Lumber News Archives: Feb 2009

Pulp and Paper ; Catalyst Closures ; Canadian Tarrif Charge; US Existing Home Sales Lumber Production; Closures and Curtailments ; US Housing Starts; US Mortgage Assistance Package Canadian Exports; Wooden Roof Trusses Into China; Japanese Housing Starts; US Home Values; Newsprint Production; Five More Years of US Housing Market Crisis; US Pending Home Sales; Closures and Curtailments;

February 27, 2009

Pulp and Paper

In the summer of 2008 pulp mills would have been celebrating the spike in European market pulp prices to US$855 per metric ton for NBSK and US$792 per metric ton for BHK, if it were not for a critical shortage of chips. While nowhere near today’s levels, sawmill closures had caused such a reduction in chip supply that several pulp mills had to close. Regardless, that price peak did not hold, European NBSK list price before discounts was down to US$671 per metric ton at the end of 2008, and stands at US$584 this week, according to FOEX, down almost US$40 from the beginning of this year.

Supply Cycle

Despite significant pulp mill closures globally, January 2009 pulp inventories in European ports is 43 per cent higher than one year ago (at 1.72 million metric tons), but 2.4 per cent below December 2008 supply (at 1.76 million metric tons) according to With such levels of oversupply, current market pulp prices are likely unsustainable and will have to fall until supply matches demand. In contrast, January 2009 shipments to China were 563,000 tons, up 62 per cent from last year’s 348,000 tons but were down 38 per cent from December’s 904,000 tons, according to PPPC. China generally orders significant quantities before year end in preparation for a slow down in business for Chinese New Year. However, the fact that pulp inventories in Chinese ports are currently very high, and a portion of December orders have yet to reach customers, the slow down is expected to continue. Given that the lowest net delivered US spot price for NBSK is currently hovering at about $480 (after discounts), both hardwood and softwood kraft prices are expected to be pushed to new lows.

The fall in market pulp prices was not unexpected given severely decreasing paper demand globally. Newsprint and coated paper demand has dropped sharply since 3Q 2008, and will likely remain low into the middle of 2010. Many factors need to change before paper demand returns to healthy levels; the economies of several key countries, such as the US, EU and China, need to recover, the balance sheets of large companies need to start showing profits, and consumers need to get back to shopping. Only then will advertisers return to the print media, bringing back thicker and bigger format newspapers and magazines.

But the supply cycle is not that simple. Just as paper mill activity relies on a robust publishing industry, keeping pulp mills running full time, primary sawmills rely on pulp mill demand for their chips as a secondary profit centre. No customers for byproducts drives up the cost of lumber production, as sawmills can normally count on a credit of about $80 per mfbm for those byproducts. When the supply cycle stagnates as it has now, there is downward pressure on prices of all the related byproducts.

Recent, and indeed ongoing, sawmill curtailments have so impacted chip supply that some pulp mills are resorting to chipping more whole small sawlogs than they normally do, which is much more expensive than using chips. Currently both lumber producers and wholesalers report record low inventories across the range of all wood products. As the balance of supply and demand for primary wood is corrected, prices will firm. Expectations are that into spring there will be a nominal increase in lumber demand. Those few mills still operating may well realize difficulty in immediately meeting an increase in demand, which would cause a short term spike in prices. Soon after that, balance will be achieved, likely at very close to production costs.

The difficulty for pulp mills located in the north is that winter is not the season to curtail or shutdown. An organized tapering off through autumn would allow time to deplete stocks of dangerous chemicals and to ensure the mills are winterized for an extended shutdown. Pulp prices have fallen so dramatically, some pulp mills are having to close in the middle of winter which is very costly. In most cases, all avenues are explored prior to making the difficult decision to close in winter, but with no storage space at Lynterm and record levels of pulp inventories in ports globally, there is nowhere to put excess product. This week’s indefinite closure of Catalyst Paper’s kraft pulp mill in Crofton and paper mill in Elk Falls, both on Vancouver Island, BC, adds to the long list of pulp and paper mill closures globally since the beginning of this year. Unlike the dimension lumber and panel market, so closely tied to US home building, the paper industry does not enjoy regular seasonal highs and lows, making predictions of recovery much more difficult.

