BC Business
BC lumber and BC forestry | BCBusiness
As China’s economy burns ever brighter, B.C. is happy to throw its lumber on the fire. Now that it’s cranking above pre-recession levels, B.C.’s ?forest industry has just one question: Can it last?
A little over two years ago, the town of Mackenzie, B.C., population 5,000, was in the final throes of a slow, agonizing death. Every forestry operation in the area had shut down – including a newsprint mill, a pulp mill, two large sawmills and a finger-joint plant. Unemployment in and around this resource town north of Prince George was close to 100 per cent.
Today both sawmills are back in operation, as is the pulp mill, and they’re investing heavily. Only the newsprint operation is unlikely to revive, but in its place, a bio-energy facility promises to employ 50 to 60 of the 200-plus people who once worked there.
A similar story is being played out in Houston, Burns Lake, Quesnel and other resource towns across the province. And it’s all due to voracious new Chinese demand for B.C. lumber.
“China picked up the slack where the U.S. left off, and that means there are people working in our forest industry all over B.C. that would otherwise not be working today,” says Pat Bell, B.C.’s Jobs, Tourism and Innovation minister and MLA for the forestry-dependent Prince George-Mackenzie riding.
But this new upsurge in business that is bringing the industry back in places like Mackenzie raises obvious questions. How far does this new Chinese demand – and players’ hopes of broadening markets elsewhere in the region – go in terms of injecting a sustained prosperity back into an industry historically dependent on housing starts in the U.S.? What’s driving the Asian boom, and how long might it last?
China surpassed the U.S. as the B.C. forest industry’s number one customer in May 2011: companies in the sector earned a collective $122 million on products shipped to China that month, while exports to the U.S. were pegged at $119 million over the same period. While this may seem a small difference, it signals a tectonic market shift, for the time being at least. Only five years ago, the U.S. absorbed about 70 per cent of the industry’s output, compared to China’s five per cent.
When the U.S. housing crisis hit, however, construction of new housing units there nosedived from about two million a year to less than 800,000. Overnight the provincial business was devastated, with sweeping mill closures and mass layoffs. And there’s no sign of relief in the gloomy economic outlook south of the border today.
But the new Chinese demand spike seen over the past two to three years has already produced a marked turnaround. According to the latest import statistics from China customs, Canadian lumber shipments to the country (most from B.C.) rose by an impressive 97 per cent in the first six months of this year compared to the same period in 2010, with projections calling for about 35 to 40 per cent of total B.C. wood exports continuing to go to China, compared to 37 to 40 per cent going to the Americans.
This implies new strategic possibilities for the B.C. industry: first, on a higher price for its products; second, on export market access for its wares; and third, for the prospects of longer-term prosperity. This latter point is what’s driving talk of a potential future “super-cycle” – a perfect storm that could result if the U.S. starts building houses again – driving up demand for B.C. wood, forcing down supply and pushing prices ever higher. [pagebreak]
Optimistic talk of super cycles is in marked contrast to the doldrums of the recent past. Until recently, the U.S. share of B.C.’s forestry exports was so huge that the Americans had us over a barrel when it came to negotiating agreements, says Bell, recalling more than two decades of acrimonious softwood lumber disputes that preceded the American housing market downturn. “They knew we were counting on them as our primary market,” he says, “so they were able to manipulate the rules and laws in a way that worked to the advantage of their producers, and to the disadvantage of ours.”
Not anymore, many industry sources say. Playing the China card well offers B.C. forest companies the chance of some leverage in the lumber pricing process. Before the burgeoning Asian demand, the U.S. slump had driven prices down to well under $200 per 1,000 board feet. Prices have now recovered somewhat, to about $250, with substantial upside potential. Perhaps more importantly, thanks to the market diversification, a long-standing case before the London Court of International Arbitration looks a little less threatening.
Certainly some senior industry executives see the recent developments in Asia as vital. TimberWest Forest Corp. spokesperson Sue Handel says the company has been selling to Asia for more than a decade, but the last three years in particular have seen a dramatic volume increase. “Asian customers, specifically from China, but also Korea and Japan, have largely replaced those we had in the U.S.,” she says. “Without this demand, our harvest levels would be significantly reduced, likely to unprofitable levels.”
Brad Thorlakson, president and CEO of Vernon-based Tolko Industries Ltd. concurs, pointing out that Tolko’s shipments to Asia doubled between 2009 and 2010 alone. “It’s fair to say that hundreds of our workers have had more sustained employment over the past couple of years because of the surge in Chinese demand for our product,” he explains.
Then there’s B.C.’s green advantage. Looking ahead, Canfor Corp. president and CEO Don Kayne – who has long focused on developing Asian markets – says China is expected to be the home of half of all global construction activity between now and 2020. He says B.C.’s history of sustainable forestry practices, dating back to before green was fashionable, is going to give the industry a huge competitive boost: “[China’s] 12th five-year plan makes specific mention of green building, and their Three Star green building rating system references wood as a sustainable building material,” he says. “We think demand from Asia and around the world for the green products coming out of our forests will be the source of generations of prosperity in B.C.”
