Russian Timber Imports, Wood Chip Demand, AbitibiBowater Production Cuts, US Lumber Imports, Pope & Talbot’s Mackenzie Pulp Mill Sold, JD Irving Mill Closures, Canadian Timberland Development in China, Forestry Equipment Suppliers, TimberWest Land Sale, US Mortgage Issues
Russian Timber Imports
Russian Timber Imports
News of the proposed Russian 80 per cent export tax on raw log exports earlier this year sent British Columbia lumber companies running to fill the supply gap. Given the ongoing depressed North American lumber market such measures may seem like a good idea, but can only be so in the short term. Denuding the landscape of valuable timber simply to help feed the bottom line temporarily is not likely to be of much help to lumber company financials in the long term. In fact quite the opposite, especially considering current bargain-basement prices. History has proven that allowing the timber to stand, only growing bigger and more valuable, until markets turn around makes more fiscal good sense.
As a result of the implemented and planned log export taxes in Russia, shipments of softwood logs from Russia have declined both to Europe and Asia in 2007 and 2008. In the first quarter of 2008, Russia shipped 44 per cent less to Europe and 15 per cent less to Asia than for the same period in 2007 according to Wood Resources International. Meanwhile hardwood log exports were up by over 50 per cent. During the 1Q 2008, Russia exported less to all of its major trading partners except China, which increased purchases by 14 per cent. Softwood log exports are, so far in 2008, at the lowest level in four years. The unusually high domestic sawlog supply due to declining log exports to Europe has resulted in a great price reduction.
A feud brewing between China and Russia over continued illegal logging in Russia, and a new threat to Russia’s entry into the World Trade Organization due to the conflict in Georgia are drastically changing that country’s wood products sector. Since the end of the 1990s, the Sino-Russian border regions have witnessed a dramatic increase in crossborder timber trade that has made Russia the largest log supplier for China’s expanding wood industry sector. Driving factors include: severe constraints in China’s domestic wood supplies, the availability of rich forest resources in the Russian Far East and Siberia, liberalised trade policies and demand from both domestic and European, Japanese and US markets for low cost Chinese wood products. The current challenges faced by a largely inefficient Russian forestry sector and decentralised Russian forest administration in the context of illegal logging and unsustainable forestry practices are widely viewed as having reached serious dimensions.
Chinese companies have entered the Russian forestry sector, introduced greater efficiency and proved competitive. This involvement has also opened doors for Chinese businesses to inadvertently or intentionally participate in illegal activities throughout the supply chain. In addition to timber harvesting, Chinese companies are involved as intermediaries in the commercial log depots and control the wholesale timber market in some parts of Russia. Chinese businesses have also increasingly invested in wood processing in Russia, partly in response to the adjustment of the Russian export tax on logs.
Most recently, there has been a trend towards vertical integration for Chinese companies, with intermediaries and wood importers attempting to extend their business to every node of the trading network. On the Chinese side of the border, preferential tax policies and infrastructure investment have spurred a rapid development of the timber processing industry with private sector processing mills replacing state-owned timber processing factories.
Domestic wood products companies in Russia and European environmental groups alike are urging changes in policy to promote responsible timber trade within this context of commodity chain transformation by recommending the following measures:
• Establish inspection sites near the commercial depots;
• Enhance the effectiveness of administrative inspection through setting-up of an integrated monitoring system;
• Localise international forest certification schemes;
• Chinese and Russian government agencies to provide joint guidance on documentation that could be used by traders to establish a chain of custody for forest products;
• Establish a China-Russian multistakeholder working group to monitor the timber trade and exchange customs data in a timely manner; and,
• Chinese government to revise its procurement policy to favour legal and sustainable wood.
In response to critics the Russian government announced in March of 2008 that the Federal Customs Service reduced the number of customs checkpoints that will process unfinished timber exports from 668 to 128 with proper technology for assessing timber cargo in order to reduce illegal logging. Kindling, sawdust, milling byproducts, pulp and other rough forms of wood were subject to the new procedure as well. Finished wood products will be handled as before. The Russian Ministry of Natural Resources reported that 7 million cu. m. of wood was cut illegally in the Russian Far East last year and annual illegal logging throughout the country tops 21 million cu. m. annually.
