Against the Grain: How three B.C. forest companies have thrived during tough times for the industry

The sales numbers told Roger Keery that things were turning around at Skeena Sawmills. Despite the COVID-19 pandemic, the Terrace mill had sold out its lumber production two months in advance. Its new $20-million wood pellet plant was exceeding expectations. And its wood chips were in demand to make medical...

Credit: Adam Blasberg

PIECING IT TOGETHER: At Terrace’s Skeena Sawmills, president Roger Keery has led a
lucrative pivot to wood 
pellets and chips

After a year of shutdowns, layoffs and curtailments, the province’s forestry industry is booming again, thanks to strong demand for lumber. But the roller-coaster ride will come back down eventually. Could small, independent producers be the ticket to a more stable future? In Terrace, Port Alberni and Castlegar, three companies show a way forward

The sales numbers told Roger Keery that things were turning around at Skeena Sawmills. Despite the COVID-19 pandemic, the Terrace mill had sold out its lumber production two months in advance. Its new $20-million wood pellet plant was exceeding expectations. And its wood chips were in demand to make medical protective equipment.

But looking beyond the data, the president of Skeena knew the company was bucking the depressing trends of B.C.’s logging industry, made even worse by the pandemic, from how the community was acting.

“In Terrace, there’s a lot of negative history with forestry, a lot of skepticism that a mill can function here,” Keery says. “We’re here to challenge that. A big piece of how we’ll work through COVID, and how we were operating successfully before, was our relationship with the community.”  

When the pandemic arrived, Skeena donated all the face masks it had on hand to the Terrace hospital and then bought masks from locals for its employees. It was how the company had done things since taking over an existing mill in 2011.

People noticed. When the lockdown order came in mid-March, Skeena was days away from starting a second shift. As an essential service, operations continued. However, with 20 to 25 percent of Skeena’s 200 employees staying home—immune-compromised, in precautionary quarantine, nursing potential symptoms (there was no outbreak at the mill)—adding another shift was impossible.

But the rest of the workers, suppliers and contractors kept showing up. Some got creative. A lumber yard manager in quarantine would arrive after everyone else went home to inventory the next day’s tasks from the confines of his truck. Despite new regulations and health rules, the Port of Prince Rupert kept running, and Skeena managed to stay mostly on schedule.

“There’s a willingness to roll up the sleeves and help,” Keery says. “The community is part of our competitive edge.”

It wasn’t so long ago that Keery’s rosy attitude was a lonely one in the province’s forestry sector. Until this May, the logging and lumber industry was in one of its deepest recessions ever. 

“I don’t like to use the word crisis, but it is pretty close to a crisis,” Ken Peacock, chief economist at the Business Council of British Columbia, said early in the year.

“Everything is absolutely negative,” echoed Russ Taylor, an independent Vancouver-based wood industry and market consultant, in May. “I’m afraid to look at the data, it’s so negative.”

B.C. is one of the more expensive places to do business in the increasingly global forest products industry. As prices tumbled in 2019, six sawmills closed and many others cut shifts. Thousands of British Columbians lost their jobs. Related employees—mechanics, contractors, professionals and others who work with forest companies—felt the slowdown, too.

The bad news in 2019 added to a drawn-out slide. Despite a few boom years, 19 mills have closed across the province since 2010. Then COVID-19 hit, reducing lumber demand by more than 40 percent in April due to a pause in U.S. house construction, a key demand variable for B.C. sawmills. Lumber prices fell below break-even for many players. Many of the big sawmills curtailed operations and cut more shifts.

Once the lockdown eased, the roller coaster took off. Demand for single-family homes shot up. Add a hot renovation market fuelled by DIYers stuck at home, plus lost production at the start of the pandemic, and lumber prices tripled over the summer, setting new records. Although prices have since come down a bit, they remain high. 

“Everyone made tons of money, and all the mills are running flat-out,” Taylor says. “It wasn’t what anyone expected.”

Some of the best performers before and since the pandemic have been private and independent companies like Skeena. While the rest of the industry was cutting back and closing, they were are quietly reinvesting and adding shifts. San Group has added more than 100 jobs to its Port Alberni production and fired up a new mill last spring. In Castlegar, Kalesnikoff Lumber Co. just invested $35 million. Prince George–based Brink Group plans to double production at all three of its northern B.C. wood products plants in the next five years. Carrier Lumber in Prince George is going full tilt. Portland-headquartered Hampton Lumber plans to build a new mill in Fort St. James.

Two value-added niches are doing even better. The market for wood pellets, burned as a renewable, low-emission fuel for electricity, is growing. And forecasts suggest that B.C. businesses producing things like engineered wood products, cabinetry and prefabricated houses will keep expanding, from revenue of more than $4.4 billion today to $6.4 billion by 2030, according to a Natural Resources Canada study.

The companies that were succeeding, during what many considered to be the worst bust ever, may hold lessons for and insight into the future of the forest and wood in B.C.

