Lumber News Archives: July 2008

Lumber News Archives: July 2008

Canfor’s Prince George Plywood Plant, Lumber Transportation on the Rails, European Timber Imports, PwC Annual Forest Industry Report, BioFuel From Wood Residue, First Nations Strike Lumber Deals in China, BC’s New Forest Minister, The New Business of Lumber, Softwood Pulp

Canfor Will Not Rebuild Prince George Plywood Plant

After a financial review and a look at some projections of plywood prices into the
future, Canfor Corp. has decided not to rebuild its North Central Plywood plant in Prince
George. Currently the insurance payout for the burned-down mill is estimated at $36
million above the cost of the lost mill, however that may change for the year-end assesment.
The estimated cost of rebuilding the mill has been pegged at about $50 million.
280 employees are to get between 10 and 15 days pay for each year at the mill, and Canfor
intends to transfer the majority of staff to its other operations.

The insurance payout pushed Canfor’s 2Q results to a profit of $64 million (compared
to a loss of $39 million for 2Q 2007).
$16 million of the insurance money will be used to build a wood residue energy
facility at its sawmill in Fort St. John, BC.

Mark Feldinger, Canfor vice-president based
in Prince George, told Madison’s that the company has been looking into energy systems
for its mills and plans to follow this business model long into the future. The energy facility
at Fort St. John will use residual bark on site to power a conventional hot oil system as
a replacement for natural gas. Canfor expects to be able to generate 100 per cent of the
sawmill’s energy needs. Excess sawdust and shavings will be sold to pulp mills.

Lumber Transportation On the Rails

The constant battle of North American lumber producers, particularly the smaller
mills, for a stable supply of rail cars prompted some inquiries by Madison’s around the
industry.
The expansion of the Port of Prince Rupert, a potential shipping hub in Prince
George at the inland port, and the intended purchase of Elgin Rail by Canadian National
Railway could all be potentially exciting developments for rail transport.

North American Railway Transportation

According to the Railway Association of
Canada, forest products account for a full ten
per cent of annual freight transportation in
Canada. In 2006, rail transportation of forest
products contributed
$928 million to rail
company coffers (second only to agriculture,
at $1,125 million). So why is it that Madison’s hears weekly from lumber producers, especially
medium-sized mills, that cars are
difficult to source? And why is it that there
are significant numbers of centre beam rail
cars sitting empty on rail sidings all over the
Lower Mainland? We can only assume the
same is true across Canada, possibly even in
the US.

With increasing disillusionment, lumber
producers in Canada and the western United
States have witnessed a decline in service in
recent years from the combined rail lines.
The amalgamation of Canadian National
Railway with BCOL in 2005 was held by CN
as the greatest improvement in freight transportation
history. Skeptical traders opined
that the only difference from the old, disorganized
process of intersecting lines across
Canada, would be a negative one.
Not only were the detractors proven correct,
but the monopoly on rail traffic in
western Canada by the CN has made the
company significantly less responsive to customer
needs: cars are late; the wrong sizes
and types of cars are delivered; the wrong
cars are shelved at mills that didn’t order
them and they end up paying for them sitting
empty.
Down the west coast, Union Pacific has
nearly as much to answer for as the CN in
Canada. Cars end up unexpectedly in places
where they are not needed while other mills
of the same recipients go begging for cars.

Arrow Reload in British Columbia told
Madison’s that lumber reloads generally deal
with one rail company, in their case it is Canadian
Pacific. Eric Larnder, Operations Supervisor
in Kelowna, BC said that their land
is owned by CP, so all he has to do is “pick up
the phone” and he gets all the cars he needs.
When asked about cedar delivery, Larnder
said that they see very little of it in their neck
of the woods, especially this year. They have
moved maybe one car of cedar since last year.
The closest cedar producer to their location
is Gilbert Smith Forest Products, who have
been trucking almost exclusively. Arrow Reload
sends their shipments mostly in an easterly
direction, generally to Minneapolis.

Mark Thompson, Transportation Group
manager for West Fraser Timber, deals with
Canadian National Railway. He told Madison’s that all 27 of his mills across British
Columbia and Alberta have had no problems
sourcing centre beam rail cars at all
in the past three months. When asked to
compare that with last year, he said there
has been a dramatic improvement, however
that lumber shipments are down 65
per cent since 2007. Box cars on the other
hand are quite difficult to get (in fact he
had just got off the phone with CN discussing
that very thing when we called), partly
due to competition from the agricultural
sector.

Many other circumstances, such as bad
weather in the United States which has affected
the cycle time for cars returning to
Canada, are impacting the availability of
box cars. Also distribution changes are having
an effect, such as a lot more product (for
example pulp) being exported rather than
being shipped to customers in North America.
Thompson explained that congestion in
the ports is causing a delay in the return of
cars. In addition, CN is upgrading their service
design plan, restructuring their crews
and introducing other operational changes,
which is having a temporary effect on logistics.

Generally speaking, for this important
lumber shipping season, CN box cars are
chronically short.
One source told Madison’s that rail companies
trade cars between each other; if one
does not have anything available in a certain
location they will use cars from another
company. However Thompson explained
that this is not the reality (even though the
rail companies will tell you it is, he said)
because they must then pay a “car hire” or
“switching” fee. CN wants a shipment that
originated using their cars to keep to their
cars only. Consensus amongst those with
long-term experience dealing with rail lines
is that they “don’t have it together”, and
don’t even know where their own cars are
half the time.

The Railway Association of Canada publishes
annual reviews of railway trends on
their website. The latest figures show a 10
year average of 412,000 carloads of agricultural
products and 382,000 carloads of forest
products annually, generating an average
of $888 million and $786 million annually
respectively. This begs the question: Why
are lumber producers regularly denied box
cars in the interest of produce? Thompson
explained that transit time for lumber is irrelevant.
But a carload of blueberries or
peaches can be very sensitive.
The two most exciting developments for
rail transportation issues in North America
of late is the expansion of the brand-new
Port of Prince Rupert, and the proposed purchase
of the Elgin, Joliet & Eastern Railway
Company in Joliet, Il by CN Rail. Integration
of that rail line with CN would save 18 hours
of travel time from the Port of Price Rupert
to the hub in Memphis, TN. However, as
Thompson pointed out, a one-day reduction
in travel time really makes no difference
for a forest products company.

