Lumber News Archives: May 2009

Lumber News Archives: May 2009

New US Softwood Lumber Customs Instructions Contradict the 2006 Softwood Lumber Agreement; Canada’s International Response to US Pulp Mill Tax Credit; US Housing Starts; Forest Products Companies 1Q 2009 Results; Biomass Fuel Developments ; Canadian Housing Starts; Japanese Housing Starts 2008; Federal Canadian Funding to Forestry Communities; Canadian Pulp Mill Tax Credit?; Pulp and Paper Markets Globally ; Coalition Complaint Against Canfor ; California Wildfires; US Pending Home Sales; MacKenzie Pulp Mill Offer; British Columbia Provincial Election; Nova Scotia Wildfires; US Commercial Real Estate Mortgages; Paper and Newsprint;

May 31, 2009

New US Softwood Lumber Customs Instructions Contradict the 2006 Softwood Lumber Agreement

The recent LCIA ruling requiring Canada’s Option B provinces to pay a $68 million penalty on lumber overshipped into the US in the first half of 2007 has had radically different interpretations on both sides of the border. Canada has requested the LCIA panel to reconvene in order to settle the different understandings between the US and Canada.

While Canada waits, the US has gone ahead and issued new customs instructions, effective mid-April, which require Canadian lumber exporters to pay an additional 10 per cent duty surcharge on softwood lumber imports. Not only are the new customs instructions counter to the 2006 SLA, but the Canadian Department of Foriegn Affairs and International Trade does not even seem to be aware that they have been in place for over a month.

A Series of Canadian Blunders

Canada’s list of blunders, ineffective responses and sheer volume of missed opportunities in relation to the ongoing softwood lumber dispute with the United States has just gotten longer. In light of the latest developments, it is easier to understand how the deeply flawed, heavily weighted towards American lumber producers, 2006 Softwood Lumber Agreement Canada has been forced to suffer with came to be. As explained in the April 03, 2009 issue of your Madison’s Reporter, Canada’s eastern provinces, which chose the Option B settlement mechanism – a combination of lumber export quota and export taxes – were deemed in breach of the 2006 SLA by an international tribunal, for shipment volumes above the quota in the first half of 2007. Quebec, Ontario, Manitoba and Saskatchewan lumber producers were ordered to pay $68 million in additional export taxes.

At the time of the judgement the Canadian government wanted to send a lump-sum payment of just under $47 million to the United States, but the US Coalition for Fair Lumber Imports maintained that such a move did not impose sufficient hardship to “cure the breach of the overshipments.” The Coalition wanted the lumber companies within the relevant provinces to pay an additional 10 per cent export tax on lumber products coming into the US until the full amount was paid off (estimated to be five years under current export figures). Canada has requested a reconvening of the international tribunal to settle this point. On April 1 the US Trade Representatives Office announced new instructions applicable to entries of softwood lumber from the four named provinces effective April 15.

A follow-up email from Madison’s to the Softwood Lumber Division of Canada’s Department of Foreign Affairs and International Trade (DFAIT) on April 16 about some of the more complex aspects of this latest dispute was answered promptly, except one question. In hindsight it does seem to be a bit of a side-step. Madison’s question was; “a customs broker dealing with Canadian softwood lumber going into the States has repeatedly taken US Customs to task over calculating a duty on the remanufactured selling price of wood products rather than the First Mill price as it is meant to be. In addition they seem to keep forgetting about the US$500 per mfbm cap. Importers are being charged a duty surcharge on Entered Value, which can be many higher than the US$500 mfbm cap (First Mill price). Is there a mechanism in place between Canadian and US officials to quickly deal with such improper implementation of international law?”

The answer to that question from DFAIT’s media department was, “The US has yet to formally announce the basis upon which they will impose the 10% customs duty. However, Canada will be seeking clairification on this issue.” The question clearly states that the new US Customs directive has already been issued. The duty surcharge has been collected in the US since April 15. It is most puzzling that customs documents continue to be in compliance with the 2006 SLA in regards to the initial 5 per cent export tax, but the new customs instructions differ radically in terms of the additional 10 per cent surcharge.

Madison’s continued to receive emails from Michael Jones at Jones & Jones Customs Brokers and Trade Consultants, a Blaine, WA, firm facilitating at all Canadian/US points of entry, to the Chief of International Coordination Trade Policy & Programs in which Jones was desperately trying to secure the correct interpretation of instructions which were blatantly counter to the 2006 SLA. On Friday, May 15, after a month of emails, Michael Jones was suddenly directed to a completely different US department on this matter.

Jones’ petitions for clarification point out that “Ad Valorem” was simply Latin for “Against the Value”, as opposed to per thousand board feet or cubic measure. The 2006 SLA specifically provides that the value assessed is the “First Mill” price.