Stumped—for now

Every company in the forest industry faces the same storm-force winds that are shutting mills across the province. Consultant Taylor calls B.C. the highest-cost player in the logging business. Besides steep labour costs, producers must contend with a heavier tax burden and more environmental regulation than rival jurisdictions.

There’s also the uncertainty around the softwood lumber agreement with the U.S. B.C. companies paid millions in extra import duties before a court decision in February reduced the rates charged from an average of more than 20 percent to about 8 percent. Then in August, a World Trade Organization panel ruled that the U.S. government shouldn’t have imposed those duties in 2017.

When lumber prices are strong, the province’s high-tech mills can compete, but wood is a global commodity. Thanks to falling demand in the U.S. and China and cheap supply from Europe, lumber prices tanked in 2018, plunging from $700 per 1,000 board feet to less than $300. In October 2020, that price stood at $662, down from nearly $1,000 in September. At the same time, the slow-moving disaster of the mountain pine beetle epidemic and several big forest fire seasons reduced the number of trees available to cut. Add stricter wildlife habitat protection and First Nations land claims, and the supply of logs shrank.

Prices and demand drive the complex way the province sells wood, with companies and individuals paying stumpage fees to cut logs on Crown land. The province also rations how much wood is harvested through annual allowable cut quotas. Both processes take months to adjust to changes in the market. With supply down, mills had to outbid each other to find the logs to stay open. So at the same time when costs were climbing, operators were paying more for logs but getting less for their lumber. Nothing’s changed. In six months, they’ll be paying stumpage fees set when prices were high, regardless of how much wood is selling for in March 2021. The mismatch makes it hard for forest products companies to adapt to changing markets.

That matters for the entire province. When forestry suffers in B.C., it’s not just the mill towns that feel it. Directly and indirectly, the sector employs more than 100,000 people, according to the Council of Forest Industries. Meanwhile, wood-related products make up 30 percent of all exports. As of last December, the value and volume of B.C. forest products had dropped 20 percent year-over-year, from $14.9 billion to $11.9 billion, reports FEA Canada, a branch of U.S.-headquartered industry tracker Forest Economic Advisors.

Production will eventually fall further. “We need two or three more mill closures in the Interior to rationalize wood supply,” Taylor says.

That’s probably a few years off, but when it does happen, it likely won’t affect independent operators. “I have noticed that all the curtailments and closures are coming from the big corporations,” Taylor says. “The private companies are more nimble and flexible. They’re good at finding creative solutions.”

Indeed, says Kamal Sanghera, it’s business as usual for San Group. “Everything for us starts with the tree,” says the CEO. “How do we get the max value out of every log?”

Over 30 years, family-owned San has evolved from making furniture to running a diversified log-to-finished-product operation. More and more, the Langley-based company is focusing its business in Port Alberni, where it bought a mill from a former supplier in 2017 and invested $100 million.

First, San improved efficiency at the existing mill, adjusting production so it could quickly shift from only working with one species of tree to milling anything cut in the forest. Then it added remanufacturing, developing an innovative tongue-and-groove wood product that uses what was waste wood as a backing and a thin veneer of high-quality red cedar as the face. To feed the remanufacturing plant, San recently added a small-diameter primary mill and several kilns. From one daily shift of 25 people, over the past three years it has ramped up production to three shifts and more than 100 employees. Then in April it bought and restarted another shuttered Port Alberni mill to add specialty cutting and chipping to its portfolio.

The company hasn’t laid off a single person during COVID19, Sanghera says. The key, as it was before, is a team of salespeople who know their customers. They’re selling what San is going to log before a faller revs up their machine.

“We’re not just making two-by-fours and hoping someone will buy them,” Sanghera stresses. “When there is lots of yellow cedar in a stand, we are selling yellow cedar before we harvest it. And then we are cutting the wood for what the customer wants. We don’t end up with waste fibre or a product that’s not saleable.”

The agility is mandatory. “As a small company, we don’t have a choice,” Sanghera says. “If we don’t adapt, the big companies will take us out. If we don’t change, in no time we’ll be left behind.”

Money for value

Kalesnikoff Lumber is another entrepreneurial, family-owned operation. For 81 years, it has cut trees in the Kootenays and milled them in Castlegar. The company mostly focuses on specialty products, turning high-value trees into high-value products for sale overseas. Seeing that it would be hard to add more value with milling alone, a decade ago the Kalesnikoff family started looking at diversifying into making engineered products used for structure and aesthetics in commercial buildings. 

“We recognized we needed to do more with our timber supply, and value-added is in our blood,” says COO Chris Kalesnikoff.

Last summer, the company opened a $35-million mass timber plant in Castlegar, creating more than 55 jobs. The plant started with glulam—chunks, or lams, of wood glued together into beams—and added cross-laminated timber this summer. Kalesnikoff, who says the large projects that his outfit supplies are continuing despite the pandemic, hopes government stimulus projects will include wood buildings.

