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Canadian Lumber Mill Prices of Wood Producers

Volume 51 No. 14, April 6, 2001

A Spot of Empathy – Part Two

Last week in Part One, I and my compassman had just been invited to supper at a bush mill—a mill whose fate we were in the process of sealing. This week we pick up on the story just as we arrive for the evening.

The door of the rough lumber shack was open as we drove into the yard, parked, and got out of the pickup. The mill owner stood in the doorway calling out a welcome and beckoning us to come in. Once inside, he introduced us to his three sons and a woman—his daughter—whom he said was the log scaler for the company. After a round of drinks which put everyone at ease and set the mood for the meal, we sat down at the home-made table heaped with steamy, hot food. Hard work and hearty appetites go together in the woods and the food quickly disappeared. Later, over hot, black coffee, we discussed forestry, sawmilling, the market, and, of course, the pulp mill invasion. The conversation eventually drifted to subjects other than business, and our host explained his family liked to shoot. He proudly brought out several custom-made Weatherby rifles for us to examine. In a couple of hours, stifled yawns implied the evening was over and we returned to our fly camp filled with warm feelings for these salt-of-the-earth people and more guilt than before.

In the following days, as we went about our work, we would occasionally hear the mill stop, then a half dozen sharp reports from a rifle. We speculated someone at the mill had bet that he or she could hit the bull’s-eye on the target they had set up and the others had taken up the challenge.

Later that fall, we started planning our first logging operations in the area. I purposely avoided tracking the family, but a year or so later, I heard they had moved to another area. It wasn’t difficult to imagine what awaited them there. They were running but without a place to hide, their fate already determined.

At that time, an estimated 300 small bush mill operations were located within a 100 mile radius ofPrince George, but they didn’t last long once the big companies moved in. Three years later, in 1967, the B.C. government came in with a new requirement that wiped them all out overnight. The Minister of Forests declared the pulpmills could no longer chip roundwood and that all chip furnish had to come from sawmill waste. That meant every sawmill in the area put in a chipper and that was the end of the bush mills. A chipper installation at that time cost $250,000 to $300,000, and no family operation had that kind of cash or credit. It was like someone had thrown a giant switch that powered all the circular headrigs in the north. Unable to compete and unable to make the transition, operators all over cut their last log, shut down their plants, and walked away into history. It was the end to a way of life.

The situation inPrince Georgein the early 1960s is analogous to the situation in the southeasternU.S.today. This area is dappled with inefficient and technologically outdated family operations that are not able to compete. These factors in themselves are

sufficient to herald the demise of these operations, but there are two additional hurdles that guarantee those mills will not endure: they have to buy their log stocks from private landowners, and they are processing southern yellow pine.

Depending on private landowners for logs is a guarantee wood will never be cheap. Let’s say I own a plot of private timber. My objective is to maximize the value of my wood and I’ll do whatever it takes to get there. I’ll sell only to the highest bidder, for instance, and when lumber goes down and the mills start complaining about my log prices, I’ll tell them to blow off. Instead, I’ll sit on my timber until the price goes up again, and while I’m awaiting that blessed event, I’ll relish the fact that the longer my trees stand there, the more meat they put on, and the more they’ll be worth when I finally do sell them.

There is no end to this cycle. With timber owners under no obligation to respond to lumber market declines, this situation will never change.

The second constraint in the southeast is the species. Southern yellow pine (SYP) isn’t the lumber of choice for home building when Canadian SPF is available. Given the choice, any builder with his head screwed on right will choose Canadian SPF every time. It’s light, easy to handle, easy to nail, and when put into a wall, it remains a wall. You don’t stand there watching it warp and twist itself into a pretzel as NMDQ southern yellow pine is want to do. (For those unfamiliar with the term, that’s nail-me-down-quick.)

Even if Canadian SPF is higher in price, builders are likely to choose it over SYP, on the basis of customer satisfaction alone. Don’t forget, lumber is a relatively small cost component in the total cost of a home, so what’s a few dollars more, considering the superiority and ease of working with SPF? No matter how you look at it, the southeast has the deck stacked against it in the competition department.

Significant though they may be, these factors have little overall impact on the current lumber trade dispute, since there is a mightier force at work here—jobs. This time, this lumber trade dispute has become 100 per cent political, and if ever there was an omnipotent political button, jobs is it. Mention jobs to a politician and he/she will move mountains and swim oceans—even if there’s but a single job to be created in the process.

Jobs on theU.S.side of the border are justification enough for a trade dispute, but this time it’s jobs on both sides of the border. Inefficient, family-owned SYP operations that haven’t a snowball’s chance in hell of competing, are shrieking jobs andU.S.politicians are listening. Canadian mills, efficient to a fault, feeding off a government-owned wood supply, putting a superior product into the marketplace at a lower cost than locally produced lumber, are also screaming jobs—particularly should theU.S.impose choking import restrictions.

