Lumber News Archives: Oct 2010

Biomass Fuel ; Canadian Rail Problems ; US Mortgages, Continued Trouble ; USDA referendum ; Nova Scotia Biomass Funding ; More Funds from Green Transformation Program ; WFP Another CEO Change ; US Requests Canadian Softwood Lumber Consultation ; Log Prices and Timberland Values ; Madison’s Timber Preview: US Foreclosure Freeze ; Housing Starts, Canada ; Japan Housing Starts and New Wood Building Law ; BC’s New Wildfire Management Policy ; Log Prices and Timberland Values ; Wildfire Danger US ; Mill and Asset Sales ; Québec Forest Industry Council New CEO; Pine Beetle Damage and Fuel from Wood ; US Economic Outlook ; Madison’s Timber Preview: WY Exits Wood Products ; US Home Building and Economy ; Japan Wood Utilization Law ; Wildfire Activity ;

October 24, 2010

Biomass Fuel

Vanilla and smokey wood flavouring, ethanol, adhesives, textiles, coatings, animal feed, soft acids, chemicals, and gasoline are but a few products made from wood through exciting new developments in biomass technology. At the Canadian Bioenergy Conference, dubbed CanBio, September 30 to October 1 in Vancouver, speakers from around the world gave presentations on the latest breakthroughs in uses for cellulose and lignin.

Fast Growing Developments

Jerry Gargulak, of Borregaard Industries in Norway, kicked off the Thursday afternoon session with a fact-jammed presentation titled ‘Bio-Refining for Pulp Mills‘. Introducing himself as a chemist and lignin technologist, Gargulak explained that his job revolves around finding value in wood residue. The main components of wood that can be used for these various applications are; lignin, including lignosulfate (modified) and oxylignin; cellulose, specifically cellubiose octanacate; and hemi-cellulose and sugars, which can be used to make yeast, bioethanol and animal feed.

“Once you start manufacturing material from lignin you can’t change your feedstock, or you will see a change in product quality,” explained Gargulak. “Rather than sell your product as a commodity, try to sell it as a service.”

Paper production ceased in Norway 30 years ago, pulp production 20 to 25 years ago, Gargulak said by way of explaining the move from a commodity-based mentality to that of service.

“In the EU, the biofuel incentive program drove up the cost of feedstock. In the past biofuel or biochemical producers were dependent on the sulphite process, thus were dependent on feedstock from the pulp mills. Now the focus is on hydrolysis of cellulose,” detailed Gargulak. “The current strategy is to produce chemicals, not biofuels. But a second-generation biofuel partnership might be a good fit.”

Second-generation bioproducts was a term Madison’s heard frequently from the presenters.

Randal Goodfellow of Ensyn, spoke next on ‘Pyrolisis Oil — Basis for Bio-Refineries‘. Working with a proprietary process called fast pyrolisis, Ensyn converts solid biomass into a liquid in one second, with the result a highly pure, high level of conversion. This result can be used to make a wide range of chemicals or energy products.

“Our production method involves flash heating of biomass in the absence of oxygen. Sand is introduced to the operation as a medium to carry heat through the system,” said Goodfellow. “There is a gas byproduct, some of which is returned to the system to move the sand around, the rest goes to a dryer which gets the moisture content of the biomass feedstock down.”

The energy products are already cost competitive per BTU with traditional gas heating, explained Goodfellow. The next stage of research and development for Ensyn will be of moving into pharmaceuticals and nutraceuticals.

Herve Chauvin, CEO of Thermya out of France, spoke next on pellets. Not just any kind of pellets, but ‘Torrefied Wood in Production‘.

“At Thermya we make a high-performance solid fuel out of biomass. We recycle wood waste into carbon fibre,” began Chauvin. “Our product is very dense, with up to 95 per cent energy content and less than 1 per cent moisture content, which makes it more compact and easier to burn [than standard pellets].”

In terms of energy, Thermya found the best results come with biofuel and biocoal cofiring.
“Our torrefication process uses 240 degrees Celsius soft thermal heat to break the wood fibre. The lignin is not changed, there is still cellulose. We then make pellets at 160 to 180 degrees Celsius. Greater heat is not needed,” explained Chauvin to the many questions from the floor. “There is a neutral gas byproduct. It is best to use torrefied wood to make second-generation pellets, as the process uses less energy than first-generation pellets.”

Thermya’s operations produce five metric tonnes of pellets per hour.

Just in case there remained skeptics in the room, Ken Shields of Conifex Timber Inc spoke Friday morning about ‘Partnerships in the Forestry Sector‘.