Canadian annual mechanical pulp production rose from 10.5 million metric tons in 1990 to 11.6 million metric tons in 1995. For the next five years production wavered between these levels. An average of 9.9 million metric tons was produced annually between 2000 and 2005, before coming back to 10.5 million metric tons in 2007, according to the UN’s FAO statistics. It is clear these numbers will be significantly lower for 2008, and even less for at least the first half of 2009. US pulp production shows a similar trend, ranging from 5.8 million metric tons in 1990 to 5.2 million metric tons in 2000, but dropping more sharply by 2007, to 3.9 million metric tons.

The simple fact is that with pulp prices expected to remain weak for the balance of the year (if not longer), lumber producers can no longer count on byproduct credits as is traditional. Lumber production will only continue to decline in the short term due to both record low demand and record low revenues from by products. In the US, sawmills have already had to close because they could not find customers for their byproducts, a situation that could easily develop in BC as well. Prices will increase because there is not enough production on line and/or stock piled to fill immediate demand. It would take a month or two of sustained demand to rebuild the infrastructure to service the hump in demand. During that time, prices would increase but flatten out again when demand and supply come back into balance.

Catalyst Closures

Catalyst Paper was forced to indefinitely close its pulp mill in Crofton and the No. 2
and No. 5 paper machines at its Elk Falls paper mill due to poor market condition.

The pulp mill curtailment will remove approximately 400,000 tonnes of annual pulp
capacity and affect approximately 375 employees. The indefinite curtailment of all three
paper machines at the Elk Falls mill removes 526,000 tonnes of newsprint and uncoated
mechanical paper capacity on an annualized basis, and affects 350 employees.

Catalyst has made repeated demands to municipal governments on Vancouver Island
to cut taxes substantially this year, claiming the high tax rate was set when pulp
prices were much higher, as were production levels.

Canadian Tarrif Charge

The London Court of International Arbitration has decided that eastern Canadian
lumber mills have breached the 2006 Softwood Lumber Agreement between the US and
Canada by failing to calculate quotas properly during the first six months of 2007. The
tribunal said Canada must provide a compensatory remedy for violating the agreement.

The duty for these mills to export to the US will go up by 10 per cent on March 25
until $68 million is extracted from the industry. This could take five years at the current
rate of business.

Significant mill closures
in eastern Canada are expected
as mills will likely not be able to bear
the added cost.

The ruling is final and cannot be
appealed, John Allan, secretary of the
Canadian Lumber Trade Alliance, said.

The Coalition for Fair Lumber Imports
claims that Canada continues to
violate the trade agreement by circumventing
those commitments through
additional subsidies and related actions,
including recent SLA-inconsistent
stumpage price manipulations in
British Columbia.

US Existing Home Sales

Home resales fell by 5.3 per cent to an annual rate of 4.49 million in January, the
National Association of Realtors said this week, and were off 8.6 per cent year-on-year.
The median price of an existing home fell 14.8 per cent on the year to $170,300. The glut
of housing inventory eased in January, as the number of existing homes for sale fell 2.7
per cent to 3.6 million, a two-year low.

The results were worse than economists expected and came after a surprise bounce
the month before, when home resales jumped by 6.5 per cent.

US Real Estate

The pace of sales
of existing homes in the US tumbled
to a 12 year low in January as prices
plunged and buyers delayed purchases
ahead of a government economic
stimulus package.

The impact of the stimulus package and lower interest rates could
boost home sales by 900,000 units
this year, NAR estimates, but for now
buyers remain anxious.

According to Lawrence Yun,
NAR chief economist, 45 per cent
of transactions in January were distress
sales at discounted prices, as
buyers hunted for bargains.

The median national home price
declined 14.8 per cent from a year
ago to $170,300, the lowest since a
$169,400 level seen in March 2003.

The Realtors said they expect
a recent federal stimulus package
and other rescue measures to
spur 900,000 home sales this year.
Still, some economists don’t expect
Washington’s encouragement or the
home-price slide to quickly restore
the confidence of prospective buyers.

Inventories are falling because
builders have put the brakes on
for quite some time now. They are
severely under-building relative to
population growth and household.

One analyst suggests that housing
inventories have peaked and
will continue to move downward
as we move forward in time. At
least 500,000 and probably closer
to 700,000 homes will be removed
from the housing supply by year’s
end. The analyst maintains that sales
do not need to increase to reduce
housing inventory. Supply is already
shrinking for both new and existing
homes based on our current tight financial
market. Even at the current
trends, at some point our supply-demand
balance will shift and we will
have pressure on prices.

