By Joel McKay
Some major forestry companies are back in the black thanks to Chinese demand, but experts say the industry faces an unprecedented level of complexity that could require a complete overhaul of the sector in only a few years.
“I’ve been forecasting for 20 years [and] I’ve never seen such supply driven dynamics,” said Russ Taylor, president of International WOOD Markets Group Inc.
Those dynamics include:
- the impacts of the mountain pine beetle infestation;
- reduced lumber production in Eastern Canada;
- a Russian log tax-fuelling demand for B.C. forest products;
- a desire to see an end to illegal logging practices worldwide; and
- attempts to get more certified wood into the supply market.
“We’ve never seen such a supply constrained market coming up, coupled with some roaring demand in China and roaring demand [eventually] coming back in the U.S and even modestly in Europe,” he said. “By the time we get to 2015, it’s going to be a whole new world order.”
Taylor’s comments came shortly after PwC released a report showing positive second-quarter earnings for some western Canadian forestry giants. Among them was West Fraser Timber Co. Ltd. (TSX:WFT) with second-quarter 2010 net earnings of $63 million versus a $39 million loss for the same period in 2009.
Canfor Corp. (TSX:CFP) also made the list with second-quarter net earnings that totalled $40 million versus $12 million the year before. Both Canfor and West Fraser later posted positive third-quarter results as well. According to PwC, cost discipline, higher prices and higher shipment volumes to Asia were largely responsible for improved results. This while the U.S. reels from the collapse of its housing market, which caused one of the worst cyclical downturns for the industry in B.C.’s history.
“The U.S. housing starts haven’t come back, so luckily China and the rest of Asia have helped with the demand for lumber,” said Michael Armstrong, a director with PwC’s global forest, paper and packing practice.
U.S. lumber consumption has dropped 51% since 2005.
Last year, B.C.’s lumber exports to the U.S. totalled five billion board feet, which was down 25% from 2008 levels.
While the U.S. has been on its knees, western Canadian forest companies looked abroad for new markets to stay afloat. The most promising has been China.
Forests Minister Pat Bell predicts B.C. will ship approximately 2.5 billion board feet of lumber to China this year, a 300% increase compared with two years ago.
But the Asian market means B.C. producers are more exposed than ever to the complexities of the global forest products trade.
One of those complexities is the Russian log tariff.
In 2007, Russia introduced a 25% tax on log exports to improve business for its sawmills. The move caused China, which traditionally sourced its logs from Russia, to look elsewhere.One of the places it looked was B.C.
But earlier this month, Russia came to an agreement with Finland to slash its export duties in a bid to join the World Trade Organization.
Russia has yet to say if it will come to a similar agreement with China, but the issue has been the talk of B.C.’s forest industry as producers try to figure out how it will affect them.
“Nobody knows what’s going on yet,” said Taylor, who returned from China the day the agreement was announced.
Armstrong believes if Russia makes a similar move with China it could have implications for B.C. producers.
“If there was an opportunity to switch back to import more logs from Russia, I think [China] would take that opportunity,” Armstrong said.
But what impact would that have on B.C. producers?
Armstrong believes if a similar agreement were made with China it would take a while before Canada’s forest companies feel the impact.
By that time the U.S. market might ramp up to cover any shortfalls.
Armstrong and Taylor also say that China has grown accustomed to the quality of B.C. lumber and might be reluctant to switch suppliers.
Meanwhile, in B.C., the fallout from the mountain pine beetle is expected to continue for years.
“The other wild card that comes into play around 2014 is that’s when more mills will close in the B.C. interior from the mountain pine beetle epidemic,” said Taylor.
That could mean B.C. lumber production will tighten as demand rises in China and the U.S. But it’s all uncertain, and the complexities of the global marketplace have made one phrase all too common in the sector these days – cautious optimism.
Said Taylor: “We’re still a couple years away but … I think we’ve turned a corner.”