“Conifex has 1.75 million cubic meters of replaceable fibre at our Fort St. James mill site. This is mainly spruce and pine, not fir. We will be able to maintain capacity even after the ravages of the mountain pine beetle kill is over,” outlined Shields. “The British Columbia Ministry of Forests has designated MacKenzie and Fort St. James as biomass areas.”

Shields maintained that, in order to embark on a proper working relationship, partners need an assured and low cost fibre supply.

“Also, BC is not currently fully utilizing biomass. It makes good business sense to make better use of the forests,” Shields said. “In terms of logistics, roads and handling areas are already in place. The infrastructure is already in place for a biomass plant in MacKenzie.”

Conifex has determined that a 34 MW plant with potential for upgrades is ideal given the fibre supply situation in BC. The MacKenzie plant is now 13.8 MW.

“We see green field opportunities of about $120 million or more,” Shields summed up.

At the end of his presentation Shields rattled off recent changes and developments in BC, quickly mentioning that Conifex has “replaced about half the slippage of US lumber demand with customers in China,” which was a juicy tidbit of information indeed.

In answer to another mad flurry of questions from the floor, Shields detailed, “With $10 to $15 million in cash flow and 320 kilotonnes of production annually, $30 to $50 per metric tonne for fibre is a price that makes sense.”

Jack MacDonald of FPInnovations kicked off the final afternoon session with his presentation ‘Roadside Harvest Residues for Feedstock’. MacDonald’s research has focussed primarily on discovering how much biomass is available in the forest, and how much it costs to transport this biomass.

“Most roadside residue is underutilized,” explained MacDonald. “Biomass salvage is a continuation of the traditional logging process, the logger simply changes how they handle the residue so that residue can be utilized. There are no changes to the cut block in terms of leaving behind residue, its a matter of dealing only with the roadside.”

MacDonald’s work discovered that transport of residue up to 80 or possibly 100 km was the farthest range for the process to be economical.

Canadian Rail Problems

The studs comment, on page 3 of last week’s Reporter said it all, “Prince George, BC, is gradually going to become a hub for tranport through the expanded Port of Prince Rupert. Unfortunately, the CN yard in Prince George is only running one shift and that is slowing the development of business out of Prince Rupert.”

This week Canadian forestry companies called for improvement of CNRail and CP Rail freight rail services. They asked railways and shippers to cooperate on voluntarily implementing a minimum notification period for changes of rail service, to negotiate good-faith service agreements, and to make reporting of service performance more transparent.

This week’s market comments on pages 1 and 3 of your Reporter give further details on freight transportation problems.

US Mortgages, Continued Trouble

As detailed in last week’s issue of Madison’s Timber Preview, some US banks and mortgage lenders have been processing foreclosure and eviction documents without proper documentation.

Home Foreclosures, US

US President Barack Obama this week endorsed a coordinated investigation by attorneys general from all 50 states into whether lenders used false documents to justify foreclosures. Mounting a response on the federal level is complicated by the fact that responsibility for overseeing housing finance and foreclosure law is fragmented among US, state and local agencies, with no single regulator shaping policy.

Bank of America is reviewing 102,000 foreclosure affidavits in 23 US states and expects to halt 30,000 foreclosure sales during its self-imposed moratorium, a company spokesperson said on Friday.

US mortgage rates reached new record lows in the latest week, according to a Freddie Mac survey released on Thursday, as data showing economic weakness fueled demand for safe-haven government debt.

Interest rates on US 30 year fixed-rate mortgages, the most widely used loan, averaged 4.19 per cent for the week ended October 14, down from the previous week’s 4.27 per cent.

The Mortgage Bankers Association said on Wednesday mortgage applications for home refinancing loans rose for the first time in six weeks, with demand jumping to its highest level since late August.

An increase in refinancing may provide a jolt to the economy as it could portend an increase in consumer spending.

USDA referendum

A USDA referendum for a Softwood Lumber Research, Promotion, Consumer Education and Industry Information Order, to assess a $0.35 per thousand board feet “User Fee” against imports of softwood lumber, as well as domestic sales within the US, was proposed this week, Madison’s has learned from Jones & Jones Customs Brokers and Trade Consultants.

User Fees, USDA

The stated purpose of the Order is to support and promote the use of softwood lumber in the US. Softwood lumber articles are the same as those captured by the 2006 Softwood Lumber Agreement, as well as those captured by the US Softwood Lumber Act of 2008, explained Michael Jones, President of Jones & Jones Customs Brokers, to Madison’s in an email.