February 20, 2009

Special Guest Writer . . .

This week’s Featured Article is written by Rick Doman, son of Western Forest Product’s founder Herb Doman. Rick has a lifetime of experience in the BC coastal forest products industry, and a great deal of insight into wood and pulp production globally.

Lumber Production

The Canadian forest industry has faced many challenges in recent years, and will continue to do so in the short term at least. However there are signs emerging that certain aspects of the lumber market are beginning to turn around.

A Global Industry

A major blow was dealt to Canadian producers in 2001 when the industry had a chance to resolve the softwood lumber dispute before duties were implemented in May 2002. At the time a deal was being negotiated for a market price system, which involved a sliding scale duty on lower priced lumber shipments. By 2003 lumber prices were rising, and duties would have been minimal. In addition any money paid would have stayed in Canada. That proposal was rejected by both government and industry groups causing many long term issues for the industry. In 2006 a very poor deal was agreed to settle the dispute.

The US housing market was showing signs of a bubble forming as early as 2005 and the effects of that have impacted the global economy. The question is where does that leave the industry going forward?

Canada will more than likely have to rely more on US and domestic markets. The Euro is falling, against the US dollar in particular, thus making European lumber producers competitive domestically, and as exports into the US, Asia and the Middle East, as well as globally. They will also in a limited way be back in the US market when that dimension and appearance grade market picks up. BC will have a problem selling into the US due to blue stained wood.

On a recent trip to Russia, I realized Canada should take a wake up call. Currently Russia harvest approximately 200 million cubic meters of mostly softwood annually, thus, between log exports and forest product exports, supplies about 3 per cent of global demand. The country could sustainably harvest 500 million cubic meters, which could increase one day up to 22 per cent of global market share for forest products. The timber, often virgin forests, is some of the best softwood in the world. The Russian federal, provincial and territorial governments are all actively encouraging the building of new mills, joint venture projects and expansion of existing lumber companies in the interests of exporting finished lumber products. Some US and European forest companies have already made investments in the Russian forest industry. Russia is the biggest country in the world by land base, has a population of 145 million, and its timberlands are generally in regions with low employment rates.

Currently there are infrastructure challenges and investment hurdles, however the Russian government and industry are working hard to overcome this. Russian industry is building more efficient sawmills and they expect to expand further in all aspects of forestry. They have a competitive currency from an export perspective, while they are close to Europe and China from a freight perspective. They intend to restrict log exports, attract investment through joint ventures, create jobs in Russia and export more finished products. We should understand that with Russian government support they will be a major player in the global markets possibly within five years.

The US expanded tree planting in particular over the past 25 to 30 years in the south. Southern Yellow Pine harvests will be increased in that region. Canadian companies that expanded in the southern US over the long term should do well, they will not have duties to contend with and freight costs to major markets are much lower. Eastern Canadian lumber producers may also do well as they are closer to major US markets, they do not have the pine beetle issue to contend with, and the US lumber coalition seems to be most concerned with the stumpage pricing system and harvesting practices in BC.

BC historically has shipped about 50 per cent of the lumber exported from Canada into the US, with most of that coming from the Interior. Due to the pine beetle BC timber harvests rose to about 84 million cubic metres in 2006, this is well above the sustainable Annual Allowable Cut. BC should reduce the total AAC to a more sustainable rate as a reflection of poor demand. The BC government should look at using more of the pine beetle wood for biomass. The current practice of lumber companies losing money by cutting so many trees, both healthy and beetle infested, and shipping them into the US is only hurting themselves and the taxpayers of BC. Stumpage prices on beetle infested good pine wood should be much higher than $0.25 per cubic meter, and minimal value trees should be used for biomass. The choice should be given to the lumber companies, to either pay more stumpage or the government should provide opportunities for green energy alternatives. Also along with the reduction in AAC, industry should look at option B under the SLA, of reducing shipments. This would correct the imbalance of supply and demand we have right now, which is driving lumber prices down below production costs.

