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Per Cent Value of Lumber Forest Market Products

Volume 52 No. 2, January 11, 2002

The Value-Added Scenario

You’d have a hard time finding anyone in the primary sectors of the Canadian forest industry these days unwilling to admit we have a crisis on our hands. This crisis is most apparent on the B.C. coast, where sawmills have been closing like hot dog stands on a rainy day. But while the impact hasn’t been as crucial for B.C. interior mills and mills in the rest of the country, they certainly haven’t escaped unscathed.

The crisis I’m referring to is the collective 19.3 per cent countervailing duty the Americans imposed last August, plus the 12.6 per cent antidumping assessment implemented a short time later. This combined 32 per cent tariff has set the Canadian forest industry on its ass and though negotiations have raised hopes several times during the last few months, as the new year begins the problem remains unresolved.

No matter how you look at it, there is too much lumber in the marketplace and too much production capacity. Mill shutdowns are painful, but they are inevitable in this situation. Lamentably, anyone thinking that once this current difficulty with the Americans is overcome everything will go back to the way it was, is only fooling themselves. Over the last four decades, forest companies everywhere sharpened their technology, honed their competitive strategies, and increased their productivity to the point where they have now made themselves obsolete.

But while primary lumber producers grapple with mill closures and production curtailments, one segment of the industry, the value-added sector, is proliferating. In B.C., this sector presently employs over 20,000 workers and generates about $4.68 billion a year. Around 73 per cent of our value-added operations export products to the U.S., and while regular lumber is subject to anti-dumping and countervail assessment, most value-added products cross the border unassessed. In addition, about 43 per cent of B.C.’s value-added product goes toJapan, where almost no import duties are applied.

The B.C. value-added sector includes cabinetry, engineered wood products, furniture and fixtures, millwork, and semi-finished remanufactured products. In cabinetry, over 90 manufacturers employ close to 900 workers and generate revenues of almost $100 million. With nearly 190 working plants in the province, engineered wood products have the largest number of manufacturers. This sector employs close to 3,700 workers and generates sales revenues above $650 million annually.

Furniture and fixtures employ approximately 1,100 craftsmen in 75 provincial facilities. One of the fastest growing categories, this group contributes approximately $140 million annually to the provincial economy. Millwork employs over 1,800 workers in B.C. and generates approximately $234 million in shipments from 120 manufacturing facilities.

The last category, semi-finished remanufactured products, is the largest sector employer in the province. With 170 plus companies in B.C., this group employs close to 6,000 people and generates revenues of $1.590 billion.

A recent news release from BC Wood, a not-for-profit association of over 550 value-added wood products manufacturers, quotes Bill Wilson, director of the Industry, Trade and Economics Research Program for the Canadian Forest Service.Wilson has just produced a report entitled “The Structure and Economic Contribution of Secondary Manufacturing inBritish Columbia: 1990-1999.” In his report,Wilson says sales in the value-added sector have increased 70 per cent over the last decade.

Highly supportive of value-added producers,Wilsonoutlines the conditions he feels are necessary for the continued success of this sector. He says with appropriate strategic product and marketing efforts, tight manufacturing cost controls, and complementary public policy, there is every reason to be optimistic about these major gains continuing.

General manager of BC Wood is Bill Downing, who reports that at the current rate of growth, sales in this sector are expected to reach $10 billion in less than seven years—double their present level. Compare that to predictions for the solid wood sector over the next seven years.

According to Downing, the market for value-added products in theU.S.alone is estimated at $200 billion (I presume he means per year), while for the primary wood products industry, it is around $35 billion. Downing explains that the value-added sector has such a high rate of return because remanufacturing adds so much value to the product.

Albeit somewhat self-serving, Downing believes the B.C. forest industry should be adopting new strategies for survival. He says the first step is to shift from focusing on volume to focusing on value. He advocates evolving from an industry that primarily turns logs into 2x4s to an industry that cuts a portion into feed stock for value-added operations.

Downing says marketing strategies must also change. The current model of first making the product then seeking a market for it must be reversed. He believes a better way is first find the market, then develop products that best suit market needs. To grow and expand the forest-based economy, says Downing, the industry needs to innovate, upgrade, and anticipate international needs. He cautions, however, that finding global market opportunities will require both public and private investment.

