week ago.

Cargo & Reload

Lumber buying is still disappointingly low in theU.S.northeast, according to stocking wholesalers. The weather was wet, but not enough to slow construction. With the region experiencing a drought of historic severity, no one complained about the rain. Massive disinterest among buyers resulted in low sales totals. Buyers want only small, highly specified orders, say traders. The softwood dispute is keeping everyone on the sidelines, buying only for immediate needs. Another theory was advanced for the current lack of buying pressure: “Great sales in January and February mean that the market dies in March and April.” Selling prices for green fir and hemlock were little changed this week, with most items trading in a very narrow range. The poor sales volumes could mean even lower prices, according to one large wholesaler. “We’ll listen to counters,” he said. “We want to sell lumber.”

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

 

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