Recently the
Port of Prince Rupert welcomed the arrival
of the first load from a second weekly vessel
by COSCO. Thompson maintains that the
port will need to greatly expand its carrier
base before it becomes viable as a long-term
distribution centre for a company like West
Fraser, which uses almost 20 cargo carriers
across North America.

An email reply from CN’s Public Affairs department
explains that, “Note that the volume
of Prince Rupert traffic CN anticipates in future
will not change as a result of the transaction
[purchase]. If the status quo remains we don’t
expect the Prince Rupert / Memphis route
harder to market in the short run, but failure
to get the expected efficiencies could make the
Prince Rupert/CN option less competitive with
other ports/railroads over time. ”

Basically the
Port of Prince Rupert needs this purchase by
CN to go through more than CN itself does.

European Timber Imports

A battle is raging in Europe over the import
of timber from so-called ‘questionable’
sources. The World Wildlife Fund on Tuesday
criticised the European Union’s illegal
wood imports, singling out Finland as the top
offender.
In 2006, the EU imported some 30 million
cubic metres of wood or wood products that
were of illegal origin, mainly from Russia,
China and Indonesia, according a the WWF
report.

Finland, which is home to several of the
world’s largest paper makers, is the biggest
importer of Russian wood to Europe, but
legitimate imports into the Nordic country
have fallen since Moscow began gradually
ratcheting up export duties in 2006.
According to WWF, some 3.7 million
cubic metres of Russian roundwood was
illegally imported into Finland that year,
corresponding to about 14 percent of all
EU wood imports “based on products derived
from illegal sources.”
The conservation group acknowledged
that some large Finnish forestry groups
have gone to great lengths to exclude illegal
wood from their production chain.

WWF meanwhile listed Britain, Germany
and Italy as the largest importers of furniture
and other wood products from Asia,
including China and Indonesia, estimating
that about 40 per cent of these products
originated from illegal logging.

PWC Annual Forest Industry Report

PricewaterhouseCooper’s 2008 Global Annual Forest, Paper & Packaging Industry
survey was released this week. Some negative statistics about the Canadian wood products
industry in relation to the international marketplace are highlighted.
The section on the rapidly expanding new industry of biofuels from wood residue
points out a very lucrative future direction for the forest industry.

PwC 2008 Forestry Report

The total sales of the PwC Top 100
were US $343.3 billion in 2007, up from
$317.3 billion in 2006. The 20 largest
companies accounted for nearly 60 per cent of
total sales. Net
income received
a boost from gains
on asset disposals, notably from Temple-
Inland’s $2 billion gain on the sale of its
timberlands.
One startling finding was that Canada
is at the bottom of the entire group for
reinvestment ratio (capital investment
as a percentage of depreciation) at 0.4
per cent in 2007. This is down from 0.8
per cent in 2006. In contrast, the greatest
reinvestment ratio was found to be in
China and Latin America (with 3.08 and
2.84 respectively). American wood products
companies actually increased their
ratio in 2007 to 1.25 per cent (up from 0.9
per cent in 2006).

No Canadian company and three
American companies made it into the
top 10 of PWC’s Top 100 List of Income
Earners. International Paper was first
on the list at number one, with a net
income of over US$1,000 million. The
top Canadian company was Domtar at
number15 with an annual net income of
US$70 million. Finnish, Swedish, Japanese
and Irish companies rounded out
the top 10.
Regarding macroeconomic issues the
report states that, “The credit crisis, collapse
in US housing starts, Russian log
export tax, excess lumber capacity, and
the beginning of the end of the British
Columbia mountain pine beetle epidemic
are all factors having a particularly
strong impact on the global lumber industry.”

The continued practice of mergers
and acquisitions is helping to keep the
Canadian and American forest products
industries dynamic, with major steps forward
by Brookfield Asset Management
in particular.
The report contains some fascinating
statements on biomass energy projects,
notably, “The pulp and paper industry
has a unique opportunity to capture value
as a result of its access to fibre and
existing ability to generate energy, however
bio-refining may actually provide
the best long-term opportunities. There
will likely be a significant first-mover advantage,
and choosing the right technology
and the right product will be critical.
[ . . . ] February 08, BC Hydro issued a
Bioenergy Call – Phase 1, soliciting potential
projects to provide energy generated
from forest biomass. A wide range
of companies responded with proposals,
including both well-known Canadian forest
products producers and smaller players.”
It is clear that fuel from biomass will
be a long term source of revenue for
lumber companies.

A simple change to
the current business model needs to
take place, whereby recovery of wood
residue becomes a priority. Particularly
in British Columbia, where a large-scale
lucrative product has as yet to be found
for the vast amounts of beetle-kill.
In addition PWC mentions that wood
pellets as a fuel source are also the verge
of becoming much more marketable.

The report can be found in its entirety on the PwC website.

Fuel from Wood Residue

In just the three short months since Madison’s wrote about the business of biofuels
made from wood residue, there has been an explosion in research, development and
technology. So called ‘green gasoline’ is being actively pursued as an inexpensive, carbon
neutral and plentiful energy source.
Europe is already engaged in education and marketing campaigns while in the
United States producers are calling for tax breaks.

Green Gasoline

A variety of universities, agencies
and corporations the world over are researching,
and rapidly developing, processing
technologies
for the use of
wood residue as a
fuel source. A brief search of the internet
brought up at least a dozen sites with fascinating
information about recent breakthroughs.
A July 04, 2008 report by the The
Rights and Resources Initiative estimates
that demand for food, wood, and biofuels
will likely contribute to massive deforestation
in developing countries around
the world by 2030. If current agricultural
land productivity doesn’t increase
substantially, by 2030 about 1.2 billion
additional acres of land will be needed
to meet the world’s agricultural, biofuel,
and wood-products demand.

