B.C. lumber | BCBusiness

BC lumber | BCBusiness
A lagging recovery in the U.S. housing market continues to hurt B.C.'s forestry industry.

China softens the blow, but forestry awaits the return of the U.S. market. (Return to B.C.'s Top 100 of 2012.)

The numbers paint a grim picture: since 2007, the aggregate revenues for B.C.’s top 10 forest and forest-product firms have dropped from $14.7 billion to $13 billion. Once the province’s biggest industry, the forest sector now accounts for a dwindling share of economic activity.

The prime suspect in the felled fortunes of the once-mighty sector is easily the U.S. housing market. From more than two million housing starts five years ago, annual starts now track at 500,000 to 600,000 fewer than that, contributing to a precipitous drop in demand for B.C. lumber. “That was B.C.’s largest customer, by far, in those years – probably accounting for approximately 85 per cent of our lumber exports,” says Kevin Bromley, a partner in the forest and paper practice of international accounting firm PricewaterhouseCoopers.

The past five years have been anything but pleasant for foresters, despite generally strong demand for other commodities. While the appetite for gold and other metals has stayed strong, U.S. demand for lumber has left loggers idle. “Mills have shut; the number of shifts are substantially decreased. There is no other market,” Bromley says bluntly.

The one bright spot is China, where imports from Canada now meet 15 per cent of local demand. Thanks to efforts by trade associations and advocacy by industry reps from B.C., a number of legislative changes in China opened doors for wood products from Canada. While much of the demand is for low-cost lumber that’s remanufactured into forming for the construction sector, pallets and crates, it’s been an outlet that mills aren’t about to dismiss. “That’s been an absolute saviour for the West Coast. In certain months they’ve now overtaken the U.S. as the largest importer of our softwood lumber,” Bromley says of China. He adds that China is now the largest importer of B.C. forest products. “So that is really keeping a lot of mills in B.C. going.”

The story’s similar for pulp, says Ken Peacock, chief economist with the Business Council of B.C. “The improvement and strength in the lumber products being sold to Asia has rescued the B.C. forest industry,” he says. “We now ship more pulp to China than to the U.S., by a wide margin.” Chinese pulp mills, once dinosaurs of industry and significant contributors to air pollution, have been retooled and are now turning to North America for high-quality kraft pulp to feed their new papermaking equipment.

But the benefits of growing demand in China for B.C. forest products hasn’t been shared evenly. The province’s top three forest companies – West Fraser Timber Co. Ltd., Canfor Corp. and Catalyst Paper Corp. – either saw lower revenues or endured financial difficulties. Catalyst was fighting for its life at the end of 2011, despite higher revenue than in 2010.

One company bucking the trend was International Forest Products Ltd., which jumped five notches on this year’s Top 100 list, thanks to a 21.2 per cent gain in revenues. At the same time, it pared its losses to end 2011 just $13.5 million in the red (peanuts next to Catalyst’s chart-topping $976.6-million loss).

“The companies are seeing somewhat better results, but the future is still in front of us in terms of more positive pricing and sustained pricing levels that would help support a healthy business,” says Ric Slaco, chief forester and vice-president with Interfor.

Interfor dodged the bullet thanks to two factors: it enjoys a diverse operating base, with mills located across the Pacific Northwest and in the B.C. Interior, and the timber feeding those mills comes from a broad range of species – Douglas fir, spruce, larch and hemlock. Pine accounts for less than 10 per cent of its supply, allowing it to operate virtually unscathed by the mountain pine beetle.

Throw in the fact that China accounted for 29 per cent of Interfor’s sales in 2011, up from a per cent or two from five years ago, and its success is understandable. “[It] makes us a bit unique in terms of how you would compare us to other players,” Slaco says.

Interfor, like the rest of the industry, also stands to benefit from a review of the annual allowable cut that aims to address timber supplies in beetle-hit forests. Bromley said estimates peg the cuts between 20 per cent and 30 per cent in the hardest- hit areas around Prince George, Quesnel and Williams Lake, and the constraints on timber supplies will boost prices that have already inched upward following recent mill closures.

While macroeconomic uncertainties hang over the sector, Bromley believes better days are coming. “Can it improve? Yes, and it will improve,” he says. “But we’ve got to get back to a stable environment in the U.S. That’s the primary driver. The China export thing has definitely helped and will continue to help in the future, but we’re heavily reliant on the U.S. housing sector in the long run.”