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Feb 8, 2019

'Which mills are going to survive?': Canada's forestry industry scales back amid soaring costs

No surprise that West Fraser is curtailing production: Forest Edge

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This is not the kind of cutting Canada’s forestry companies wanted to be doing.

Canfor Corp. announced last week that it will temporarily curtail operations at three sawmills due to current market conditions, following an announcement of further cuts by West Fraser Timber Co. Ltd. on Jan. 14.

The industry-wide move to scale back, is a logical move according to one analyst.

“With the economics not making sense – just because the log costs are so high and the lumber prices so low – the logical outworking of that is curtailment, or outright closures,” Kevin Mason, managing director at ERA Forest Products Research, told BNN Bloomberg in a phone interview.

“West Fraser has always been viewed as the – if not one of the – lowest-cost producers out there and yet, here they’re [reducing production hours]. Canfor’s taking an ounce curtailment and additional extended curtailments. We’re definitely seeing the fact that even traditionally low-cost-producers are realizing that the current situation is untenable and they’ve got to take production offline.”

Rival producer Interfor Corp. and Resolute Forest Products Inc. both scaled back production in the fall, also citing market conditions.

Lumber prices in North America have regained some ground, touching US$418 per 1,000 board feet as of 10:10 a.m. ET on Friday after briefly dipping below US$300 on Oct. 25. The swing was dramatic, with the commodity hitting a 2018 high of US$659 on May 14.

The wild swings, in combination with the devastation wreaked by the mountain pine beetle, slowing U.S. housing demand and high log costs have forced many of B.C.’s producers to do what they must to survive.

“It’s a bit of a battle,” Mason said. “Which mills are going to survive? And we know regions that there’s not enough fibre in particular regions and we know that mills are going to have to shut, but everyone’s going to do what they can to hold on as long as possible.”

SOUTHERN EXPOSURE

Many of the large B.C. players have invested in the southern U.S. to balance their dependence on local Canadian supply.

Mason estimates that Canadian firms now own almost a third of production in southern U.S. states as they seek alternate sources.

Robert Hagler, principal at Forest Edge, said it’s not just a Canadian concern.

“We are seeing capacity move out of the western part of North America, both western Canada and the western United States into the U.S. south, simply because of log supply and production economics,” Hagler told BNN Bloomberg in a Jan. 16 interview.

 

Embedded Image

Boards are marked blue for very high moisture content after being sorted at the West Fraser Timber Co. sawmill in Quesnel, B.C., on June 5, 2015. The mountain pine beetle attacked and killed more than 700 million cubic meters of pine trees in the inland forests of B.C. prompting greater investment in U.S. facilities by some Canadian companies.

Hagler says the companies that have moved south will ultimately outlast their local competitors.

“What I see is that there’s going to have to be some more capacity declines in places like British Columbia where log supply is constrained, and I see those players who have gone into the U.S. south – diversified geographically – probably doing better going down the road,” he said.

Shares of Canfor, Interfor and West Fraser have all gained ground in 2019, while Resolute shares are down three per cent from their final 2018 close.

However, an industry leader also sees the U.S. push as a hedge against U.S. President Donald Trump’s softwood lumber duties, which have remained in place since April 2017.

“Some companies have invested in the U.S., which is more of a hedge on the trade file, actually, more than anything,” Susan Yurkovich, CEO of the B.C. Council of Forest Industries, said in a phone interview.

“The constraints that we’ve had in place would be a 35-year fight around softwood lumber,” she added. “That’s certainly been one of the factors that has led people to purchase or acquire production in the U.S., and they’re doing that.”

FOREST FOR THE TREES

So, where do these issues leave the industry?

Yurkovich says one of the keys to future success for B.C.’s producers is to lessen their dependence on trade with the U.S.

“We have made huge in-roads into China. We have about 25 per cent of our product going there. We see lots more opportunity in China and while China’s economy is slowing, as well, it’s slowing on a massive base. So if they have even five per cent growth on that massive base there’s lots of opportunity,” she said.

Mason agreed that diversification was key.

“We saw the B.C. guys pivot pretty aggressively in November to China… just because selling into the U.S. market with the duties and everything else, the economics just made absolutely no sense.”

However, Mason also said that supply constraints may spell the end of the line for some producers in the province.

“At the end of the day there’s just too much iron in the ground compared to the amount of fibre there,” Mason said.

“So, we are going to see more mills close permanently. That’s just a reality. The wood isn’t there.”