At that point Madison’s got in touch with DFAIT to inquire why this solitary, small customs broker is left to resolve this issue independently. Why wasn’t the relevant Canadian agency responding? After being greeted by a series of answering machine messages from various DFAIT departments, Madison’s finally got through to a real live person at the office of Josee De Menez, Deputy Director of Consultational Policy Issues. After a detailed explanation of the question, Madison’s was put on hold for a length of time only to be told that this was not, in fact, the correct department. The Softwood Lumber Division is responsible for queries of this nature. Armed with a direct line and email, Madison’s did as advised and sent the questions, including the emails between Michael Jones and the US trade department.

On Wednesday morning Madison’s called the direct line, catching the DFAIT trade lawyer off guard. After explanations of the issue the staff member assured Madison’s there would be a reply forthcoming before the production deadline of Thursday afternoon Vancouver time. During the conversation, Madison’s was struck by a long pause, after which the staff member stated that he was not aware of this issue. He went on to say that, “we never know about problems like this unless someone informs us.” That statement, if it is indeed factual, is troubling in the extreme.

Mid-Thursday morning Madison’s left a message on the direct line as a reminder of the promised reply.

By Friday morning there was still no response from DFAIT. Madison’s finds it truly baffling that such an important issue can go completely undetected by Canada for over a month, and that – once notified – the federal government department responsible is disinterested at best. At the very least Canada must be apprised of this collection of additional money, otherwise how will the DFAIT know when the penalty has been collected in full? It is also important to remember that under the terms of the 2006 SLA, all revenues were meant to be collected on the Canadian side, not by the US, and to remain in Canada.

The fundamental issue here is not so much this latest blunder, but the fact that this is the way things always seem to go on the Canadian side in regard to softwood lumber. When it became public that the US Highway Act was being abused by American pulp mills, who were adding fossil fuels into their ‘black liquor’ in order to be eligible for substantial tax credits, an “ad hoc group of Canadian pulp industry professionals” travelled to Ottawa to make their case against this tax credit (as reported in the mainstream press).

Why is it always an ad hoc group? The US lumber industry speaks in one loud, cohesive voice. It has a very powerful lobby group permanently set up in Washington, one of the most powerful lobby groups in the country, the Coalition for Fair Lumber Imports. Whenever something happens that the US lumber industry does not like, they have one place to go to lodge their complaint. Action by the Coalition is swift and often extremely effective.

Meanwhile, Canada has innumerable lumber industry groups, organizations and agencies, all dealing with their specific regions, product types, or issues. Often these groups do not even agree with each other. On a political level each province insists on having its own voice, and often they do not agree. The federal government wafts between dealing deftly with issues as they arise, and ignoring problems completely. No wonder the US industry has soundly defeated Canadian lumber exporters on many fronts, and no wonder this latest Softwood Lumber Agreement is so poorly crafted in terms of Canadian lumber producers’ interests.

There is a decided lack of awareness, of cohesion, and of cooperation going on in the Canadian lumber industry which, if it continues, will only make recovery from this current downturn more difficult.

Canada’s International Response to US Pulp Mill Tax Credit

Canada’s Ambassador to the US, Michael Wilson – along with his counterparts from the European Union, Brazil and Chile – have sent a letter to leading Democratic members of Congress, including Senator Max Baucus, chair of the Senate finance committee and long-time supporter of US forest industry interests.

In the letter the ambassadors said the US forestry companies are reaping a windfall from a loophole in the law intended to encourage the production of cleaner-burning biofuels. American companies are reaping up to $8 billion a year by mixing in a pulp byproduct called black liquor with diesel fuel, qualifying for the credit, in contravention of World Trade Organization rules.

Some companies claim credits that amount to approximately 30 per cent of the selling price of pulp, the diplomats assert.

The issue has been a sore point in the Canadian forestry sector, which believes it is a constant target for what the US perceives as unfair subsidies, but which have repeatedly been discarded by trade dispute panels. The global forest industry is reeling from the economic downturn, and the head of the Forest Products Association of Canada has urged Ottawa to match the U.S. subsidies to create a level playing field for domestic mills.

US President Barack Obama has indicated he wants Congress to terminate the U.S. tax rebate as soon as Oct. 1. But the credit has strong supporters. Senators see it as a legitimate way to keep pulp workers employed in their constituencies.

US Housing Starts

Housing starts in the US fell 13 per cent in April, the lowest since records began in January 1959. The drop reflected a 46 per cent plunge in breaking ground for multifamily units and indicated homebuilding remains a drag on the economy. However, starts for single-family homes rose 2.8 per cent, a second straight gain that showed the worst-hit part of the market was stabilizing. The month’s building permits fell by a smaller amount compared to March, but hit the lowest level since January 1960.

American Home Building

“U.S. housing remains very weak, but the stability in single-family units is encouraging,” Benjamin Reitzes, an economist at BMO Capital Markets, said in a research note.

Multifamily construction plunged 46.1 per cent to an annual rate of 90,000 units after a 23 per cent fall in March. Permits for multifamily construction dropped 19.9 per cent to 121,000 units.