Caught smack in the middle is the Bush Administration. Should it restrict the flow of excellent, low cost, Canadian SPF in favor of the dastardly SYP? Should it move to perpetuate family-owned, inefficient, SYP operations that will never be competitive? Should the Bush Administration allow theU.S.construction industry to build better, cheaper homes for first time buyers, the aged, and those with low incomes? Or should it give in to the retail lobby and the free traders and go for unrestricted imports of Canadian SPF?

This dilemma is not unlike that of the Canadian agricultural industry in reverse. Every year, income for many farmers is made up in greater and greater percentages of government subsidy. A recent report on the CBC indicated that within the next few years, subsidies will account for the majority of many farmers’ income. The Canadian farm industry is fast becoming uncompetitive. Does that mean we sacrifice our Canadian farmers for low cost products coming up from the U.S? It’s a dilemma, isn’t it?

I don’t sympathize with southeasternU.S.lumber producers because of the contemptible tactics they are employing in opposing Canadian lumber and the manner in which they are manipulating the political system to achieve their objectives, but in light of what happened to the northern B.C. bush mills, I can empathize with them. I understand what it’s like to come to the end of your string—to have no alternatives, no prospects, no future. But no matter what happens this time, or the next time, or the time after that, the small, inefficient SYP operations are gone goslings. Like my bush mill friends, they are bound for the annals of history.

It’s a sad commentary when a way of life accedes to progress. We humans are uniquely innovative and adaptable, but sometimes there’s no avoiding reality. Should theU.S.government decide in favor of the southeasternU.S.industry—a highly plausible prospect—the inevitable is merely delayed. Inefficiency and non-competitiveness can be perpetuated up to a point, but economic reality must eventually prevail.

Chips finally did in those northern bush mill operators and chips may also be the undoing of the small SYP operations. Southeastern forest plot owners can begin collecting chip revenues in about 15 years, compared to 25 years for lumber revenues. It’s a good bet two crops of pulp will be worth more than one crop of lumber over the same 30 year period. That makes it a pretty simple decision.

I wouldn’t be surprised, however, if the problem isn’t strictly academic anyway, since, with all the fuss over his trees, the land owner might instead decide to sell his land to a housing developer and take early retirement—a prospect eminently more appealing than supplying logs to a family owned SYP mill.

U.S. Floods Market

With lumber exports from B.C.,Alberta,Ontario, andQuebecregulated over the last five years by the Softwood Lumber Agreement (SLA), the U.S. South and West, along with the Canadian Maritimes, took advantage of the situation to increase lumber output, says a study by Doug Smyth, director of research for IWA Canada. According to Smyth, lumber exports from the four provinces controlled by theSLAfell by 1.2 billion board feet from 1995 to 2000. During that same period, however, production from the U.S. South increased by 1.9 billion board feet, the U.S. West increased production by 1.8 billion board feet, while the Canadian Maritime provinces tallied up an additional 1.2 billion board feet. Smyth says it is clear theU.S.industry and the Maritimes took advantage of theSLAto flood the market.

The intent of the SLA was to restrict Canadian lumber flowing into theU.S.to keep lumber prices high, but that hasn’t worked. Lumber prices have hovered near record lows for months, due mainly to an oversupplied market. Lumber prices are 20 per cent below where they were in 1996, Smyth reports.

According to Smyth, 73 per cent of the demand increase was met byU.S.mills, while the Canadian Maritime andPrairie provinces, along with a small portion of offshore imports, met the rest. He attributes much of the increasedU.S.production to logs imported from B.C. The log imports were the result of lumber export restrictions imposed by theSLA, and the collapse of the Japanese housing market, says Smyth. TimberWest and Weyerhaeuser, who have significant private timber holdings, are cited as the main log exporters.

Madison’s expects to publish an abridged version of Smyth’s entire report once it is available. All subscribers will receive a copy free of charge.

Bowater Buys Alliance

In a $1.2 billion deal, Bowater Inc., third largest newsprint company in the world, has announced it has purchased Alliance Forest Products Inc., one ofCanada’s last remaining independent paper producers. Bowater will addAlliance’s higher value and specialty paper products to its coated groundwood papers and newsprint. Bowater expects to be one of the world’s leading producers of specialty grade papers by the end of 2002.

WSPF As Usual

The unusual characteristic this week was the lack of anything unusual. Everything ran smoothly, like any other week in spring. Thanks to warm weather, good housing starts and permits, and low interest rates, spring buying increased substantially from the previous week. In this duty-free period between the previous softwood lumber agreement and its undetermined successor, no one took advantage of the situation by ramming as much wood through the border as trucks and rail cars could haul.

