Lumber News Archives: Apr 2010

US Non-Residential Construction ; Madison’s Live Online Lumber Producer Listings ; Japan Timber Supply and Demand Forecast ; Housing Starts, Canada ; US Housing Starts ; BC’s New Timber Pricing Policy ; Madison’s Timber Preview ; US Softwood Lumber Tax ; Canada Building Permits ; Japan Housing Starts Forest Fire Season ; Lumber Market Forecast ; Eacom Timber buys Domtar Assets ; Global Manufacturing Demand for March SurgesGlobe 2010: Green Energy and Sustainability ; Madison’s Timber Preview ; US New Home Sales ; Grant Forest Products to Sell Mills ; Conifex to Buy Abitibi-Bowater’s Mackenzie Assets

April 25, 2010

US Non-Residential Construction

As the US economy continues to wallow in the aftermath of the recent brutal economic downturn, analysts and professionals of all kinds are trying to determine if recovery has begun or is still in the future. Needless to say reports vary widely, with some saying the US economy has already improved while others point to late 2011 before things will really turn around. Assessments and conclusions depend on which indicators are seen as more important.

Sharp Drop for 2010

All agree that employment is a lagging economic indicator — by the time employment figures improve the economy has already rebounded — however non-residential and commercial construction is even more lagging. On this subject there is disagreement whether or not large construction projects are on the rebound. Madison’s examines several reports and conclusions, taking into account regional differences, to help decipher the large volume of information.

FoxBusiness released a report April 15 asking, “What’s Next for Commercial Real Estate?“, which states that commercial real estate is showing few signs of levelling out nationwide and several regions continue to get hammered by declining values. In this week’s Beige Book, the Federal Reserve reported that “commercial real estate activity was slow across the nation,” noting that only Richmond, VA, and Dallas, TX, have seen positive signs of late. Analysts say that while the four main hot spots – Florida, Georgia, California and Illinois – will continue to get hammered by the commercial mortgage crisis, a new batch of states will join the ranks, continues the report.

“Delinquency rates on residential construction are very high in the Pacific Northwest and in the Seattle-Tacoma area, in particular,” said Matt Anderson, a partner at real estate analyst Foresight Analytics. Anderson said the economy there continued to grow even as it stalled in other parts of the country.

“Quite a bit of construction got going, and then the job declines hit in 2009,” he said. “Very quickly, the markets went from growing to shrinking.”

This cautious sentiment is echoed by Ken Simonson, chief economist for the Associated General Contractors of America. In a report issued April 1, the AGC found that “US Construction spending tumbled in February by US$11.6 billion, or 1.3 per cent, to US$846 billion, a low last recorded in 2002. Declines occurred relative to both the previous month and February 2009 in most categories of private residential and nonresidential construction, as well as public construction.”

“Most of the economy seems to be improving but construction is falling into an even deeper hole,” Simonson commented. “Bad weather may account for a small part of February’s downturn, but most of the contraction reflects ongoing lack of demand, tight credit conditions and shrinking state and local budgets.”

“It appears many projects are being halted or scaled back,” Simonson continued, pointing out that February numbers are likely to be revised downward as more government data is released. The April 1 report included downward revisions of $27 billion (3 per cent) in the January total and $20 billion (2 per cent) in the December figure. The December number had already been cut by $13 billion (1 per cent) in an earlier report.

In contrast, International Construction magazine published an article also on April 15 asking, “North America: is the construction market turning the corner?“, which found that while privately funded construction fell a massive -14.3 per cent, the value of public sector construction rose +2.1 per cent. In the public sector it was transportation infrastructure and projects related to conservation that saw the biggest gains. Meanwhile all the sub-sectors of privately funded construction fell, with non-residential building taking a much bigger hit than the house building sector, said International Construction.

Particularly interesting for the industry was the announcement that US$8 billion of the funds would be used to develop high speed rail links in the US — an interesting development for a country often thought to be so in love with its cars and freeways. The bulk of government funding will go to new, large-scale programs, with US$1.25 billion for a 140 km long high speed rail corridor in Florida between Tampa and Orlando, while in California US$2.25 billion will be invested in a 440 km link to connect Los Angeles and San Francisco, according to International Construction.

April 15 was a big day for releases, with Robert O’Brien, US Real Estate Leader at Deloitte & Touche, reporting that US commercial real estate values have decreased significantly, up to 40 per cent across all property types, since their peak in 2007. There is excess capacity in almost every asset class, according to Deloitte. On the industrial front, high availability rates and sharply reduced construction activity have been the norm in the large distribution centres of Chicago and Atlanta.

By contrast, Terrebonne, QC-based ADF Group Inc., a structural steel fabricator, Thursday reported upticks in orders and bidding activity for much of North America after a year marked by declines in revenue and profit. The company reported that it had an order backlog of $116 million, a 17 per cent increase over levels seen a year ago, and is currently in the negotiation stage for $250 million worth of additional contracts.

Again on April 15, Fidelity Southern Corporation out of Atlanta, GA, holding company for Fidelity Bank, reported a net income of $195,000 for 1Q 2010 compared to a net loss of $3.4 million for 1Q 2009. Total residential and commercial construction and land loans decreased to $133.6 million or 10.4 per cent of loans at March 31, 2010, from $154.8 million or 12.0 per cent of loans at December 31, 2009, and $228.6 million or 17.1 per cent of loans at March 31, 2009. All real estate loans, excluding owner-occupied properties, as a percentage of capital decreased to 135 per cent at March 31, 2010, from 144 per cent at December 31, 2009.

In an effort to make more sense of these conflicting reports, Madison’s spoke Thursday to Ken Simonson of ACG.