US housing starts have fallen to unsustainable levels and based on the government stimulus plan which includes a $8000 tax credit for new home buyers, and also a new plan to assist existing home owners with providing some flexibility with mortages so they can retain their homes. This should allow housing demand to start to pick up in 2010. The new mortgage relief package in the US will subsidize up to nine million homeowners as well as the banks, preventing foreclosures. This means the current large volume of existing homes for sale will drop. The most important thing is that the fear of investing in real estate will begin to evaporate. New homes for sale will go quickly, as there is little supply and builders have basically halted new home construction. Into 2010 both existing and new homes for sale inventories will be absorbed, and home building will begin again, but it will be starter homes rather than the more luxury-style homes built in recent years. This means demand by builders will be for commodity grade dimension lumber, OSB and some plywood. Many southern US mills will come back on line at this time.

Coastal BC may lag behind the expected recovery, because a lower standard of living is developing in North America due to the impacts of the recent economic crisis, which will create demand for more starter type homes not the larger ones that use more high end products. These type of homes tend not to use cedar siding and decks, or wood windows and doors.
Also Japan may recover more slowly due to a drop in its exports causing lower demand for Canadian lumber, particularly high grade coastal products. The standard of living in countries like China and India, meanwhile, due to a growing educated work force along with lower wages, should continue to expand, creating demand for lumber from Russia. At this time pulp and paper companies expanding in these countries have the distinct advantage of a much less costly workforce.

Pulp and paper producers will continue to face more challenges due to lower cost producers in South America and Asia. Global capacity reductions should allow for a slow recovery within a few years, however byproduct revenues for Canadian lumber producers will remain under pressure. Low chip, sawdust and hog fuel (the key ingredients in making pulp) prices increase production costs for lumber. The eventual sale of these byproducts is essentially a credit on primary lumber production. which, when lacking, results in lower revenues.

The Canadian industry has to learn to better manage its markets and make more by producing less when demand is not there, rather then losing large amounts of money. The days of massive production levels are behind us, the world has changed very quickly and we need to adapt and change our business methods equally quickly. The industry also has to further develop global markets despite growing global competition. While the US will always be a major customer of Canadian wood products, such a heavy reliance on that market has caused a lot of the problems Canadian industry faces today.

Rick Doman President/CEO Eacom Timber Corporation
former President/CEO Doman Industries Ltd. and Western Forest Products

Closures and Curtailments

West Fraser Timber Ltd. has idled several sawmills in the face of weak lumber sales
after releasing 4Q 2008 results showing a lost of $70 million, or $1.63 per share, on sales
of $746 million in the fourth quarter. That compared with a loss of $3 million on sales of
$782 million, in the same quarter of 2007, the company said. The operating loss was $64
million, the same as a year earlier.

Canfor Corp., in the midst of a temporary one-to-two-week shutdown at its sawmills,
reported a $229.8 million loss in 4Q 2008, and a $345.2-million loss for the full year. The
financial loss was impacted by write-downs on the company’s assets of $74.1 million and
a foreign-exchange loss on its US denominated debt of $52.2 million. Over the past 18
months, Canfor has reduced its logging and hauling costs, increased productivity despite
curtailments, disposed of non-core assets and enacted salary rollbacks and staff reductions,
effectively reducing operating costs by $10 million.

Catalyst Paper Corp. is shutting down its BC mills in Campbell River and Powell
River, laying off more than 525 people at the two operations, because paper markets have
collapsed, according to a company statement.

Tembec will be eliminating 100 positions, freezing salaries and cutting other costs in
response to tough times on the forestry industry. The staff reductions will involve terminations,
layoffs and retirements. The wage freeze will affect management and staff.

TF Sawmill in Cumberland, BC, is shutting down, putting about two dozen people
out of work. The 52,000-square-foot sawmill and the eight acres of industrially zoned
property upon which it sits are being sold, by court order, for $3.6 million. The mill produced
high quality lumber up to 60-foot lengths, much longer than the 24-foot lengths
typically cut at most traditional mills.

US Housing Starts

Housing starts in January were at a seasonally adjusted annual rate of 466,000. This
is 16.8 per cent below the December estimate of 560,000 and 56.2 per cent below the
January 2008 rate of 1,064,000.

Building permits in
January were at a seasonally adjusted annual
rate of 521,000, 4.8 per cent below
the December rate of 547,000 and 50.5 per
cent below the revised January 2008 estimate
of 1,052,000.

New-home construction fell to its
lowest level on record in January as builders
virtually closed up shop amid falling
demand, tightened credit markets and a
flood of foreclosure properties.
The numbers show a housing market
that is still declining after more than two
years of slumping prices and lower demand.

