Dollar looms as stumbling block in Canada-U.S. softwood negotiations

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The Canadian dollar’s nosedive has disrupted North American lumber markets to the point that Canada is expected to face currency-induced pressure to make concessions in the next softwood lumber agreement with the United States.

Henry Spelter, a leading analyst at the U.S. consulting firm Forest Economic Advisors, said the effect of currency changes is likely to influence any negotiations. Spelter, who is one of North America’s most respected lumber consultants, said U.S. sawmillers are now at a disadvantage in their own market because of the collapse of the Canadian dollar.

“This world we are living in – this nightmarish world where you have to focus on every nuance and accent on the part of central bankers and how they are going to control the exchange rate – is having a huge impact on business profitability. It obviously has disadvantaged the U.S. producers of lumber and greatly advantaged Canadian producers of lumber. This development is totally independent from everything else.”

With the October 12 expiry of the last softwood lumber agreement, Canada and the United States entered a one-year standstill during which the U.S. agreed that it would not launch a round of duties on Canadian lumber exports.

Three months into that standstill, both sides have begun informal discussions but Canada’s stated goal of a new agreement that’s identical to the old one is officially dead.

Both B.C. Forests Minister Steve Thomson and Council of Forest Industries president Susan Yurkovich said January 13 that British Columbia no longer expects to simply renew the old agreement. Thomson and Yurkovich met with Canada’s international trade minister, Chrystia Freeland, earlier that week to exchange views on the softwood file. 

“I think the Canadian industry recognizes that this won’t be a straight rollover or renewal of the existing agreement in its current form,” Thomson said in an interview after the meeting. “We will need to negotiate. The key point is the agreement will have to be one that works for the Canadian and B.C. industry. It won’t be an agreement at any cost. And that will have to be part of the negotiations.

“If we aren’t able to achieve it we are prepared to defend our market-based forest policies should the U.S. choose to bring a legal challenge against Canada and B.C.”

The discussions now underway are not formal negotiations. Rather, Thomson said, they are to develop the principles for negotiation. Asked if currency rates would be included, he said a number of elements will be on the table.

“We know there is interest in caps, interest in trigger mechanisms, rates, surge protection. All of those kinds of factors will be part of the discussions.”

Yurkovich said the end of the agreement on October 12 also ended the opportunity for a straight rollover into a new agreement.

“In discussions we will be looking at how we could find a new way forward in an agreement, and if the U.S. and Canada are looking for things to modify about this agreement, what would they be?”

She said although currency fluctuations are making Canadian exports more cost-effective in the U.S. market, there is no evidence that Canada is increasing its market share as a result.

U.S. companies would view an increase in Canada’s share of their domestic market as justification for launching trade action if both countries are unable to conclude an agreement once the one-year standstill ends next October.

B.C. is Canada’s largest softwood lumber producer, and the U.S. closely monitors what happens within this province. The most recent Statistics Canada data shows that as of November 30, B.C. lumber shipments to the U.S. have increased by 7% year-over-year. U.S. lumber consumption data for the year – which will provide a benchmark on market share – will not be released until March.

A 7% increase in exports is modest and in line with the gradual recovery of the U.S. housing market, said David Elstone, executive director of the Truck Loggers Association.

He said B.C. has diversified its markets and is continuing to ship large volumes to China despite a weaker market there. Further, he said, mills are unable to increase shipments to the U.S. even if they wanted to, because of constraints imposed by the mountain pine beetle on the province’s timber supply.

“We physically can’t do it,” he said. 

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