Lumber News Archives: Oct 2008

Mountain Pine Beetle, Mackenzie Pulp Mill Freeze, US Existing Home Sales, Russian Log Export Ban, Smurfit-Stone Container Corp., European Trade with Canada, Sales Closures Cancellations, Global Mortgage Buyouts, Lumber Industry Investment, Mackenzie Pulp Mill Stalled, Sawmill and Pulp Mill Curtailments, The Business of Credit

Mountain Pine Beetle

A new education package for BC secondary students developed by the Council of Forest Industries and Forestry Innovation Investment was announced this week by Minister of Forests and Range Pat Bell. Madison’s sought updates on what effect cooler temperatures this year will have on the pine beetle population, and the migration into Alberta.
Cold Weather
Building on the success of the mountain pine beetle educational kits distributed in 2006 and 2007, a new educational resource kit for secondary students has been developed by Forestry Innovation Investment and the Council of Forest Industries. One year and $80,000 in the making, the learning resource has been endorsed by the Ministry of Education.
Focussed on the economic importance and international reach of British Columbia’s forest sector, the learning kit was launched October 18 by Forests and Range Minister Pat Bell. This new teaching resource will examine the development of BC’s forest industry, its dependence on international markets and the challenges and opportunities the forest industry faces in maintaining markets in Asia.
The kits are intended to help students:
• describe what happens to harvested timber;
• demonstrate the importance of the forest industry to the provincial economy;
• demonstrate the importance to the provincial economy of marketing wood products around the world;
• identify and evaluate international markets for BC’s wood products; and
• assess the opportunities and challenges in marketing of BC’s wood products internationally.
With over 80 per cent of all BC wood products destined for international markets, the importance of maintaining and growing these markets is critical to the forest industry and to BC’s economy. After reading about this new learning tool, Madison’s became curious about the cooler weather this year in British Columbia to learn whether it would have affect in slowing down the mountain pine beetle’s rampage.
Brian Aukema, a scientist with Natural Resources Canada working at the University of Northern British Columbia told Madison’s that cold weather can only affect the beetle if it comes when the pest “least expects it”. Such an affect can only happen twice a year; in early autumn or in the spring. In autumn the larvae are vulnerable to a cold snap of at least -20 C for a few days, while in the spring a similar cold snap can catch the beetles by surprise as they are emerging from a state of hibernation. Otherwise throughout the winter the natural defense of sugars in their body fluids act as an anti-freeze which “allow them to super-cool without forming ice crystals”.
When asked for numbers, Aukema said that the population growth this year “did not speed up as fast” as in recent years, and he attributed that to the cooler temperatures over the past year. In particular the Peace River region and – more importantly- Alberta saw a “very big winter kill last year”. Any potential effects to the beetle population over this winter season will not be seen until next year. Despite this possible slow down in beetle reproduction, he expects the current five year forecast posted on the Ministry of Forests website for the extent of the beetle kill in this province to remain accurate. There is not much to be done here, as we all know, except to wait it out. Aukema’s advice to our readers is to “keep up forest management plans”.
The critical question of what is going to happen to vulnerable forests in Alberta came up next, and Madison’s was referred to David Langor, also with Natural Resources Canada, working in northern Alberta. Langor pointed to the cooler summer, especially up north, this year. It seems that the pine beetle can only be a serious threat to trees and forests if the bugs stick together. As trees have a natural defense system, too few beetles are not able to overcome a tree. They need a critical mass to be able to “attract a lot of mates” through pheremones and all infest at the same time. The cooler temperatures this summer caused in interruption in the migration of the beetles from BC to Alberta.
Interpreting what he sees in the forest, Langor said that there was an initial migration, then “two to three weeks later, another big flight” crossed the Rocky Mountains. Such a gap Could cause the “timing of development to be thrown off enough” for there to be less trees attacked and less eggs laid. Regardless of how successful conditions in Alberta are in thwarting pine beetle reproduction there, as long as there continue to be massive migrations coming out of BC every summer Alberta will eventually have a similar infestation problem. The beetles are “just starting to get into the Boreal system”, according to Langor.
According to the Ministry of Forests website, the ‘observed annual red attack’ reached its peak in 2004, dropped significantly into 2008 and is expected to continue falling after 2010 to eventually reach pre-2000 levels in 2020. Potential slowing effects of another cool year will not be known in Alberta until next summer. Madison’s will be calling back then for an update.