The number of unsold homes on the market at the end of March fell 1.6 per cent from a month earlier to 3.7 million, not including new homes, according to the National Association of Realtors. But since sales remain sluggish, it would take almost 10 months to rid the market of those properties, compared with about 6.5 months in 2006.

The median price of a new home sold in March was $201,400, down 23 per cent from a peak of $262,600 two years earlier.

“The first step to healing the housing sector is to eat into inventory. There is so much inventory on the market that the sooner we stop building and start eating into existing inventory the better off we’ll be,” said Brian Dolan, chief currency strategist at Forex.com.

Forest Products Companies 1Q 2009 Results

Canada’s 14 largest forest products companies lost a total of $480 million in the first quarter, with BC firms hardest hit, a report by PricewaterhouseCoopers shows. The losses were $91 million more than the same quarter last year, when the overall losses were $381 million, as sales and prices continued to drop as a result of the recession.

Western Canadian companies lost a total of $314 million in the January-March period, which was compared to losses of $312 million the same time last year.

Losses in Eastern Canada widened to $166 million in the quarter compared losses of $77 million the year before.

By comparison, 10 of the largest public US based forest and paper companies posted cumulative losses of US$63 million in the first quarter of 2009.

That was a drop of US$429 million from earnings of US$366 million in the same period of 2008, the report said.

May 24, 2009

Biomass Fuel Developments

Biomass Fuel Developmens
In a very exciting industry that continues to grow in leaps and bounds, both in North America and in Europe, there are several new developments for the use of biomass residue as a fuel source.
From Quesnel, BC to Burns Lake, BC, from Wisconsin to Colorado, companies are moving forward at a breakneck pace to be at the forefront of this new technology. Several project announcements are examined.

A Growing Business

There are so many new developments, so much research successfully completed on an ongoing basis in the biomass fuel sector that Madison’s can hardly keep up. In North America alone, industry is growing and partnerships are being formed at a pace that is frankly astounding. As previously detailed in Madison’s, the two processes that are currently the most commercially viable for getting fuel from biomass are gasification and pyrolisis. There are mega-million dollar plants being built in several locations across North America, and also in Europe, using these methods.

Brand-new research in technological advancements using fungii to extract sugars from biomass is currently being conducted in British Columbia under a sizable grant from the federal government of Canada.

At the provincial level, on April 3, 2009 the BC Ministry of Small Business, Technology and Economic Development announced major funding for eight biofuel projects, two of which use biomass, under its Innovative Clean Energy (ICE) program. Lignol Innovations Ltd. of Burnaby, BC will receive $3,405,000 (30 per cent of the total projected cost) to produce cellulosic ethanol from beetle-killed lodgepole pine. Pure Power Global Ltd., of Quesnel, BC will get $880,000 (less than 1 per cent of total projected cost) to design and build a bio-refinery in Quesnel to convert 10 MT per day of woody biomass into cellulosic ethanol, lignins and xylose.
The balance of the funded projects include biofuels from landfill, sewage, agricultural waste and waste cooking oil from restaurants. Funding provided by the Province of BC for these most recently announced projects is almost $8 million, while total value combined is almost $100 million.

On May 07, 2009 Lignol patented a “organosolv digestion system” comprising of four modules. Through this four step process, the company can “further process [biomass] into high-value products such as fuel ethanol, lignins, furfural, acetic acid, purified monosaccharide sugars among others.” The new invention is an important progression on existing technologies because “the old methods require expensive pretreatment steps and currently produce only low-value co-products,” according to specifications of the patent. Meanwhile Lignol’s US subsidiary is moving forward with its previously announced plan to construct a commercial demonstration cellulosic ethanol plant in Colorado using a US$30 million grant from the US Department of Energy. The proposed facility will be designed to process hard and soft woods and agricultural residues such as straw and corn stover. Lignol expects the facility, once operational, will process about 100 tonnes of feedstock per day and produce approximately 10 million litres of ethanol per year.

Another exciting development in this fast-growing field includes a group of 11 University of Wisconsin-Madison undergraduates researching biofuels for a synthetic biology competition. Andy Braasch, a senior molecular biology major, explained that current ethanol processing methods are unsustainable. The next step in ethanol is to make biofuels from cellulose. Braasch and four team members are working to break down lignin, a compound that coats cellulose, into simpler compounds that can be used to produce biofuels. The remaining six team members are using bacteria to produce sorbitol, a sugar compound that could potentially be used to make biofuels. The team is working to manipulate E. coli to produce the compound with more energy efficiency.

An announcement out of the Burns Lake and District Chamber of Commerce on May 12, 2009 explains how CORE BioFuels Inc (CBFI) and Lakes Timber Health and Salvage will work together to turn wood waste into fuel. Construction on a biofuel plant will soon begin that will produce environmentally clean gasoline from the wood waste currently being under utilized in the area.

“The gasoline would be able to come straight out of our plant and be put directly into your cars and trucks, it will be high octane, clean, non contaminated fuel,” George Stanko, president of CBFI said. “Our gasoline will meet the American Society for Testing and Materials standards, and is perfectly safe for your cars, it is greener to burn in your cars because its components come from a tree.”