Home values, which rose steadily
for more than a decade, have fallen by an
average of about 25 per cent from their
If there is one bright spot to dwindling
new-home construction, it is that
supplies will eventually fall in line with demand.

At the end of December, the inventory
of unsold homes fell to a 9.3 month
supply from 11.2 month supply a month
earlier, according to the National Association
of Realtors.

US Mortgage Assistance Package

Newly elected US President Barack Obama unveiled his mortgage assistance package
this week, in an effort to prevent the next round of foreclosures (expected to be 2
million in 2009), and restart home building in the US.

US Mortgage Crisis

US government
stabilization initiative is designed to
stem a rising flood of foreclosures and
help between seven and nine million
homeowners restructure or refinance
their mortgages to avoid losing their
homes, the Treasury Department said.

$75 billion would be made available
in a homeowner stability initiative to help
up to four million homeowners at risk of
foreclosure keep their homes. The plan
will also contain incentive payments for
lenders to give help to up to four million
borrowers at risk of foreclosure. The aid
is meant to cut homeowners’ monthly mortgage payments back to no more than
31 per cent of their income.

The President assured the American
people that the plan will not aid those that
either borrowed or lent money irresponsibly.
However concerns are that the rampant
levels of foreclosures, which are only
expected to rise in the absence of some
form of assitance, will only serve to continue
to drive property values even lower.

In the end even people who have been
paying their mortgages would get hurt
because the value of their home would fall
yet more below their mortgage.

The most affected areas, the previously
hot real estate markets of Arizona,
Florida, Nevada and California continue
to see record numbers of people defaulting
on their mortgages.

February 13, 2009

Canadian Exports

Figures released by Statistics Canada and Export Development Canada this week
show that Canadian exports globally, and into the US specifically, fell in December 2008.
Trends and indications demonstrate that while Canadian exports to the US have been
falling in recent years, exports to other countries have been rising.

Global Trade

In what industry hopes is a temporary
situation, Canadian exports internationally
fell by almost 10 per cent in December,
putting Canada
in a trade deficit
– of $460 million
– for the first time in 33 years. Trade Minister
Stockwell Day said, “If the United
States continues to stay in the doldrums
and if China’s economy continues to
move downwards, that means there will
be less demand for Canadian products.”
Total Canadian products going into the
United States also declined by 10 per
cent in December, and export levels of
forest product specifically declined 4.6
per cent. Compared to December 2007,
Canadian forest products exports fell by
almost 3 per cent. Export numbers from
December, 2008 reflect orders that were
placed months before, noted Jayson Myers,
president of Canadian Manufacturers
& Exporters.

A press release from Statistics Canada
states that, “Overall, exports have been
trending downwards since July 2008.”
According to the Canadian federal Department
of Foreign Affairs and International
Trade, national commercial trade
in 2007:

    • Canada’s bilateral merchandise trade
      with the U.S. was $576.4 billion;
    • Canadian merchandise exports to
      the US were $356.0 billion, while imports
      were $220.4 billion;
    • Canada’s exports to the US were
      equivalent to 23.2 per cent of its gross domestic
    • The US receives roughly 74 per cent
      of Canadian goods and services, and;
    • Over 63 per cent of Canada’s imports
      come from the US;
    • Nearly one third of Canada-US trade
      is now said to be “intra-firm” trade with
      inputs and outputs crossing the border
      multiple times during production cycles
      between multi-national tentacles of the
      same companies;
    • The US is the largest foreign investor
      in Canada and the most popular destination
      for Canadian investment abroad.


2007, the stock of American direct investment
in Canada surpassed $288.6 billion,
while Canadian direct investment holdings
in the US reached $226.1 billion.
In contrast to the sharp drop in export
shipments to the US, two regions internationally
showed even more marked
increases in receiving Canadian exports.

Canadian exports to the UK rose by almost
81 per cent from November 2008
to December 2008, and over 26 per cent
compared to one year ago. Canadian exports
to other European countries fell by

1.3 per cent from November 2008 to December
2008, but rose by 24.5 per cent from December
2007 to December 2008.
The trend of Canadian exporters finding
other markets and other customers seems to
be growing, despite incessant rounds of objections
from traditional players in the lumber
industry that these markets are “too small” or
that it is more costly or complicated to ship
overseas. Transporters of all kinds are also
hurting, as are the ports. If there was ever
a time to find new partnerships, to negotiate
new deals and to strike out in new directions,
this is it.