“It depends on which segment of construction one is examining,” said Simonson in a phone interview. “Single family home building will likely start to increase within one year but most non-residential and multi-family building will continue to be down through 2010. There are huge vacancy rates, in fact occupancy rates are in excess of capacity, which has dampened demand for new construction.”

“Financing is almost unobtainable,” Simonson continued. “Rental suites and condos are oversupplied, which is driving down rental rates.” Generally speaking a decrease in rents causes a drop in property values.

“2010 will be even more difficult than 2009,” Simonson explained. “2008 was a record year, at least until September or October. Large building projects were carried through to 2009 but as these were completed plans for new projects dropped significantly. 2009 non-residential construction activity was carried along by backlogs and cash reserves, and companies were able to impose cost cutting measures like office closures and layoffs.”

“For non-residential construction, we will start to see an upturn in 2012,” concluded Simonson.

April 19, 2010

BC’s New Timber Pricing Policy

British Columbia’s Minister of Forests and Range, and Integrated Land Management, Pat Bell, has indicated recently that there would be some changes to timber pricing policy in the BC interior in order to take into account the volume of beetle kill wood. A new “stand as a whole” policy is being rolled out, with a first announcement coming on April 1, to be implemented June 1.

Madison’s examines this first announcement, and breaks down what the changes will mean for BC lumber producers.

Changes for BC

First thing Wednesday morning, April 7, Madison’s got a call from the US Coalition for Fair Lumber Imports asking for insight on a memo by British Columbia’s Deputy Minister of Forests and Range that had been posted April 1 on the Revenue Branch website. Madison’s had been unaware of the announcement, despite having checked with the Ministry of Forests information service a few days earlier. Upon investigation Madison’s discovered that many forestry professionals in this province also did not know about this memo.

Pat Bell, BC’s Minister of Forests and Range, and Integrated Land Management, has frequently indicated that a new, “stand as a whole” timber pricing model was coming to the BC Interior. With this announcement the foreshadowed change is now being rolled out, to be implemented June 1, 2010. Vivian Thomas, Communications Manager at the BC Ministry of Forests and Range, broke down the new system, explaining the differences from the previous system, and what that means for BC lumber producers.

The auction system currently in place through BC Timber Sales is referred to as MPS-B, and uses auction data to calculate the average timber price—with individual rates determined using a separate appraisal system. The new system, MPS-A, uses auction data to directly estimate the market value of individual timber stands (through the use of cutting permits). The latter method has been in place on the BC coast for about three years.

According to the Revenue Branch April 1 memo, “A single stumpage rate will be determined for all of the merchantable timber on the cutting authority area. The cruise of the timber will be used to determine the volumes for billing purposes [ . . . ] rather than the current system of scaling and post harvest waste assessment”.

Essentially, market prices are to be determined for entire stands of timber. At present there are separate prices for the sawlog timber and low-grade timber components of stands. This change eliminates the need to scale timber for grade.

So, no scaling and no log grading for regions of the BC Interior “where 35 per cent or more of the Mountain Pine Beetle damaged timber is Red and Grey attacked lodge pole pine”.

In an email, Thomas explained to Madison’s that cruise based billing means the charge for the stand is based on the volume of timber in the stand as measured in a cruise multiplied by the average value of the timber in that stand. (Editor’s note: Timber cruising is a method for measuring the volume and grade of timber prior to harvest while the timber is still standing Scaling measures volume after harvest when timber is in the form of logs). Cruise-based billing is calculated on the total merchantable volume, and results in licensees paying stumpage for the entire volume. Cruise-based billing eliminates the need for scaling and waste assessments and therefore should make more stands economical to harvest.

The cruise will assess stumpage on all merchantable volume within the cutting permit, whether the licensee harvests the volume or not, thereby encouraging “greater utilization”, according to the Ministry.

A question immediately leaps to mind: if there’s no scaling or grading, how do you know you’re getting fair value for the timber? Thomas explained that BC Timber Sales auctions are used in the pricing. Industry already does cruising to a high standard and the ministry does check-cruising and inspections to ensure only timber that was cruised and appraised is removed.

What does this mean to BC lumber producers and exporters in practical terms?

As the changes don’t take effect until June 1, there is no clear answer to that question right now. However there is concern that an accurate account of harvest volumes will not be calculated, or will be more difficult to calculate. More cynical observers think that, despite the incentive to utilize the entire stand, companies are going cut everything but only take the quality timber, leaving the rest on the ground.

Another question that pops up is: why implement such a change at this time, when the majority of the pine beetle infestation has run its course?

Rob Kitamura, of the Southern Interior Timber Cruisers Association, provided some explanation of how this new system could work. Despite being short on details, and pointing out that the Association will be holding a Timber Cruising Seminar in the southern interior on May 20 by which time more details will come to light, Kitamura explained that the cruise, “takes into account volumes and quality and damage.” As a cost-cutting measure, eliminating scaling and grading should not be an issue as cruisers are bound by the ethical requirements of their profession.

Madison’s caught up with Pat Bell for further explanation.

“The ‘stand as a whole’ system more closely parallels the US system,” said Bell in a phone interview. “Focussed on areas heavily attacked by the pine beetle, the value of a stand will be determined by a previously assessed value of a comparable block in a regionally sensitive manner.” Bell maintains that, in reality, most of the “blocks will be virtually 100 per cent dead” timber. “This method encourages the highest utilization” of the forest.

There will be no longer a need for scaling, because the stand will be paid for in its entirety in advance. This is where the incentive to use everything will come in.

“The issue of Grade 4 logs goes away. Whether it is a sawlog or Grade 4 doesn’t matter anymore,” said Bell. “The Ministry of Forests knows where the stands are, that qualify for MPS-A, and uses an independent cruise to periodically check the harvest information.”

