Lumber News Archives: Dec 2011

Climate Change ; Alberta Forest Products Association 3Q ; Canadian Housing Starts ; Texas Wildfire Tally ; Housing Starts, Japan ; Moody’s Downgrades Forestry ;China Home Building ; Madison’s Timber Preview ; Alberta Mountain Pine Beetle Update ; US Construction, Real Estate Data ; Nova Scotia Sawmills ; Global Net Forest Loss ;2006 Softwood Lumber Agreement ; BC’s “Not Sufficiently Restocked” Timber ; US Existing Home Sales ; Conifex Reports

December 19, 2011

Climate Change

As the two-weeks long talks on global climate change wrap up Friday in Durban, South Africa, issues surrounding forestry and forest health seem to have gotten only murkier. One of the topics under discussion at Durban is the role carbon farming and other forestry measures could have in reducing emissions. Forests can capture carbon from the air and act as carbon sinks, thus resulting in a lesser release of global warming causing gas into the atmosphere. Countries in the Cancun Agreement decided on a mechanism where polluting organisations in rich nations can offset their emissions by providing money to protect forests.

At Durban, representatives from almost 200 nations were working on the finance text for forestry until early Wednesday, said lobby group Ecosystems Climate Alliance to Bloomberg BusinessWeek. Those negotiations are part of wider talks on a global climate treaty to succeed the Kyoto Protocol.

And Forestry

There is “considerable disagreement on market mechanism and whether to include or exclude offsets and carbon markets” under the United Nations’ program of Reducing Emissions from Deforestation and forest Degradation or REDD+, explained Donald Lehr, a spokesman for the alliance. There’s “at least five options on the table regarding finance,” he said to Bloomberg.

The REDD+ program was designed to offer extra community and biodiversity benefits alongside emissions savings from preserving forests. It helps finance tree-protection projects by awarding them with tradable credits. With the phase out of the Kyoto Protocol commitment period in 2013, one proposal is to reduce emissions from REDD, or developing, countries, and allow developed countries to count these as “offsets”.

In a surprise move this week, Tuvalu, a small island nation in Pacific, has blocked the proposal supported by India to protect rights of indigenous people living in forests around the world. A global protocol under REDD+ aims to protect tribal communities dependent on forest produce from proposed market interventions. Tuvalu, a country of 10,000 people with less than one per cent forest cover, at the last moment sought inclusion of action against human rights violations in the proposal.

“It is just a last minute bid to block a decision,” said a senior climate negotiator to the Hindustan Times. “Every country has laws against human right violations. Having such a provision under REDD will not make any difference.”

Due to Tuvalu’s proposal, the talks on market intervention has since not moved forward.

While the developed world is not without negative environmental impact in the forest, it is a fact that most unsustainable timber harvest practices still going on in the world today are committed by developing nations, in emerging markets.

New data published in Science Magazine‘s August issue by the Global Carbon Project, a network of experts on the carbon cycle, indicates that deforestation contributes roughly twice as much to global warming as recent estimates suggested. The new figures indicate that stopping deforestation could cut global carbon emissions by as much as three billion tonnes a year, or the equivalent of more than one-third of fossil fuel emissions. These figures come from the first global assessment of carbon flows between ecosystems and the atmosphere, using millions of ground measurements as well as remote sensing, since 1994.

One reason for the changed estimate is that researchers have finally disentangled emissions from deforestation, at 2.9 billion tonnes a year, from the amount soaked up by regrowth of natural forests on logged and abandoned land, which is put at 1.6 billion tonnes.

In the past, the two have often been lumped together, giving a lower net loss of carbon from tropical forests. But the logged and degraded forests where this regrowth happens are increasingly being targeted by governments and agribusiness to grow oil palm and other cash crops, meaning natural regrowth will decline. Despite deforestation, however, the world’s forests still manage to absorb 2.4 billion tonnes of carbon from the atmosphere each year. But as science has raised the stakes for protection of the world’s forests, UN negotiations aimed at finding money to do that are in crisis.

“Clearing and burning of tropical rainforests is responsible for approximately 15 per cent of global carbon emissions, but conserving forests is one of the most affordable ways to reduce pollution,” said former US President Bill Clinton in a brief address to a large crowd in Durban Wednesday. “Help us fight one of the greatest threats in history.”

“We need to have a COP decision on REDD,” said UN Secretary General Ban Ki-Moon. “We need to support a climate friendly forest sector. And we need innovative policy and actions that can halt deforestation.”