The April 7, 2008 issue of Chemistry
& Sustainability, Energy & Materials reports
the first direct conversion of plant
cellulose into gasoline components by
the National Science Foundation (NSF)
and the University of Massachusetts-
Amherst (UMass). “For their new approach,
the UMass researchers rapidly
heated cellulose in the presence of solid
catalysts, materials that speed up reactions
without sacrificing themselves in
the process. They then rapidly cooled
the products to create a liquid that contains
many of the compounds found in
gasoline.
The entire process was completed in
under two minutes using relatively moderate
amounts of heat. The compounds
that formed in that single step, like naphthalene
and toluene, make up one fourth
of the suite of chemicals found in gasoline.
The liquid can be further treated
to form the remaining fuel components
or can be used “as is” for a high octane
gasoline blend.” Using the current cost of wood in
Massachusetts, which is US$40 per
dry ton, as an example of the feedstock
to be used in this process, researchers
estimate that a gallon of green gasoline
can be produced with this method for
between US$1 and US$1.70.

Meanwhile Stora Enso, a Finnish paper
and and timber producer, has joined
hands with Neste Oil Corporation to set
up a plant that will utilize wood based
residues to produce biofuel (July 13,
2008). The project is in part motivated
by the ambitious target set by the EU
of replacing 18 million tonnes of fossil
fuels used for transportation by 2010.
On February 18, 2008 the Colorado
Department of Energy announced that
it would pay $30 million towards the
construction of that state’s first cellulosic
ethanol plant. The plant will use a
technology that will convert beetle kill
into ethanol, a technology that has been
developed and tested in British Columbia.
In addition to ethanol fuel, the
Colorado plant will produce lignin as a
byproduct, which is a useful ingredient
in lubricants and other goods.

Another good use for wood residue
besides ethanol is wood pellets, which
conveniently can also be very easily
made from beetle kill. On June 03, 2008
New Hampshire-based American Biomass
announced an ambitious project
to widely market pellets using US$4
million in funding from .406 Ventures.
Taking advantage of a European
surge of interest in the new energy
source, a major forest industry group in
Finland is actively pursuing the future
of biofuels. From their website (http://
www.forestindustries.fi/
),
Research objectives associated with
wood biomass and its properties:

• Develop methods and solutions for
the management of the properties of
wood biomass as well as for influencing
the raw material properties of wood
grades being allocated for different
uses;

• Develop cost-effective, sustainable
and acceptable ways to produce, harvest
and transport wood biomass;

• Know and exploit timber resources
and the properties of forest biomass as
well as the materials and compounds
produced by different wood species over
their lifespan;

• Establish the preconditions for new
ways to produce wood competitively.

On May 16, 2008 Auburn University
engineers gave Alabama Power Co. executives
and employees a peek at the future
with a demonstration of its mobile
biomass gasification unit, which converts
wood chips into power. The US$250,000
gasification unit sits on wheels and houses
a 5-foot steel drum. A conveyor belt empties
wood chips into the top of the drum.
Inside, the wood burns, releasing carbon
dioxide, carbon monoxide, methane, hydrogen
and oxygen. The gases are then
filtered into a V6 engine and used to generate
electricity. The generator consumes
about 50 pounds of wood chips per hour. A
ton of wood could generate a megawatt.

The Natural Resources Canada government
webpage on bioenergy states
that, “Canada has millions of hectares
of managed forests and extensive tests
have shown that only a small percentage
of forest growth is harvested for forest
products. Nutrient balance experiments
have shown that forest residuals can be
removed for fuel without adversely affecting
the forest ecosystem. [ . . . ]
The technology and resources exist
to provide a significant percentage
of Canadian energy demands. And the
demand can be met without impacting
on the production of food or traditional
products.”

BC First Nations Embark on Lumber Trade Deal with China

Quick to take advantage of the 25 per cent tax levied by the Russian government
on raw log exports earlier this year, a seven person First Nations delegation has just returned
from a trip to China. Trade representatives with the B. C. First Nations Forestry
Council signed a letter of intent with Qingdao Liangmu, the largest forestry remanufacturing
company in China’s Shandong province, and a memorandum of understanding
with Zhongchuan International Mining Holding Co. Ltd.

Qingdao Liangmu operates 14 factories in the province of 100 million people, and
has in the past relied heavily on logs and processed wood imported from Russia. The
company is hoping to find new supply sources, and is interested in British Columbian
wood, such as western hemlock, spruce, pine, subalpine fir and Douglas fir.

Detractors raise concerns that most of the product crossing the ocean will be raw
logs. B.C. First Nations hold 155 forestry licences totalling up to an annual timber harvest
of more than 13.5 million cubic meters. Since 2003, the B. C. government has handed
out harvesting rights to 33.2 million cubic metres of wood — about half the province’s
entire annual harvest — to the First Nations. However only approximately seven million
cubic meters has actually been harvested.

The First Nations group says that the challenge is to create the right projects to
turn the allowable annual cut covered by First Nations forestry licences into jobs and
revenues. The trade delegation also returned with leads from other major forest and
wood-producing companies, including Canlum which specializes in importing Canadian
wood species, Jiangsu Overseas Corporation which is one of the world’s largest importers
of wood, and some others.
The delegation also began talks with the Zhejiang Forestry University with the intent
of sending B.C. First Nations students to China on language and forestry university
exchanges.

British Columbia’s New Forests Minister

With a background in timber harvesting and originally from Prince George, BC,
the MLA for Prince George North is fully aware of the challenging state of today’s lumber
market.
As the new Minister of Forests and Range, Pat Bell has wasted no time getting to
work, and already has plans for policy changes as well as some major initiatives. The
basis for his plans is the understanding that there is a lot of value in the woods that is not
presently being utilized.

Pat Bell Interview

Liberal MLA for Prince George North
Pat Bell has had his sights on the Forests
and Range portfolio since first getting
into politics.
Madison’s caught
up with him while
he was on the road from a meeting with
the ILA (Interior Lumbermen’s Association)
in Vernon, heading to Kelowna
for another information session.
Feeling bright and chipper in his new
post, Bell immediately launched into
a commentary of how he sees this as
an “exciting time for new opportunity”.
While the industry will continue to incorporate
dimension lumber, panel and
pulp products, there is a whole new
world out there to explore. Most notably
bio-fuels (from the bio-refining of
wood residue) and pellets.