This new model has been “run on little pilots, within BC Timber Sales under the Innovative Timber Sales License, and will eventually extend to tenure volume,” explained Bell. “It took time to acquire sufficient data to shift to MPS-A, in a further move to a full market-based pricing system according to the terms of the 2006 Softwood Lumber Agreement. This new system makes a clear, simple calculation of the true market value.”

The data upon which the MPS-A is based was provided by BC Timber Sales, of log prices over the past five years.

The Revenue Branch web page announcing the policy change can be found here

while the memo itself can be found here!publish/web/InfoPaper/Interior-Timber-Pricing-Changes.pdf

Madison’s Live Online Lumber Producer Listings

Calling all Canadian dimension lumber producers, remanufacturers, wholesalers and exporters, panel, pulp and paper, and cedar makers! Madison’s is updating its mill listing information.

Contact us to make sure your company information is accurate.

Japan Timber Supply and Demand Forecast

On March 23, Japan’s Forestry Agency held a meeting concerning lumber supply and demand and formulated the supply and demand prospects for major timber in the 2nd and 3rd quarters 2010, says the Japan Lumber Journal. According to the mean values from a research agency of a private financial institute, the forecast for construction starts is 840,000 to 850,000 units for 2010, and an increase up to 920,000 units is expected for fiscal 2010 in the forecast.

Japan Timber Demand

Nishimura Mokuzaiten Co., Ltd. in Central Japan, as a sawmill specializing in cypress, is planning to raise its monthly consumption of materials to 5,000 cubic meters in August this year. It has set its yearly consumption of materials at 80,000 cubic meters for fiscal 2010.

In fiscal 2010, Kuma Forest Cooperative in the Shikoku (the Chuyo mountainous) area is planning to consume 65,000 cubic meters of logs in its Chichinokawa office, where the cooperative is manufacturing studs and laminated lumber.

Kumamoto Cooperative of Sawmills in the Kumamoto area is aiming at 100,000 cubic meters of log consumption in fiscal 2010 in a two-shift system. At present, it is planning to procure logs from Miyazaki prefecture, which is south of Kumamoto, and make active use of logs in national forests.

Mochinaga Mokuzai Co., Ltd. in the Miyazaki area, which consumes 70,000 cubic meters of logs, installed a high-speed molder which can process 10,000 pieces of studs per day.

By operating this new system in two shifts from April, its annual log consumption will become 80,000 cubic meters. Combined with existing facilities it will exceed 100,000 cubic meters.

– Japan Lumber Journal

Housing Starts, Canada

Canadian housing starts fell for the first time in three months in March, Canada Mortgage and Housing Corp said Monday, led by multiple-family projects.

Starts declined 1.5 per cent to a seasonally adjusted annual pace of 197,300 units from a revised 200,400 units in February. Work on urban multiple-family homes fell 15 per cent to 77,500 units, and work for new singles rose 6.9 per cent to 97,700 units.

Canada Mortgage and Housing also increased its estimates for February and January. Starts increased by 7.5 per cent in January and by 6 per cent in February, the government agency said.

Canadian Housing Starts

The pace of housing starts – and broader real estate activity – will likely ease in the second half of this year as mortgage rates rise and new tax regimes and regulations dampen the market, economists said.

“It’s a bit hard to believe starts will hold at this level,” said Pascal Gauthier, economist at Toronto-Dominion Bank.

Canada requires a pace of housing starts of about 175,000 to 185,000 to keep up with demographic demand, economists estimate.

Single starts are now running at a four-year high. “Activity in this sector is now up 126 per cent from the recession low and … has seen 11 consecutive monthly gains since bottoming in April last year,” Bank of Montreal economist Robert Kavcic said.

Starts fell 16.3 per cent in British Columbia, 15.5 per cent in Ontario, and 8 per cent in Atlantic Canada. They rose 13.5 per cent in Quebec and 7.3 per cent in the Prairies. Rural starts were estimated at 22,100 units in March.

US Housing Starts

Permits to build new US homes unexpectedly surged in March to their highest level in more than one and a half years. Building permits, which give a sense of future home construction, jumped 7.5 per cent to a 685,000-unit pace last month, the US Commerce Department said Friday. Markets had expected a 630,000 unit-pace.

New home construction was the highest since November, although the bulk of the rise was in the volatile multifamily segment.

House starts rose 1.6 per cent to a higher than expected seasonally adjusted annual rate of 626,000 units. February’s housing starts were revised up to show a 1.1 per cent increase, which was previously reported as a 5.9 per cent drop.

A National Association of Home Builders survey on Thursday showed home-builder sentiment rose to a seven-month high in April as consumers rushed to take advantage of a home-buyer tax credit. Better economic conditions also helped.

US Housing Building

“The surge in single family permits that is the main leading indicator within the report, should be regarded as a very positive sign that the recovery is gaining some momentum even within the weakest sector of the economy,” said Alan Ruskin, chief international strategist at RBS Securities in Stamford, Connecticut.

New home completions fell 3.1 per cent to a record low 656,000 units. The inventory of total houses under construction dropped 1.4 per cent to an all-time low of 489,000 units in March, while the total number of units authorized but not yet started soared 7.5 per cent to 103,200 units — the highest level since June.

“The bottom line is that there is an upward trend [and] construction will be moving higher provided that new-home sales improve as well,” said Michelle Meyer, economist at Barclays Capital.

Meyer cautioned that one should not get carried away with the improvement as it comes from “an incredibly low level of activity.”

The government cautioned that its monthly housing data are volatile and subject to large sampling and other statistical errors.