Stanko went on to explain, “Any waste wood source such as stripped bark, low grade waste and residues, brush and trimmings, pine beetle damaged wood, pallet wood, old planking, burnt wood from forest fires, waste wood from mills, wood can be in a log form or ground up, if you can get it on a trailer and get it to us we can use it. Any species of wood that is not treated or that does not have nails in it is fine, if it is clean and it is wood it can go in. If we can gasify it we can use it.”

“We will be the place of last resort for wood sources, we don’t want to compete for wood sources, we want all the wood that nobody else wants, we want your worst quality stuff, and there will not be a piece of fibre that does not have a home,” he continued.

“We will use 250,000 metric tonnes of beetle damaged wood annually,” noted Marvin Strimbold from Lakes Timber, jokingly calling the gasoline ‘beetlejuice’ because of its utilization of pine beetle damaged wood.
In terms of what waste product will be left over from the production of the gasoline Stanko explained, “Ash, which will be land fillable, but we will be looking for other opportunities and uses for the ash.”

The Burns Lake group says they are actively seeking fibre within an 80 mile radius of the plant, and are looking to develop a partnership with the Hampton Group, the owners of Babine Forest Products and Decker Lake Forest Products, and would also like to develop partnerships with other mills in the area to utilize the waste wood currently being burnt in the beehive burners.

Canadian Housing Starts

Canada’s housing starts dropped in April, with most of the decline said to be occurring in the condominium segment in Ontario.

The Canada Mortgage and Housing Corporation reported that the seasonally adjusted annual rate of housing starts fell to 117,400 units in April 2009 from 146,500 in the previous month.
The seasonally adjusted annual rate of urban starts fell 24 per cent to 96,800 units in April. Urban multiple starts decreased 32.7 per cent to 54,700 units, while urban single starts edged down 8.7 per cent to 42,100 units in April.

CMHC said April’s seasonally adjusted annual rate of urban starts increased one per cent in BC, but declined 44 per cent in Ontario, 16 per cent in Atlantic Canada, 7 per cent in Quebec, and three per cent in the Prairies.

Japanese Housing Starts 2008

Housing starts in Japan rose 0.3 per cent for fiscal year 2008 (April 2008 through March 2009), to 1,039,108 units. The building rate matched 2007, when housing starts plunged after new building codes were put into effect.
Despite the slight increase year-on-year, home building in Japan was down 14 per cent compared to average annual starts for the five years from 2002 to 2006.

Units built for sale wer down 3.5 per cent from 2007, of which condominiums were up 3.1 per cent, the first increase in two years. Detached units built for sale were down 12 per cent from one year earlier. Compared to the previous five year averages, units built for sale were down by almost 24 per cent.

Wood based unit construction decreased by 2.6 per cent, while 2.4 units were up by 4.8 per cent and prefabricated units were up by 1.2 per cent.

Meanwhile sales in the Tokyo metropolitan area of units built for sale were up since December. Analysts predict the local real estate market will pick up in June and July.

A major realty company reported twice as many sales in January 2009 compared to the previous month.

Federal Canadian Funding to Forestry Communities

The Community Adjustment Fund will deliver a total of $1 billion over two years to local economies throughout Canada. While in New Westminster, BC, Minister Raitt announced that British Columbia’s share of this funding will be $125.2 million.

Meanwhile, the town hardest hit by the forestry downturn is already lining up to get some of the new federal aid for BC resource communities.With all six of its sawmills closed, and 1,000 jobs lost, Mackenzie plans to use its share on community projects.

About 200 Mackenzie workers have either lost their Employment Insurance, or could see it shortly expire, and are looking for any kind of work. Waycheshen wants 70 per cent of the project funds to go directly on wages.

Canadian Federal Funding

Projects to be funded could include reforestation activities, investments in machinery or equipment, demonstration of new mining technologies and initiatives to improve market access for products.
Regional allocation of the $1 billion funding is broken down as follows:

  • Atlantic Canada $100.4 M
  • Quebec Region $211.6 M
  • Ontario Region $348.9 M
  • Western Canada $306.3 M
  • Northern Canada $32.8 M

A community will be eligible under this initiative if its population is 250,000 or less and it has both experienced major layoffs and there is a lack of alternative employment locally, or has had a 20 per cent increase is EI beneficiaries in the past year.

“A lot of communities indicated they wanted help in firefighting, forest-fire prevention [and] in clearing deadwood from the mountain-pine-beetle infestation,” said Raitt.

Resource communities such as Prince George, Quesnel, Port Alberni and Campbell River are expected to apply.

Canadian Pulp Mill Tax Credit?

The Canadian paper industry is calling for speedy government action to counter a hefty American subsidy they say could be the final nail in the coffin for many struggling Canadian pulp mills.

The tax rebate is wreaking havoc on markets in an already fragile economy by lopping $220 US a tonne off American pulp costs, about one-third of their total production costs. The cost of a Canadian program has been estimated by industry analysts at $1.8 billion.