A further complication to the talks came out of Brazil Tuesday. Brazil’s senate has passed a new forest code that threatens to undo many of the legal protections that have helped prevent deforestation in that country in the past few years. The new law, which must first be signed by President Dilma Rousseff, would update legislation from 1965.

It reduces the amount of forest cover that rural landowners need to maintain on their property, and gives further exemptions to landowners with the smallest properties, ranging from 20 to 400 hectares. Growers who in the past might have deforested beyond the legal minimum have to sign up to government plans to gradually restore those lost trees over the next two decades, but they no longer have to pay fines associated with deforestation, fines that could have reached into the billions of dollars since Brazil made changes to forest practices a few years ago. Landowners will also be able to rent or buy a nearby patch of forested land, and keep it untouched a form of essentially forest offsets, if they don’t want to cut deforestation on their own land.

This new forest code will do little to inspire confidence in Brazil’s sustainable forestry, just as the South American giant is trying to exercise leadership at the ongoing UN climate talks in Durban, and in June Rio de Janeiro will be hosting a major meeting to mark the 20th anniversary of the 1992 Earth Summit.

Rousseff has already promised to veto any bill that would have offered deforesters sweeping amnesty, but the Senate version of the law might give her enough wiggle room to support it, according to the Financial Times. The new law was pushed by Brazil’s powerful agribusiness industries, who hope to open new areas of the forest to agriculture and cattle raising. Polls show a majority of Brazilians oppose this new law.

Word came that the European Union said it has the support of at least 120 nations for its Road Map proposal at the Durban talks, suggesting it may be able to break a deadlock on how to fight climate change, according to various news sources late Thursday. The shift “has the potential to be a game-changer in the sense that it’s the first time that developed and developing nations stand together,” said Martin Lidegaard, the Danish climate and energy minister whose nation takes over the EU’s rotating presidency in 2012.

While this new EU Road Map may have achieved agreement among the relevant nations, there was no word on progress with REDD+ or forestry-specific issues by press time Thursday.

Alberta Forest Products Association 3Q

Values of lumber, panelboard, pulp and paper manufactured by Alberta Forest Products Association-member companies totalled approximately $548 million for 3Q 2011. The value of production was down roughly $2 million from the previous quarter and $50 million from the 3rd quarter of 2010.

AFPA-member companies produced 720 mmfbm of dimension lumber products between July and September 2011 with a value of $172.9 million. Part of this production came from the secondary manufacturing sector. Total production volumes were down 12.1 mmfbm or 1.7 per cent from 3Q 2010, but stronger prices led to a $3.3 million or 1.9 per cent increase in values. Compared to 2Q 2011, volumes were down by 9.9 mmfbm, or 1.4 per cent, but values increased by $4.3 million, 2.6 per cent.

AFPA-member panelboard operators produced 273 million square feet of 7/16 inch equivalent product in 3Q 2011, valued at $67.5 million. Production was down 11.3 million square feet, or 4 per cent, and value decreased $5 million, or 6.9 per cent compared to 3Q 2010. Production was down 29.5 million square feet, or 9.8 per cent compared to 2Q 2011, but pricing factors moderated the decline in value to $1.1 million, or 1.6 per cent.

Canadian Housing Starts

New home building across Canada dropped by a sharp 13 per cent in November as the volatile sector that represents condos and apartments showed declines.

Housing starts in Canada fell in November to a seasonally adjusted annualized rate of 181,100 units from an upwardly revised 208,800 units a month earlier, Canada Mortgage and Housing Corp said Thursday.

Housing Starts, Canada

The drop was partly due to a drop in construction of multi-residential buildings such as condominiums. The seasonally adjusted annual rate of multiple starts in urban areas fell 23.3 per cent to 95,300 units.

The more stable and important single family market nudged up 3.5 per cent.

Separate data from Statistics Canada on Thursday showed new home prices climbed 0.2 per cent in October from September, after a similar increase in September.

Nationwide, prices rose 2.5 per cent in the 12 months to October and have been well above the pre-recession levels of 2008 since mid-2010.

Prices were unchanged in nine metropolitan regions and fell in three.

The cost of land only rose 0.2 per cent in the month, as did housing-only prices, StatsCan said.

The heavily populated Toronto area, along with Edmonton, in the oil-rich province of Alberta, contributed most to the gain in the new housing price index.

Downward pressure on prices came from the West Coast cities of Vancouver and Victoria, where the housing market has eased from extreme highs.

Texas Wildfire Tally

The costs for this year’s raging wildfires in Texas have been added up. The Insurance Council of Texas estimates that US$325 million will be paid out to people who lost houses during the Labour Day wildfires in Bastrop County. This latest figure is up from previous estimates of US$250 million. More than 1,600 homes were destroyed earlier this year.