An added complication to Russia’s burgeoning efforts to gain a foothold as a major global wood products suppler is the recent outbreak of conflict in Georgia. Under WTO rules a candidate country must reach agreement with all 153 members, represented by a working party which any existing member can join, as well as agreeing separate bilateral deals with any member that seeks them. Russian accession to the WTO depends on its settling outstanding issues such as export duties on timber, farm subsidies and the role of state-controlled enterprises such as gas producer Gazprom. Georgia objects to Russia’s support for rebel regions South Ossetia and Abkhazia, saying among other things that it cannot control customs on Russia’s borders with the regions. As a result it is blocking formal talks on Russia’s accession while allowing informal negotiations to continue.
Wood Chip Demand
Tightening softwood chip supply in Asia and increased Japanese demand caused chip prices in Australia, the world’s largest exporter, to rise dramatically in 2008. For the first half of 2008, Australian export prices for wood chips were at US$150 per oven-dry metric ton (odmt), 45 per cent higher than in late 2006, and almost a doubling since 2003 according to Wood Resource Quarterly (WRQ). The average global conifer wood price reached a new all-time-high of US$112/odmt for the same time period, which was up 11 per cent from 2007 and 26 per cent from two years ago.
Chips and Sawdust
Wood fibre prices, the major cost component when producing wood pulp, increased in practically all major pulp-producing regions around the world in the 2Q 2008 as a result of a continued weakening of the US dollar against most major currencies and due to higher transport costs for both pulpwood and wood chips, according to Wood Resource Quarterly (WRQ). As Australian softwood chips are perceived to be of lower quality than North American species by some pulp companies in Japan, the rising cost of Australian wood chips resulted in US suppliers increasing their market share from 25 per cent to 32 per cent of the total Japanese imports through 2007. With the slump in the lumber markets in North America and Europe, the supply of residual chips from sawmills continued to decline, bringing increased competition and higher reliance on the more expensive wood fibre from roundwood. In addition, competition from Europe, Brazil, Russia and Australia caused softwood pulplog prices to fall between 1-6 per cent from the previous quarter, depending on the region. A Wood Resource Quarterly (WRQ) report states that the higher cost of producing pulp the past few years has to a large extent been passed on to wood pulp consumers. Market pulp prices have almost doubled since 2003 and are currently at the highest level in 13 years.
AbitibiBowater Production Cuts
AbitibiBowater Inc. embarked on the first stage of a plan to remove one million tonnes of newsprint capacity from its North American operations by cutting production at its Grand Falls-Windsor, NL plant. In an effort to avoid closing the paper industry’s highest-cost facility on this continent, the company will cut up to 150 of the 450 workers. Other measures being taken to make the plant profitable again include a reorganization of its woodlands division, contracting out silviculture operations, and closing the chip room and the manual cut and bunch classification division. Wood will be chipped off-site.
The world’s largest newsprint producer, with 15 per cent of global capacity, and eighth-largest publicly traded pulp and paper company, AbitibiBowater reported a 2Q loss of US$25 million at the beginning of August. After the curtailment announcement, AbitibiBowater shares gained 23 cents to $6.91, an increase of 3.44 per cent in afternoon trading on the Toronto Stock Exchange. The goal behind reducing newsprint supply was to push through a US$20 per tonne price increase per month for the rest of the year, a move that would take newsprint prices to $820 per tonne. Currently US newsprint prices are at $720 per tonne, a 12-year high.
US Lumber Imports
Farm Bill Amendment
Just when Canadian wood products companies thought the terror and confusion of the Softwood Lumber Agreement was behind them, yet another complicated process has been implemented. During the summer of 2008 a massive Farm Bill was passed in the US House of Congress. As is commonly done with such legislation in America, a number of Bill proposals were added at the final moments (a process known as “pork barelling”) which effectively added cumbersome reporting requirements to US Customs paperwork on lumber imports. While inclusion of an “Export Price” and an “Importer’s Declaration” is required by the Bill with regard to softwood originating from all countries, Canada was clearly the target of this legislation. Only after a demand by Canada that it not be the only country subject to the new requirements were other importing countries included.
