Forest industry experts believe emerging markets could be the key to seizing the upper hand during the next round of Softwood Lumber Agreement negotiations with the U.S.
“To be really simplistic about it, anyone in business knows you have to be diversified,” explained Dave Lewis, executive director of the Truck Loggers Association (TLA).
“Our domestic market [for lumber] is less than 5% of what we produce, and we’ve relied on the U.S. for the majority of the rest.”
But that’s changing.
Last year, lumber exports to China totalled 1.6 billion board feet, more than doubling 2008’s volume. By August of this year, B.C. lumber producers sold 1.5 billion board feet to China, prompting Forests Minister Pat Bell to predict that total exports in 2010 could reach 2.5 billion board feet.However, those exports are largely dependent on B.C.’s effort to market its wood in China, and China’s desire for new lumber markets after Russia placed tariffs on its log exports.
Still, more wood to China means B.C. is diversifying its market base. In the past, reliance on the U.S. fortified that country’s position at the bargaining table when it came to the tariffs Canadian exporters pay on lumber destined for markets south of the 49th parallel.
The 2006 Softwood Lumber Agreement won’t expire until 2013, but tensions between the two countries flared up last month after the U.S. complained that B.C. had violated the trade agreement.
At issue is the glut of timber from B.C.’s mountain pine beetle infestation that the province’s forestry companies have harvested for a rock-bottom stumpage fee of $0.25 per cubic metre.
“The British Columbia government is effectively funnelling back hundreds of millions of dollars in collected export fees to B.C. producers,” said Steve Swanson, chairman of the Washington-based Coalition for Fair Lumber Imports. “This circumvents and violates the Softwood Lumber Agreement and has caused serious harm to the entire North American industry.”
The sheer volume of beetle-kill wood means many sawmills in B.C. are running on a heavy diet of the stuff, and experts have said the province has approximately a decade to harvest it before the timber rots (see “New industries help B.C. companies harvest dollars from dead beetle wood” – issue 1092, September 28-October 4). After the U.S. initiated consultations with the Canadian government regarding the alleged violations, Bell said the U.S.’s “continuing protectionism” revealed the importance of developing new markets such as China.
MaryAnne Arcand, executive director of B.C.’s Central Interior Logging Association, said the relationship between the U.S. and the industry is combative.
“Every time someone tries to do something innovative or new so we can deal with the aftermath of the mountain pine beetle … someone screams in the States, ‘Softwood lumber!’ and tries to take us to court. It really hinders the best management of the resource.”
Arcand added that if B.C. can reduce its dependency on the U.S. market then Canada can have a stronger hand during lumber negotiations.
“We’ll be able to say, ‘We don’t need you that bad.’”
But there are hurdles the province needs to clear before it and Canada’s bargaining hand are truly strengthened.
First, more lumber needs to move to Asia. As it stands, China accounts for less than 20% of B.C.’s total lumber exports compared with more than 60% that heads to the U.S. (see “B.C. wood campaign puts feet on the ground in Asia” – issue 1084, August 3-9.)
Second, China needs to use more of B.C.’s high-grade lumber, which increases profits for producers.
“The challenge for us is to move away from a lower-grade lumber perspective to a more construction grade … that’s the big win,” explained Chris McIver, vice-president, lumber sales and corporate development, at West Fraser Timber Co. Ltd. (TSX:WFT)
That challenge became more difficult last week after Russia reached an agreement with the EU that would cut its softwood log export duties in half. In recent months, Russia’s tariffs have forced the Chinese to source logs from new, less-expensive markets such as B.C. It’s too early to say how the agreement could affect B.C. exporters, but it could make the third hurdle the industry has to clear all the more important – sticking with Asian markets even when the U.S. market recovers from the downturn.
“In the past, we’ve tried to develop overseas markets, but what typically has happened is China would be a low-volume, spot market, low-quality player,” explained the TLA’s Lewis. “As soon as the U.S. market came back we’d ditch those relationships – and that really doesn’t sit well with the Asian culture.”
McIver acknowledged that risk, but he said that makes it all the more important that China uses more high-grade lumber to ensure exports are profitable for B.C. producers.
He added that even when the U.S. market does ramp up, producers would be unwise to abandon Asia, which is why West Fraser has established a presence in Japan and South Korea as well as China.
“We’ve learned as an industry that when you marry yourself to the largest economy in the world [and] things go bad, they go very, very bad.”