“This one individual fire – the Bastrop fire – has become the costliest wildfire in Texas history,” said Mark Hanna, spokesperson for the Insurance Council of Texas.

Overall 2011 wildfire insured losses are projected to hit US$500 million. The previous record was US$115 million in insured losses in 2009, ICT says.

Texas Wildfires

“The insurance industry was handing out checks the day after the fire to homeowners who had lost everything,” says Mark Hanna, Insurance Council of Texas spokesman, in a statement. “The recovery process will simply take time as insurers continue to pay for additional living expenses for homeowners who are either rebuilding or seeking a new place to call home.”

Hanna said to NU Online News Service that the US$500 million loss estimate for the 2011 wildfires remains the same despite the increased estimate for the Bastrop fire because the other fires did not do as much damage to insured property as previously thought. Many of those fires burned outside of population centers, he notes, while the Bastrop fire struck suburban areas.

This week, Texas Parks and Wildlife Department officials asked the public to visit the state’s 94 parks and to make donations to help the parks system, according to the San Antonio Express-News.

The Parks and Wildlife Department depends on visitors’ park fees to fund about half of its US$69 million annual budget.

Drought conditions, record heat and wildfires resulted in a dramatic drop in the visits and a huge loss of revenue. The state park system is asking nature enthusiasts for help to recoup some of their losses.

Meanwhile, recent rains in parts of Texas have led to less than half of the state being in the worst category of drought for the first time since last spring.

The US Drought Monitor map released Thursday shows 43 per cent of Texas in exceptional drought, down from 53 per cent last week.
It was the first time since May that the map showed less than 50 per cent in the worst category. The highest percentage came in October at 89 per cent.

Texas is in its worst single-year drought ever. The state has seen an average of about 12 inches of rain since January, just 46 per cent of the normal total of 26 inches.

Blistering temperatures and dry conditions fostered wildfires that blackened about 6,000 square miles and destroyed more than 2,700 homes this year.

Housing Starts, Japan

Seasonally adjusted, the number of new housing units built in Japan for October rose by 3.9 per cent, to 774,000, according to Japan Lumber Reports. Total October starts dropped by 5.8 per cent compared to one year ago, to 67,276 units.

Japan Housing Starts

The number of units built for owners in Japan dropped for two straight months in October to 25,581, says the Japan Lumber Reports. Condominium starts rose 7.5 per cent compared to October 2010, to 8,775 units.

Wood-based units made up 56.6 per cent of total new housing starts, a slight drop of 0.5 points due to the increase in condominium starts.

Following the Great Eastern Earthquake and Tsunami, the affected regions of Iwate and Fukushima prefectures showed a 12 per cent and 10 per cent decrease in new starts respectively compared to one year ago, while Miyagi prefectures had a 16 per cent increase, says the Reports.

Moody’s Downgrades Forestry

In a release that can only be described as laughably behind the times, Moody’s Investors Service Thursday downgraded the world’s paper and forest products industry to negative, saying it expects a rough year or two of weaker demand and prices resulting from sluggish economies in Europe and North America, increased supply from China and the continued shift away from paper to electronic devices.

Obviously having used historical data to make its forecast, Moody’s says the industry’s overall income will decline over the next 12 to 18 months as demand or pricing weakens for most of its products. Moody’s said it doesn’t expect that any cost-cutting measures companies take will be enough to offset these challenges.

The rating agency clearly has ignored several critical issues to the short-term financial health of the sector, most importantly extremely low lumber inventories and sheer lack of log supply.

The rating firm said it likely would raise the outlook to stable if global operating income rises between 0 per cent and 4 per cent in the next 12 to 18 months. The outlook likely would be changed to positive if income growth exceeds 4 per cent.

Expect exactly that to happen.

December 14, 2011

China Home Building

More and more indicators out of the US suggest that a slow recovery to home building in that country will be upon us soon enough. Please see Page 2 for details. What manner of building that will be remains to be seen. Most analysts suggest smaller homes made of less expensive material and the latest building permit figures seem to point to an emphasis on multi-family building in the next year or two. The shrinking but still sizable glut of unsold home inventory and another year of foreclosure activity cast uncertainty on the level of improvement for US housing starts in the next year.

Meanwhile, the latest data from China presents a muted picture of building activity in that new market for North American wood products.

Real Estate

China’s home prices fell in 33 of 70 cities monitored by the government in October, the worst performance since it expanded property curbs and scrapped the reporting of national average housing data this year, according to figures from the statistics bureau on November 18, says Bloomberg.