Bearing trademark signs of influence from the very powerful lobby group, the Coalition for Fair Lumber Imports, and proudly championed by Montana Senator Max Baucus who is a vocal supporter of limiting Canadian lumber coming into America, the Softwood Lumber Act of 2008 (not to be confused with the Softwood Lumber Agreement of 2006) requires additional data reporting on US Customs documents accompanying lumber imported into the United States. Concerns by the US lumber industry that Canadian producers were under-reporting the value of lumber exported to the US when filing their Export Permits and remitting the applicable Export Surcharges prompted the action. Unfortunately the terms of the Act, written into Law on June 18, 2008, were impossible to implement by the prohibitively early deadline of August 18, 2008. Customs brokers and exporters alike across North America scrambled to decipher to wording. Calls and emails to US Customs and Border Protection, under the Department of Homeland Security, as well as the International Trade Administration for clarification heeded little results.
Although these agencies tried to be helpful, apparently they themselves did not grasp the portent of their own directives as mandated by the Department of Commerce, and how their instructions to Trade were in conflict with provisions of the 2006 Softwood Lumber Agreement. A small broker out of Blaine, WA, Jones & Jones Customs Brokers and Trade Consultants finally managed to make some headway with relevant agencies that confusion was two-fold: first impractical language regarding the three new Customs entry requirements, “Export Price”, “Estimated Export Surcharge” and “Importer’s Declaration”; and second, the apparent dismissal of the $500/mfbm “cap” on lumber imports dictated by the Softwood Lumber Agreement of 2006. One set of instructions even contradicted earlier instructions issued the very same day.
Michael Jones, president of Jones & Jones explained to Madison’s that the new Softwood Lumber Act of 2008 was simply a matter of the US government attempting to exercise closer control over the valuation data involved with these imports. The US Department of Commerce felt it needed to reconcile “huge differences in sale price vs. export price”. There was suspicion that the actual Export Surcharges being paid by Canadian exporters were much lower than they should be. As Jones explained, the Department of Commerce is already allowed, under the terms of the SLA 2006, to ask DFAIT to confirm via audit all prices reported and surcharges remitted. However, it seems that the US lumber industry, or more correctly the members of the Coalition for Fair Lumber Imports, did not trust the Canadian figures being declared, and demanded closer scrutiny.
Unfortunately the language used with regard to how the new requirements were to be facilitated, and the system put into place to capture the data, not only lacked the required clarification in order to ensure compliance, but was also counter to the SLA of 2006, according to Jones. After much effort and communication US Customs, Jones finally managed to explain the discrepancies. The August 18 deadline has been extended 30 days to September 18 in order to give exporters and brokers a chance to update their systems.
Trade disagreements between Canada and the United States go back to before either country was founded, with lumber and wood products being among the most legendary. When home building activity in the US is high, demand for Canadian lumber rises accordingly. However the US lumber industry does not like to see wood products crossing the border freely, thus various efforts to impose quota restrictions or duties have historically been in place. Conversely US home builders, realtors and mortgage lenders campaign to have restrictions removed or reduced, but generally to little avail. When US home building activity is low, as it is now, American lumber producers work to have Canadian lumber imports restricted further. Statistically speaking, the US lumber lobby is not comfortable with Canadians having more than a 33 per cent share of their lumber market.
While it seems a bit hypocritical to at both welcome Canadian lumber when demand is high and try to restrict imports when home building decreases, and it may well be so, there really isn’t much Canadians can do about it in practical terms. As my predecessor Madison’s publisher of 35 years, Laurie Cater, now retired, used to say when we would get bogged down in the details of some lumber dispute or another, “It’s their industry; they can do whatever they want with it.” And so they will. Full explanation of the new lumber duty entry form requirements are available on the US Customs website here http://www.cbp.gov/xp/cgov/newsroom/ alerts/alert_softwood_lumber.xml, with explanation of the extended deadline here http://www.cbp.gov/xp/cgov/newsroom/ news_releases/08192008_2.xml.
P&T’s MacKenzie Pulp Mill Sold
This week the BC Supreme decision to uphold the chip supply contract between Canfor’s sawmill in Mackenzie and the bankrupt Pope & Talbot’s closed pulp mill paved the way for the sale of the pulp mill to go through. Edmonton based real estate company Worthington Properties made a surprise bid for the mill on Monday. The chip supply agreement with Canfor was crucial in completing the deal.
Canfor closed its Mackenzie sawmill on June 10 due to a depressed lumber market. The company claimed that its consent is required for the fibre supply agreement to be assigned to a new owner but was denied in the court ruling. Canfor lawyer Shelley Fitzpatrick hinted at the possibility of an appeal over the agreement to supply 200,000 tonnes of chips to the pulp mill. The fibre supply agreement could impact the potential purchase price by as much as $13 million. Should receiver PricewaterhouseCoopers decide not to exercise an option not to transfer the fibre supply agreement, the sale price of the pulp mill will fall from $20 million to $6.5 million.
