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Canadian Lumber Prices in the Wood Market Industry

Volume 52  No. 15, April 12, 2002

The Wall of Wood Game

Whoever first coined the phrase “‘a wall of wood” to describe a potential export marketing action by the Canadian forest industry not only initiated a highly imaginative mental image, but an effective marketing ploy as well. A mere mention of that phrase immediately conjures up images of an veritable wood tsunami heading inexorably toward the Canada-U.S. border with the sole purpose of overwhelming the lumber market.

Within the last half dozen or so years there have been a number of “tsunami” warnings, but either the thing never materialized, or it ran out of gas before it reached the border. Despite the admirable description, the physical existence of the wall isn’t the issue, but rather the market effects it engenders. All it takes is the hint of a Canadian wall of wood and the lumber market goes into a demented frenzy akin to that of a hive of honey bees that has just been kicked by the neighborhood urchin. The effect goes through the industry like our mad bees after their tormentor, and before you know it, down goes the price of lumber. Objective achieved.

Remarkably, the wall of wood threat breaks out, or doesn’t, according to the convenience of the marketplace. At present, for instance, conditions are ideal for another round of the wall of wood game, but again, it isn’t happening. Question is—again—why not?

To determine the answer, we have to go back to last summer when the Americans imposed preliminary tariffs totaling 32 per cent on Canadian lumber. As soon as that determination hit the streets, the Canadian forest industry was in trouble. You’d have a hard time finding any business except maybe drugs that can take a 32 per cent hit and not writhe in agony. The only thing that kept the Canadians going this time was that the initial determination was not the final one— and it was scheduled to expire in December.

When December came, the countervail part of the U.S. tariff, which included the stumpage subsidy contention and injury to the U.S. industry, did indeed expire, leaving Canadian producers facing only the antidumping part of the determination. This averaged 9.69 per cent, but it required that Canadian producers post bonds in the total amount owed each time lumber crossed the border. Although devastating, at least some Canadian operations had the financial resources to abide the U.S. assessment, provided the price of lumber was sufficiently high to cover it.

Since then, the Canadian industry has continued to send lumber across the border, all the while anteing up huge sums of money in anticipation of the increase sure to be imposed next month when the U.S. Commerce Department issues its final judgment. It takes little intelligence to conclude there is now an opportunity for that mythical wall of wood to finally materialize. In theory at least, Canadian companies should be trying to get as much wood across the border as possible before the determination is issued, thus bypassing the higher assessment sure to follow.

Part of the reason that isn’t happening is that Canadians are waiting to see how the U.S. department of commerce will rule. If it rules

Canadians are indeed subsidizing lumber production with low stumpage rates and Canadian lumber is indeed injuring the U.S. industry— the most likely scenario—we’re going to be hit. In this worst case scenario, Canadians could face a countervail penalty of 19.3 per cent.

But that’s only the half of it. There’s also the dumping issue, and if the commerce department decides Canada is dumping product into the U.S., an additional penalty of 9.69 per cent could be added to the countervail assessment, for a total tariff of over 29 per cent. Not only would this devastate the Canadian industry, but if the script plays out this way, Canadian companies can kiss their ante-up money goodbye—which, theoretically, is now over a billion dollars.

These are compelling reasons for not sending down a wall of wood, but they aren’t the only ones.

Everyone knows how the market responds to excess supply with declining prices. For the sake of argument, let’s say the Canadian mills decided to ship large volumes of lumber across the border. The only way to do this would be to put the wood into storage and dole it out piecemeal, since dumping so much wood on the market at one time would certainly drive down market prices. Not only are price decreases undesirable for Canadian producers, but they are also disagreeable to U.S. producers, who benefit from high lumber prices as well.

A third reason for not sending a wall of wood into the U.S. is the impact on Canadian workers. Ramping up production and over-supplying the market eventually results in slowdowns at the mills as demand drops off. Without the need to produce lumber, mills reduce shifts and go into downtime, leaving workers unemployed—a situation most operations strive to avoid.

Like most things, this lumber trade dispute is more about money rather than injury, anti-dumping, stumpage subsidy, or anything else the American lumber cartel attempts to fabricate. Although Canada doesn’t have the power on its own to shift the added penalty onto lumber prices since lumber prices are market-driven, driving up the price of traditionally lower cost higher quality Canadian lumber sets off a chain reaction in the marketplace that benefits American producers. Higher lumber prices mean higher profits for American lumber operators and higher values attached to U.S. timber stands. These in turn yield more favorable fiscal results in annual reports, which ultimately increase company asset values and generate higher share prices.