If you want to read Bill Wilson’s full report, you can download it from http:// bookstore.cfs.nrcan.gc.ca. You can reach Bill Downing, general manager, BC Wood, at 1-877-422-9663 or 604-556-3373

C-Housing Up

Canada Mortgage and Housing Corporation (CMHC) reports that seasonally adjusted annual housing starts inCanadarose 4.0 per cent in December to 175,500 units. That’s up from 168,800 units the previous month. Urban singles jumped 2.0 per cent from 84,000 units in November to 85,700 units in December, while urban multiples increased 7.9 per cent from 63,300 in November to 68,300 units in December.

Actual urban starts year to date are 8.6 per cent higher for 2001, compared to 2000. Single detached units increased 5.2 per cent while multiples, the main source of strength, shot up 13.0 per cent. Phillippe LeGoff, senior economist at CMHC, says this is a strong finish for Canadian housing starts. He attributes the favorable results to tight resale and rental markets in many metropolitan areas.

Pulp Holding

Pulp is holding at US$465-470 per ton. Inventory in November increased by 97,000 tons to 1.598 million tons. The November operating rate for Norscan countries was pegged at 90.7 per cent. Deliveries were set at 85.7 per cent.

COFI Challenged

Giants of the B.C. forest industry are challenging the value they are getting from umbrella association COFI (the Council of Forest Industries). At least one major player, Canfor, has already pulled out of COFI and two of its affiliate organizations. Canfor, which contributes about 10 per cent of COFI’s annual budget and about 30 per cent of the Northern Forest Products Association’s budget, canceled its memberships effective December 31. Interfor says it is also assessing the cost benefits of COFI, as is Weyerhaeuser. The Coast Forest & Lumber Association, a COFI affiliate, says it wants changes to the organization.

As an umbrella organization, COFI services members in all regions of the province, but coastal companies say their operations and interior operations are too different to be represented by one organization—par-ticularly since the lumber sector formed the B.C. Lumber Trade Council to battle the Americans over softwood export issues. As well, mergers and purchases over the last several years have resulted in behemoth companies which wield significant political power on their own and are able to bypass the benefits of an association such as COFI in dealing with government.

With a budget of $4 million a year, COFI has 105 members and is affiliated with six member associations in various areas of the province. Canfor says it pays about $400,000 a year to COFI and another $1.3 million to the Northern Forest Products Association. In total, Canfor claims to pay upwards of $10 million a year in association dues.

A key issue for Canfor has been the provincial government’s practice of waterbedding, where stumpage is raised in one area to compensate for lower stumpage rates in other areas, in order to maintain revenue flow.

Left in the lurch are medium and smaller sized operators, to whom an association such as COFI is an important input conduit for the political decision making process. Without this venue, these operators are likely to be overrun by the machinations of the big companies.

Market players are surfing tiny ripples of spotty activity, surfing the Internet, and generally smurfing around the office. Although activity was very light, minimal levels were steady. Traders had to be patient and take one order at a time. Spotty business contributed little to the tone of prices in a two-tier market.

Although mills looked at small counters, they weren’t feeling the pinch of oversupply, so they tried to hold the line within a few dollars of their lists. Wholesalers liquidated futures positions and speculative inventories with no fanfare. A few interested buyers found bargains at the secondary level and that is where we pegged our market prices this week. Order files were small—measuring under one week at most mills.

KD R/L Std&Btr 2×4 went down $2 to $226. In KD R/L #2&Btr, 2×4 chipped off $4 to $246; 2×6 unbent $3 to $222; 2×8 held at $230; 2×10 climbed $5 to $240; 2×12 flushed $5 to $310. In Utility 2×4, scarcity drove prices upward $5 to $150.

Studs Flaking

It’s beginning to look more like winter in central B.C., where both snow and temperatures are falling. This puts stud mills in the mood to produce. Unfortunately, transportation is causing headaches. Trucks are scarce, particularly on theEdmontonroute, and this has loads backed up at all mills. A bottleneck of cars on the BCOL is causing fits for some operators in Fort St. James, while others are enjoying a plentiful supply in all car sizes. Order files at the mills are into the week of January 20.