There are provisions allowing for the $0.35 mfbm assessment to be increased to $0.50 mfbm
Interested parties have until November 30 to submit their comments regarding the referendum. If the referendum passes, US Customs will be charged with the collection of this user fee on imports. US producers will make their submissions to the Blue Ribbon Commission Board, said Jones.

See the USDA press release here.

Nova Scotia Biomass Funding

The Nova Scotia Utility and Review Board has approved a $208 million biomass project proposed by that province’s power utility and the owners of a Port Hawkesbury paper mill.

Funds, Biomass

The board says Newpage Port Hawkesbury and Nova Scotia Power can proceed with plans to burn waste wood for energy using a massive steam boiler at the Newpage mill, but it has applied several conditions.

The board says the utility won’t be allowed to pass on any contract price increases to ratepayers, and that should the project fail, any associated costs can’t be passed on to consumers.

The utility has argued that the biomass plant would help the provincial government meet its goal to have 25 per cent of its energy supply come from renewable sources by 2015.

More Funds from Green Transformation Program

Nanaimo, BC’s, Harmac pulp mill received $4.31 million on Wednesday, part of a $1 billion federal aid package for the nation’s struggling pulp and paper industry.
Tolko Industries Ltd. has received $2.26 million from the federal government for its kraft paper mill in The Pas, MB.

Pulp and Paper Mill Upgrades

Planned upgrades will allow the Harmac mill to better control the amount of energy that is consumed, process more wood fuel and help displace the use of fossil fuels.

Energy savings will help Harmac reduce its reliance on natural gas by approximately 108,000 gigajoules annually.

The funding to Tolko’s mill will be used to improve energy efficiency and to increase renewable energy production. Alterations will be made to the power and recovery boilers to promote better fuel combustion.
The new equipment will increase the production of thermal energy from wood waste, and black liquor, by close to 114,000 gigajoules a year. This increase will reduce the Tolko mill’s need to use fossil fuels to compensate for renewable energy shortfalls.

Norampac Trenton, in Ontario, a division of Cascades Canada Inc, is receiving $83,000, also from that federal program. That investment will be used to improve the energy efficiency of the mill’s existing paper machine by upgrading its capacity to capture and redirect energy for other uses within the mill.

Norampac has made improvements that have increased the efficiency of the mill’s heat exchangers. The recovery of this additional energy will reduce the mill’s energy requirements and its use of natural gas by more than 20,000 gigajoules per year.

WFP Another CEO Change

Stephen Frasher has resigned as President and CEO of Western Forest Products.

The WFP board of directors has re-appointed Dominic Gammiero as CEO, in addition to his current role as Chair.
Lee Doney, currently Vice Chair, will play a more active role and will focus on strategic initiatives.

“Our goal now is to position the company to grow as the US housing markets are poised for recovery over the medium term. Lee Doney’s experience in the sector will be of great assistance in pursuing growth opportunities,” said Dominic Gammiero.

October 18, 2010

US Requests Canadian Softwood Lumber Consultation

As the British Columbian forest industry has long known, the US Coalition for Fair Lumber Imports has been preparing a claim against BC lumber imports into the US. At issue is the increased harvest of mountain pine beetle killed timber, and the reduced stumpage to incentive processing of recently dead wood into lumber before the quality degrades too much.

The US government delivered a formal request for consultation to the Canadian government Friday.

2006 Softwood Lumber Agreement

United States Trade Representative Ron Kirk announced Friday that the US has requested consultations with Canada under the 2006 Softwood Lumber Agreement regarding the apparent unfair under-pricing of timber harvested from public lands in the Interior region of British Columbia.

At issue are BC’s practices that have led to a dramatic reduction of stumpage costs for BC Interior lumber producers through a massive increase in the share of logs classified as “Grade 4” and therefore stumpage rate of C$0.25 cents per cubic metre, says a Friday press release out of the US Coalition for Fair Lumber Imports.

“Since the spring of 2007, the BC Government has sold enormous amounts of timber to Interior lumber producers for the minimum price of C$0.25 per cubic metre contrary to the rules governing eligibility for minimum stumpage prices that are grandfathered under the SLA,” says a USTR fact sheet obtained by Madison’s Lumber Reporter.

“It is very disappointing that President Obama is talking about pulling down trade barriers, yet the US administration is entering into an arbitration over something that is clearly grandfathered into the 2006 SLA,” BC’s Minister of Forests and Range, and Integrated Land Management, Pat Bell told Madison’s in a phone interview.

“BC has not changed any of its harvest practices since the signing of the SLA. It is no big secret that the longer the beetle kill timber is dead the less suitable it is for lumber purposes. Forest companies in BC are doing the best they can with a very poor log grade,” continued Bell.