Mackenzie Pulp Mill Freeze

The re-opening of bankrupt Pope & Talbot’s former pulp mill in Mackenzie was delayed for 60 days, according to an announcement two weeks ago by new owner Edmonton’s Worthington Properties. That start date was adjusted to “indefinitely” this week due to dismal market conditions for northern bleached softwood kraft pulp, as well as expected continued global credit difficulties.
Experienced mill employees raised concerns that simply “winterizing” the mill will not be enough to prevent harmful environment effects. In particular the plastic liners covering the chemical holding tanks are sensitive to below zero temperatures, and could crack causing dangerous chemicals to leak directly into Williston Lake and the Peace River. Steam boiler worker Rick Berry was quoted in the Vancouver Sun as saying, “We could have an environmental disaster if the chlorine-dioxide tanks rupture. They would have to evacuate the town.”
“Plant equipment is beginning to ice up at night”, head of the Mackenzie local of the Communications, Energy and Paperworkers union Carl Bernasky told the Vancouver Sun in the same article. The weeks immediately following Worthington Properties’ purchase of the pulp mill were fraught with several unexpected economic downturns and difficulties which the company is having trouble overcoming in the short term.
Owner Dan White has said that he will only open the mill once the pulp market recovers or he can find a stable customer. Current wisdom holds that it will be 18 months before the regular cycle of pulp prices returns to the highs seen in the first half of this year.

US Existing Home Sales Jump Slightly

US existing home sales rose by an unexpected 5.5 per cent in September as buyers were attracted by falling prices, an industry survey showed Friday. The National Association of Realtors said sales of existing homes and apartments were up 1.4 per cent from a year ago, the first annual increase in three years.
Existing home sales rose to an annualized rate of 5.18 million units in September, beating analysts’ consensus forecast of 4.91 units. The market rebounded from a decline in sales in August as buyers were drawn by falling home prices due to continued foreclosures. The inventory of unsold homes on the market slipped 1.6 per cent to 4.27 million units in September, a backlog of slightly less than 10 months at the current sales pace, compared with a 10.6 month inventory in August. A six month inventory of unsold homes is the norm.
Buyers responded to improved housing affordability conditions, bringing home sales to above year-ago levels for the first time since November 2005. However existing home sales are based on contract closings and, therefore, are unlikely to reflect that access to credit tightened at the end of September. The median price of existing homes fell again, dropping 9 per cent in September from a year ago, to $191,600.

Russian Log Export Ban

The Far East Economic Forum was held September 30 to October 1, 2008 in Khabarovsk, Russia. It was there that Russian authorities announced the idea of submitting a bill in the Russian Duma for a total ban on raw log exports from that country. The impact of such a ban is expected to have a radically different effect on the Far East wood products industry than the previously announced 80 per cent duty.
The government of Russia had planned to raise the softwood log export duty from the current 25 per cent to 80 per cent in January 2009, but the country’s forest industry is asking for a postponement of higher duties since establishing processing facilities in Siberia and far east Russia are largely delayed.
It seems that the log export duty increase from 20 per cent to 25 per cent earlier this year did little to prevent a sizable volume of log shipments into China. In addition a vibrant black market for raw logs continues to operate unabated.
The Minister of Natural Resources put his full support behind the idea of a total ban on Russian log exports.

Smurfit-Stone Container Corp.

The company announced that due to the weakening pulp market, it plans to permanently stop production at its Pontiac pulp mill in Portage-du-Fort, Quebec, as of Oct. 31.
The closure will result in 218 employees losing their jobs. A company press release explained that it expects to take restructuring charges in the fourth quarter of about $39 million, of which approximately $20 million is non-cash.
“The mill produces northern bleached hardwood kraft paper-grade pulp, which is not core to the company’s transformation strategy,” Steve Klinger, Smurfit-Stone president and COO, said in a statement. “The rapidly deteriorating conditions in the pulp market necessitate that the company take prompt action to avoid cash losses.”