Madison’s Timber Preview

Madison’s Timber Preview this week looks at the list of capital investments announced in the past few weeks for the building of biofuel and cogeneration facilities at various solid wood, pulp, and paper mills around the world. In total $1.4 billion in investment has been announced in the past few weeks alone.

Contact us any time for a subscription.

US Softwood Lumber Tax

Lumber traders and exporters across Canada were poised on the edge of their seats this week in anticipation of a reduction in the softwood lumber tax for Option A provinces. Expectations are that, based on current and short term projected lumber prices, the duty will fall to 10 per cent for May. Some also expressed hope at the possibility that the supply/demand balance for solid wood products in North American would move further into constricted inventories, which could potentially cause the duty to go to zero by mid-summer.

Canada Building Permits

Canadian building permits fell unexpectedly in February, a result of the decline in multiple-dwelling residential construction plans, Statistics Canada reported Wednesday.

Permits dropped 0.5 per cent to $5.7 billion, despite an increase for commercial buildings and single-family dwellings, said the federal agency. Economists had expected permits to increase by two per cent.

Canada Building, Economy

When compared with last year, however, the permit value is 56.7 per cent higher than it was at its lowest level during the economic slowdown.

Municipalities issued permits worth $2 billion, a 16 per cent gain following three consecutive months of declines. Permits for commercial buildings posted the largest gain in February.

The value of commercial building permits totalled $1.3 billion, up 27 per cent from January. The increase was mainly due to hotels and office building construction permits in Ontario and Quebec. Alberta recorded an increase in permits for recreational buildings and retail stores.

Analysts were not perturbed by the 7.5 percent decline in the value of residential permits, saying that supply in the housing market remains strong despite an expected surge in demand in the spring ahead of widely forecast interest rate increases later in the year.

Also on Wednesday, the Ivey Purchasing Managers Index rose to 57.8 in March from 51.9 in February. A reading of above 50.0 indicates an increase in activity.

The Ivey employment index jumped to 51.6 in March from 41.3 in February, while the inventory subcomponent rose to 55.2 from 47.9.

The Ivey index is based on figures from 175 members of the association. It is roughly equivalent to the US Institute of Supply Management indexes, but is not seasonally adjusted.

Japan Housing Starts

Seasonally adjusted February housing starts in Japan declined for the 15th straight month, falling by 9.3 per cent compared to February 2009, and 8 per cent compared to January 2010, to 794,000 seasonally adjusted units, according to the Japan Lumber Reports.

However actual housing starts increased by 26 per cent over January.

Applications for large building permits started to increase, which is a good sign for recovery. Meanwhile Japan experienced a sharp drop in new condominium building. On the increase are detached units and units built for sale, says the Reports.

Wood based unit building increased for two straight months, to a share of 57 per cent of all building, a 3.5 point increase from January 2010.

Housing Starts, Japan

Japan housing starts have been recovering since the bottom of 688,000 units in August 2009, but for February the large drop in condominium starts brought the total down. Units built for rent are also slow to recover.

In February, units built for owners increased for four consecutive months, particularly in the Tokyo metropolitan region whre independent units built for sale increased for two straight months, says the Japan Lumber Reports.

April 11, 2010

Forest Fire Season

In a frightening foreshadowing of what might come in this year’s forest fire season, British Columbia, Alberta, and other northern regions have made a preemptive strike by issuing summer forest fire warnings. Lower than usual snow fall and winter precipitation levels are cited as the reasons for this year’s early warnings, but the devastation of the mountain pine beetle in the interior of BC has exacerbated the severity of this the basic cause for great concern. The BC Ministry of Forests, Alberta’s Ministry of Sustainable Resource Development, Ontario’s Ministry of Natural Resources, the Wisconsin Department of Natural Resources, as well as agencies in the Philippines, Cuba, and China have all issued forest fire danger warnings in the past week. Fast snow melt, low precipitation and dry timber have been given as reasons for the current concern.

Arrives Early

In Alberta, officials estimate ground moisture levels in most Alberta forests at about 80 per cent of normal levels, so this year’s fire season starts in that province on April 1. Below-average snowfall across Alberta could mean a busy summer for firefighters. Officials say they project spending of $52 million on firefighting efforts this year, opening 127 fire lookouts and maintaining 57 bases. Last year, there were more than 1,600 wildfires in Alberta, torching 67,000 hectares of land. More than half were started by human activity.

Ontario is already experiencing forest fires. A bush fire ignited this week just off Highway 17 between Wahnapitae and Kukagami Lake Road, and is only one of 14 forest fires to occur in the northeastern region of the province so far this year. That province has also issued warnings effective April 1. The Greater Sudbury area is already considered to be at a moderate fire risk level, along with the North Bay area and the whole northwestern area of the province. A lower than normal snowfall, plus an early spring, have contributed to the early fires.

In Wisconsin, the fire danger risk remains “very high” in the Northwoods with the recent unseasonably warm weather bringing no relief to the dry conditions, according to Forest Ranger John Gillen. All burning permits in the area have been suspended for the time being. “It will take quite a bit of moisture to lower the fire danger level,” said Gillen.

In BC, areas that were hit with the beetle infestation first are now covered with standing dead timber that is very low in moisture content and depleted of resin. Twelve or fifteen-year dead trees rise to the sky, devoid of needles, like so many matchsticks awaiting a lightening strike or wayward spark from a foolish passerby. The forest floor is littered with dry pine needles. With no canopy to block sunlight, grasses grow during summer but then die off in winter, adding yet more fuel to a potential fire. Eventually bacteria and mold attach to the bottom of dead trees, after 10 years the trees fall in a lattice work, with underbrush growing through. This all serves to create the perfect conditions for an epic forest fire.