The country’s private housing investment is expected to increase 14 per cent in 2012, matching the gain in 2008, which was the slowest in 10 years, according to Nomura Holdings, a Japanese financial holding company. So-called second- and third-tier or less affluent cities will drive the nation’s housing demand, said Zhang Zhiwei, a Hong Kong-based economist at Nomura.

“The government is taking a different strategy by pushing public housing,” Zhang said. “Private housing will stay weak for quite some time.”

China’s government this year raised down-payment and mortgage requirements and imposed home purchase restrictions in about 40 cities to avert a bubble, while the central bank increased interest rates three times and the reserves ratio six times this year.
The government of China has deliberately engineered a credit crunch with the goal of slowing inflation as well as making it harder for speculators to borrow money, according to the New York Times. The government has also limited the number of mortgages for each individual borrower, raised the down payments for mortgages to as much as 40 per cent to protect the banking system from losses, and begun experimenting with the introduction of real estate taxes in cities like Chongqing.

Residential property accounted for 6.1 per cent of China’s gross domestic product last year, according to Citigroup.

China Real Estate Index System said Thursday a survey of property developers and real-estate agencies showed the average home price in November was 0.28 per cent lower on-month at 8,832 yuan, US$1,385 a square metre, down from 8,856 yuan in October, according to the Wall Street Journal. The November average price was the lowest since May, when it was 8,819 yuan. The China Real Estate Index System said property prices in 57 cities declined in November from the previous month, while prices in 43 cities rose. Average prices for new property in November climbed 4.06 per cent on a yearly basis, a smaller increase than October’s 5.2 per cent on-year gain.

Housing transactions in Beijing declined by 22 per cent year-on-year in the week of November 21 to 27, says the latest data compiled by the China Index Academy, as reported by Business China.

China’s national statistics bureau recently released data showing that prices for new homes in the 70 Chinese cities that it monitors dipped by an average 0.15 per cent month-on-month in October, according to Forbes. The trend seems to be clear, housing prices fell in 34 of the cities in October — twice as many as in September. Residential real estate prices in October for the 100 cities that make up the China Real Estate Index range from RMB 25,747 per square metre in Shenzhen at the high end, to RMB 3,120 per square metre in Hengshui at the low end. Residential real estate prices in twenty five of China’s top 100 cities are below RMB 5,000 per square metre, says Forbes.

Chinese developers are facing the prospect of grim sales, with the top 10 developers recording total sales of only RMB 2.7 billion in November, down 25 per cent month-on-month, according to data provided by domestic realtor Beijing Homelink, says Business China.

China’s economy, the world’s second biggest, will expand 8.5 per cent next year even as export growth is pulled down by weak demand and a decline in the nation’s competitiveness, the Organization for Economic Cooperation and Development said in a report Monday. Government housing projects can help to support construction and moderating inflation may allow Premier Wen Jiabao’s government to cut interest rates from the middle of 2012, the OECD said.

“Even if China doesn’t grow at the predicted 8 to 10 per cent, but at a figure 1 or 2 per cent lower, there will still be tremendous growth,” said Cushman & Wakefield Chair Carlo Sant’Albano, from the company’s headquarters in New York. “Furthermore, its economy will be increasingly focused on encouraging domestic consumption. Therefore, there is tremendous potential for growth, driven by the needs of domestic consumption.”

Andy Zhang, Managing Director of Cushman & Wakefield’s China office, added, “Although the market is challenging, we are now seeing more opportunities. Every year there is a huge population coming from the countryside into cities, and at a scale never previously experienced by any country.”

Madison’s Timber Preview

This week’s issue of Madison’s Timber Preview looks at the latest forest industry asset sales and takeovers. Tembec’s sale of two BC sawmills to Canfor, and Resolute Forest Products’ unsolicited takeover of Fibrek are examined.

Contact us any time for a subscription.

Alberta Mountain Pine Beetle Update

Alberta’s aerial surveys this year show about 50 per cent fewer red beetle-killed pine trees where control programs are in effect, primarily in west-central Alberta and east to Slave Lake. However, the number of newly attacked trees has increased in the Grande Prairie and Peace River areas, despite the aerial surveys showing no large in-flight of beetles from eastern British Columbia.

Single-tree removal is the government’s main strategy to deal with infestations. Aerial surveys note the location of red, beetle-killed pines, allowing contractors to remove nearby infected trees over the winter. Just under a million trees are currently infected in Alberta, and the government plans to remove around 130,000 over this winter.