Despite the uncertainty, Worthington president Dan White is expected to arrive in Mackenzie today to meet with former managers and employees of the mill to discuss a start-up strategy.
J.D. Irving Ltd. has announced the closing of a sawmill in Prince Edward Island and another in Maine. The company will try to place the 36 employees in P.E.I. and about 44 workers in Maine who are facing layoffs at its other facilities. A fire on Monday that destroyed the planer mill in Maine expedited the closing of that operation, which had been on reduced shifts for the past three years. The P.E.I. mill had been curtailed since September.
The number of sawmills in North America has continued on a downward decline since 1995, while the size of the remaining plants continues to increase, according to a recently updated study by economist Henry Spelter with the American Forest Products Laboratory. The number of sawmills has dropped to 990, down from 1,311 in 1995, the first year the study analyzed. At the same time, the average output of sawmills has increased — climbing to 70 million board feet from below 50 million board feet.
Canadian Timberland Development in China
Mississauga, Ontario based Sino-Forest Corp. stock gained 17 per cent this week after reporting glowing 2Q results, including net income that soared by 98 per cent, and earnings per share that jumped 82 per cent year on year. The company recently purchased 200,000 hectares of timberland in China, and has very ambitious plans for the future.
On August 11 a company statement announced the signing of an agreement to acquire 200,000 hectares of non-stateowned plantation through Sino-Panel (Asia) Inc., its wholly-owned subsidiary. “The price is not to exceed US$51.40 per cubic meter (m3) over a 10-year period. The plantations include mature pine, Chinese fir and eucalyptus trees with an estimated aggregate yeild of 20 to 24 million m3 of wood fibre.”
Increased demand in China for logs and wood fibre as the economy expands prompted Sino-Forest’s expansion. The Canadian company also plans to buy new timber stands as the Chinese government moves to nearly double high-yield plantations to 13 million hectares by 2015. “We will continue to focus on acquiring standing timber and improving our operating practices,” chief executive Allen Chan said in the statement. The company’s average selling price for logs rose 7 per cent, excluding currency appreciation, compared with a year earlier, he said.
Sino-Forest expects wood-product prices in China to increase by as much as 10 per cent this year as Russia increases tariffs on exported logs and as reconstruction intensifies in Sichuan following that province’s earthquakes in May, the company said. Recent stumpage acquisition agreements in Guanxi and Fujian provinces give the company a higher assest valuation, making it attractive to investors.
Brokers and analysts on three continents are issuing strong “buy” ratings. However, some caution is advised as log price trends in China are already far higher than they are in the U.S. As well, there is potential for costs to increase as volumes ramp higher in Hunan and Yunna, and for losses to occur as the company invests more in wood products and manufacturing.
Detractors express concern that there is a fundamental difference between natural forests (in Yunnan having substantial non-timber forest product value) and plantations (commonly referred to as green deserts).
Forestry Equipment Suppliers
Just as Modern Machinery completed its takeover of recently bankrupt Madill Equipment, quarterly results were released for Finning International Inc. and Deere & Co. Finning’s 2Q net income was US$67 million, compared with earnings of US$74 million from one year ago. The company stated that “despite the challenges of a much stronger Canadian dollar, the dealership operations exceeded Q2 2007’s record revenue levels, producing the highest revenue on record for any quarter in Finning’s history.” Canadian 2Q 2008 sales accounted for US$849 million compared to US$846 from one year ago and US$681 million in 2006.
Meanwhile Deere & Co.’s 3Q 2008 net profit rose 7 per cent from the same period in 2007 to US$575 million as soaring crop prices boosted global demand for agricultural equipment. A year earlier Deere earned US$537 million. Deere released a statement warning that “soaring raw materials prices would pressure profit margins for the current period, sending shares down as much as 12 per cent (US$140 million).” Deere’s shares plummeted the most in 20 years after that company forecast 4Q 2008 earnings to be just US$425 million.