John Betts, Executive Director of the Western Silvicultural Contractors’ Association, told Madison’s in an interview, “The September 2009 Lava Canyon fire west of Williams Lake was forest killed by the pine beetle in the 1980’s. 30 year dead wood and waist high dry pine needles add the vigour of a secondary structure to fuel a fire.” The average moisture content of beetle kill is approximately 20 per cent, said Betts, which is about half the usual amount for green timber.

“We are going to have fires of more intensity and severity,” said Betts. “The wood on the ground burns the soil, which may actually harm the site and cause reduced productivity in the future.”

This fuel provided by the pine beetle devastation needs to be managed, needs to be removed not only so replanting can take place but also to mitigate fire danger. “We can’t fight fires until we take the heat out of the woods,” said Betts.

Together with other scientists Betts created a comprehensive hazard assessment, a pilot model, for forests that had departed from their regular pattern of disturbance to measure the fuel hazard. Using BC’s Okanagan forest district as an example, Betts explained, “there were disturbance regimes of seven to 10 years, areas that hadn’t burned for 80 years. The danger in this area was extreme.” Betts classified the assessment results as “disturbing”, which Madison’s considers to be a great understatement.

The BC government is well aware of this fire danger. In an interview last year, Pat Bell, Minister of Forests and Range, and Integrated Land Management, explained to Madison’s that the province’s lightening detection technology and communications network means crews can respond to a lightening strike fire within 24 hours (refer to the July 25, 2008 issue of your Madison’s Reporter for details on BC’s forest fire emergency response). Efforts at educating the public about forest fire safety have already begun, with a warning issued Thursday morning for “British Columbians to reduce wildfire hazards around their homes and exercise caution with backyard burning activities this spring.” Visit for more information.

The Forest Practices Board of BC issued a release in early February titled, “Managing Forest Fuels in the Wildland Urban Interface” which addresses concerns of clearing the threat of forest fires in areas where there is human development. The report focusses on the issue of public safety arising from the risks of wildfire where communities have extended into the forest, known as ‘wildland urban interface areas’. Provincial estimates are that 685,000 hectares (or 6,850 square kilometres) are at high risk of an interface fire.

“Years of very successful fire suppression, dry weather, insect infestations and increasing and uncoordinated development across the forest landscape have combined to create ideal conditions for catastrophic wildfires affecting thousands of people,” the report warns.

Lumber Market Forecast

Scotiabank commodities expert Patricia Mohr, proven over time to have spoken with sound accuracy, has some good news for BC’s battered lumber sector. Lumber prices are expected to surge in two to three years as years of timber and capital destruction begin to affect the market, Mohr said Monday.

“Medium-term [around 2012-2013], lumber prices and timber values in the BC Interior are expected to skyrocket as the annual allowable cut is reduced in BC due to the mountain pine beetle infestation and as the capital destruction of the past four years translates into fewer-than-expected North American mill restarts,” Mohr said in her latest commodity price index.

Residential housing is currently being under-built in the United States.

Commodities Report

Year-over-year lumber prices jumped 85 per cent in February to $282 US per thousand board feet, although they declined in March to $275, Mohr said.

Still, prices should average $243 this year, up from last year’s average of $178, thanks to price increases in the third quarter, she said.

“U S housing starts should improve modestly to 700,000 units in 2010 and 1.04 million in 2011, up from a very weak 550,000 units in 2009,” said Mohr.

“Financial market concern over sovereign debt risks in Greece, Portugal and Spain reduced investor risk appetite in early February, leading to a shift to ‘safe-haven’ US dollar Treasury securities and temporarily pushing down dollar-denominated commodity prices,” Mohr continued.

“Despite this development, the All Items Index remains 25.7 per cent above its cyclical low in April 2009, and will likely rebound again in March, with risk appetite returning.”

Eacom Timber buys Domtar Assets

BC-based EACOM is buying Domtar Inc.’s sawmills for $80 million, plus $30 million to $40 million in working capital. EACOM is paying partly in stock, so Domtar keeps a 19-per-cent equity stake in the new company when the deal closes around June 30.

Eacom Timber, Domtar

Rick Doman, CEO of newly listed Eacom Timber Corp., said. “The Quebec and Ontario softwood construction lumber industry has lots of life yet and prices have almost doubled from the dismal 2008-09 lows.”

Domtar, North America’s leading producer of business, copy and specialty papers and high-quality pulps, has had its sawmills on the block for several years.

‘’The Domtar sawmills are in good shape and cost-competitive, but they’re running at 60 to 70 per cent of capacity,’’ Doman said. ‘’We think we can get that up near 100 per cent, which would sure help the bottom line.’’ He said Eacom’s headquarters will move to Montreal.

Eacom is buying four sawmills in Ontario and three sawmills and a remanufacturing plant in Quebec. Two of the mills are now shut down. Altogether, they have capacity of almost 900,000 million board feet of lumber. Eacom also gets an interest in Arkansas’s Anthony-Domtar.

Global Manufacturing Demand for March Surges

From the United States to Europe and China, the latest readings on the manufacturing sector show industry bouncing back from the worldwide slump, when trade buckled and deep production reductions became the norm. While factory activity remains well below pre-recession levels, the marked pickup in global manufacturing is one of the most concrete signs yet that economies are healing after international trade collapsed last year.

The comeback in manufacturing is key to a sustained economic recovery around the world.

Manufacturing Shipments

The US Institute for Supply Management’s manufacturing index showed an increase to 59.6, a reading that outpaced even the most optimistic of forecasts. Exports rose to the highest level since 1989, while orders and production also picked up the pace.

The report, issued April 1, found that manufacturing activity, as measured by the Purchasing Managers’ Index (PMI), grew for the eighth straight month to achieve the fastest rate of expansion in nearly six years. The overall economy expanded in March for the 11th consecutive month, ISM said.