In a January 7, 2009 report full of gloomy
expectations for this year, Peter Hall, Vice-
President and Chief Economist of Export
Development Canada states, “Markets that
provided the most lucrative opportunities in
recent years – Canada’s traditional markets
– now face the weakest near-term prospects.
[ . . ] Although they will share the pain of the
global slowdown, emerging markets will still
post growth far in excess of our own, and of
Canada’s traditional customers.” Interpretation:
get out there and find new customers,
if only to fill the gap until American demand
starts to increase again.

After all, Canadian exports
into the US fell from almost 87 per cent
in 2000 to just over 75 per cent in 2008. Considering
that experts and analysts agree this
trend will continue into the near-, and possibly
medium-term, future, it seems only reasonable
to go looking elsewhere for customers

Wooden Roof Trusses Into China

On Monday the BC Ministry of Forests made two announcements of more wood
home building in China. Through Forestry Innovation Investment (FII), the Province
has been working with the Mongolian government for the past 18 months to adapt its
building code to Canadian standards and build capacity for a wood-frame housing sector.
This included building two demonstration homes in Ulaanbaatar, and funding the British
Columbia Institute of Technology to provide training and technical support to Mongolian
officials and developers.

In a $4 million project, the Pacific Homes division of Pacific Building Systems is
supplying 48 townhomes for a new development in the Mongolian capital of Ulaanbaatar.
All major structural components – including floors, walls and ceilings – of the homes will
be built in Cobble Hill, and then shipped via containers to Mongolia where they will be

Meanwhile, the Shanghai government has formally approved a BC designed roofing
system as part of a plan to renovate 10,000 city apartment buildings in the lead-up to
the World Expo 2010 in Shanghai.
“With this approval, BC wood producers now have access to a market for as many
as 10,000 new roofs over the next two years,” said BC Minister of Forests and Range,
Pat Bell.
In the first nine months of 2008, exports of BC wood products to China were more
than for all of 2007 and were valued at more than $166 million.

Japanese Housing Starts

December 2008 housing starts in Japan fell by 5.8 per cent, while annual starts rose
3.1 per cent over December 2007, but fell 15.3 per cent when compared to December

2008 owner’s unit
starts were 318,508, almost the same as
1951 levels. Overall, 2008 housing starts
were the lowest since 1967 (with the exception
of 2007, when building standards
were changed significantly).

There was a sharp increase in Japanese
real estate prices in the first half of
2008, then a sudden economic slow down
in the second half of the year which accounts
for the decrease in December

Traditional post and beam units
started were 391,221, while wood framed
homes altogether accounted for 516,868.
The percentage of wood framed housing
starts rose steadily in Japan in 2008, to
52 per cent in December, compared to 47
percent one year ago.

Orders received by 50 major construction
companies fell 27 per cent in
December from a year earlier to 894.2 billion
yen ($10 billion), marking the second
straight month of falls.

US Home Values

The US National Association of Realtors reported a record drop in home values
around the country this week. Nationwide home prices fell 12.4 per cent during 2008.

US Home Prices

In the largest yearly
decline since the NAR began tracking
the numbers in 1979, the median price
for a US home sold during the fourth
quarter of 2008 fell to $180,100, down
from $205,700 during the last quarter
of 2007.
Foreclosures and short sales accounted
for 45 per cent of all deals. That
has driven sales volume up in states like
Arizona, Nevada, Florida and California.

“Once again, we see a pattern of
strong sales gains, particularly in lowerprice
homes, in areas with price declines
resulting from foreclosures,” said Lawrence
Yun, NAR chief economist, in a

Meanwhile, under a plan approved by
the US Senate on Wednesday, homebuyers
could get a tax credit of 10 per cent of
the value of new or existing homes, up to
$15,000. The measures could help reduce
the huge glut of homes that has wreaked
havoc on the industry and helped drag
down property values, which would be a
boon to homebuilders.

February 06, 2009

Newsprint Production

With newspaper revenues, which rely heavily on advertising sales, hit hard by the
global economic downturn, drastic reductions in newsprint ordering have forced paper
mill closures in North American and Europe.
Paper producers forge ahead with efforts to raise prices regardless.