This is not to say the B.C. industry is methodically capitalizing on a long-term green strategy. The current Chinese demand spike has been triggered by chance just as much as anything else, says David Fung, a senior Chinese-Canadian entrepreneur who is chair and CEO of the ACDEG Group of companies. Three years ago, when Russia supplied China with about 20 million cubic metres of logs annually, he explains, Canadian wood exports to China stood at a modest one million cubic metres. But when Russian Prime Minister Vladimir Putin imposed a 25 per cent export tax, things changed quickly.
The tax compounded what had been a long list of Chinese frustrations with Russia, including rail transport bottlenecks along the two countries’ common border due to mismatched track gauges. And when sea shipments from Vladivostok were considered, further Russian infrastructure deficiencies showed clearly that although the actual sea shipping distances from Russia compared to Canada were vastly different, the net effect was that Canada had faster boats to China.
For all that has been said about galloping Chinese housing demand, the primary use for B.C. wood currently is not for wood-frame houses, but for concrete forms as part of China’s epic infrastructure upgrade. (China currently consumes about 30 to 40 per cent of the world’s concrete supply to that end.) This demand has proved to be a further boon to the B.C. Interior, where the mountain pine beetle epidemic has been slowly killing off huge swaths of lodgepole pine, causing a serious downgrade in the aggregate profit potential of this species. As it turns out, this dead or dying wood still qualifies as the lower-grade product the Chinese have been mostly looking for. And the earnings generated are providing the means to clear large acreages of unmarketable forest for replanting.
And even though the Chinese chose B.C. wood on a basis of convenience and price, once they started using it they found, to their surprise, that the wood is long-fibred, and thus stronger and longer-lasting than Chinese domestic and Russian wood.
Still, convincing Chinese lumber buyers to purchase higher-quality B.C. wood remains a slow process, and selling more of our value-added wood for housing construction remains for the most part, a future hope. Still, B.C. foresters are making small inroads into niche markets in the country. One example is the growing use of wooden pitched-roof trusses for the three-storey concrete “village houses” that are typical outside of China’s urban centres. Traditionally these had flat roofs, but given inconsistent Chinese construction standards, many experience serious leakage problems, particularly in locations prone to wet, rainy seasons and typhoons. A flat roof also means that the top floor is uncomfortably hot in summer. A peaked wooden roof solves both of these problems. So with the now firmly established quality of B.C. wood, and Canadian expertise readily available, many in the B.C. industry hope that a new growth market will take root.
This new potential niche, and many recent market opportunities and developments, are the result of a concerted, highly coordinated effort by the provincial and federal governments, major forest companies and industry workers. The collective aim has been to get B.C. wood products known, with the understanding that once the market has been established, the product will sell itself. Pat Bell says such coordinated efforts started back in the early 2000s and have been gaining momentum since. He attributes the Asian success so far to two key strategic shifts, the first of which was to move away from the individual marketing of products by stand-alone companies. “We opted to present a single face in China,” says Bell, including well-known companies like West Fraser Timber Co. Ltd., Canfor, Tolko, International Forest Products Ltd. and Western Forest Products Inc., plus key provincial and federal government representatives.
“When we met with senior Chinese officials, they were impressed seeing a government minister sitting alongside all these CEOs, and all of us saying the same thing. I think that was important,” notes Bell.
The second change was dropping the strategy of trying to sell China the products the B.C. side wanted to sell. Instead, the Canadians took the approach of engaging the Chinese, trying to get a clear understanding of what their central government and people needed. And in doing so, the Canadians took into account an essential reality: China is still very much a command economy, and potentially a very lucrative one. Regardless of whether demand is determined by market forces or a central planning agency, the Chinese potential is huge: “The Chinese project is building about 85 million new housing units over the next five years,” Bell says. “By comparison, the U.S., in a big year, builds two million.”
Canfor’s Don Kayne, engaged in this collective effort from its earliest days, gives high marks to the B.C. and federal governments for their work, adding that many initiatives have been taken to date, including advising the Chinese on their building codes and standards to support wood construction in the country, transferring technology and assisting Chinese capacity to design, build, inspect and maintain wooden structures. Government and industry have also worked with a wide range of Chinese designers, development companies and builders to construct a series of wood buildings to showcase how our wood can be used in their style. Canfor itself founded Canfor College near Shanghai early on to provide professional training and support. “As Chinese uptake in wood-frame construction continues, the potential for lumber demand is limitless,” says Kayne.
Even though the market spotlight is on China right now, B.C. wood continues to sell well elsewhere in Asia too, with much untapped potential, says Paul Newman, executive director responsible for market access and trade with the Council of Forest Industries. Newman points out that Japan has bought – with ups and downs – 10 per cent of B.C.’s lumber output for the past 15 years, and that the Japanese market this year was showing steady growth right up to the triple-whammy earthquake, tsunami and nuclear disaster. And this was being achieved despite weak macro-economic fundamentals and a greying society – meaning many fewer single-housing-unit starts. He adds, the Japanese market is recovering faster than expected: for example, at the last peak in 2008, two-by-four building demand was pegged at 104,000 units. This year it’s expected to approach 100,000. [pagebreak] As for South Korea, B.C. earnings there are growing at about 15 per cent annually. Both Korea and Japan are important because they buy higher grades of lumber; of all the wood sold to Japan and Korea, 97 per cent is of higher grade. China too, Newman adds, is moving up the value chain: while the Chinese bought only about 15 per cent of the total amount of higher-grade wood produced in B.C. a couple of years ago, that number has since moved closer to 40 per cent.