Both new orders and production exceeded the 60 per cent threshold, indicating that the economy ended the first quarter with “significant momentum going forward,” said ISM Chairman Norbert J. Ore in a statement. A reading of 50 or better indicates an expanding manufacturing sector.

Supplier deliveries, while showing an increase over February, indicated a slowing pace of growth. This may signify a shortage of available product, as well as a problem with order lead times. The survey’s respondents also said that the inventory levels held by their customers in March were too low, ISM said.

April 05, 2010

Globe 2010: Green Energy and Sustainability

This week British Columbia’s Ministry of Forests introduced new legislation, called The Zero Net Deforestation Act, to help BC reduce greenhouse gas emissions by 33 per cent by 2020, and fight climate change. Replanted forests will absorb and store carbon. The government hopes the newly created forest land will be equal or greater to what has been lost by 2015, said BC’s Minister of Forests and Range, and Integrated Land Management, Pat Bell in a CBC interview. Timber harvesting is not considered deforestation by the government because the government says that is already managed sustainably.

Sustainable Energy

This emphasis on sustainability, reducing or offsetting greenhouse gas emissions, and green energy, is part of a global movement away from former practices wasteful of natural resources toward making better use of the resources around us. To this end, Globe 2010, a biennial conference on business and the environment, held this week in Vancouver, BC, highlights developments and new technologies in green business. Globe 2010 is produced by the GLOBE Foundation, an international consultancy organization in the business of the environment, and North America’s longest operating producer of environmental events. More than 10,000 participants from at least 84 countries joined an elite roster of business and government leaders addressing the Future of Sustainability at the GLOBE Opening Plenary on Wednesday morning.

Madison’s attended the trade show Wednesday afternoon, gathering information from a wide range of businesses and agencies about new uses for forest residue. Most of the foreign delegates were unaware of the scope of the mountain pine beetle infestation in BC, nor had they been apprised of the availability of this fibre as feedstock in the manufacture of green energy. After a brief technical explanation from Madison’s, specifically in terms of moisture content of long-dead wood, the current viability of beetle kill to make pellets and indeed biofuel, and access to that fibre, each of the delegates remarked, “So why isn’t it being done?”

Madison’s had no good answer to that question, except to say that there seems to be some political constraint on tenure, and that the BC government’s policy to require applicants to hook their business model into the power grid through BC Hydro seems to be deterring investment.

According to the GLOBE Foundation’s February 2010 Report, Building a Strong Low-Carbon Future, “While BC’s forestry industries annually produce well over 2 million tonnes of by-product wood waste and forest residues that can be transformed into energy uses, there is also the potential for using some of the dead standing timber from mountain pine beetle-ravaged forests. With approximately half of the lodgepole pine in the province’s timber harvesting land base affected by the beetle—roughly 15 million hectares, equivalent to three times the area of Denmark—this dead wood can be used for various heat and power generating purposes, as well as for a burgeoning wood pellet industry.”

“In 2010, BC is expected to produce 3 million tonnes of wood pellets. While local wood pellet companies are in advanced stages of commercialization, over 90 per cent of BC wood pellets are currently exported, primarily to Europe and Asia for district heating and energy purposes. In addition to wood pellets, BC’s biodiesel production could reach 125 million litres per year if all potential sources of feedstock were used.”]

Apart from private businesses promoting their technology or extraction methods at Globe 2010, there were agencies working to facilitate the use of green energy, as well as various research organizations helping to foster more developments in uses for ‘waste’.

The BC Bioenergy network, established in April 2008 with a $25 million grant from the BC government, is an industry-led initiative that acts as a catalyst for deploying near-term bioenergy technologies and organizing mission-driven research for the development and demonstration of new bioenergy technologies that are environmentally sustainable for the province of BC. The province is steward to one of the largest forested areas in the world and a leader in biomass to value-added wood products. The BC Bioenergy Network will provide the leadership in developing and marketing wood-to-bioenergy and other bioenergy technologies. Its latest announcement, on March 24, details $1.5 million in conditional financing to the BC-based International Composting Corporation for a $7.7 million project to convert municipal source separated organic waste into vehicle and aviation biofuels. This is the first demonstration of these technologies in the world and will help to develop and support the renewable bioenergy and biofuels industry within the BC.

Forest resources are an integral part of the Bioenergy network’s green energy value stream, with solid wood residue, pulp and paper residue, timber harvest and pelletizing, and agricultural waste, making up fully half of the available feedstock for bioenergy in BC.

The independent power production industry in BC was originally launched in 1989 when the BC government instructed BC Hydro to issue calls for proposals for private power, and the Independent Power Producers Association of BC was incorporated at the end of December 1991. The mandate of the IPPBC is to develop a viable independent power industry in this province that serves the public interest by providing cost-effective electricity through the efficient and environmentally responsible development of BC’s generation and transmission resources and facilities. According to the IPPBC’s fact sheet on biomass, “Biomass generation is the creation of bioenergy from wood or wood residues, agricultural food and feed crop residues, aquatic plants, animal wastes, and tree farms. The technologies utilized to create bioenergy include combustion, gasification, pyrolysis, digestion, and gas collection. [ . . . ] Bioenergy production in British Columbia is limited to wood and wood residues, as well as landfill gas collection. While over 600 MW of capacity is currently in operation in the province at large pulp and paper facilities (largely co-generation), only 65 MW is in operation from Independent Power Producers (0.5 per cent of the province’s total generation portfolio). Future woody biomass sources in the province include existing mill wood residues, roadside debris and standing bug kill. Generation potential for existing mill residue is in excess of 200 MW. The total generation potential for all wood sources is in the order of 2,300 MW.”