For Brian Hawrysh, what stands out from Kalesnikoff’s move is that every cent for the expansion came from the family. “It’s really exciting,” says the CEO of BC Wood, a joint venture between the provincial government and companies to promote and market value-added wood products. “When someone puts their own money in the game, it means more.”

Kalesnikoff joins a growing value-added sector. While log home builders struggle to find trees and some products are hampered by the softwood lumber dispute, companies that build cabinets, prefabricated homes, engineered wood products and mass timber are all expanding, Hawrysh says. The value-added sector has rebounded beyond its pre-2008 high, according to a study by the Canadian Forest Service. With about 700 companies and 17,200 employees, it now accounts for more than 25 percent of the B.C. forest industry. Forecasts suggest that by 2030, there will be some 800 companies employing 21,500 people. 

“The employment and sales growth potential could go a long way to offset the job losses in the primary sector, if not cover them completely,” Hawrysh says. “It’s where the growth is going to be in the future. When you look at the mature forest sector around the world, there’s always a large value-added component.”

Looking overseas is a good strategy, says John Innes, dean of UBC‘s faculty of forestry. In particular, adopting Finland and Sweden’s more agrarian approach to forest management could help yield more value, explains the professor, who is Forest Renewal BC Chair in Forest Management. Rather than leave the forest for 60 to 100 years between harvests like in B.C., those countries treat trees like a crop, thinning and tending them throughout the life cycle. Cutting some trees when they’re big enough but not full-size provides income for the timber company. Selective logging thins the forest, which encourages the trees left behind to grow faster and bigger.

This approach is more productive, Innes notes, and it would mean we’re not harvesting forest that the public views as having high ecological or environmental value, like old-growth and sensitive habitat. “I think it could achieve more of what we as a society are looking for from forest,” he says.

In some places, B.C. could double productivity, Innes thinks. He’s starting to hear interest in the idea, especially from companies that own private land. “They have a longer-term vision.”

No. 1 with a pellet

That brings us back to Terrace. 

Skeena bought the mill operation in the centre of town from Vancouver-based West Fraser Timber Co. in 2011. The mill had sat idle since 2007, while raw logs rolled by on their way to the Port of Prince Rupert and Asian sawmills. Roc Holdings, an investment firm owned by Vancouver businessman Teddy Cui, saw the potential to do things differently. Cui bought the property, changed its name to Skeena Sawmills and invested $40 million to restructure and upgrade its operations.

There was more work to do. Until last year, Skeena had a waste problem: what to do with the sawdust, bark and other unusable fibre? Most mills would sell it to a pulp or wood pellet plant, but in the isolated northwest, president Roger Keery’s only option was to dump it. “Not only was it not sustainable, we were losing 20 percent of the value of the log and were paying to get rid of it,” Keery recalls. Building a pellet plant at the mill “was necessary to continue to operate, practically and economically,” he adds. “It was a game changer.” 

The $20-million plant, which started operating in the first quarter of 2019, went into full 24-hour, seven-days-a-week production in December. It compresses the waste products into pellets, loads them on rail cars and ships them to Japan, where they’re burned to produce electricity. It’s part of a long-term sales agreement with another B.C. pellet producer, Vancouver-based Pacific BioEnergy Corp. 

The wood pellet, or biomass, niche might be the best-performing part of forestry industry in B.C. More than 13 new wood pellet plants have opened since 2000, and the province is the country’s largest bioenergy exporter, producing 70 percent of Canadian pellets shipped overseas.

Wood chips are an increasingly vital part of the business, too, and things only look better with the pandemic. One of Skeena’s customers, Harmac Pacific, has doubled output at its Nanaimo plant to make a unique grade of medical pulp to supply a mask maker. Skeena boosted wood-chip shipments to help Harmac meet that need.

Maybe the most surprising aspect of Skeena’s success, though, is the species of tree it’s working with. Western hemlock dominates the forest around Terrace. Most think it’s only good for chipping for pulp and paper or exporting to China for milling. 

“The old model of picking what you want and leaving what you don’t in the woods doesn’t work anymore,” Keery says. “Our strategy is to work with what we have and make it work.”

And it is working. Japan and China consider hemlock a desirable wood; 85 percent of the mill’s lumber goes to Asian buyers. As China emerges from the COVID crisis earlier than many other nations, demand for Skeena’s wood is recovering while other markets remain in decline. The chips are the highest-value in the pulp and paper industry. Even the pellets stand out. Skeena took a chance as the only company producing hemlock pellets, but testing shows that they produce more energy with less ash.

“Being a hemlock specialist is part of how we differentiate ourselves,” Keery says.

The success of the pellet mill and solid demand for Skeena’s other products give Keery and the executive team room to plan their next move—replacing the mill’s small log line, upgrading its big log line and adding kilns for drying the milled wood.

COVID is making finding a lender or other kinds of finance for the $30-million project even more difficult than when the company was just a bright spot in a busting industry. But Roger Keery and his team at Skeena Sawmills remain optimistic, and for good reason. They keep proving that sometimes the best way out of hard times is to go against the grain.