Now it’s India that’s emerging as the potential hot new market, says Newman. Shipments to date have been limited due to import permit issues and bottlenecks linked to so-called phyto-sanitary requirements wherein any wood that India imports must be deemed pest-free.
Back at home, strong China/Asia demand is benefiting the whole of the B.C. forest industry, although the impact is different depending on where you are. In many ways, the coastal and interior industries bring different export products to growing Asian markets.
“I’d say they are quite different industries,” says Bruce McIntyre, a forest industry consulting partner with the Vancouver office of PricewaterhouseCoopers, of B.C.’s coastal and interior areas. “Coastal operations offer a product that is more expensive to harvest and ship, so they are definitely trying to extract higher values and thus tend to approach Asian niche and boutique markets.”
McIntyre says most Interior producers on the other hand are primarily focused on super-efficient, construction-grade, high-volume output. This approach has driven a consolidation of Interior mills, where the high volume has resulted in the mothballing of smaller output operations in favour of larger mills equipped with the latest in production technology, the main focus being on improving grade recovery.
Then there is the elephant in the room: the always contentious issue of log exports, and the idea that B.C. is shipping badly needed local jobs overseas. Despite public perceptions, the volume and value of dimension lumber shipped to China today actually dwarfs the log component. The bulk of the increased number of raw logs being shipped to Asia originate in the province’s northwest, where hemlock – a lower grade of wood than fir or spruce – is a significant portion of the available stock. Prone to internal rot, however, it can’t be sawn profitably in high-tech Canadian mills because the rot causes the logs to disintegrate upon hitting a high-speed saw. But it is ideal for simple, single band saw, mom-and-pop family milling operations in China.
While Asian lumber market demand has appeared like the answer to a prayer from the B.C. industry, will it last? The experts take a generally optimistic view, though not without reservations.
Regarding the Chinese market specifically, what would happen if the Russians realize the folly of their current export tax policy and simply reverse it? David Fung says that other disadvantages beyond the taxes afflict the Russian forest industry, and he doesn’t expect to see Russia become a serious competitor with B.C. anytime soon; rather, he says the Chinese now fully recognize the value B.C. offers, and have no further need to be convinced.
PWC’s Bruce McIntyre takes the more cautious view: while the current boom in Chinese demand has been both well-timed and much-needed, he has concerns about B.C. becoming over-reliant on it and therefore simply exchanging one big-customer dependency for another. He also points out variables that could affect the Chinese market, including rising inflation.
Another question mark is the strong Canadian dollar. With lumber prices remaining on the low side, affected still by the soft American housing market, and B.C. lumber priced in U.S. dollars, many Canadian producers are still struggling to turn a small profit or just break even.
Pat Bell tempers his optimism with a solid dose of realism. He sees growth of B.C. forestry exports continuing in the 10 to 20 per cent range annually, with the likely advent of Indian market growth over time being another big plus. “These Asian market developments that we’ve seen are not an aberration,” he says. “They are the real thing.” But he does not expect B.C.’s forestry export trade with China to continue doubling every year as it has over the past four years. “If that super-charged growth continued, we’d very quickly run out of production capacity,” he says.
Some industry players see recent market growth as simply the first act in a longer play that will reach its denouement in a “super-cycle” of returns for the B.C. industry – when the U.S. housing market genuinely recovers, as most believe is inevitable. McIntyre says that even though economists are not forecasting much of a U.S. upturn over the next couple of years, eventually pressures to build needed new homes, or even to remodel and repair those already in the inventory, will rise again, and probably all the more sharply after the long delay.
Paul Quinn, an analyst with RBC Capital Markets in Vancouver, takes this view a step further: “What we’ve already seen of Asian demand, even if it just stays at today’s levels, will be very significant when the U.S. housing market does come back,” he says. “That’s where the talk of super-cycle lumber pricing comes in.”
Prices today are just above break-even levels for many producers, he says, and current 2012 projections call for more of the same. But he sees the potential for a turning point in 2013: “U.S. housing formation numbers are the key indicator, and these are slowly improving.” Collectively, a U.S. demand resurgence combined with continued strong, and even expanding, Asian demand – plus the effect of mountain pine beetle-afflicted trees reaching the end of their market life – all add up to a considerable tightening of supply, hence a spur on any upward price movement.
Would more expensive B.C. wood kill a good chunk of the new Chinese demand? Decidedly not, says Pat Bell. He figures that Russian “round wood” costs the Chinese about $430 per 1,000 board feet by the time they saw it; so as long as B.C. prices stay below that price, B.C. will not have any trouble competing with them. “If we got into lumber prices north of $400, no one would care,” he says. “That’s highly profitable territory for us.”