Contrary to rumors from theU.S.side, there was no wall of Canadian wood poised behind the quota barrier. This mythical behemoth was expected to roar over the border after the March 31SLAdeath knell, but that didn’t happen. Wood stashed in a ‘load and hold’ pattern as producers ran out of quota at the end of March, was pre-sold—not waiting to be pushed over the border on April 1.

While American special interest groups ran to their representatives to propose a 40 per cent countervail duty and a 40 per cent anti-dumping penalty against Canadian lumber, producers north of the border conducted business as usual. They took orders, filled rail cars and trucks, and sent them on their way to customers.

The anti-dumping penalty is expected to apply to shipments 15 per cent or more above the normal cross border flow, as established in the last year of the old quota agreement. Canadian WSPF producers were quick to point out, however, that the production capacity to generate that volume of wood does not exist, even if producers are inclined to take a chance on shipping now and paying the penalty later.

Prices on KD R/L Std&Btr 2×4 blipped upward $5 to $220 in decent sales from the mill level. On KD R/L #2&Btr, 2×6 gained $11 to $206; 2×8 hefted upward $13 to $208; 2×10 stuck on $6 to $260. The only holdout was 2×12, which held pat at $320. Order files were into the first of the week of April 16, approximately two weeks at most mills.

Studs Convened

It was annual convention time inPrince George, B.C. for the NFPA (Northern Forest Products Association). A mood of uncertainty prevailed over the affair, as delegates toured local mills and discussed the softwood lumber issue. Those left on the trading floor were busy taking calls and filling orders. After several weeks of light activity, a return to normal was welcome. Late in the week, sales of commodity studs were particularly good, and order files grew into the three-week range. Other decent sellers were one-inch items, 2×3, and finger joint studs.

MSR Quoting

The phones were ringing and traders were kept busy generating quotes on new MSR orders. Customers were tentative on the duty question, but they needed wood to satisfy immediate needs. Business prospects in MSR look good this spring.

Shingles Even All

Activity in shingles and shakes was measurable this week.Californiacustomers were eager for treated cedar roofing materials. Shingles were selling well into the southwest andChicagofor repairing last fall’s hail damage. Prices are steady, with #2s experiencing upward pressure. There are no problems with transportation. Spring replacement logs are still too expensive for many shake and shingle makers to re-open.

Cedar Unruffled

Cedar producers are confident the next softwood lumber trade arrangement will not be as worrisome as customers fear. Many are willing to designate ‘duty for mill account’ and assume any risk themselves. Mills throughout the cedar industry are on a reduced output schedule. Certain items are in short supply, particularly longer lengths and some larger timbers. Sales are good and customers are paying quoted prices on most products. Price increases to cover an anticipated duty could drive away customers or undermine product loyalty.

OSB & Plywood

Along with sunny weather and melting snow in centralCanadathis week, there was even more good news. The drywallers are expected to settle, which meansToronto’s labor problems are looking less serious. Drywallers are the most militant group in the building trades, and if they settle quickly, the construction season could be off to a strike-free start.

OSB activity was stronger toward the end of the week with strong out-turn, although prices were off a little from a week ago. 7/16”Torontowas selling at C$205, down $5. Order files are through the week of April 16 and into the week of April 23.

In westernCanada, activity also improved. There was some local buying inVancouver’s lower mainland, as wholesalers finally began replenishing depleted stocks.Albertaalso reported good inquiry.Californiawas buying in volume, andSeattlewas also doing some business. 7/16”Vancouversold for C$210, coinciding nicely with newly revised producer asking levels. Wholesalers say volume deals could be made for $5 less.

Cargo & Reload

Although weather in theU.S.northeast was warm and sunny for the first time this year, the lumber business didn’t reflect the upturn, as contractors waited for job sites to dry out. Retail yards held off buying in volume, in anticipation of a price decline that didn’t happen. While the mood was better, the real problem was uncertainty. How much stock do buyers have left? When will they begin buying for the coming construction season? What will happen after April 23, when Canadian lumber could be hit with a retroactive but unknown tariff? How much might the tariff be? And, most importantly, how much will Canadian lumber prices go up to cover the tariff? According to one veteran trader, if the warm weather continues, the crunch should begin in about a week. At that time, inventories will be down to the point where buying can no longer be postponed.

This week, selling prices for green fir and hemlock moved sideways for everything but fir 2×8, which managed a $5 gain. Traders don’t expect lower prices will bring more business. It’s a waiting game for now.

Announcements

Cascades Inc. ofKingsey Falls,Quebechas named Michel Desbiens, former Donohue Inc. president and CEO, to its board of directors. Also named to the Cascades’ board is Laurent Verreault, president and CEO of Societe Groupe Laperriere & Verreault Inc., a forest industry supply company. Cascades is undergoing financial restructuring and wants more independent directors on its board.

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

 

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