Meanwhile, US President Barack Obama’s new budget plan will see the end to the pulp mill tax credit loophole. The White House is proposing to immediately shut down the loophole that allowed the pulp mills to qualify that are already burning an alternative fuel.

May 18, 2009

Pulp and Paper Markets Globally

The Pulp and Paper Council hosted their annual International Pulp Week this week in Vancouver. Pulp producers, traders, stockers, transporters as well as investors and analysts gathered to discuss recent major changes in the pulp and paper industry.

Presentations were made showing the latest figures for pulp and paper production and demand, as well as forecasts for the pulp industry globally and the world economy.

International Pulp Week

The Pulp and Paper Products Council’s (PPPC) annual conference was held in Vancouver, Canada, this year. Pulp and paper, producers, buyers and sellers as well as investors and analysts from around the globe gathered to discuss the latest changes to the industry and what is to come for the future.

All were in agreement that China is rapidly becoming a major customer, while Brazil’s production is expected to climb in the years to come.

Another common topic was the emerging biomass fuel industry, which is expected to compete with pulp mills for their main source of fibre, sawmill residuals, into the long term.

The global pulp production industry is undergoing a fundamental shift. Due to developments in technology, high-quality, long-fibre northern bleached softwood kraft (NBSK) is no longer necessary to make quality paper grades. Pulp mills south of the equator are able to mix a small percentage of NBSK with Eucalyptus pulp and some recycled fibres to make good quality pulp. Smaller, older (usually at least 25 years), pulp mills in North America, and to some extent in Europe, with no meaningful capital investments in the past two decades, will simply not be able to compete with brand new pulp mills in emerging markets. Coupled with fast-growing fibre, and energy and labour subsidies or discounts in those regions, the obvious conclusion is that traditional pulp mills north of the equator must either adapt or die.

In terms of consumers, China has doubled its market share to 20 per cent of world demand since mid 2008. It was largely acknowledged by all in attendance at the conference, however, that this surge of pulp buying in China is simply a function of stock building in the face of recent sharp price reductions. Those pulp orders are either currently “in transit, with traders or with customers but not yet consumed” according to the PPPC. In other words, that increase in pulp purchased has gone into inventory. The rate of pulp buying in China is not expected to continue rising at this pace, in fact some of the volume recently purchased will likely find its way back onto the open market when pulp prices rebound.

There was also a lot of talk about recent mill closures. The number of pulp producers globally has been reduced by 25 per cent in the past four years. Those reductions were almost entirely among North American and Western European, so-called traditional producers. Expectations are that even when pulp demand rises, a sizable number of these mills will not come back online. New pulp mill building has stalled, with previously announced projects either delayed indefinitely or cancelled outright. All but one of these projects were in emerging market regions.

Fisher International Inc. used very sophisticated computer models to demonstrate that it is “possible that 1.8 million tonnes of NBSK and 2.1 million tonnes of hardwood pulp will come off the market in the next three years”, with most of this expected to come from North America. At the same time, forecasts show that “inventories, prices and operating rates will rise sharply into 2011.” The business of making pulp is moving from the north to the south, where market pulp production is likely to stay.

Figures gathered by the PPPC showed that North America shipped 82 per cent of pulp production capacity in 2008, while Latin America was very close to 100 per cent. Meanwhile pulp demand fell 22 per cent globally, matching the drop in demand for paper almost exactly. Demand for pulp from Japan fell 28 per cent in 2008 while demand in North America and Western Europe fell 19 per cent collectively. Chinese demand was up 53 per cent, bringing the figure for global demand down 7 per cent in 2008 from 2007. The PPPC then forecast that 6 million tonnes of market pulp will be taken out of production between 2008 and 2011, and a further decline in softwood pulp production of 1.6 million tonnes into 2013.

Wood Resources International (WRI) figures showed that fibre costs almost doubled from 1998 to 2007, then fell back sharply. There will be an increased supply of wood chips into 2011 when the lumber market recovers. Despite fibre costs almost doubling in the US south in the past 20 years, that region still has some of the lowest wood costs globally, followed closely by British Columbia. In fact, according to WRI data, chip costs in eastern Canada are almost double that of the west. WRI also found that there are “major battles in Europe over chips and other sawmill residuals between biomass energy plants and traditional users like pulp mills.” In addition, “competition from the biomass sector in the US will continue to drive up chip prices.” Expectations are that “whichever sector has the most buying power at the time will be the winner over fibre sources.”