US Construction, Real Estate Data

The Standard & Poor’s/Case-Shiller index, which covers half of all US homes, released Tuesday, showed US home prices dropped in September from August in 17 of the 20 cities tracked. That was the first decline after five straight months where at least half of the cities in the survey showed monthly gains.
The Case Shiller index measures prices compared with those in January 2000 and creates a three-month moving average.

US Home Building, Selling

US home prices had stabilized in coastal cities over the past six months, helped by a rush of spring buyers and investors. But this year, home prices in many cities, including Cleveland, Detroit, Las Vegas, Phoenix and Tampa, have reached their lowest points since the housing bust more than four years ago.

Foreclosures and short sales — when a lender accepts less for a home than what is owed on a mortgage — are selling at an average discount of 20 per cent.

The Federal Housing Finance Agency released it own data Tuesday, finding that US home prices dropped 2.2 per cent in the 12 months through September as the housing market struggled to emerge from a five-year bust.

The slump was led by a 5.7 per cent decrease in the region that includes California, while the second-largest decline was 4.9 per cent in the area that includes Nevada.

In other news, the National Association of Realtors Pending Home Sales Index, based on contracts signed in October, rose 10.4 percent to 93.3 from 84.5 in September, the agency said in a release Wednesday.

That was the biggest monthly gain since November 2010.

In yet another release, construction spending in the US rose in October for a third consecutive month on gains in housing and commercial projects like office buildings and power plants.

Building outlays increased 0.8 per cent, Commerce Department figures showed Thursday in Washington.

New activity in the housing market, driven by low interest rates and home improvement projects, is starting to tug the industry up from decade lows. Even so, overall weakness in residential construction alongside declines in government spending mean the industry will take a long time to strengthen.

Spending on public construction dropped 1.8 per cent, the report said. Federal construction outlays decreased 5 per cent to US$26.4 billion, the lowest level since May 2009.

In October, builders broke ground on more homes than forecast and construction permits climbed to the highest level since March 2010, evidence that housing may become less of a drag as the U.S. recovery enters its third year.

Housing starts were at a 628,000 annual rate that month, Commerce Department figures showed November 17. Building permits, a proxy for future construction, increased 11 per cent.

Private construction spending climbed 2.3 per cent in October from the prior month. Homebuilding outlays increased 3.4 per cent, including a 6.7 per cent gain in home improvement.

Homebuilder sentiment has began to turn up as well. The National Association of Home Builders/Wells Fargo sentiment index increased to 20 last month, the highest level since May 2010. Readings less than 50 mean more respondents said conditions were poor.

Nova Scotia Sawmills

Two lumber producing operations received varying forms of support from the government of Nova Scotia this week.
Bowater Mersey and NewPage Port Hawkesbury will be receiving a three year break on their power bills. The Nova Scotia Utility and Review Board announced their decision Tuesday in Halifax, amending the load retention rate for the mills.
The Board said the mills will get a break on their rates because it is better for the ratepayers to have the mills open than to close due to their high power costs.

The ruling indicates the two mills would save $14 million next year with the new rates. It also indicates other Nova Scotia Power customers would save $20 million by having both mills operating and on the grid next year.

Bowater Mersey, NewPage Port Hawkesbury

Also Tuesday, the Nova Scotia Supreme Court approved an extension to NewPage Port Hawkesbury‘s creditor protection period.
Now the company has until January 20, 2012 to sell the Cape Breton paper operation. By December 16, the field of four bidders will be narrowed to one.

NewPage Port Hawkesbury said it has sufficient cash reserves to maintain the operations at the mill in a “hot idle” state until January 20, 2012. However, that estimation is based on the assumption the company will collect $3.3 million in HST receivables during the week ending on December 24, 2011. Without that amount of money, there will not be sufficient cash to maintain the hot idle state past Christmas.

And on Friday, Nova Scotia Premier Darrell Dexter was in Liverpool, NS, to make a $50 million dollar announcement for the Bowater Mersey mill.

The mill will receive:

  • a $25 million capital loan through the Nova Scotia Jobs Fund over five years for a long-fibre refining project that will reduce the mill’s electricity consumption;
  • a capital loan to build a topping turbine at the nearby Brooklyn Energy Power Plant;
  • $1.5 million in workforce training for workers losing their jobs; and,
  • Bowater Mersey will sell $23.75 million, about 25,000 acres, of land back to the province by March 31.

Global Net Forest Loss

The global net loss of forest over 1990-2005 was smaller by a third than earlier estimated but deforestation still threatens environment and food security, the United Nation’s food agency said on Wednesday unveiling new satellite-based data.

