BC Business
Forestry, the cornerstone of the B.C. resource sector, is showing improved revenues.
After tough times in recent years, many companies in the B.C. forestry industry are boosting revenues and making a comeback. (Return to B.C.'s Top 100 of 2011.) Commodities enjoyed good times in 2010, with several new mining companies joining our Top 100 list or climbing in the standings. But if there is one sector in B.C. that deserves recognition for its performance last year, it’s forestry.?
Commodities enjoyed good times in 2010, with several new mining companies joining our Top 100 list or climbing in the standings. But if there is one sector in B.C. that deserves recognition for its performance last year, it’s forestry.
The cornerstone of the B.C. resource sector, the forest industry has been hard hit in recent years by beetle infestations, exchange rates and slack demand from U.S. home builders reeling from an implosion of mortgage markets. While many mining companies operate outside the province, forest companies have an inextricable link to the vast swaths of evergreen that define B.C.
Our softwood forests make the province a major exporter, and while a lacklustre housing market and ongoing issues surrounding softwood lumber duties continue to dog trade with the U.S., Asia was a bright spot for many companies in 2010, allowing many forest companies to boost revenues at double-digit rates. CanWel Building Materials Group Ltd. and International Forest Products Ltd. led the way with 153 per cent and 60 per cent revenue gains, respectively.
Ken Higginbotham, chair of the Council of Forest Industries and vice-president in charge of forestry and environment with Vancouver-based Canfor Corp., says the ongoing strength of China was an important factor in the turnaround staged by many B.C. forest companies in 2010. The demand, coupled with cuts to production capacity during the 2000s, contributed to higher prices than would have otherwise been warranted by the still-sluggish U.S. economy. Production now lags demand, Higginbotham says, and rebuilding efforts following Japan’s March earthquake will probably boost orders in the foreseeable future, putting further pressure on the system.
But if production capacity was cut in 2010, it was also streamlined. “There’s much more focus on trying to satisfy a certain market segment now, I think,” Higginbotham explains, noting that government grants for upgrading and improving the environmental performance of mills has given added impetus to making changes.
“You’ve got at least a two-pronged positive for the investment,” Higginbotham says. While production at lumber mills is meeting demand for new engineered lumber and boards designed for specific building applications, mill residues are being effectively channelled to pulp producers for use in kraft paper, pellets or as hog fuel.
Higginbotham’s major concern as summer heats up is that U.S. housing starts won’t. A late spring has contributed to slow lumber sales to home builders, who are also still struggling with weak demand.
“We are still optimistic that it’s going to pick up as we get into better weather and more favourable building conditions, but not much has changed in the U.S. housing market,” Higgenbotham says. “There’s clearly uncertainty associated with it and, as a result, a continued effort to take advantage of and to continue to develop the Asian markets.”
Beyond lumber sales, which have been a boon for B.C. companies, Asia’s demand for paper and particularly wood pulp has also increased. “Demand has improved, particularly from Asia, but also combining that with the reduction in supply has resulted in quite healthy pulp markets over the last while,” explains Bruce McIntyre, leader of the forest, paper and packaging practice at accounting firm PricewaterhouseCoopers LLP.
But if Higginbotham is sanguine, McIntyre doesn’t see the uptick in the lumber market continuing. The greatest asset the forest sector has, and also one of its greatest headwinds, is exchange rates. Since commodities, including forest products, are typically traded in U.S. dollars, a weaker greenback means weaker revenues. On the other hand, production costs are in Canadian dollars, so a stronger loonie in 2010 meant a better bottom line for many companies.
“Companies have been in a really focused cost-cutting, and cost-reduction mode for a number of years now, so I think they’re seeing the benefit of very serious cost-reduction programs,” McIntyre says. “Combined with the improvement in markets, especially the Asian markets, in the last year or two, that’s combined to help improve earnings overall.”
The top 10 companies to post increases in profit in 2010 include two companies representing the hottest segments of the forest industry: Taiga Building Products Ltd. and Canfor Pulp Products Inc., which improved earnings by a stunning 61 times and nine times, respectively.
The improved revenues also reflect a marked improvement in operational efficiency. McIntyre points out that two years ago Canadian and B.C. forestry operations were probably the worst regions in the world from a financial performance point of view, with return on capital in the order of minus three to minus four per cent. “What we’re seeing is almost a complete reversal of that,” he says now. “B.C. and Canada are probably in that three per cent to four per cent range on the positive side.”