European Trade with Canada

Given that a rebound of the US construction industry is likely far off, this week’s push of French president, and current president of the European Union, Nicolas Sarkozy for a trade agreement with Canada could not be more welcome.
Deal in the Works
To date nearly 90 per cent of Canadian trade has been with the US. A good idea when that’s country’s economy is doing well, since Canadian businesses enjoy significant savings in transportation costs, however recent events have shown us that such a dependence can quickly bring problems. The European Union is Canada’s second-largest commercial partner, while Canada is among Europe’s 10 largest partners. The European Union is the second-largest foreign investor in Canada; Canada is the fourth-largest investor in the European Union.
A joint EU-Canada study into the benefits of an economic partnership released Thursday said that both economies would gain almost $32 billion, or 19.8 billion euros, per year through deeper ties. The EU would benefit by almost $19 billion while Canada would gain $13 billion. But in terms of per cent of gross domestic product, Canada at 0.77 per cent would easily gain more than the EU at 0.08 per cent.
Unfortunately the economic turmoil in Europe forced Sarkozy to cut his trade talk meeting with Stephen Harper in Quebec City today to only six hours. Both leaders have announced intentions to harmonize regulations, leading to an open skies accord and allowing the free flow of Canadian and European workers across the Atlantic Ocean. Stephen Harper said Canada and the European Union are committed to fighting protectionism and to achieving a comprehensive economic partnership. The trade agreement is meant to build on 2007 increases in Canadian exports to Europe.
Canadian merchandise exports to the EU shot up dramatically last year, propelled by merchandise exports to the U.K. and to the Netherlands. Exports were up 19.4 per cent to $34.8 billion. The U.K. in particular, was responsible for nearly one-third of Canada’s total exports growth.

Like 2006, Canadian merchandise imports from the EU grew at a slower pace than did exports, edging up by only 0.2 per cent to $49.4 billion in 2007. Investment from Europe also grew in 2007, by a substantial 26.2 per cent to $157.5 billion, with growth being driven by investors from the U.K. whose stock jumped by 37.5 per cent to $54.8 billion, and a 27.5 per cent increase from the Netherlands to $31.5 billion.
Investment from Europe continues to be dominated by these two countries and France, which combined account for close to two-thirds of European investment in Canada and 20.7 per cent of the overall stock of FDI in Canada.

Sales, Closures, Cancellations

East Fraser Fiber Co. Ltd. and Parallel Wood Products Ltd. will close their fingerjoint stud plants in Mackenzie and Williams Lake, BC, for an indefinite period, effective October 17. The shutdowns are the result of falling stud prices.
Jackpine Group will be shutting down all Williams Lake production centres for two weeks, effective October 20, due to the poor housing market which has fallen to about 40 per cent of levels set three years ago. The two-week shutdown will take about 4.5 million board feet out of the market and affect about 100 employees at the two Williams Lake operations.
International Paper will shut down its plants in Stockbridge, GA and Hanford, CA, in December. The news comes on the heels of last week’s announcements of closures in Ohio and Oregon. Roughly 86 employees in Stockbridge and 90 in Hartford will be put out of work by the closures.
Weyerhaeuser is selling off its Trus Joist Commercial division to Atlas Holdings. Four plants in the US are included in the transaction, as well as 13 sales and engineering offices, representing employment for approximately 428 people. The sale will allow the company to hone in on its core strategies in the residential structural frame market.
Ainsworth Lumber Co. Ltd. has terminated a commitment agreement with the government of Manitoba on a planned engineered wood production facility. The May, 2006, agreement contemplated the issuance of a forest management licence for 838,000 cubic metres annually of timber on a renewable 20-year basis. Ainsworth is no longer required to post a performance bond and the associated $2.5-million will be returned to the company.