As a former log harvester and native
of Prince George, Bell is exploding with
ideas to help keep the industry current
and profitable into the future. He intends
to encourage better utilizing of
timber resources, plus foster research
and technology. In particular there will
be an impetus to creating products,
including pellets, from the beetle-kill
wood. One of his prime objectives is to
promote more efficient harvesting. At
the moment the beetle-kill harvest is
saddled with low sawlog volumes (Bell
estimates 20 per cent). He plans to “create
economic opportunities to get those
areas harvested.”

Pat Bell also has plans for changes to
silviculture practices. The figures show
that fewer trees harvested in recent
years equals fewer trees planted. If that
policy continues through the end of
this year, there will be significantly less
trees put into the ground. He will focus
on “how we grow fibre”, to get more
value than simply from wood products.
He remembers a time when even pulp
was considered residue; clearly those
days are long over.
While actual silviculture practices
will remain the same, there will be
implementation of planning regimes to
lower costs.

With an eye to the future,
Bell thinks of the “incremental value”;
where and when to plant, and the process
of tending. The current ministry
“Free to Grow” campaign will continue.
Bell wants to introduce a life-cycle
management regime. He believes that
society is “willing to pay”, thus will introduce
a Cap & Trade initiative. For
example, to other industries like auto
manufacturing that do not currently
have opportunities to offset carbon.
In that regard, Pat Bell believes there
are “long term opportunities and solutions”
available from related industries.
Currently there are strong fundamentals
in place that he intends to build
upon. In addition there will be partnerships
between the federal, provincial,
and municipal governments and industry,
agencies, universities etc. There
will be a focus on “growth and yield” opportunities.

Some changes will happen
quickly, for example to BCTS (BC Timber
Sales), and regarding pulp mills.
Former Forest Minister Rich Coleman
started a task force on pulp, that should
be ready to table a few solutions soon.
Bell’s basic principle is that “when
industry gets challenged, people get innovative”
and his ministry will support
the industry as a whole. Current government
policy of no direct subsidies
will continue.
While he plans to use the same
principles to the coast forest products
industry, Pat Bell realizes that there
will have to be some different applications.
For example, he plans to encourage
“quality (high end) products” for
specialty species such as Douglas Fir,
rather than a focus on quantity. He
maintains that there are lessons to be
learned around stand utilization and
farm licenses, and that there will be no
financial penalty for mixed-species logging.
Second growth logging will also
rigorously studied. Replanting of Cedar
will need to be carefully examined; with
climate change upon us old models will
no longer hold.

Bell is aware of the terms of the current
Softwood Lumber Agreement, and
intends to “not mess with what works”,
particularly with regard to value-added
products and remanufacturing.
When asked about the government
funding slated to help communities
impacted by the Mountain Pine Beetle
devastation (very little of which has
actually been distributed to date), he
said that a lot of work has been done
by both levels of government for the
Community Development Funds in
receiving applications from various
towns, industry and associations.
While there are not likely to be any
news before Madison’s press time,
Bell assures that there will start to
be “announcements of a dispersal of
funds” very soon.
On a final note, the imminent danger
of a massive forest fire this year had
to be mentioned, especially considering
the fires raging across northern
California right now.

Mr. Bell explained
that that emergency response personnel
across the province are in close
communication with each other, and
that his office receives daily updates
of the BC fire situation. There is good
technology for recognizing lightening
strikes and a system of fast response
already in place. However, the greatest
danger comes, he said, from humanmade
fires. New BC Forest Minister Pat
Bell reminds us all not to leave any fire
unattended, even for 30 seconds. Let’s
not forget what happened in Barriere
in 2003, a fire that
was started by the discarded cigarette
of a volunteer fire fighter.

The New Business of Lumber

As everyone is by now aware, the current slump in the US housing market will not
soon be over. Despite what some analysts predicted earlier this year, there is clearly at
least two years’ worth of fall-out from the zero-interest mortgage fiasco before the market
can even start to turn around.
Japan, Europe and other importers can only pick up a portion of the slack in lumber
demand. Wood products companies across North America are coming up with innovative
ways of protecting their bottom line, most notably sales of timberlands.
This week Madison’s explores the financial viability of this activity, looking closely
at two British Columbia companies that have already embarked on such measures; TimberWest
Forest Corp. and Western Forest Products.

A New Era

2007 proved that continued production
of 2×4’s and other dimension lumber
in the face of clearly eroding demand is
a bad idea. This
year lumber and
wood products
companies are faced with the difficult
task of finding new ways to help their
bottom lines. Particularly since America,
the number one lumber customer, is not
likely to come back to the market until
mid 2010 at the very soonest.

While wood pellets and biofuels from
wood residue are seen across the industry
as excellent future products, they are
currently not cost effective. Consumer
demand and production technology both
need to improve before these products
can be put out to the marketplace on a
large scale. So what is to be done in the
short term?
Using examples from the United
States, there are two major lumber companies
in British Columbia embarking in
the real estate business. Both privately
own significant timberlands, and have
been looking at ways to capitalize on the
resource beyond simply sawmilling.

TimberWest Forest Corp., the single
largest private landowner in BC, hired
John Hendry from The St. Joe Company
(FL) as their VP of Real Estate in May
of 2007. Using the successful business
model of his previous employers, Mr.
Hendry identified 134,000 acres (54,000
hectares) of forestland as “higher and
better use” than from timber management
alone. Of that, 39,000 acres (15,700
hectares) is being actively sold off over
the next 10-15 years. This quantity of
land amounts to 17 per cent of Timber-
West’s property holdings. The other 83
per cent is still deemed most profitably
used for lumber.
TimberWest’s web site describes the
land to be sold as “provid[ing] a wide
range of sustainable real estate opportunities,
including mixed use, residential,
commercial and resort development”.

Stephen Bruyneel of TimberWest’s
communications office told Madison’s that the company works very closely with
communities immediately surrounding
the real estate land to determine its best
use. Direct consultation helps decide
what kind of development will take place
on the land, whether it be residential,
parks and trails, airport or other kinds.
Often people who have moved out to
the forest do not want their viewscapes
marred by logging activity, and are open
to alternatives.
Mr. Bruyneel acknowledged that – being
uniquely positioned on the west coast
– TimberWest is probably in possession
of more valuable real estate than a lumber
company situated in a remote inland
area, however he maintains that the
business model is sound and that similar
valuations should take place across
North America. In these changing times
it would be unfortunate to miss out on
such an opportunity.