Not only a major research facility into new uses for beetle-kill, including green energy, the University of Northern British Columbia is putting these resources, agencies and technologies to good use. Installation of a 1.4 million BTU pellet burning system in the University’s I.K. Barber Enhanced Forestry Lab is underway. This project is fully funded at $517,000. UNBC has also signed a letter of intent with Nexterra Energy to install a biomass gasification system that will provide heat to the core campus buildings and offset an estimated 85 per cent of current natural gas consumption (refer to the November 28, 2008 issue of your Madison’s Reporter for more information on Nexterra’s process for extracting energy from forest residue). This 15-million BTU fixed-bed gasification project has attracted $5-million from Public Sector Energy Conservation Agreement funding and $3.5-million from the Government of BC’s Innovative Clean Energy fund – just over half of the $15-million estimated total project cost (refer to the May 22, 2009 issue of your Madison’s Reporter for more information on BC’s ICE fund).

The green economy in British Columbia could be worth more than $27 billion by 2020, according to an independent study by the GLOBE Foundation of Canada. The study determined that BC’s six green sectors in 2008 contributed $18.3 billion in revenues to the BC economy, accounting for nearly 166,000 direct and indirect full-time equivalent jobs (equal to 7.2 per cent of total provincial employment) and $15.3 billion to provincial GDP (equal to 10.2 per cent of total provincial GDP).

Clearly a growth industry, green energy is a natural fit for BC’s forest companies, as those with access to fibre and expertise in getting timber and slash roadside. What has been considered, until very recently, a liability—or at best something to simply be left behind after harvest—is already proven to be a valuable source of revenue for anyone willing to make the business connections and effort to embark on salvage.

US Infrastructure Spending

A newly-signed stimulus package in the US will bring infrastructure spending on highways and surface transportation in that country for the next five years. An extension to the “Highway Act” to the end of 2010, and funding, tax credits and rebates, and other incentives, are now available in a new bill signed Thursday by US President Barack Obama.

“Highway Act” Job Creation

The most recent multiyear federal highway bill, SAFETEA, (the Safe, Accountable, Flexible, Efficient Transportation Equity Act) was passed in 2005, providing US$42 billion per year nationally to fund highway and bridge projects for cities, counties and states. When it expired in September 2009, Congress extended SAFETEA, but only at a $30 billion annual level. The HIRE (Hiring Incentives to Restore Employment) Act passed on Wednesday by the US Senate and signed Thursday by President Obama extends funding for SAFETEA through December 31, 2010. The bill pumps US$19.5 billion into the Highway Trust Fund to ensure its solvency just in time for the spring construction season, restores US$8.7 billion in funding for states, and restores the funding to the federal highway program’s 2009 level of US$42 billion.

In addition to the highway funding, the bill provides hiring tax incentives, extends a tax break for small businesses buying new equipment, and modestly expands an initiative that helps state and local governments finance infrastructure projects. The bill will also allow the Highway Trust Fund to collect interest in deposits and pay fuel-tax exemptions for government vehicles out of the General Fund rather than the Trust Fund.

For US$18 billion in hiring tax credits, the Congressional Budget Office predicted the bill won’t create more than 300,000 jobs. Optimistically, this moves forward US job creation by about a month and a half.

“The beauty of this bill is; it’s simple, it’s focussed on private-sector job growth and it’s paid for,” said New York Democratic Senator Charles Schumer, one of the measure’s co-authors. “It’s modest, but … it’s almost a legislative dream.”

The Senate vote came as the House Ways and Means Committee approved a bill that lawmakers hope will generate jobs through infrastructure spending and tax cuts for investing in some small businesses. This bill would exempt long-term investments in certain small businesses from capital gains taxes, and would expand the Build America Bonds program, which subsidizes interest costs paid by local governments when they borrow for construction projects. The bond program would be extended through June 2013, at a cost of US$7.6 billion. The entire bill would cost about US$17 billion over the next decade.

These are the first of several jobs bills passed that had been promised by Democrats. Optimistic estimates predict the tax break could generate perhaps 250,000 jobs through the end of 2010, but that would be just a tiny fraction of the 8.4 million jobs lost since the start of the recession.

“The impact on hiring will be small,” writes Augustine Faucher, director of macroeconomics for Moody’s “Before business will really boost payrolls they need to be convinced that the recovery will strengthen.”

According to Moody’s prediction, America’s jobless rate will peak near 10.3 per cent in the second half of 2010 – a forecast the firm said it did not change as a result of the legislation Mr. Obama signed Thursday. This is a worrisome prediction for politicians since it means unemployment rate would be in the double digits when voters go to the polls in November.

The Highway Trust Fund extension will enable states and local agencies to advance mass transit and highway projects, creating and preserving 1 million jobs, said Democratic Senator for California, Barbara Boxer, who chairs the Senate Environment and Public Works Committee, in a prepared statement. “Now … we will focus on moving forward with a transformational transportation authorization that will create jobs and build the infrastructure America needs for economic recovery and long-term prosperity,” she said.

Senator Byron Dorgan, the retiring North Dakota Democrat with a track record of economic prescience, warned that real progress in job creation will only come if the administration addresses the toll of uncontrolled globalization. Likening today’s jobs bill to opening a (small) faucet, Dorgan noted: “Even as we do that, we’ve got a wide open drain.”

But he said that the minute you start talking about protecting American jobs in this town, “you are called some sort of xenophobic isolationist stooge who just can’t see over the horizon.”

“We are delighted that the House and the Senate have reached final agreement on this significant piece of legislation,” said John Horsley, executive director of the American Association of State Highway and Transportation Officials in a statement. “It’s a win for the economy and a win for workers and the communities which will benefit from the transportation projects to be built across the country.”