A little pain for Canadian producers is nothing compared to the benefits American producers enjoy. Make no mistake, however, the ultimate beneficiaries of gains in the North American lumber market are the Europeans, who not only put product into that market penalty-free, but also have a very favorable currency exchange.

I’m sure I haven’t put the wall of wood theory to bed for good. As certain as the sun will rise tomorrow, the wall of wood theory will emerge again to play out its role in the marketplace. But despite the political machinations and marketing psychology at work with this strategy, there is at least one consolation in understanding and rationalizing it—at least you can avoid getting swept up in the tide.

Housing Market Roaring

Canada Housing and Mortgage Corporation (CMHC) reports Canadian housing starts increased 10.9 per cent in March to 199,800 units on a seasonally adjusted annual basis, up from 180,100 units in February. Urban singles increased 3.4 per cent to 103,200 units compared to 99,800 units in February. Urban multiples rose 27.0 per cent to an annual rate of 76,600 units, up from 60,300 units the previous month.

Actual starts for the period January to March 2002 were 32,571 compared to 24,823 units in 2001, an increase of 31.2 per cent over last year. Single detached starts increased 32.5 per cent while multiples increased 29.9 per cent. CMHC says there is

strong demand for new housing due to low mortgage rates and an improving economy.

Faced with shortages in the resale market, buyers are moving toward the new home market. First time home buyers are expected to lead the Canadian market, with renters representing the majority of buyers over the next year. According to the Royal Bank, 35 per cent of those now renting will purchase a home within the next two years.

Beetles Proliferate

The desperately hoped-for long, cold winter needed to help control the mountain pine beetle epidemic underway in north central B.C. did not materialize this year, which means the epidemic will continue spreading at an uncontrollable rate. The B.C. Ministry of Forests expects the infestation, which is already twice the size of Vancouver Island, will increase by 80 per cent this summer, once the beetles have swarmed. The infestation has already destroyed timber worth a estimated $4.2 billion and that figure is now likely to go much higher. Industry representatives in the area say the epidemic now exceeds their harvesting and milling capabilities and that a significant portion of the infected fiber will be lost.

A factor in the utilization of this wood is the softwood lumber dispute. Normally government offers salvage wood at a reduced stumpage rate as an incentive to harvest it. This time around, however, there is concern such a reduction would be perceived as a subsidy.

Tembec and SGF Partners

Tembec and SGF Rexfor of Quebec have announced that they have formed a 50/50 joint venture: Temrex Forest Products, Lim-

ited Partnership. Temrex has acquired the St-Alphonse sawmill in Quebec from Produits Forestiers St-Alphonse Inc., a wholly owned subsidiary of SGF Rexfor, as well as Tembec’s Nouvelle sawmill, located in the Gaspe region. Price was quoted at $65.6 million, including $11.6 million in working capital. The two sawmills’ combined production is approximately 143 million board feet of green dressed and green rough SPF annually. Major markets are in Quebec, Ontario and the Maritimes. Annual sales for the coming year are projected at $62 million.

Temrex has also entered into a long term agreement with Gaspesia Papers Limited to supply wood chips to Gaspesia’s paper mill in Chandler, Quebec, when it resumes operation.

Slocan Reports Loss

One of B.C.’s largest forest products companies, Slocan Forest Products Ltd., has posted a fourth quarter loss for 2001 of $16.1 million. That compares to a profit of $7.1 million in the same period a year ago. Included in the results is a provision for possible countervail and anti-dumping duties of $12.7 million. If this amount is removed, the company lost $8 million in fourth quarter 2001. Slocan blames the loss on poor economic conditions, slumping lumber prices, and uncertainty over the softwood lumber dispute.

The company says, however, it expects to turn the loss around for the first quarter of 2002. A spokesman said an increase in lumber prices due to surging U.S. housing activity, coupled with a more favorable exchange rate, will likely result in a favorable first quarter for this year.