Similarly, Duncan Kerr – CEO of Western
Forest Products – sees timberland
sales for real estate as an irrefutable aspect
of the future of lumber industry. He
told Madison’s that even five years ago
this was not the case. The company assessed
2,500 hectares of land on southwest
Vancouver Island to have a “better
use potential than ongoing forest land”.
Western Forest Products also started
conversations with the community to
develop a vision for the best future use
for that land. In the interim a slight hitch
has been put into place by the Capital
Regional District (not to mention no
small amount of outcry from some public
groups), however WFP is still in a conditional
deal with the potential buyer.

Mr. Kerr also holds the opinion that
real estate activity is an obvious choice
for future potential revenue, particularly
as “non forestry people move into
the forests”. Given the rampant and
continuing mill closures across Canada,
the hardest-hit communities must look
to other avenues for an income source.
Tourism, eco or otherwise, is one possibility.
Another is intelligent development
and land use management to capitalize
on the interest of city-dwellers in moving
out to the country.
The United States has already embarked
on such ideas.

About 4.5 million
acres of timberland, worth about $3.3
billion, were sold in 2007, according to
Chris Lyddan, editor of Timberland Markets
Report in Richmond, Virginia. Lumber
and paper companies unloaded about
70 per cent of that total. Land that had
previously been considered too remote,
too wild or was lacking in infrastructure
or services is now becoming more attractive.
Of course in the US more lumber
companies are also landowners. However
in Canada 15 per cent of timberland is privately
owned.
During the past 15 years, the NCREIF
Timberland Property Index climbed at an
annual rate of 14 percent, exceeding the
12 percent gain of the Standard & Poor’s
500 Index. Often the pension fund, universities
or other investors that are buying
up timberlands in the US have little or
no intention of development. They plan to
simply hold the land for its value, and as a
future source of timber revenue when the
market does turn around.
With new interest in forest land coming
from all kinds of sources, it seems
only logical for Canadian wood products
companies to jump into the game as
well.

Softwood Pulp

For the first time in a year and a half, European NBSK pulp price is down, due to a
slowdown in both the European and US economies. Despite pulp mill closures in North
America and Finland, continued weak demand for paper is causing a turn-around in the
pulp market.

This week European Softwood
Kraft pulp was selling for US$903.70
per metric ton, down US$0.94 from last
week and up US$32.54 from the beginning
of 2008. (SOURCE: www.foex.fi).
In a sign of potential future pulp oversupply,
Europulp reported a 7 per cent increase
in May pulp inventory at European
ports (to almost 1.4 million tons) when
compared to April, and up almost 27 per
cent from May of 2007.
US NBSK pulp stayed firm at US$880
per metric ton, due to very low North
American sawmill activity. Wood chips are
in short supply, prompting producers to
announce an expected price increase of
US$20 for July.

that Dick Harris,
MP, talks about
moving into MPB
recovery actually came from the previous
Federal Liberal government of Paul Martin
and was a backfill for previous cuts
that government had made,” remarked
Bob Simpson, MLA.
“It is troubling that we don’t have a
coordinated Federal – Provincial response
to the Mountain Pine Beetle problem,”
said Bob Simpson, British Columbia member
of legislature representing Cariboo
North. His constituency encompasses the
cities of Prince George and Quesnel, BC.
“One problem is that we can’t track what
happened to the money from the Federal
government.”

In a time when the US housing market
has taken a downturn, mills are closing
throughout the province of BC due
to market conditions, the mountain pine
beetle is devouring the forests and those
stands are being clear cut, the Canadian
government is funding research and development
projects that are not being
monitored for effectiveness. Bob Simpson
asked, “ How much money has gone into
R&D pet projects? We don’t know. How
many of those products have gone into
the market? None. Not one has seen the
light of day.”

Simpson asserted that he is all for
monitored R&D. Value-added products
must be developed to augment the dwindling
income from the direct forest resource.
However, sourcing the raw materials
for these products is hampered by
the “tenure” system as it exists in BC.
Tenure is an arrangement between
the provincial government and private industry
to access public lands for economic
activity. In the case of the forest industry,
only four or five companies have special
tenure relationships with the province
that directly or indirectly control the log
flow in BC.

Currently all wood fibre from
crown lands goes into lumber, and is unavailable
for new, value-added products.
“We need to change the tenure system.
If we had a free market for logs, we
would have fibre available for other programs. In addition, without the tenure
system, the objections of the US lumber
lobby would no longer be relevant,” said
Simpson. The softwood lumber agreement
between the US and Canada is predicated
on special relationships like the tenure
system between the forest industry and
the province.

Rich Coleman, British Columbia Minister
responsible for Forests and Range,
has recently come under fire for failing
to fulfill his promises to coordinate the
effort on the Mountain Pine Beetle. “He
dropped the ball,” said Simpson. “Years of
this [Provincial] Liberal government have
not produce the results that were specifically
targeted.”
“Right now we view our forests as a
source for lumber only. We have to shift
to see it as a resource for a variety of products
including: pharmaceuticals, bio-plastics,
bio-fuels, bio-chemicals.

Direct forest
products like lumber need to be just part
of the mix including value added and engineered
wood products, pulp, pellets and
power.”
Simpson continued, “ The next five
years we have a huge impact on allowable
cuts. As a province, we need a new business
model and market strategy that is
value-added.”
To ensure that there will be forests
in British Columbia in the future, forest
health must be a major thrust. For example,
trees must be planted at least at the
rate that they are being taken out. But is
that the case?

“There is a lack of provincial
leadership and an actual falling off
of all forest health activities,” said Simpson.
“In 2007, 270 million seedlings were
planted. That is less than were planted in
a single year a decade ago. We are also
cutting a significantly higher number of
trees, in addition to the loss of land base
to fire, pests and disease.”
What is even more alarming is
the drop off in the projected number of
seedlings to be planted in the future. “In
2009, the province of BC projects that it
will plant 190 million seedlings. That is
the lowest number in 30 years,” reported
Simpson.
Many of the private and publicly
initiated projects for MPB mitigation are
abandoned before they start. “The stumbling
blocks to getting funding are many.
Each program, Federal or Provincial, has
to be applied for separately.