MSR Spotty

A diet of lean pockets is sustaining MSR traders this week. Although spots of activity are apparent, it’s the flat areas between them that define the present market. The usual customers, truss manufacturers and distributors, are buying replacement inventory as they use up stock. Order files are approximately one week.

Cedar Think No Evil

If you hold positive thoughts, you may only notice positive outcomes. That is the philosophy in cedar this week. Although the current market is not especially active, planning for the first and second quarters continues. After long shutdowns in the fall and over the Christmas holidays, mills have nothing on the ground to fill orders. Traders are under little pressure to make deals, although they are listening to some small counters. Customers are buying out of need rather than greed.

Green Fir Foggy

The green fir business is so unclear, it’s like walking in a dense fog—you don’t know where you are going to come out. Tone firmed midweek after a squishy beginning. Supply and demand are apparently well balanced at this time, but in a market as mercurial as this one, this situation can turn in an hour. Customers are buying at quoted levels and mills are pricing defensively. The southernCaliforniamarket is heating up and can shift into high gear with little warning. As green fir 2×12 dimension becomes more cost competitive in light of rising southern yellow pine prices, buyers are sure to see the value and step in.

OSB & Plywood

Basking in what for many is the mildest January weather in memory, the panel market in centralCanadais unusually active. Some demand comes from stronger than normal buying in theU.S., but most of the market push is local. Plywood, which comes mainly from westernCanada, is increasingly scarce, with no relief in sight. OSB is easier to find, but with mills reporting order files into early February, prompt wood has to be obtained from secondary suppliers at higher prices. Producers attempted to raise 7/16”Torontoprices late last week to C$225, but were unsuccessful. This week 7/16” prices settled down $10 at C$215, with a few sales at C$220.

In westernCanada, decent business was reported in the B.C. lower mainland and inCalgaryandEdmonton. “Inventories are light and there’s no winter weather. They have to buy,” said one wholesaler. The mild weather also prompted some spec buying.U.S.buyers in southernCaliforniaandArizonaadded to market pressure. Most of the 7/16”Vancouversold this week at C$200, down $5 from a week ago.

Cargo & Reload

The weather is still mild in theU.S.northeast, but lumber market activity this week was disappointing. The week started well enough, but business turned slow on Thursday. Traders reported their customers are buying small mixed trucks for the short term. Cooler weather is expected and since buyers feel winter will soon arrive, they see no reason to build inventory. Stocking wholesalers have lumber on the ground and all have experienced this sort of winter buyer reluctance. “We’ll wait. They’ll buy from us when whey need lumber,” said one patient wholesaler.

Green fir and hemlock selling prices were little changed from a week ago. Lower prices generally don’t boost sales at this time of year, agreed traders. Supplier mills in theU.S.west lowered green fir delivered prices this week by $5 for most items, but there was little interest from northeastern buyers.

Announcements

The Northern Forest Products Association (NFPA) has announced cancellation of its spring annual convention in Prince George, B.C. NFPA says its structure is currently under review and in light of the uncertainty pending possible restructuring, it has decided to cancel the 2002 convention.

Slocan Forest Products of Richmond, B.C. has announced that Brandt Louie is replacing I.K. Barber as Chairman of the Board, effective February 15, 2002, Barber announced his retirement from the position last October. Presently Chairman and CEO of London Drugs Limited and President of H.Y. Louie Co. Limited, Louie has been a member of the Slocan Board of Directors since 1994. In addition to these responsibilities, Louie is also a governor of the B.C. Business Council, the Vancouver Board of Trade, andSimonFraserUniversity, as well as a director of the Royal Bank ofCanada and theHeartCenter,DukeUniversityMedicalCenter.

Daaquam Lumber Inc., a Quebec based company, has announced it has signed a letter of intent to purchase International Paper Co.’s Costigan mill site in Maine. The company plans to build a new state of the art sawmill there, employing approximately 140 people. Selling price of the property was not disclosed nor was the dollar value of the new plant or its production capacity.

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

 

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