Net loss, in which forest losses are partially offset by new plantings and natural expansion, totaled 72.9 million hectares between 1990 and 2005, 32 percent down on the previous estimate of 107.4 million ha.

The new data also showed the net loss of forests accelerated at the end of the survey period, rising to 6.4 million ha per year between 2000 and 2005 from 4.1 million ha per year between 1990 and 2000.

December 07, 2011

2006 Softwood Lumber Agreement

Canada’s defense against the latest US claim under the 2006 Softwood Lumber Agreement was released to the media this week, although it has not yet been posted on the federal government’s website for the public. After rocking the relevant parties for a few days, Madison’s was individually emailed the 207 page filing by the communications section of the Department of Foreign Affairs and International Trade.

The bulk of the Canadian defense rests in the legal arena rather than on technical issues specific to the forest industry. While not an international trade law expert, Madison’s has some grave concerns about the logic behind this Canadian defense and what level of success it will eventually bring in this very important legal arbitration. The possibility of Canadian lumber producers, but only those from British Columbia not any of the other provinces, paying significant additional export taxes on lumber shipments into the US is frightening.

Madison’s will provide as clear a summary of the intricate arguments as is possible so readers can decide for themselves about the relative merits of the case.

At its essence, Canada’s defense asserts that what the US has alleged, in terms of the harvest of mountain pine beetle infested timber in British Columbia and subsequent alleged subsidies in the form of discounted stumpage fees to salvage the dying and dead timber, is inaccurate and not applicable under the terms of the 2006 SLA. However, given that this arbitration is “not bifurcated” as the Canadian defense states, meaning there are not separate proceedings to determine the validity of the claim and the amount of the penalty, Canada goes on to refute the US claims in detail nonetheless.

Please refer to the August 26, 2011 issue of your Madison’s Lumber Reporter for an analysis of the US claim, and the September 16 issue for a breakdown of the US expert witness report.

The Canadian defense starts by saying that the expert report is flawed in both its calculations and its conclusions, and that the four actions the US claims the BC government took to change “the grandfathered provincial timber grading and scaling system” are not in breach of softwood lumber agreement.

Current Arbitration

It is difficult to match the various arguments put forward by each side because each approaches the issues differently. Canada’s answer to the individual complaints comes from a different angle than the US claim does.

Right away, paragraph two is confusing because the Canadian defense says, “The central factual assertion on which the United States seeks to erect its claim is that ‘the mountain pine beetle does not impair the quality of timber’. That statement is demonstrably untrue”. The paragraph cited actually says, “[The BC reforms to its timber pricing system] recognized that the mountain pine beetle does not impair the quality of timber, which can still be used to produce lumber, and therefore recognized that BC should not sell all MPB timber for the minimum stumpage fee.” This is all by way of tracking the timeline of changes to the BC timber pricing system, and does not pretend to be “the central factual assertion” of the US claim.

Madison’s is alarmed because fashioning a defense against something that is not the complaint seems unlikely to meet with success.

The defense goes on to say that the US solicited expert testimony from a solitary economist, not from “any witness with actual experience managing a forest, harvesting timber, or manufacturing lumber. Nor [ . . . ] who has studied the behaviour of the mountain pine beetle.”

Canada then uses a tricky logical construct to deflect all examination of the volume of Grade 4, or salvage, timber harvest compared to the volume of #2&Btr, or merchantable, lumber produced during the disputed years of 2006 through 2009. The Canadian defense maintains that the US claim states “(1) that the SLA implicitly imposed a ceiling [ . . . ] on the percentage [ . . .] that could properly be graded as Grade 4; and (2) [ . . .] unaccompanied by a significant decline in the quantity and value of lumber produced must demonstrate misgrading. [ . . . ]” Then explains, “Canada will show that [ . . . ] no one pretended to be able, in 2006, to anticipate all the effects that the MPB might have [ . . . ] and that the SLA did not guarantee a certain percentage of Grade 4 logs.”

This is troubling because that does not appear to be what the US claim says. Again, not a legal expert, but it seems worthwhile to present a defense against what the actual claim is.

In Madison’s understanding of the US claim, the focus is on changes to the provincial timber pricing system in April 2006 to better account for log degradation following the mountain pine beetle infestation. At issue, the US maintains, is that BC “quickly abandoned the new [April 2006] reforms beginning in early 2007”. In its claim, the US doesn’t delve into the details of this alleged abandonment in the same way it does for both the pre- and post-April 2006 timber pricing methods.