The picture for printing and writing paper is similar. European total paper exports were down over 41 per cent from 1Q 2008 to 1Q 2009, according to Burgo Group SpA. If this trend continues into 2010, there will be another 2 million tonnes less of paper demand. Another presenter, Fisher International Inc., found a decline of 10 million tonnes in global paper demand from 2007 to 2009, an 18 per cent reduction. This loss of demand brought operating rates globally at paper mills down to 80 per cent. From 1Q 2008 to 1Q 2009, paper imports into Asia (excluding Japan) were down 50 per cent, and imports into Europe were down 23 per cent, which is close to 2 million tonnes. Surprisingly, paper imports into Japan were up 31 per cent for the same time period. Given that operating rates at current levels are not sustainable, according to the Burgo Group presenter, there will be a “1.2 million tonne net increase in capacity into 2011, almost entirely in the emerging countries. Capacity in North America and Western Europe is expected to continue declining.”

Attendees were very concerned about the new US pulp mill tax rebate, or “black liquor” credit. Jimmy Lee, CEO of Mercer Int., ventured a theory that the “fuel tax rebate will affect southern and hardwood producers rather than NBSK, as those mills are already efficient. As long as there is no restart of old US softwood mills, the fuel credit will make a few companies more competitive but otherwise not bring significant change” to the industry. Lee added that “the fuel subsidy should be reflected in the price of paper to consumers, considering that taxpayers are funding the tax credit.” Mark Wilde of Deutsche Bank suggested that, if the tax rebate to pulp mills is allowed to continue, it will be reduced greatly.

A joint presentation by the Chicago Merchantile Exchange and FOEX pointed out that any growth in pulp usage for North America and Western Europe will be outside of the paper industry, specifically in “non-wovens” such as diapers and high alpha pulp for textiles and other uses.

Coalition Complaint Against Canfor

A press release late Wednesday by the US Coalition for Fair Lumber Imports claims that the BC government violated the softwood lumber agreement by allegedly subsidizing timber prices to Canfor’s sawmill in Mackenzie. The province adjusted timber pricing to make it more in line with other Northern Interior BC forest districts, potentially reducing the fees by millions of dollars to Canfor.

“While initially claiming that these latest SLA inconsistent stumpage reductions were as a result of “anomalies,” media reports have clarified that Canfor simply pressured for, and received, “concessions on stumpage” rates from the provincial government,” states the press release.

California Wildfires

A fire erupted Tuesday on the slopes above Santa Barbara, CA. On Wednesday, gusting winds had stirred the stalled wildfire to threaten 2,000 homes. By Friday, the stubborn brush fire that consumed 75 foothill homes above the coastal town raged with renewed ferocity for a fourth day, forcing at least 20,000 people to flee as it advanced on the city and two nearby communities.

The fourth wildfire to strike the affluent, picturesque Santa Barbara area in two years had charred some 3,500 acres (1,400 hectares) by daybreak Friday.

The unusually early start to California’s fire season was due to very dry fuel littering the landscape.

“We saw the fire spread laterally across the top of the city and the fire front extend to almost 5 miles (8 km) last night,” said city Fire Chief Andrew DiMizio.

As of Friday morning, more than 20,000 area residents were ordered to leave their homes and nearly 17,000 others were warned to be ready to flee at a moment’s notice, county officials said. That amounts to over a third of the population of Santa Barbara, located 90 miles (145 km) northwest of Los Angeles.

Joe Waterman, the state fire commander on the scene, told reporters he expected the force of 2,300 firefighters to get some additional help later in the day from the state’s specially equipped water-dropping DC-10 jet. Firefighters’ aerial arsenal already includes several smaller planes and some 15 helicopters.

California Governor Arnold Schwarzenegger declared a state of emergency Tuesday. The cause of the fire is being investigated.

US Pending Home Sales

Pending sales of previously owned homes rose for a second straight month in March, while construction spending edged higher, according to reports on Monday that suggested moderation in the long housing slump.

US Home Sales

The reports lent support to the view that the recession, now in its 17th month, was close to finding a bottom.
Prices, however are still falling. The median price of a new home sold in March dropped to $201,400, a 12 per cent decline from a year earlier. The demand for new homes appears to be recovering faster than that for previously occupied homes. In March, sales of existing homes fell 3 per cent to an annual rate of 4.57 million from a downwardly revised pace of 4.71 homes in February, the National Association of Realtors reported.

A report from the U.S. Commerce Department showed construction spending rose 0.3 per cent in March, the first increase in six months. Non-residential construction rose 2.7 per cent in March, the biggest advance in nine months. It marked the second straight increase and was led by gains in office construction, hotels and power plants.

MacKenzie Pulp Mill Offer

Mackenzie Timber Group, a wholly owned subsidiary of Range Gold Corp, has entered into an option to purchase the Worthington Mackenzie pulp mill.

The offer is for a cash payment of $12 million, and as much as $33 million in shares of Range Gold. The option is good until May 1, 2010.

Worthington Properties purchased the mill for $20 million in 2008 from bankrupt Pope & Talbot, but when Canfor cancelled the mill’s wood chip supply contract, the purchase price was reduced to $6.5 million.

In other news, Worthington Properties is facing the court-ordered sale of their fire-damaged building in Edmonton, AB. The building is an historic Edmonton landmark. In March it was damaged by arson, and is expected to sell as part of a court-ordered sale for less than half of what is owing on the property.

