The massive Cielo di San Francisco will steam into a Chinese port in the coming days laden with as much as 18 million board feet of B.C. lumber.
The ship, which departed a North Vancouver port earlier this summer, is evidence of an unprecedented level of co-operation among B.C.’s largest forestry companies.
The mission?
To not only get Asian customers hooked on the quality of B.C.’s trees, but also to make sure the products made from those trees get to market on time and within budget.
That’s why West Fraser Timber (TSX:WFT), Canfor (TSX:CFP) and Tolko Industries have joined forces to charter a ship for a year to carry their products to market.
Larry Hughes, West Fraser’s vice-president, finance, and CFO, said despite the efficiency of B.C. ports, the rapid increase in lumber shipments to Asia, notably China, started to put a strain on container availability last year.
“There had been at times late last year … some challenges with lumber shipments,” said Hughes.
Their products were still getting to market, but the forest companies could see that if the volume of exports continued to increase it would only be a matter of time before ships and containers would be hard to come by.
That’s a big deal in an industry where transportation is the second largest cost of doing business.
In the first six months of 2011, West Fraser and Canfor spent $465 million on freight and other distribution costs.
That includes everything from trucks and railcars to ships and containers.
“These particular participants were looking for a way to assure themselves of delivery of their product to market … this is a strategic move,” explained Robert Fischer, CEO of Loadline Forest Carriers, the company created to charter the Cielo di San Francisco.
The pinch at the port came on the heels of record levels of lumber exports to China, totalling $687 million in 2010.
Exports to the Asian juggernaut continue to soar, eclipsing the value of lumber sent to the U.S. in May for the first time on record. (See “B.C. lumber firms court more clients in Asia” – issue 1137; August 9-15.)
That’s good news for foresters across the province.
Yet the market shift, following years of downsizing and mill closures, has also revealed major gaps in the industry’s logistical capacity.
MaryAnne Arcand, executive director of the Central Interior Logging Association, said Interior producers are battling a “continuous shortage of truck drivers.”
The shortage is a result of the recent downturn in the industry, which saw many drivers leave forestry for jobs in Alberta’s oil and gas sector.
“We’re seeing cost increases as a result,” said West Fraser’s Hughes.
On top of that, sawmills remain at the mercy of two rail companies, which some in the industry have called a “monopoly.”
“I’m hearing from the sawmills that moving lumber by rail is also a challenge, not enough railcars available,” said Arcand.
She added that Highway 16 has become a bottleneck for forest products moving west toward Prince Rupert.
Despite the challenges, forest product shipments from B.C. ports have shot through the roof.
The volume of containers exported via the Prince Rupert Port Authority jumped 82% year-over-year.
“That’s mostly attributed to forest products,” said Shaun Stevenson, vice-president of marketing and business development at the port.
Prince Rupert, which converted its breakbulk terminal into a container terminal just a few years ago, said it’s re-thinking its breakbulk options.
“We think there’s likely the need to explore the development of breakbulk capacities in Prince Rupert,” said Stevenson.
The Port Alberni Port Authority said it also has seen shipments of lumber and logs steadily increase in the last year.
Lumber shipments via Port Metro Vancouver jumped 48% to 2.3 million tonnes in the first six months of 2011 compared with the same period last year.
Foreign breakbulk exports posted a 12% increase in the first six months, signalling a shift away from container shipments as supply becomes constrained.
The Cielo di San Francisco, for example, is a breakbulk ship.
Even though some forestry companies have had trouble locating containers in the past, both Prince Rupert and Port Metro Vancouver say they have plenty of capacity.
B.C.’s jobs minister Pat Bell, on the other hand, believes the province’s ability to handle the increase in forest-product movements is nearing capacity.
“We are potentially coming to a constraining place,” said Bell. “That is very high on our radar screen.”
In addition to chartering a ship, West Fraser is refining logistical efficiences elsewhere in the province.
Earlier this year, the forestry giant signed a service-level agreement with CN (TSX:CNR), Squamish Terminals, Tembec (TSX:TMB), Canfor Pulp and Daishowa Marubeni International to improve supply-chain efficiency for the export of wood pulp from Howe Sound.
Kim Stegeman, manager of marketing and administration at Squamish Terminals, said the agreement means workers are unloading railcars seven days a week instead of five.
“Increasing the day’s service was a big change,” Stegeman said.
Meantime, Vancouver’s International Forest Products (TSX:IFP.A) bought full control of Seaboard Shipping Co. earlier this year in an effort to have more control over its shipping options.
But aside from all the effort being put into shipping products to China, no one will say how much it actually costs to get their products to the Asian market.
Citing competitive reasons, Loadline’s Fischer wouldn’t divulge the cost to ship lumber via the Cielo di San Francisco.
But he did say it allows for “transparent costing” for member mills.
“They will know exactly what it’s going to cost … whereas if you go through a third party you don’t know that, you’re just getting a number with a profit margin built in,” Fischer said.
Brad Johansen, president and CEO of Welco Lumber, a lumber marketing and distribution company in Vancouver, said at times this year there has been a “significant spread” in the cost between offshore and domestic shipments.
West Fraser wouldn’t divulge its freight costs either, but Hughes said it’s competitive with the U.S.
“We can ship lumber from our Quesnel mill to Shanghai for roughly the equivalent cost of shipping it to San Antonio, Texas,” said Hughes.
And as long as B.C. lumber producers can keep ships filled with their products, he doesn’t believe shipping costs will be a problem.
“As long as there is a demand there, our view is the transportation costs will not be prohibitive.”
The Cielo di San Francisco is due back in Vancouver on September 10.