Ottawa announces softwood lumber aid package

Ottawa to provide $867 million in aid to lumber producers hit with U.S. duties
Lumber producers are expected to weather 2017, but duties in 2018 could start taking their toll.

Ottawa will provide $867 million in aid to Canadian lumber producers to help them them survive American softwood lumber duties and a potentially protracted softwood lumber dispute.

Natural Resources Minister Jim Carr and Foreign Affairs Minister Chrystia Freeland announced the plan Thursday, June 1.

In April, the U.S. Department of Commerce announced countervailing duties in the 20% range for Canadian softwood lumber producers. B.C. and Quebec are the provinces hardest hit by the duties.

Three major B.C. lumber companies – Tolko Industries Ltd., Canfor Corp. (TSX:CFP) and West Fraser Timber Co. (TSX:WFT)  – were singled out for duties that range from 19.5% to 24%. Unnamed exporters face 20% duties.

“Canada is standing up to the U.S.,” Carr said at a press conference. “We will continue to fight these duties vigorously including through litigation. While we are confident in prevailing, as we always have, that doesn’t make the uncertain days ahead any easier for those affected.”

Carr said the Business Development Bank of Canada and Export Development Canada will make $605 million available in loans, at commercial rates, to help “viable” companies make capital investments and diversify their markets.

Other financial assistance measures in the package include:

• $160 million to help the industry as a whole expand its product lines and develop new markets;

• $90 million in new funding for work sharing to help companies retain workers and help the workers themselves upgrade their skills and transition to other jobs; and

• $10 million for an indigenous forestry initiative to help First Nations pursue new economic opportunities in the forest sector.

“We will consider additional measures, including additional loans and loan guarantees, to address changing market conditions,” Carr added.

“This package is a prudent response that can provide both immediate support for workers and communities if required, along with enabling additional investments in longer-term opportunities for the sector,” said Susan Yurkovich, president of the BC Lumber Trade Council. “We particularly appreciate the investment in expanding markets for Canada’s high-quality forest products overseas which will help to further diversify our markets.” 

Companies like Canfor and West Fraser are now somewhat insulated from softwood lumber duties, since they now own more sawmills and plants in the U.S. than they do in Canada, although their Canadian mills could be forced to curtail production at some point.

While the aid package may help some of the marginal players, one industry analyst said the American Lumber coalition could argue that it is yet another government subsidy, adding some fuel to the fire.

American lumber producers argue that Canada’s Crown tenure system for forestry is a form of government subsidy, since in the U.S. timber is mostly privately owned.

In fact, the U.S. Lumber Coalition does consider the aid package announced Thursday as another subsidy, according to coalition spokesman Zoltan van Heyningen.

“Today’s announcement of a new government subsidy for Canadian softwood lumber producers only further tilts the trade scale in Canada’s favor, threatening more than 350,000 jobs in communities across the United States,” he said in a press release.

"The U.S. Commerce Department’s recent anti-subsidy duties were a step in the right direction, and we appreciate the administration’s support. But Canada continues to push back and refuses to play by the same set of rules. We need a level playing field and must limit the flow of unfairly subsidized softwood shipments flooding the U.S. market, driving American lumber manufacturers out of business.”

“Any action has the potential of carrying trade risk,” Carr said, in response to questions about aggravating the situation with a perceived government subsidy.

“We believe that we have been prudent, as we have been in the past, when we have won virtually all awards and decisions at international tribunals. We believe that this group of measures across the sector…is an appropriate response that is one that we think will stand the test of scrutiny.”

In addition to the aid package announced Thursday, Carr said Canada has been vigorously working overseas to develop new markets for Canadian lumber, particularly in Asia. The U.S. remains Canada’s biggest customer for lumber and other wood products.

Referring to the current dispute with the U.S. as “Lumber Five,” Freeland said she has been meeting with American Secretary of Commerce Wilbur Ross to try to get a negotiated settlement, and added Prime Minister Justin Trudeau raised it with American President Donald Trump at a recent G7 meeting.

Asked if softwood lumber might finally get included in the North American Free Trade Agreement, which is now being reopened for renegotiation, Freeland said: “I make it a rule not to answer hypothetical questions.”

She pointed out that talks to try to resolve the softwood lumber dispute through negotiations are already underway, whereas NAFTA talks won’t begin until after mid-August.

Currently, lumber prices in the U.S. are so high that many Canadian lumber producers are expected to be able to pay the duties without having to curtail production.

But some smaller sawmills, especially in the Interior of B.C., may eventually be forced to shut down, or at least curtail production periodically.

The countervailing duties only apply to lumber and products derived from lumber.

Products like plywood, oriented strand board (OSB) and the glulam made by companies like Structurlam are currently not captured by the countervailing duties. That explains why Tolko is planning to open an OSB plant in Alberta, Taylor said.

At the beginning of the year, Canadian lumber producers were selling at just a little more than US$300 per thousand board feet. They boosted their prices to around $400, in anticipation of 30% duties, but then lowered their prices to around US$370 when the duties turned out to be less than that.

Thanks to a relatively strong recovery in the U.S. housing construction market, lumber prices are expected to remain relatively strong for the next three or four years, Taylor said.

U.S. new housing starts are at around 1.2 million whereas the long-term average is 1.5 million.

“We expect housing starts to keep inching up and hitting maybe 1.5 (million) by 2021,” Taylor said.

Some analysts have pointed out, however, that the housing market in the U.S. is changing, with more condo construction, and less single family home construction, which could mean the long-term average is a thing of the past.

“I think we’re going to do OK this year,” Taylor said, adding it’s 2018 when the duties are likely to start having a more significant impact on Canadian lumber producers.

He expects there will be production curtailments right across Canada, and possibly one or two permanent mill closures in B.C. interior. Those mills are in trouble even without the duties, Taylor said, because of a shrinking timber supply as a result of the mountain pine beetle epidemic.

"There's going to be lots of independent mills across Canada curtailing, and the biggest declines, the closures that we see? The greatest amount of job losses? The B.C. interior. But it's only because of the mountain pine beetle, not so much because of the duties. This was inevitable. We think that probably this (duties) is going to accelerate the closure of one or two mills that would have lasted a little bit longer."

nbennett@biv.com

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