May 10, 2009

British Columbia Provincial Election

BC goes to the polls on May 12, 2009. Madison’s will feature interviews with current Minister of Forests and Range Pat Bell (Lib – Prince George North) and current Forests Critic Bob Simpson (NDP – Cariboo North).

This week Bob Simpson discusses the flaws of the current stumpage and tenure systems in British Columbia, as well as his plans for revitalizing the forest products industry.

NDP Forests Critic Bob Simpson

First elected as MLA for Cariboo North in 2005, Bob Simpson has been deeply involved in British Columbia’s forest products industry since. Based in Quesnel, Simpson is well aware of the recent upheavals and difficulties faced by those involved, either directly or on the periphery, from loggers to truckers to mill workers, silviculture workers and beyond. In a lengthy interview Simpson stuck close to what he considers to be the central issues; stumpage and tenure policy, silviculture practices, and biomass fuel.

The recently completed Forestry Roundtable heard one consistent comment in its travels through the province, according to Simpson, that there is “a desperate need to reform tenure and to reform stumpage.” As these comments were heard by loggers, forestry communities, First Nations, silviculture workers and independent sawmills, Simpson sees this as an opportune time to “restructure the forest industry. The current tenure system is broken and can’t be tinkered with,” said Simpson.

The market-based timber pricing system set up by the Liberal government in BC in response to complaints by the US Coalition for Fair Lumber Imports put BC Timber Sales in an awkward position, explained Simpson. “There is a conflicting mandate from the Province, of both setting a benchmark for a market-based pricing system and generating maximum revenue for the Crown.” The result has been that those harvesting timber have not “been disclosing the whole profile of the cut to include lower and higher grades, thereby skewing towards the higher value to maximize return.”

In addition, said Simpson, “higher value stands are not moderated when no one bids. Zero bids are not entered into the system. There is no correction.” The feedback Simpson has been getting from those involved in harvesting is that the “market priced system is a mess.”

In terms of tenure change Simpson explained he wants to embark on “consultation with land owners [BC residents], as the true shareholders, who are getting less return” on forest resources than it is worth. When pressed for what solution he has in mind, Bob Simpson outlined a plan in which “50 to 60 per cent of timber needs to be free from direct manufacturing control. The province needs to move toward area-based harvesting” which would have companies “vested in using all the resources.” When current five-year licenses expire, Simpson would “not renew them right away” but also “not redistribute them right away.” His plan is to “bring the Ministry of Forests back into land-based management, into a stewardship role rather than as gatekeepers.” Under the current system, said Simpson, “BC residents are getting short-changed” on forest revenue.

For Bob Simpson, problems with the tenure system are coupled very closely with stumpage policy. He cited that “over the past two years the BC government allowed companies to abuse the $0.25 stumpage” that had been intended to encourage harvest of beetle-kill. According to Simpson, there is indeed “green wood being harvested [in the Interior] because of how scaling works and how scaling is audited, allowing kiln drying of logs to force a lower grade for stumpage.”

Bob Simpson pointed out that the Coalition for Fair Lumber Imports is coming after BC next. This claim has been already confirmed to Madison’s by the Coalition in the April 03, 2009 issue of the Reporter, in response to perceived breaches to the 2006 Softwood Lumber Agreement. The Coalition’s list of grievances are clearly itemized here http://www.fairlumbercoalition.org/doc/violations_summary.pdf . Simpson estimated that punitive damages in the amount of $500 million could be claimed by the Coalition against BC lumber companies.

According to Simpson, on the coast, the dominance of high-grade cedar logging and heli-logging are causing “two-bit” stumpage. Companies are engaging in “green profile harvesting”, yet there has been “no change, the same amount of Spruce and Fir is being cut” as in earlier years. Simpson maintains that the average is skewed. In the same regard, said Simpson, for the 2007-2008 season in Quesnel “a 20 per cent increase in harvest brought a 60 per cent decrease in creating wood residue.”

The way Bob Simpson sees things, “now is an end-game for an industry poorly positioned for the collapse of the US housing market due to government policy.” The solution, the way to move to a profitable future for everyone, is to “engage in a whole new industry to include bio-mass in creating a fossil fuel substitute.” Simpson proposes to “work with the existing industry, which would still have access to saw logs, but no guarantee to the land base.” Simpson explained, “If we revitalize existing industry and start new industry” by continuing to supply saw logs on the open market but “restrain and restrict log exports through incremental taxation” there will be no market for US industry looking to buy cheap BC logs. In short, by fostering partnerships with emerging industry, which doesn’t want saw logs but rather the wood residue, the traditional forest industry will also be helped.”

Use of a capital tax, various incentives, and an environmental review process will “shift the taxpayer to fostering new industries, instead of spending $100 million on selling better 2×4’s,” Simpson explained. Recent reports by a couple of independent agencies have estimated that in the past five years there has been 17.5 million cubic meters of usable wood left behind by forest operations. Simpson thinks the figure is accurate as he “gets calls all the time from locals of very low utilization.” Simpson points out further that creating products from biomass residue “can never be economical if companies must go back. It must be a one pass system in order to be profitable.” Thus the current system should be adjusted with an eye towards new industry because “it is unfair to make companies absorb the cost of bringing it all in when all they want is pure sawlogs.”