The crux of the US argument seems to revolve around the difference in the volume of Grade 4 logs harvested during the course of those timber pricing changes, of approximately 20 per cent of the total BC timber harvest, rising to 44 per cent by 2008, then to 55 per cent between 2008 and 2010. The US asserts that the volume of merchantable lumber did not decline to a similar ratio during that time, and suggests this is because #1 and #2 sawlogs were misgraded as salvage.

The US claim does not say there is a ceiling on the percentage of Grade 4, as the Canadian defense maintains. In direct response to this point, however, Canada does offer more insight, saying that this US conclusion, “mistakes the relationship between timber quality and lumber production.”

Canada also points out, rightly so, that “the total volume of BC’s pine harvest declined steadily from 2006 through 2009, so that a large shift in the percentage of pine graded as Grade 4 corresponds to smaller increases in the actual volume.” Meaning, as the total amount of timber harvest fell due to lack of demand for lumber, the ratio of Grade 4 logs increased by more than the total volume of Grade 4 logs. In itself, this is an extremely critical point and may go far in supporting Canada’s case.

Canada continues by saying that BC lumber producers were able to moderate the effects of the MPB infestation “by vigorous efforts and significant capital expenditures”, and by developing “new markets, notably in China, for increasing quantities of lumber of lower quality.”

The Canadian defense also says that the US does not sufficiently demonstrate a circumvention claim under the SLA, because the US does not show that the BC government took an action, and does not show that the action provided a grant or benefit to Canadian softwood lumber producers or exporters. Canada then explains at length that the US does not prove that any changes to log scaling, kiln drying of logs, and bucking practices, were directly a result of government action.

Given that it is the BC government which sells the timber and indeed which sets the log grading and scaling requirements, its difficult to agree with the above assertion.

The Canadian defense then turns its focus on the proposed remedy. As stated at the outset, this arbitration will deal with the US claim and the amount of damages all at once. Canada maintains that upon arriving at the requested penalty, the dreaded US$499.2 million, the US expert witness’ “benefit calculations contain egregious calculation errors”. In addition, Canada explains that BC timber prices during the worst of the lumber market downturn, 2007 through 2009, fell by less than that in the US, and at the same time BC’s share of the US lumber market fell from 19 per cent in 2006 to 16 per cent in 2009 and in 2010. Canada then states, “If British Columbia had actually been flooding the market with cheap timber [ . . . ], its share of the US lumber market to have risen.”

Again, the reader is confused. There is talk of logs and lumber in the same argument. Timber sales and lumber exports are two entirely different things. The data does not track in parallel, each market — that of logs and that of lumber — operates on its own. They are not interchangeable. Also, speaking about BC timber “flooding the market” doesn’t really make sense because it is the policy of BC Timber Sales to offer logs to BC buyers first. Only if no BC buyers make a bid are those logs then offered to buyers from other regions, like Japan, China, or the US.

That brings us to page 14 of the Canadian defense. The remaining pages break down the above arguments into ever increasing detail. On page 206 Canada says, “it is unlikely that any adverse affects on US markets could be tied to BC exports.” Given the scope and breadth of Canada’s defense, Madison’s is uncertain whether Canada’s claim of no wrongdoing therefore of no penalty will be enough to convince the tribunal.

A red flag in the US claim appears again in the Canadian defense. Discussions by both sides about a sharp rise in the availability of Grade 4 logs as the MPB infestation progressed focus on the increase in #3/Utility and #4/Economy lumber produced only as a function of supply. However, the reality is that the ratio of low grade lumber increased markedly when compared to that of the standard #2&Btr is precisely due to this new customer base in China. Had this new demand from China not happened, had Canada continued to rely on the US housing market as its sole lumber customer, production volumes of both #2&Btr and #3/Utility would have dropped.
BC lumber producers did not manufacture more utility grade lumber during the disputed period only because the volume of beetle-kill timber harvest increased, they produced more because they were able to sell more.

The US has until December 23 to file its rebuttal to the Canadian defense, and Canada has until February 1, 2012, to submit a rebuttal of that rebuttal.

Madison’s will analyze each respective document as it comes out.

BC’s “Not Sufficiently Restocked” Timber

Further to discussions about the lack of updates to the British Columbia forest inventory data in various media that have been going on since late last year, BC’s Chief Forester Jim Snetsinger submitted an article, titled “Not Satisfactorily Restocked (NSR) Area in BC”, for the September/October issue of BC Forest Professional Magazine.

Reporter subscribers have had an early taste of the contents of this article. Please refer to the July 29 issue of your Madison’s Lumber Reporter for details.