Some programs
require that the applicant show
other source money. The catch is that
they have differing criteria.” Using the
same application for several programs is
nearly impossible. “The applicant can’t
leverage funding between programs,”
noted Simpson.
Bob Simpson went on to ask, “ Where
is the coordinated, comprehensive plan
for the Province and Federal government
working together to direct funds to the
forest land base? Where are the programs
that address socio-economic conditions?
We need to transition affected communities
through this horrific experience. And
where is the strategy for this?”

Forestry concerns more
than Pine Beetle

The city of Mackenzie in northern British
Columbia is in the news with the shutdown
of its single largest employer, forest products
mills. In a wave,
other small, forest
industry dependent
towns throughout BC are losing their means
of survival. The reason for the closures? Market
conditions; the downturn of the US housing
market. The shift in value of the Canadian
dollar to equal or greater than its US counterpart.

With a high dollar, Canadian lumber is
neither as profitable to its makers nor is it as
attractive to US buyers. But when mills close
for market conditions, there is still a chance
that they may reopen if the market changes
in the near future.
However, according to Bob Simpson, member
of the provincial legislature for BC’s Cariboo-
North, the media isn’t talking about the
towns like Quesnel, Williams Lake, Prince
George and Princeton where the mills are
still running in the heart of mountain pine
beetle country.

“Mountain Pine Beetle areas
are not in the news while they are chewing
through the affected forests. The clock is ticking,”
says Simpson. In these areas, a whole
landscape, miles and miles of standing beetle
killed timber must be removed and milled
before it is no longer merchantable. And that
means clear cutting on a scale that most have
never dreamed of.

But this is no dream, it is
a nightmare.
“There will be no come back for those communities,”
said to Simpson, “Within only the
next few years, some say as soon as 2010 or
2012, those forest dependent towns in beetle
country will not have enough standing forest
to keep operating.” The mills in those cities
will close and those closures will stick, not
because of market conditions but because
a mill can’t run without material. “The Ministry
of Forests response to the economic
problems is to increase the annual allowable
cut which speeds up mowing [the forests]
down.”
Why can’t we simply replant all the trees?
Seedling counts are referenced by the province
and the Canadian federal government
as the great hope of the future. New trees
would be the answer
if they will grow fast
enough and if they
can survive. But
global warming and
soil depletion are two
factors that will inhibit
the recovery of
the naked land. “We
are not just dealing
with the mountain
pine beetle,” advised
Simpson. “MPB is
just the canary in the
coal mine.”

The lack of the
natural cleansing
and soil nourishing
from periodic forest
fires adds to the
lack of cold winters
as the planet gradually
heats up. “These conditions set the table
for pests that we’ve never seen in these areas
before such as the spruce bud worm, pine
blight, root collar weevils, rusts and mites.
These used to be controlled by cold winters
and periodic forest fires.” Some or all of these
pests will become the nemesis of the newly
planted forests.
Bob Simpson noted,“The funds needed to
deal with the beetle killed forests would be
around $800 Million to $1 Billion over the
next ten years. But so far the province has
allocated only $160 Million over three years
and the federal government has matched
that with nothing.

Not only is the province
under-funding the effort, but its estimates
on the number of affected hectares of forests
only take into account mature trees affected
by the beetle. It actually has affected
all age classes. The forests are not healthy.
14 Million hectares [province estimates
of affected forest] is only the tip of the ice
berg.”
In single resource
communities that will
be affected by the loss
of their forests, the
province has proposed
job retraining for 55-
plus year old workers
and make-work projects.
“But that plan flies
in the face of reason.
It assumes that this
industry will rebound
after the forests are cut
down. Many mills are
afraid to take down time
now because they will
lose their work force.”

The workers will be
at the mills until the
day when there are no
materials to run. Then
there will be no jobs
and no plan for individuals to transition.
Simpson says, “Contributing to the
loss of the forests to pests is the softwood
lumber agreement that was signed in
2006.” In Simpson’s opinion, Dick Harris
was mistaken in his recent interview with
Madison’s that the decline of the US housing
market was an unfortunate coincidence
with the signing of the Softwood Lumber
Agreement. “It’s on the public record that
in the fall of 2005 our industry was poorly
positioned for the housing bubble to burst.
I knew it and said it at the time. The feds
knew early in that summer that the dump
was coming.”
“The softwood lumber agreement was
[Prime Minister] Stephen Harper’s quick
political win. Industry was brow beaten into
signing it. The Prime Minister knew they
were saddling us with a 15 per cent tax,”
stated Simpson. “In the middle of the signing
process, we had rulings that we would
surely have won.”
“The [Harper government] said we
gained certainty from this agreement. But
where is that certainty now with the new
US farm bill tacking on conditions to lumber
imports from Canada? That puts lumber
into the [internal US] political arena.
The trade deal is supposedly under NAFTA.
The irony is that the US lumber lobby won
this battle with the $1Billion in duties that
wasn’t returned to Canada as a result of
softwood negotiations,” Simpson added.

Pine Beetle remedies funded says Dick Harris, MP

Conservative member of the Canadian
Federal Parliament (MP) for the Cariboo
Chilcotin Region, Mr. Dick Harris’ riding
encompasses
the cities of Prince
George, Quesnel,
Wells / Barkerville, Williams Lake and
Vanderhoof, BC.

Madison’s: What is the status of the
Canadian government’s program to stop
the mountain pine beetle?

Mr. Harris: We are into a number of
phases of the mitigation program. Out of
the $300 Million allocated for this, $100
Million has gone to the province of BC as
of December 2005. In the 2006-07 federal
budget, another $200 Million was allocated
for the following three fiscal years.
$102 Million was allocated to projects
such as:
– economic diversity
– to control the spread of the mountain
pine beetle in pockets
– wildfire protection
– research into bio fuels
– value added products from the beetle
killed wood and finding markets for these
new products
The money was released directly into
the affected communities for job training.
Another $102 Million was given and $198
Million as allocated for disbursement
through March 2009.

Madison’s: What products have developed
as a result of the mountain pine beetle
infestation?