Global Mortgage Buyouts

In a different type of bailout package than that recently enacted in the US, the Government of Canada will ensure $5 billion in mortgages held by the federal agency Canadian Mortgage and Housing Commission. However there are no sub-prime mortgages included in the deal.
Bank Bailouts
The Canadian government designed the program to help banks raise money for new loans, by taking old home loans off the balance sheet thus giving them more cash to make loans and overcome the severe constraints in global credit markets. There are plans for more purchases totalling $20 billion. The government is expected to make a big profit on its program to help banks jump-start lending. CMHC will earn an average yield of 4.24 per cent on the mortgages it bought from banks this week.
At the same time, the government sold $3 billion of five-year bonds to finance the purchase at a yield of 3.24 per cent. The 1 percentage point spread means the government will make $50 million a year in profit from the interest-rate differential on this batch of loans. The loans the federal government is purchasing are insured, meaning the government shouldn’t be putting taxpayer money at risk. CHMC did not say which institutions offloaded the mortgages from their balance sheets or how much was offered in total. Each issuer was allowed to sell up to $1.25 billion.
The assets bought by the government, known as National Housing Act mortgage-backed securities, are pools of mortgages issued by banks and other financial institutions and are considered low-risk investments because the mortgages are insured against default by CMHC. Also, Canada’s housing market is relatively healthy compared with the US market, so risk of default is seen as minimal. The government has not yet announced the full schedule of these “reverse auctions.”
As financial crisis and bank failures shook world markets, a survey by the World Economic Forum found that Canada has the world’s soundest banking system, closely followed by Sweden, Luxembourg and Australia. The US, where some of Wall Street’s biggest financial names have collapsed in recent weeks, rated only 40, just behind Germany at 39, and smaller states such as Barbados, Estonia and even Namibia, in southern Africa.
The US government plans to take equity stakes worth up to $250 billion in financial institutions to inject trust back into lending between financial institutions now too wary of one another to lend. The package is part of the $700 billion government bailout plan Congress approved this month. The plan represents a partial nationalization of the US banking system — a move not made since the Great Depression. It also means the government will own a non-voting piece of some of the companies it is supposed to regulate.
Some of the nation’s largest banks had to be pressured to participate by Treasury Secretary Henry Paulson, who wanted healthy institutions that did not necessarily need capital from the government to go first as a way of removing any stigma that might be associated with banks getting bailouts. The actions are intended to restore confidence in the US financial system.
A recent lack of availability of short term credit caused work slowdowns across North America as businesses struggled to make regular payments. Britain, Germany, France and others pledged more than 1 trillion euros (US$1.36 trillion) in direct capital injections for their banks, and to underwrite lending between banks that has all but frozen, choking off funds that drive business and industry.

Lumber Industry Investment

In another indication that the smart money knows the lumber industry will become profitable again, at some point in the future, Toronto’s Fairfax Financial Holdings Ltd. boosted its ownership stake in Interfor for the second time in three days, bringing its holdings to more than 19.7 per cent
Largely devalued shares of wood products companies are proving too delicious to resist for all manner of financial investment groups. An insurance and investment management firm, Fairfax said yesterday it now holds 6.8 million of Interfor’s class A shares, roughly a 14.75 per cent stake. In recent months, Fairfax has shifted its attention from financial services to a beaten-down companies in a wider variety of sectors.
Earlier this year, Fairfax decided to step into the troubled paper and forestry industry by making a $350 million investment in AbitibiBowater Inc.Transactions such as these are based on the principle that company stocks are currently so undervalued that their price can only go up. The question is when. Many investors play a short term game, hoping for profitable returns in 90 days or maybe six months.

Pension funds, universities and other groups look for long terms investments. They don’t need to show a profit on the money for three or four years into the future.In this case there is no question that Farifax will make a tidy sum on its stake in Interfor. The unknown factor right now is how much of the 99 per cent B class holdings currently in the hands of the Sauder family will remain there. Fairfax is probably betting on a sell off in the near future.

Mackenzie Pulp Mill Stalled

The planned startup of the bankrupt Pope & Talbot’s former pulp mill in Mackenzie, BC has been put on hold for 60 days. Late last week union leaders told staff to start looking for work elsewhere. New owners, Edmonton’s Worthington Properties, had another look at their numbers in the face of recently falling pulp prices and the global credit crisis and did not like what they saw.
Company president Dan White returned from China recently, after a search for a stable pulp customer. While Worthington Properties does intend to run the operation as a long term project, in the short term the plans are to winterize the mill and wait out the current difficult market situation.
Sawmill and Pulp Mill Curtailments
Ainsworth Lumber is taking temporary downtime at its oriented strand board mill in Bemidji, Minnesota. Starting October 6, the mill will stop operating due to reduced customer demand and log shortages. The facility employs 140 people. The mill has an annual production capacity of roughly 350 million square feet.
Down Time
Tembec is implementing production curtailments totalling 35,000 tonnes from its three high-yield pulp mills in an effort to balance inventory levels. The company’s Temcell facility in Temiscaming, QC, will absorb the largest production cut for four weeks, with 16,500 tonnes being removed. Tembec’s Chetwynd, BC mill will close for two weeks in October, a shutdown that will effectively remove 4,000 tonnes from the market. The Matane, QC mill will be subject to two closures in October and November, removing 14,500 tonnes.
Tolko is temporarily closing its stud mill and planer operations in Soda Creek mill in Williams Lake, BC starting on Oct. 20 for at least a month, affecting about 145 employees. Nearly nine million board feet will be removed from the marketplace.
Canfor Corp. said Wednesday that it will be closing indefinitely its Tackama plywood plant in Fort Nelson, BC, due to continued poor demand and low prices for plywood across North America. 290 workers would be affected when the plant closes after the existing log and veneer inventories are depleted. The Tackama plant has an annual capacity of 220 million square feet of plywood.