Snetsinger provides the same figures and explanations on the issue of reforestation of BC’s NSR lands following disturbances by the mountain pine beetle and forest fires that he had provided to Madison’s back in July.

BC Forest Inventory

Compelling questions remain, however. As the time lag between the most recent full inventory of BC’s forests, with 75 per cent of it completed over 15 years ago, and the full scope of devastation in the wake of the pine beetle grows, continued assertions that “It is too early to definitively determine how much of the mountain pine beetle impacted area will ultimately require reforestation”, as Snetsinger maintains in both Madison’s Reporter and BC Forest Professional Magazine, ring increasingly hollow.

With all the new technology that the BC Ministry of Forests, Lands, and Natural Resource Operations claims bring efficiencies to the surveying of forests, any excuse for not having done re-surveys by now seems implausible.

Admitting that there is at minimum 2 – 2.9 million hectares of the productive forest landbase in BC “still being harvested and salvaged” then pointing to the same measly 715,000 – 775,000 hectares “currently identified as NSR” that has already been mentioned is frankly inadequate.

The forest industry, and the public at large, of British Columbia deserve to know the hard facts of what is happening to the timber supply on the land base following natural disasters.

Fending off further questions by saying that timber is still in various stages of mortality and will be salvage logged for years to come is an unsatisfactory excuse for not getting ministry staff and contractors out into the forest to do current surveys.

This September, the BC Forest Practices Board became so alarmed by the lack of forest inventory and restocking activity, it started work on a Special Report which will be released in early 2012.

US Existing Home Sales

Existing home sales unexpectedly rose in October as low interest rates for mortgages and rising rents led more homebuyers into the market, the National Association of Realtors said on Monday.

Sales climbed 1.4 per cent to an annual rate of 4.97 million units from September’s revised rate of 4.90 million. Despite the modest increase in sales, the median sales price for existing homes was 4.7 per cent lower, at US$162,500, in October than it was a year earlier.

Existing homes are selling at roughly the rate they did in the late 1990s.

Home Sales, US

Also tempering the outlook for the housing market, the share of contract failures, which happen when banks reject mortgage applications or when appraisals come in below a sale’s negotiated price, rose to 33 per cent in October from 18 per cent in September.
One in three real-estate agents who responded to an NAR survey reported that a sale had fallen out of contract in October. Some contracts are falling through because appraisals come in too low and because wouldbe buyers aren’t qualifying for mortgages.

There were significant regional differences in the data. In October, sales of existing homes rose 2.8 per cent in the Midwest, 2.1 per cent in the south and 4.4 per cent in the West. But sales declined 5.1 per cent in the Northeast. Lawrence Yun, chief economist of the NAR, said an early snowstorm that took the region by surprise could be blamed for delaying some sales.

Nationally, sales were up by 12.3 per cent from one year earlier, when sales had been depressed by the aftereffects of home-buyer tax credits. Sales dropped sharply in the summer after those tax credits expired. But while the country as a whole was up strongly from one year ago, sales were down by 4.1 per cent in Washington, DC, and by 0.8 per cent in the New York metro area.

While sales are improving, they remain weaker than some economists and housing analysts had anticipated, considering that 30-year mortgage rates in September and October fell below 4 per cent, the lowest level in at least 60 years.

The number of homes listed for sale fell in October to 3.33 million, the lowest level of the year and down by 13.8 per cent from one year ago.

While low inventories are often a sign of health because reduced competition can boost prices, many analysts believe the phenomenon reflects the inability or unwillingness of many homeowners to sell their properties.

Real-estate agents say more sellers are pulling their homes off the market rather than sell at today’s reduced prices. About one in four homeowners with a mortgage owes more than their home is worth.

A separate report from mortgage-data firm CoreLogic to be released Tuesday projected that it could take until 2020 for markets to fully digest an overhang of foreclosed properties that represent a “shadow” inventory of potential bank-owned homes.

CoreLogic estimates that there are 1.6 million single-family homes in some stage of default or foreclosure that will ultimately be taken back and resold by banks over the next 18 months. Assuming that homes are sold at roughly the same pace that has existed over the past two years, it would take until 2020 for the shadow inventory to decline to the level that prevailed prior to 2005, said Mark Fleming, CoreLogic’s chief economist.

Conifex Reports

Conifex Timber Thursday reported a net loss of $2.2 million in its third quarter on sales of $38.2 million.

Current quarter net loss improved by $1.4 million over the previous quarter, and improved by $0.7 million over the third quarter of 2010. Overall operating rates based on current total estimated production capacity were approximately 55 per cent during the second and third quarters of 2011 compared to 21 per cent during the third quarter last year.