Mr. Harris: We are providing funding
to Universities for research to find new
products. The concrete – wood fiber combination
being worked on at the University
of Northern British Columbia is one I
haven’t checked on this since last fall. But
there are several products that look good
in the laboratory. Finding market uses for
them is the next challenge.

Madison’s: How does the government
anticipate controlling the spread of the
mountain pine beetle?

Mr. Harris: There is a major pocket in
northeastern BC that has moved through
a pass into Whitecourt, Alberta. To control
this, we are pursuing a cut and burn exercise.
The key is to first identify affected
trees. This project is in cooperation with
the Provinces of BC and Alberta. Financial
allocations on this one project are $52.2
Million from the province of Alberta and
$29 Million from the province of BC.

Madison’s: How does the current situation
look on the MPB?

Mr. Harris: We were helped out by a
major freeze this winter. It’s possible that
we had a 90 per cent kill as a result.

Madison’s: On another topic, what is
the status of the Softwood Lumber Agreement?

Mr. Harris: It was what we needed at
the time. We didn’t need to continue the
litigation [with the US]. The costs and
uncertainty had to end. We have a saying
“you don’t get what you deserve, you get
what you negotiate.” In this case we got
about $5 Billion back to Canada from the
duties that had been collected.
It was just an awful coincidence that,
after signing, we saw
the US housing market
go into the sewer and
that drove lumber prices
down. The mechanism
to start the 15 per cent
happened pretty quickly.
It’s still a much better
situation than without [the softwood lumber
agreement].
The Americans would have put a
duty on it any time they wanted. At least
now the duty is staying in Canada.
The softwood lumber agreement:
– stopped lawyers from getting rich
– gave us certain so that mills can
plan for what they need to do
– when the market comes back, folks
will think it’s a good thing.

Madison’s Canadian Lumber Reporter thanks Dick Harris, Member of Parliament,
for taking the time to talk with us
on these important issues.
Dick Harris’ riding includes
Tweedsmuir Provincial Park where the
mountain pine beetle (first detected in
the 1980s) made news in 1994 with a
major infection. The bloom in the 2.4 million-
acre park, the largest in the province
was assessed by BC Parks and Ministry
of Forests.

MPB management actions at
that time included the use of prescribed
fire and fall and burn treatments. Other
outbreaks outside of protected areas were
also discovered around Quesnel, Williams
Lake and Princeton, BC. Despite these
management tactics, beetle populations
have expanded by three or four times each
year, now in the 14th year of expansion.
As of 2006, the mountain pine beetle
had devoured 9.2 million hectares of BC
forest, making it one of the largest insect
infestations in recorded history. In Prince
George alone, more than 50,000 dead pine
trees have been removed from city-owned
land and school grounds – not including
the trees removed from
private property.

Forestry experts and
entomologists agree that
you can’t “stop” a beetle
expansion such as we
now see across British
Columbia. Only nature
can do this through two consecutive very
cold winters. With global warming, cold
winters have been too few and far between
to kill the beetle. Large scale government
funding has been allocated at the provincial
and federal levels to study how to deal
with the beetle. Meanwhile, the epidemic
has spread throughout the central interior
of BC, to neighboring Alberta and into the
state of Montana.

In his capacity of MP for five consecutive
terms (the past 15 years), Dick Harris
has served in several Parliamentary positions,
currently serving on the Standing
Committee on Natural Resources. While
a member of the Official Opposition, Dick
was the leading spokesperson for the Official
Opposition on the pine beetle issue.
He continues that role as a member of the
Conservative Government of Canada. His
experience, influence and determination
allowed him to secure a $1 billion commitment
to mitigate the pine beetle infestation.

US Softwood Control Bill

A surprise move in the US House of Congress Wednesday attached a piece of restrictive
legislation on softwood lumber to an unrelated agricultural bill. US President George
W. Bush had initially indicated he would impose a veto.
However, on Thursday the bill passed through the Senate with well over the 65 per
cent majority needed to effectively remove the possiblility of an executive veto. Experts
now predict that there is little to no chance of Presidential involvement.

Softwood Lumber Imports

The controversial addendum to the
farm bill was strongly supported by
Montana Senator Max Baucus, a long
time proponent of restricting Canadian
lumber imports into the United States.
Meanwhile US trade representative
Susan Schwab, one of the signators of
the 2006 Softwood Lumber Agreement,
expressed opposition to the amendment
of the farm bill.
The terms of the bill will require Canadian
importers to prove the current 15
per cent tax on lumber has been paid, and
goes so far as to allow intrusive and detailed
examinations of related paperwork.
Canadian exporters estimate the extra
work and delays could cost them up to $20
per load of lumber crossing the border,
adding yet another burden during these
times of instability in the marketplace.
The timing of this surprise addendum
to a completely unrelated bill raises the
concern of heightened US protectionist
policies, particularly given the likelihood
of a Democratic succesor to the White
House in the upcoming Presidential
election.

PwC Annual Conference

Every year at this time Pricewaterhouse Coopers holds a conference in Vancouver
about paper and forest products. Particularly of late, it has been a joyous event, with
analysts throwing out figures of record production amounts and commodity prices.
This year told a different story. Recent statistics and predictions alike showed a difficult
future indeed – at least in the short term – for the North American wood products
industry, especially in British Columbia.

Paper & Forest Products

Craig Campbell, of PwC, explained
that the value of the Canadian dollar
has risen 57 per
cent against the
US greenback
since 2002. The five cent increase since
2006 alone has cost the Canadian forest
industry over $2 billion, $600 million of
which comes from BC.
British Columbia alone must take
a certain amount of blame for the current
lack of lumber demand, since that
province did not decrease production in
2007. Campbell maintains that company
strategies of cranking out product in an
effort to remain the “last man standing”
only served to exacerbate the problem
of oversupply.

The large number of mill
closures announcement for 2008 still
don’t appear to be enough to bring about
a supply balance in the marketplace.
Patricia Croft, chief economist at
Phillips, Hagar and North also spoke
at the conference, explaining that traditionally
the US economic cycle downturn
is two-thirds of up-cycles. This
latest up-cycle was 10 years, so the US
economy can be estimated to be only
half-way through this down-turn. In fact,
Croft predicted more hard times in the
US, with the next phase of collapse to
be in defaults of credit card, auto and
student loans.