The Business of Credit

The greed and lack of foresight of money managers and other financial wizards during the recent US housing boom did more damage than simply precipitate the ongoing massive levels of foreclosures we are seeing now. Businesses and consumers are going to find it increasingly difficult, if not impossible, to get credit due to the rampant speculation and careless practices of lenders.
New Difficulties
With supposedly safe, stable investments in various ‘paper assets’ being proved worthless on the market this year, credit – and even actual cash to lend – is becoming increasingly scarce. The fresh turmoil on Wall Street and the US government’s seeming lack of decision on how to settle the disarray is causing further uncertainty. Top financial analysts and stock traders alike, not to mention international political leaders, have vastly differing opinions on how to proceed.One thing everyone can agree on is that this unique combination of circumstances has never happened before.
The impact will be felt in households and businesses across North America, particularly those operating under a razor thin financial status. Already this week Canadian companies that were relying on a continued line of credit just to keep normal operations going had to close due to rejection by their lending institutions.
This week lumber traders reported similar trouble in the southwestern United States. One KD Fir trader with contacts in California told Madison’s that “at least two sources in Los Angeles had stories of half-finished building projects that were deserted by workers who dropped their tools and walked off the job because they were not paid”. A Canadian MSR dealer who drafts weekly status sheets totalling up to millions of board feet for his customers had zero orders from his two biggest clients. A veteran with many decades of experience, he declared that “this has never happened before”.
How it will all play out in the coming months is not known. Perhaps after some initial weeks of panic, and recalculation of actual dollar figures, business will return to normal. However it seems obvious that any company, or household, that has needed an uninterrupted source of credit just to maintain a status quo is going to receiving bad news in the very near future.
The agriculture sector, a close relative to the forest products industry, is already feeling lighter wallets in the US. The American Farm Bureau said last week that the financial crisis now gripping the United States could moderate both global and domestic demand for US farm products, according to the Globe and Mail. Farmers are being offered lower prices for their products at the same time as they are being forced to pay higher prices for the supplies they need. Consumer demand worries are just part of the negative tone in the agribusiness and food sectors. With credit crisis uncertainties spreading out globally, suppliers to farmers are being swamped with doubts.
This week governments from London to Berlin have seized or bailed out five faltering banks. In Ireland, where rumours of panicked withdrawals from banks spooked the stock market, the government has offered a two-year blanket guarantee on all deposits and bank debt, according to the New York Times. Some of these banks suffer a form of guilt by association by being in the home lending business. Others, like Fortis, lack a strong base of deposits, which acts as a buffer against credit-related jitters. Russia has plowed its oil wealth into American debt, including Fannie Mae. Russia has additional problems, including unstable oil prices and a newly assertive foreign policy that is unpopular with many investors.
A lot of eyes are turning towards China, of all places, for a solution. Britain’s The Guardian ran a story this week about western delegates at the World Economic Forum’s conference this summer. Chinese investments in US and European financial assets have gone sour in the toxic meltdown, so that country’s leaders are demanding global co-operation to fix the regulatory framework.
There are going to be a lot of meetings, a lot of recalculatons, and a lot of discussion about how to best get out of this widespread credit drought. For North American wood products companies, negotiations are going to be difficult as long as the reliance on the US housing market continues. Now that almost all analysts agree with what Madison’s was saying at the beginning of this year, that it won’t be until 2010 at the soonest before home building in the US reaches normal levels, lenders will be wary of extending credit to the forestry sector.