A World of Newsprint

As most people know, newspaper sales
volume is linked directly to economic
strength; when times are good there are
plenty of advertisers,
making for fat
newspapers containing
a lot of newsprint. When times
are tough, like now, advertisers drop off
dramatically, and newspapers reducetheir
page count, sometimes even shrinking
page size. In 3Q 2008, quite a few large
circulation American newspapers cut their
paper size, some stopped either weekend
or mid-week editions, and some even
switched from the regular 30 lb. stock
to a thinner newsprint. All these factors
together, when added to fewer pages per
newspaper and fewer customers – since a
segment of the public has switched to online
editions in an effort to save a few pennies
– have hit newsprint producers hard.

According to the Newspaper Association
of America, advertising revenue
dropped almost 8 per cent to $45 billion to
date since 2006, as a 19 per cent increase
in online ad spending failed to offset an
over 9 per cent reduction in print. That’s
because online ad revenue made up only 7
per cent of all advertising sales at newspapers
in 2007, and print ads still command
several times more money per reader.
America’s largest newspaper chain, Gannett
Co., recorded revenue reductions of
16 per cent in June and 17 per cent in July
2008 compared with a year earlier. Mc-
Clatchy Co. saw a 15 per cent decrease in ad revenue through May but drops of
greater than 19 per cent in each of June
and July 2008. In those two months, The
New York Times Co. reported a nearly 18
per cent ad-spending decline at the flagship
Times, The Boston Globe and other
news media properties, after dropping
only 10 per cent through May. Expectations
are that, while ad revenue will not
continue decreasing, it is also not likely to
rise again in the short-term, or even medium,

The one salvation for North American
newsprint producers is that the industry
has learned from past lessons, and started
to cut production in mid 2007. Announcements
of closures and curtailments continue
through today. This united effort has
served to bolster newsprint prices in view
of reduced supply. According to the pulp
and paper industry price sheet, FOEX, 30
lb. newsprint prices in Europe have risen
by €4.40 since the beginning of 2009 to almost
€500 per metric ton this week.

Meanwhile the commodity in the American
market has dropped by US$16.64 for
the same time period to US$733 per metric
ton. Part of this difference can be accounted
for by a strengthening of the US dollar
since 3Q 2008. On a side note, readers
might be interested to know that FOEX
has started tracking hardwood kraft pulp
prices in the Chinese market, in both US
dollars and Chinese yuan. Visit www.foex.
on Tuesdays for weekly updates.

Speaking of pulp, production curtailments
have lead to reduced supply, helping
to bolster newsprint prices somewhat.
The cycle of lumber mill closures
causing fewer chips sent to the pulp mill,
forcing pulp mill closures due to lack of
supply – despite steady price increases in 2008 – gives less room for newsprint
producers to maneuver at a time when
quick response to market conditions is
necessary for survival. Newspaper publishers
are, of course, not in favour of
newsprint price increases and have few
options available to offset higher costs.
Cuts in other areas ensue, such as layoffs,
closures and a movement towards
online-only publishing. In the end newsprint
demand drops significantly, causing
a vicious cycle.

Vital to the global pulp and newsprint
market are Scandinavian producers,
where the top five companies account for
over 80 per cent of European newsprint
and magazine paper capacity. This week
Norway’s Norske Skog said it would cut
newsprint production by 200,000 metric
tons and magazine paper by 75,000 metric
tons in 2009. The move is motivated by
the need to reduce company debt. Finnish-
Swedish Stora Enso announced 1Q
2009 production cuts similar to 4Q 2008,
at 490,000 metric tons, or 15 per cent of
capacity. Sweden’s UPM-Kymmene Corp.,
the world’s largest magazine paper maker,
this week reported sales fell 8 per cent to
€2.3 billion ($2.9 billion) in 4Q 2008, from
€2.5 billion one year earlier. UPM expects
poor demand to continue this year, and repeated
its plans to cut production and lay
off personnel.

