A chance phone call about a business mission to India forever altered the direction of Parm Jhajj’s lumber venture earlier this year.
A few months ago, the Surrey businessman was happy shipping his 2x4s to local re-manufacturers.
Taiwan was about as far as his lumber went, and the thought of loading his product on a ship bound for the Indian subcontinent was little more than a passing fancy.
After all, what profit could possibly be generated in a market that accounted for less than 1% of B.C. lumber demand?
But Surrey Mayor Dianne Watts had a different idea.
Watts was convinced that a trade mission to India would generate all kinds of business opportunities for her city.
Jhajj wasn’t certain of that, but a friend had asked him to come along for the ride, providing, if nothing else, a little company while they toured one of the fastest growing nations on Earth.
So he went, and somewhere along the way got talking to people interested in construction materials.
“It was just a matter of talking to this fellow and that fellow and so on and away it went,” described the Jhajj Lumber CEO.
It turned out that pine tree logging in India’s Kashmir region had been curtailed in recent months, leaving local manufacturers without a steady supply.
The opportunity was obvious.
Jhajj shook a few hands and raced back to B.C.
Two months later, he packed five containers full of lumber and sent them to new customers in India.
Today, Jhajj is putting the final touches on a second deal to send 30 more containers to even more customers on the subcontinent.
“Before a long period of time we could see India being 30% to 35% of our business.”
To say he’s excited would be an understatement.
“It’s huge; it’s huge,” enthused Jhajj.
But he isn’t the only one looking to overseas markets to lift the lumber business out of a multi-year depression.
In fact, Jhajj Lumber is a microcosm of a startling transformation underway in one of B.C.’s oldest and largest industries.
Lumber producers big and small, from the coast to the Interior, have set their sights on customers on the other side of the world’s largest ocean.
While lumber shipments to India were 143% higher in the first five months of 2011 compared with the entirety of 2010, it’s another Asian nation that’s on every forester’s lips these days – China.
Canadian lumber exports to China, mainly from B.C., soared 97% in the first half of the year compared with the same period in 2010, according to International WOOD Markets Group.
In May, the value of B.C. lumber shipments to China exceeded the value of shipments to the U.S. for the first time in history.
That’s a huge increase for a market that accounted for just 1% of total B.C. lumber exports in 2004.
There are a number of reasons for that growth. They range from China’s stupendous economic expansion to Russian log taxes and carefully crafted trade missions led by the B.C. government and the province’s largest lumber producers.
But the single most important reason is desperation.
When the U.S. housing market collapsed it took the B.C. lumber industry with it.
Nearly four-dozen mills closed, resulting in pink slips for 10,000 mill workers, according to a government report.
The value of lumber exports to the U.S., which accounted for 75% of exports in 2004, tanked.
Things aren’t much better today.
In the first five months of 2011, the value and volume of lumber exports to the U.S. dropped below 50% of B.C.’s total production for the first time in more than two decades.
That’s why Pat Bell, B.C.’s jobs minister, is so keen on Chinese demand.
In fact, he believes if the Asian juggernaut’s demand continues to grow it could make up for the losses in the U.S.
“My gut instinct from travelling back and forth is we could send 30 billion board feet there and they would eat it all up,” Bell told Business in Vancouver.
But few in the industry share his level of optimism.
Both Canfor (TSX:CFP) and West Fraser Timber (TSX:WFT), the province’s largest lumber producers, believe the B.C. forestry sector is unlikely to fully recover until the U.S. starts building houses again.
Paul Quinn, an analyst with RBC Capital Markets, doesn’t believe the B.C. forestry sector can return to its former glory without a recovery in the U.S.
“North American producers can easily outstrip North American demand right now, and that’s why you have operating rates down in the 60% level – and that’s given pretty strong demand out of Asia,” said Quinn.
BCStats trade figures reveal that China has a long way to go before it can make up for the downturn in the U.S. In 1997, the value of total B.C. lumber shipments to all markets hit a peak of $7.8 billion.
By 2010, that figure had dropped to $3.6 billion.
Although shipments to China have increased dramatically in recent years, they totalled only $683 million in 2010.
In terms of volume, the U.S. accounted for 77% of B.C. lumber exports in 1997, dropping to 59% in 2010.
China, meantime, accounted for only 22% of 2010 volume.
BCStats figures also show that Japan’s market share according to value slipped to 19% in 2010 from 28% in 1997.
On top of that, Western Europe, which was once the province’s third largest market, has dropped to a 4% market share by value from 15% in 1988.
In sum, B.C.’s traditionally largest markets have borne significant decreases in both the volume and value of lumber shipped in recent years. China has yet to make up for those declines.
And China hasn’t embraced B.C.’s top-quality products either.
Chinese buyers prefer low-grade lumber used for concrete forming, that is, when they can’t buy logs from B.C., which creates other challenges for local sawmillers (see “Log export animosity accelerating” – issue 1133; July 12-18.)
And no one in the industry has said how profit margins in China compare with the U.S.
“That market is known … to make sure they squeeze profit margins out,” Hanif Karmally, CFO of Surrey-based lumber producer Teal-Jones Group, said of China.
But trading with China does have political benefits for B.C. business.
Forestry analyst Peter Woodbridge believes China provides B.C. with a better bargaining position with the U.S. when it comes to the oft-criticized softwood lumber agreement.
He also said Chinese demand has had a positive impact on lumber prices, which are traditionally set by the U.S.
“China can start defining price and that, six months ago, was worth [an extra] $30 to $40 per thousand board feet,” said Woodbridge.
Finally, China has begun substituting hardwood lumber with softwood lumber, meaning a greater demand for high-value softwood lumber from B.C. could be on the horizon.
Woodbridge agreed that China is not likely to replace the U.S, but that doesn’t mean lumber producers are any less dedicated to it.
In 2010, a rise in lumber prices, in part driven by Chinese demand, helped more than 25 mills in B.C. re-open their doors and get people back to work.
The province’s major lumber producers have also set aside their competitive nature and joined forces to build a ship to transport products to Asia.
But when asked about profit margins in India, which many consider “tomorrow’s market,” Jhajj snickered.
“Virtually nothing,” he said. “At this point, I hate to use this term, but we’re almost buying market share, right?”
But, like every other lumber business in the province, Jhajj believes real growth opportunities exist overseas.
The trick is making them profitable.
“We’ve got our toes in the door and next it’s up to us. Can we make it a little more profitable? That will come.”