Conditions varied throughout the western spruce market this week. A revision of the disposition and effective date of the countervailing duty made the whole market take a giant step backward. Producers were unwilling to offer more attractive deals to turn fence sitters into buyers. Mill traders admitted taking $4-$5 counters, but that wasn’t enough to generate much excitement. Wholesalers with rolling wood to sell at even further reduced numbers formed a second tier on that basis. Order files were approximately one week at some mills, while others were sold out through April.

Pricing in KD R/L Strd&Btr 2×4 knocked off $3 to $282. In KD #2&Btr, 2×4 sunk $10 to $285, and 2×6 erased $5 to $280. Better demand and pinched supply in 2×8 resulted in a firmed tone, but the price stayed at $260. In wide dimension, KD R/L #2&Btr 2×10 marked off another week at $280, and 2×12 subtracted $10 to $320.

Studs Drop Off

Another good beginning fizzled off by mid-week. A drop in orders was still represented by a steady buzz on the phones that kept traders busy. Prices on the better quality products were reduced by $10 to $305 on KD SPF 2×4 92-5/8″ PET studs.

The rail car shortage was gradually improving and producers were better able to source their requirements early in the week. Some shippers, however, found that available rail cars ran out by the end of the week. Logging finished in the central interior of British Columbia in a bout of rainy weather that muddied the roads and made hauling treacherous. Log supplies at the mills were considered adequate to take producers through to the beginning of the summer logging season.

Shakes Running Scarce

The raw materials needed to make cedar roofing were quickly running out at the mills due to the scarcity of logs and blocks. Production in the shake and shingle industry was reduced to approximately 40 per cent of full capacity. Prices shot up as sales depleted stocks on hand. Makers expected a saturation point where buyers would just say no.

Cedar Springing

The big cedar producers took the news of the delayed countervailing duty as an opportunity to spring into action and ship

everything on order over the border. They held off on orders beyond the duty effective date, because they were unsure of how to price them.

KD Fir Unmotivated

A lack of momentum plagued the dry fir business as buyers were more ho-hum than gung-ho. Little bits were sold each day, but most of the calls were tire kickers. The one-week order file was mainly small sales in mixed lots. Producers got their asking levels on narrows, but wides were another story, with softer prices and small bargains for bigger customers. Prices in KD Douglas fir were subject to the inclusion of more short lengths; mills with a high percentage of long lengths in the mix were at a disadvantage.

OSB & Plywood

The weather was fine in central Canada, but it was a pretty boring week for OSB traders. Plywood is the flavor of the week right now, according to panel traders, easily outselling OSB in the Toronto area. U.S. buyers seem mesmerized by the scuffle over tariffs on dimension lumber. Lots of inquiries; not much business, said producers.

OSB prices inched higher this week, but with construction still not fully underway and a final decision from the ITC rescheduled to May 16, the usual pressure on OSB prices from the American side has yet to come. Mills were asking C$310 for 7/16″ Toronto this week and reported order files into the week of April 22.

Positive comments on OSB activity in western Canada have all but disappeared. Buying from the U.S. has gone away, said one trader. Construction in Alberta and the B.C. lower mainland is active, but there is little panel buying. Existing inventory and secondary supply is sufficient for current demand, but that will only last a week or two. Although producters are doing little or no business, they have chosen to hold prices at last week’s levels. Numerous inquiries from CA, AX, NV and NM bolstered their confidence that prices would soon firm back to asking levels. Order files are nearly through the week of April 22. 7/16″ Vancouver could be found this week at C$295, off $9.

Cargo & Reload

A tough, frustrating, baffling week for stocking wholesalers in the U.S. northeast. Product is moving, but the softwood lumber issue has persuaded most buyers to remain firmly on the fence. Whether they need lumber or not, buying in volume is not a consideration. When the U.S. International Trade Commission rescheduled the finaliza-tion date of its injury determination from May 6 to May 16, the period of uncertainty was further extended.

There are more reasons not to buy than to buy: slow business, adequate inventories and, above all, confusion about the outcome of the softwood lumber dispute and its effect on prices. The confusion will last until the outcome is known. A veteran wholesaler put it best: “If Canada wins, you get one guess what will happen to lumber prices.”

Selling prices for green fir and hemlock were little changed this week. Supplier mills in the U.S. west struggled to hold prices while still selling lumber in a market that is already well supplied. Rumors abound that delivered prices to the northeast are already below cost for some western mills.

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

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