“The vast majority of the public understands that a commitment to congestion relief and safety investments on our roads and bridges will help every part of America become stronger,” said Greg Cohen, president and CEO of the American Highway Users Alliance. “This bill should provide stable guaranteed funding for our highways from 2011 to 2016,” Cohen said. “But Congress also needs to prepare the American people to pay for this bill ‘as-we-go’ with adequate highway user fees on gasoline and diesel. [ . . .] Without a new six-year bill, a weak and unstable highway program will be funded only in drips and drabs – leaving thousands of projects stuck on drawing boards and motorists stuck in congestion,” Cohen said.

Matthew Lewis of the US Center for Public Integrity notes, in an excellent examination of transportation lobbying, that political support for a particular project tends to be a far higher priority than the economic benefit a particular project may bring. As a result of this need to curry political favour, rural projects tend to get an outsize return on their tax investment and the pet projects of powerful politicians tend to get precedence. More egregious examples include Alaska’s “road to nowhere”, which leads to a non-existant bridge meant to connect Ketchikan with Gravina Island, where Ketchikan International Airport is located, and John Murtha Airport, which is located in a small Pennsylvania town and receives just three commercial flights a day.

Madison’s Timber Preview

This week’s issue of Madison’s Timber Preview examines Fortress Paper’s financial performance, and looks at the company’s purchase of an idled Fraser Papers pulp mill in Thurso, QC.

Contact us any time for a subscription.

US New Home Sales

Sales of new homes in the US fell in February primarily due to snowstorms and layoffs, revealing the continued weakness in the housing sector. Demand for single-family homes decreased 2.2 per cent from the previous month to a seasonally adjusted annual rate of 308,000, setting a new record low, the US Commerce Department said Wednesday. Records began in 1963.

Year over year, sales were lower by 13 per cent from February 2009 – despite a big government tax credit. Buyers are passing up on new homes in favour of cheaper used homes. Some economists are projecting an extended $8,000 incentive for first-time buyers could lead to increased activity in the spring.

US Home Sales, Employment

Wednesday’s new-home sales data showed inventories picking up slightly again. There were an estimated 236,000 homes for sale at the end of February, a 1.3 per cent increase from 233,000 in January. The months’ supply at the current sales rate increased to 9.2 from a revised 8.9 in January.

The median price for a new home increased, year over year, in February 5.2 per cent, to $220,500 from $209,700 in February 2009.

If prices go up, so might supply – the so-called “shadow” inventory of property kept off the market by homeowners waiting for better conditions.

Regionally, new-home sales in the West saw the only gain in February, 20.8 per cent. Meanwhile, new claims for unemployment benefits fell more than expected last week as layoffs ease and hiring slowly recovers.

The US Labor Department said Thursday that first-time claims for jobless benefits dropped by 14,000 to a seasonally adjusted 442,000.

But most of the drop resulted from a change in the calculations the department makes to seasonally adjust the data, a Labor Department analyst said. Excluding the effect of those adjustments, claims would have fallen by only 4,000.

Fewer Canadians also received jobless benefits in the start of the year, and the number of new claims continued to decline.

The number of people in Canada receiving employment insurance fell 6.4 per cent to 698,800 in January from a month earlier, Statistics Canada said Wednesday, the fourth straight monthly decline. The report does not include the number of people who exhausted their EI benefits.

Grant Forest Products to Sell Mills

Georgia-Pacific moved one step closer to completing its acquisition of Grant Forest Products’ oriented strand board facility at Englehart, ON, the associated facility at Earlton, ON, and OSB facilities at Allendale and Clarendon, SC.

Grant Forest Products is offering the Timmins oriented strandboard mill for sale and has advertised for tenders. So far, Grant has arranged for the sale of its Englehart, ON, plant, but not the Timmins, ON, operation, located on Highway 101 West. It’s this plant where unionized workers have been locked out since September 2006.

Grant Mill Sale

Georgia-Pacific, bidding to buy the Englehart operation, has indicated it has no interest in the Timmins plant.

The deadline for submission of offers for the Timmins plant is next Wednesday, March 31, which the company says it may decide to extend.

Timmins-James Bay MP Charlie Angus demanded the federal government ensure Canadians’ interests are put at the forefront when approving any foreign takeover of Canadian companies.

“Right now we are looking at the third largest OSB manufacturer in North American disappearing in a fire sale, bank sale. Grant Forest Products runs four of the five largest and most efficient OSB mills in North American and it is about to be taken over by Georgia-Pacific. There will be hundreds of layoffs of white-collar staff in training, development and marketing,” Angus said in the House of Commons.

Conifex to Buy Abitibi-Bowater’s Mackenzie Assets

Conifex Inc, currently running a formerly long-shuttered sawmill in Fort St. James, BC, this week confirmed it’s purchase of the Abitibi saw mills in Mackenzie. The Quebec Court has approved the sale but there are still some conditions to the deal. It’s expected the deal will close by the end of June.

Abitibi’s Mackenzie Sale

Under the deal, Conifex will get the sawmill and planer, the newsprint plant, and the timber rights with an annual allowable cut of approximately 932,500 cubic metres. The two sawmills will be combined and modernized into one operation.

The company says it intends to sell the newsprint mill assets but will retain the power generation assets which can produce 13.8 megawatts of electricity.

Conifex and its affiliates, on a combined basis, will own sawmills having an annual lumber production capacity in excess of 600 million board feet on a two-shift basis, all supported by renewable forestry licences with an allowable annual cut of approximately 1.6 million cubic metres.

Ken Shields, CEO of Conifex, stated: “This acquisition is consistent with our objectives to invest in promising softwood fibre supply regions and to upgrade and operate low-cost lumber converting facilities.”