“The US lumber industry is not competitive, there has been little investment in mills, they are not current, and they can’t compete with world class mills,” Bell charged back at the US Coalition for Fair Lumber Imports.

Full BC Ministry of Forests and Range press release available here.

Madison’s Lumber Reporter has also obtained copies of letters on the subject of softwood lumber between US Trade Representative Ronald Kirk and Canada’s federal Minister for International Trade, Peter Van Loan.

Zoltan van Heyningen, spokesperson for the Coalition, explained to Madison’s Friday, “We anticipate that the arbitration process will be executed. If the 40 day consultation period between the US and Canada as set down by the 2006 SLA does not see resolution we fully expect arbitration to proceed expeditiously.”

When asked about statements from some BC forest agency representatives that this claim is politically motivated in the face of US mid-term elections this November, van Heyningen said, “The idea that this is a political move is ridiculous. The US is not of the same point of view as BC that practices currently engaged in with Grade 4 logs is grandfathered into the 2006 SLA. US Trade Representative Kirk is simply making sure that international trade agreements are enforced. This is not protectionism.”

The 40 day consultation period expires November 17.

Madison’s has faint hope of a resolution coming out of that consultation period, or this claim would frankly not have been made in the first place.

van Heyningen has indicated to Madison’s that a formal SLA arbitration will likely be launched by the US against Canada before the end of 2010.

Madison’s Timber Preview: US Foreclosure Freeze

Recent revelations that some US banks and mortgage lenders have been processing foreclosure and eviction documents without proper documentation have thrown US congressional representatives and the courts into a tizzy. Already three of the largest holders of mortgages have stopped foreclosure proceedings while they check their staff’s paperwork.

This week’s issue of Madison’s Timber Preview examines the changes already put into place and looks at some possible outcomes of this new US mortgage crisis.

Contact us any time for a subscription

Housing Starts, Canada

September Canadian housing starts fell by 1.5 per cent compared to August, which was less than expected, to 186,400 units said the Canada Mortgage and Housing Corp Friday. Single family home building dropped by 8.1 per cent to 63,600 seasonally adjusted units, while multi-unit dwelling remained unchanged from August at 99,600 units.

Japan Housing Starts and New Wood Building Law

Total housing starts in Japan for August were up 20.5 per cent over August 2009, to 71,972 units, according to the Japan Lumber Reports. August 2009 Japan housing starts were down 40 per cent over the same month in 2008. It is the first time in 19 months that starts were over 70,000 units and the third consecutive month of increases. Seasonally adjusted monthly starts were 829,000 units, a 7.4 per cent increase over July.
Condominium starts increased by 44 per cent in August, while owner’s starts held steady with ten straight months’ recovery. 2×4 homes increased by 7 per cent and traditional post and beam units were up by 7.8 per cent.

Japan Wood Building Policy

August wood based units built increased by 21 per cent over August 2009, to 42,073, comprising 58.5 of total units built says the Japan Lumber Reports.

August building permits were also up, by 19.3 per cent over August 2009, to 48,628.
The unrolling of Japan’s Forestry Agency’s push to increase the use of wood in all building got more encouragement from five groups of wood importers. At issue is the Forestry Agency’s previous focus on domestic wood products.

The importers maintain that Japan’s domestic forest industry is not big enough to support a proper move to wider use of wood, and the wording of the Agency’s statement should be changed to a target of 50 per cent utilization for both building materials like lumber and plywood, and pulp and chips. The Agency had previously announced a target of 60 per cent for wood building but of domestic products, and only 39 per cent for pulp and wood chips, says the Reports.

BC’s New Wildfire Management Policy

As first announced in the September 24 issue of your Madison’s Lumber Reporter, the British Columbia Ministry of Forests and Range will be re-examining BC’s wildfire strategy in the face of 2010 forest fire activity.

Madison’s managed to track down the very busy Minister responsible, Pat Bell, to find out what this new strategy will mean in terms of the harvest.

“We are going to incorporate planning for fires into forest stewardship plans for the first time,” Bell told Madison’s in a phone interview late Thursday. “There will be planning for cut blocks in consideration of forest fire management.”

Planning tools will be in place for harvesting practices for 2011, and changes will be rolled out over time. By the end of this year the BC forest industry will start seeing new instructions, said Bell.

“We had to re-think our planning after the large complex fires of 2010. We found that a series of small fires can grow together using wildlife corridors, riparian areas, and old growth management, to combine into one large fire,” explained Bell.