Bob Simpson feels that the current BC government missed an opportunity for BC to take advantage of the rising home renovation market in the US while the home building downturn continues. “Because of forest policy and deliberate choices made in 2003, high volume-low cost mills killed the value-added industry,” said Simpson. He cited examples of BC lumber companies who “have customers, have the technology, have the ability” to sell value-added and remanufactured products into the US right now but “can’t get wood.”

Nova Scotia Wildfires

Brush fires burning around Halifax are now under control and some residents are being allowed back into their homes. Officials say the 800-hectare fire has destroyed seven homes and caused damage to at least a dozen others. An estimated 1,000 people were out of their homes Friday morning. No major injuries have been reported.

The fire started Thursday afternoon in the Spryfield area of Halifax. “We’re describing the fire as being held,” said provincial spokesman Paul Schurr. “We don’t have control lines over it to get it contained.” The province is using five helicopters to fight the fire. Waterbombers were sent from New Brunswick Thursday but have since gone back due to safety concerns with people still in the area. More than 100 firefighters were battling the blaze.

Cooler weather and higher humidity helped slow down the progress of the fire, officials said. The remnants of downed trees and brush from hurricane Juan in 2003 helped ignite the fire, said Lloyd Currie, a spokesman for the Halifax fire service. “The leftovers from hurricane Juan have been an issue,” Currie said. “They have been an issue from the start.”

US Commercial Real Estate Mortgages

Delinquencies on loans backing CMBS (commercial mortgage-backed securities) accelerated in April, jumping to levels nearly five times those of a year ago, according to Trepp, LLC. Loans on office, retail and multifamily buildings that are at least 30 days past due rose 0.48 percentage point to 2.45 per cent last month, Trepp said in a report on Friday.

US Mortgage Issues

Commercial real estate is following the slump in residential property as the US recession reduces land values and the revenue needed to pay debt. Delinquencies could rise to 4 per cent this year and 8 per cent in 2010 amid lower cash flows and a lack of funding, according to Citigroup Inc.
In other news, US house prices fell in April, but it was the first time in 16 months that the decline didn’t set a new record.

Behind the scenes, the market is still deteriorating. As JP Morgan’s finance boss Michael Cavanagh admitted this month, “until home prices stabilise and unemployment peaks, we’ll continue to be under pressure for losses on our balance sheet.”

“Virtually every investment manager I speak to says that until these [mortgage] securities can be properly valued, a floor cannot be put on the banks’ losses”, says the Guardian’s Patrick Collinson. “And they can’t be properly valued until US property prices stop falling”.

The problem is a growing supply of ever-cheaper properties. Mr Obama came up with a mortgage relief plan to help some distressed borrowers earlier this year. But now that the banks have worked out who’s going to get help and who’s not, they’ve kick-started foreclosures again.

In other words, repossessions are soaring once more. More than 800,000 properties received a “default of auction” notice, or were seized, in the first quarter of 2009, the highest since records began four years ago, according to Bloomberg.

Paper and Newsprint

Inventories at all US users of newsprint declined 4.5 per cent in March from a month earlier to 679,000 metric tons from 711,000 tons in February and was off 15 per centfrom the 799,000 a year ago. This might be supportive if it weren’t for the fact that total US consumption fell 28.5 per cent from a year ago, according to the Pulp and Paper Products Council and industry analysts.

Paper and Cardboard

As a result, newsprint price declines accelerated in April with list prices falling by as much as US$40 a metric ton, said Mark Wilde, market analyst for Deutsche Bank in an article in Pulp and Paper NetLetter.

Recently bankrupt Abitibi-Bowater controls about 40 per cent of North American newsprint production, but the highly leveraged firm was having trouble shrinking itself to prosperity with consumption dropping off so sharply.

The shipment-to-inventory ratio, at 50 per cent, is nearly 30 points below the norm, meaning suppliers have a far larger share of the total system inventories than normal, said David Allan, president of Allan Consulting. “And overall inventories are still rising in spite of heroic downtime totals.”

Meanwhile, US corrugated shipments dropped 8 per cent year-to-year in March to 29.05 billion sq. ft., making the first quarter decline in demand at 11.5 per cent, according to data released by the Fibre Box Assn.

Adjusted for two more shipping days this year, average week box shipments of 6.6 weeks were down 16.3 per cent from last March. For the first quarter, average week shipments fell 10 per cent.

Containerboard mills operated at just 77 per cent in the month, according to the American Forest & Paper Assn., and box plant consumption of containerboard rose from February by 250,000 tons, resulting in a combined drop in inventories at mills and box plants by 114,600 tons. Containerboard inventories have dropped by an average 65,000 tons this decade.

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