Meanwhile, Avrim Lazar of the Forest
Products Association of Canada explained
that while the nation is currently
facing hard times in the forest products
sector, land scarcity is going to lead to
future growth. Several BC lumber companies
are already embarking on real
estate ventures, most notably Western
Forest Products and TimberWest. Lazar
maintained that the cost of food, fibre
and oil will be equally influenced by
soaring demand.

More information on the conference
and its speakers is available at the
PwC website at www.pwc.com/ca/fpp.
In a few weeks, Pwc and the FPAC will
be coming out with a study regarding
wood and paper-based products and
sustainability.

Lumber
Remanufacturing

When the current Softwood Lumber
Agreement was signed in 2006, remanufacturers
in British Columbia noticed a
marked discrepancy
to the previous
agreement;
they were suddenly required to pay tax
on commodities that had been exempt.
All attempts, by agencies serving the industry,
individual lumber companies, and
local politicians, to have the terms of the
Agreement in this regard adjusted failed.
At the end of 2007 the British Columbia
Ministry of Forests and Range, with the
help of Pricewaterhouse Coopers, came
out with a study of the effects of this new
tax, particularly on producers in the Interior.

Post Softwood Agreement Effects in BC

After heavy consultation with the industry
and relevant agencies, the study
determined that not only was there a
desire to rework the terms of the Agreement
regarding remanufacturing, but
also there was a call for changes to BC
forest policy. The Ministry because it
expects changes of ownership and operating
structures as a result of the new
taxes.
The study concluded that the new
Softwood Agreement affects lumber remanufacturers
differently, depending on
market strategy and product types.

As the
business of secondary processing differs
for various regions of the province, there
is no one way to determine the resulting
impact. Fibre shortages were found to be
a problem throughout the industry, with
Coastal mill having trouble sourcing raw
logs and Interior mills needing more trim
blocks and low grade lumber.
Companies surveyed agreed that
“Option B” (Export Charge + Volume
Constraint) was having a negative impact
on their business. It was felt that exclusion
of non-dimensional remanufactured
products from the Agreement, and improvements
in BC stumpage determination
for low grade logs would go far in
solving some of these new problems.

The study itself can be found on the
Ministry of Forests and Range website,
at http//www.for.gov.bc.ca/HET/Sofwood/
index.htm
, then scroll down to the
link *NEW* Softwood Lumber Remanufacturing.

Wood Chips

In probably the most bitter irony currently facing the North American lumber
industry, at a time when Northern Bleached Softwood Kraft pulp prices are very high,
wood chips have become dangerously difficult to source. Ongoing and recent mill
closures in Canada and the United States have brought such a reduction in chip and
sawdust production that some pulp mills are curtailing production as well. Its an unpleasant
pill to swallow when in 2007 a strong pulp market was the only thing providing
help to the profit margins of lumber companies.

Sawdust demand from other industries, for anything from fuel, building, agricultural
or chemical uses, has only served to restrict supply of chips to the market further
while at the same time causing prices to rise by 50 per cent from one year ago. A sweet
twist to the irony indeed, giving lumber producers an unexpected income boost. Once
demand for lumber increases, the price of chips will fall back down.

Lack of Supply

Early figures estimate that in
2007, North American sawmill closures
brought a 15 per cent reduction in wood
chip production.
Pulp mills are being
forced to buy
more expensive roundwood chips, driving
up demand for small sawlog chipping.
In a reality repeated across the continent,
the threat of supply has become
so severe it was cited as the sole cause
in Catalyst Paper’s April 30th announcement
of 235 layoffs. Their Elk Falls mill in
Campbell River and Crofton mill in North
Cowichan will be permanently idled in an
effort to make production more cost effective.
The recent closure of the nearby
TimberWest sawmill in particular has
hurt Catalysts’ fibre supply.

On a brighter note, Catalyst kept its
Port Alberni paper mill running by signing
a rather unusual labour agreement
with union members in February. The
company was able to reduce its production
costs by C$45 per metric tonne, and
expressed hope in being able to draft
similar deals at other plants. Both the
Communications, Energy and Paperworkers
Union and the Pulp, Paper and
Woodworkers Union of Canada objected
to the deal, and stated emphatically that
such terms (such as rotating shifts giving
workers few weekend days or Christmases
off, and less vacation time) would
not be entertained when negotiations
take place for a major contract set to expire
April 30.

As chip shortages continue, NBSK
pulp prices are sure to be affected. For
the moment the regular price cycle has
been stable, with sufficient market pulp
in the system to keep paper manufacturers
– particularly in Europe – running as
usual. As the shortage of each commodity
in its turn makes its way up the pipeline,
however, eventually paper mills are
likely to be hit with a price increase of
their own.
Some customers have turned to
shipping chips in from great distances,
but are paying a premium so don’t expect
to continue this practice for now. Everyone
agrees that the only solution is for
lumber demand to rise, bringing an eventual
increase in the availability of this
wood residue.

Raw Log Sales

The recent practice of forest products
companies of exporting raw logs rather
than milling lumber themselves has driven
up log costs at a time when companies
can ill afford to pay. In addition, British
Columbia’s stumpage fees are expected
to be adjusted upward accordingly.
In October of 2007 Rich Coleman,
British Columbia Minister of Forests
and Range, announced the provincial
government was going to increase taxes
on raw log exports on February 1 2008.
In a two-tiered fee program, companies
in northern British Columbia are allowed
to export up to 35 per cent of logs
harvested with no penalty. After that they
must pay a 5 per cent tax, while in the
south of the province companies pay a 20
per cent tax on Douglas Fir (15 per cent
on all other species) provided the tax on
softwood lumber exports remains at the
15 per cent level. Export of raw cedar
log is, as always, prohibited.

Since then
the proposal has been delayed as the
Ministry of Forests and Range embarks
on further study.
The suggestion of a tax penalty,
however, did not seem to have stemmed
the tide of raw log shipments south,
particularly by Canadian companies
owning sawmills in the United States. If
anything, there appeared to have been an
increase in raw log exports over the past
year as lumber prices remain depressed
and, more recently, the Canadian dollar
has gained strength against the American
greenback. Reports of log shipments by
water or over land were both frequent
and widespread.

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