The consensus among paper producers
is that 2009 is going to be a difficult
year, just as it is expected to be for lumber
producers. The entire forestry industry is
caught not only in the abysmal US housing
market, but in the global economic
downturn. Production cuts are needed
for companies to stay afloat, but new and
innovative business practices are also in
order. Unfortunately, paper producers
do not have as many alternative avenues
to explore for use of their products as
do wood producers. While it is true that
trends show an increase in online reading,
there is no evidence to suggest that
paper will ever “go away” entirely (despite
predictions in the early 1980s to the

What needs to happen is for balance to
be restored between advertising, newspaper
sales, and newsprint costs. At present,
market corrections are occurring. The unexpected
scope of ailing economies internationally,
which only just came to light in
3Q 2008, is making it even more difficult
for paper companies to assess how to respond.
Clearly they have decided on yet
more drastic closures and curtailments,
on the understanding that it is easier to
start back up should the situation improve
sooner than expected than it is to pay off
massive debt incurred during an extended
market slowdown.

Five More Years of US Housing Market Crisis

In a recent article on Bloomberg, John R. Talbott, a former investment banker for
Goldman Sachs, explains how US house prices got so far out of kilter with wages, rental
prices and replacement values — the cost of buying a property and building a new home.
Talbott is a very reliable source for predictions, his previous books predicted the collapse
of both the housing bubble and the tech-stock binge before it.
Talbott claims that the US is only halfway through the total potential decline in housing
prices, as home values will likely continue to deteriorate for four to five years. More
importantly, adjustable-rate mortgages issued in 2004 and 2005 are only now resetting
for the first time, he notes.
At the end of 2008, a record 19 million US homes stood empty and homeownership
sank to an eight-year low as banks seized homes faster than they could sell them, the
US Census Bureau said this week. Almost one in six owners with mortgages owed more
than their homes were worth, said the same day.
By the time the crash ends, Talbott predicts, homeowners will have lost as much
as $10 trillion, with investors and banks worldwide losing almost $2 trillion.

US Home Financing

The International
Monetary Fund warned Thursday that
the US housing downturn may deepen
and last longer than previously forecast,
and the slump could spread to other
countries. The US housing slump, at the
epicenter of the global financial crisis, in
under severe pressure “as labour markets
deteriorate further, mortgage financing
remains restrained and foreclosures rise
steeply as the ‘negative equity’ problem in
housing spreads,” it said.

“House prices could continue to fall
sharply through 2010, undermining recovery
in financial markets and contributing
to the adverse feedback loop with the real
economy,” the 185-nation IMF warned.

Meanwhile, the Winans International
Real Estate Index calculates that
new home prices in the United States are
down 23 per cent since March 31, 2007.
New homes sales have fallen 71 per cent
and new property listings are down 34 per
cent in the same time period.

“This bear market will probably not
end in 2009. Past real estate bear markets
ended when the average time it took to
sell a new house dropped to 3 1/2 months.
Currently, it is taking over 9 months for
transactions to close due to tight credit
conditions,” says company founder Ken

In other news, the number of Americans
filing first- time claims for jobless
benefits unexpectedly jumped last week
to a 26-year high, signaling a deepening
deterioration in the labour market.

US Pending Home Sales

Fast on the heels of a rise in existing US home sales in December and a sharp drop
in new US home sales for the same month, the National Association of Realtors Pending
Home Sales Index, based on contracts signed in December, surged 6.3 per cent to 87.7,
rising for the first time since August.
Compared with the same period a year-ago, pending homes sale were up 2.1 per
cent in December.

Buyers waded
back into the market to take advantage
of lower prices and mortgage interest
rates. “In an otherwise bleak landscape,
this represents a ray of hope, as it’s a
leading indicator for existing home
sales. I’m sure it’s foreclosure-driven,
so it could be a hollow number,” said
Brian Dolan, chief currency strategist

The NAR’s housing affordability index
jumped 11 per cent in December to
158.8, the highest since it began tracking
records in 1970. The index rose on falling
home prices and low mortgage rates.

Closures and Curtailments

Due to continued extremely weak demand for framing and dimension lumber and
panel products, and strong indications that the situation will continue through 2009 at
least, wood products companies announced wide spread closures and indefinite curtailments
this week.

Domtar, West Fraser,
Canfor, Tembec and Weyerhaeuser
all announced major sawmill and pulp
mill closures this week in an effort to
bring production levels closer to demand.

Canfor will take 258 mmfbm out of
production at three mills, West Fraser’s
curtailment of five mills will reduce the
company’s annual production by 446
mmfbm. Weyerhaeuser’s closure of its
Alabama mill will put 300 employees out
of work.

Tembec’s closure of three Canadian
mills will cut 1,400 jobs.

closure of its North Carolina fine paper
mill will lay off 293 staff and cut production
by 293,000 metric tons.