Nanaimo’s Madill Equipment assets were auctioned by Toronto-based Danbury Sales Inc. August 12 after the long-standing forest equipment company declared bankruptcy in April and immediately locked its gates, leaving about 190 employees out of work. Washington- based Modern Machinery, which sells heavy equipment for the forestry industry and others, bought all the rights to the Madill name and product from the receiver, RSM Richter, and will be the worldwide distributor of parts and service for Madill machines. The company has no plans to manufacture Madill parts at the closed facility in Nanaimo.
TimberWest Land Sale
Moving forward with its intention of several years to sell off a portion of its privately owned timberlands for real estate, TimberWest Forest Corp. recently got approval for the rezoning of 166 hectares near the Campbell River airport for industrial purposes. “These lands have the benefits of being next to an expanding airport, having utilities in place, and being located in a very cost-competitive location like Campbell River, which itself is part of one of the most attractive destinations in the world – Vancouver Island.” said John Hendry, Vice President, TimberWest Real Estate. By offering a swap of 480 hectares of what was determined to be superior quality land to be included in the Agricultural Land Reserve, TimberWest has successfully pulled 166 hectares out of the ALR with the intention of selling it in parcels.
Newly appointed British Columbia Forest Minister Pat Bell toured the Campbell River area to review logging practices on Crown land and privately owned timberlands. In conjunction with the tour the Minister met with the local Forestry Round Table to discuss public outcry over the province’s decision to allow private lands to be taken out of tree farm licences – something which the Association of Vancouver Island Coastal Communities has asked Premier Gordon Campbell to review.
Bell said he intends to try to make sure the voices of local communities are heard when forestry decisions are made, but he does not think the TFL decisions are likely to be changed. Port Alberni Mayor Ken McRae said communities were left out of the decisions to withdraw private lands from TFLs. Meanwhile Western Forest Products is moving forward with development plans of its own timberlands being sold as real estate. The company is pushing ahead with building roads meant for a housing subdivision, even though the Capital Regional District insists it doesn’t have the right to do so. However, Western Forest Products replied that it does not need a development permit for road building as the land is still private managed forest land and comes under provincial regulations, not CRD rules. That does not mean the roads are being built for forestry purposes. “If the subdivision application is not approved, then we will likely use these roads for part of our future logging operations, but there’s no question that the preparation work underway now is absolutely for subdivision purposes” said the company’s chief operating officer, Duncan Kerr.
The relationship between the CRD and Western has been strained since the regional district rezoned forestry land in the southwest corner of Vancouver Island to 120-hectare-minimum lot sizes. That move restricts the number of houses that can be built.
US Mortgage Issues
Economic reports out of the United States, particularly regarding 2Q 2008, continue to shock and alarm analysts. For the 26th straight month, in May, newly delinquent homeowners who put down less than 20 per cent outnumbered those who caught up on overdue payments. The arc of the crisis in subprime loans suggests that the problems in the broader market may not peak for another year or two, according to analysts. “Subprime was the tip of the iceberg,” said Thomas H. Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. “Prime will be far bigger in its impact.” Defaults are likely to accelerate because many homeowners’ monthly payments are rising rapidly
US Credit Crisis
Tax rebate cheques sent out earlier in the year in an effort to bolster spending have mostly been distributed. While the cheques did temporarily increase spending, they failed to generate activity that is likely to carry on even after the cash has cycled through the economy. As the impact of the rebate cheques continues to wear off in the coming weeks, households will be left confronting the same set of troubles that have been dragging on the economy for many months: a deteriorating job market, rising prices for food and gas and plummeting housing values.
What will sting borrowers more than rising interest rates is having to pay interest and principal every month after spending several years paying only interest or sometimes even less than that. Some borrowers could see their payments jump 50 per cent or more, and they may not be able to sell their properties for as much as they owe. The wave of foreclosures is still rising in states like California, where many homeowners turned to creative mortgages during the boom. From April to June, mortgage companies filed 121,000 notices of default in California, up nearly 7 per cent from the first quarter and more than twice as many as in the second quarter of 2007, according to DataQuick, a real estate data firm based in La Jolla, Calif.
Home foreclosure filings rose 14 per cent in the second quarter, the eighth consecutive quarterly climb, up 121 per cent from the same period a year-earlier. “Although much of the fallout from foreclosures is being driven by rampant activity in a few states, such as Nevada, California, Florida, Ohio, Arizona and Michigan, most areas of the country are seeing at least some increase in foreclosure activity,” James J. Saccacio, chief executive of RealtyTrac, said in a statement.