October 11, 2010

Log Prices and Timberland Values

Those using timberland as an investment tool, whether investors or analysts, understand that the main driver for the value of timberland is log prices. Log demand drops when the lumber market is depressed, so timberland owners look at forecasts to determine when to plan the next timber harvest, or if they should simply let the trees grow for another couple of years thereby increasing the value of their investment. Until very recently lumber production and log demand was essentially all timberland owners needed to look at, but increasingly factors like watershed health, easements, higher and better use, biomass fuel, and carbon credits are coming into play when valuing timberland, both in the US and globally.

Changes to Traditional Model

The sixth annual Who Will Own the Forest? conference at the World Forestry Center in Portland, OR, on September 20 to 22, 2010 brought fascinating presentations and discussion on this expanded model for valuing timberland around the world. While some speakers focussed on specific issues like hardwood plantations in Africa, pulp-grade Eucalyptus in Brazil and New Zealand, or navigating the new legalities of environmental and energy issues in the US, the most popular — and debated — speeches covered what the future holds for timberland investors.

As moderator for Session 3: Appraising Valuations, Dennis Neilson of DANA, Ltd. out of New Zealand offered useful summaries and pertinent questions. This is now the third time Madison’s has encountered Neilson at such events, and is always impressed with both his grasp of the subject matter and his ability to deliver information effectively (despite a thick New Zealand accent and speaking very quickly indeed). As Director of DANA, Neilson consults on timberland investments, appraisals, strategic planning, and international wood products trade to a number of international companies.

“Transactional evidence (on timberland sales) in the US are generally measured in dollars per acre, with Australian and New Zealand transaction evidence often converted to an Implied Discount Rate, or Discounted Cash Flow, for the purposes of a cross-check of a Net Present Value calculation,” detailed Neilson at super-sonic speed.

What this means is that log prices are but one factor in valuing timberland in New Zealand; discount rate is important, and treatment of the land, as well as treatment of secondary and more timber rotations. In addition, explained Neilson, New Zealand has now legislated an emissions trading scheme involving trees, essentially a carbon offset.

“We employ quite a range of methodologies, taking into account averages of the last eight, 12, or even 20 quarters,” concluded Neilson, miraculously not yet out of breath. “We were betting on a regression to the mean.”

That bet turned out to be a good one and DANA, Ltd. continues in excellent standing for its log market and timberland value analyses.

Next, Whit Hill, of John Hancock Bond and Corporate Finance, tackled the subject of A Lender’s Perspective on the Credit Environment. Managing Director of Hancock’s Investment Sector, Hill is a member of the Natural Resources Team, which is responsible for a US$9.4 billion portfolio in oil and gas, timber, paper, forest products, building materials and homebulding companies worldwide.

After explaining recent developments in the credit market generally, Hill moved on to timberland credit specifically.

“In terms of outlook, the positives for US timberland economics are; residential construction will recover, the interior BC timber harvest will decline, and export markets are improving,” began Hill. “Lingering difficult conditions include; weak economic fundamentals hinder cash generation, and valuation and asset liquidity remain a concern.”

Regardless, concluded Hill, timberland remains an outstanding vehicle for fixed income investment, the interest rate environment is favourable, and the long term fundamentals are positive.

The next speaker, Rick La Mont, President of Timberland Appraisal Inc, analyzed US timberland value beyond log prices. With 25 years’ experience in valuing billions of dollars in timberland in the US and overseas, La Mont is a leading consulting authority on the supply of the world’s timber resources and in the design of complex timber inventory management programs.

Using a telling graph, La Mont’s data shows that, given the trend over the past 40 years, real log prices in all species across the US are currently well below where the average should be. Log prices dropped from a high of just under US$1,100 in 1994 to less than US$500 Scribner’s scale in 2010. Log prices have fallen by an average of 4.95 per cent from 2000 to 2010.

Using a Return to Trend Forecast, and keeping the log price cycle of the 1980’s well in mind, La Mont’s data shows log prices rising to close to US$700 Scribner’s scale by 2015.

Getting to the much-discussed topic of assessing the land value, La Mont explained, “In terms of allocated values, it is necessary to compute the timber value and the residual land value. Timberland appraisers determine bare land value, which is usually only 10 to 15 per cent of total timberland value. Site and soil productivity analysis is based on Faustmann’s formula. Large properties use the Discounted Cash Flow while smaller properties require a Higher and Better Use analysis.”

Regarding Higher and Better Use, and non-timber values, La Mont asks the question, ‘Is there a market for this?’ One thing making it difficult for analysts to factor in these new criteria is the lack of sizable timberland sale transactions in the past few years, so one and all were qualifying their projections by saying that only once a few large parcels of timberland start changing hands again will proof be available.

“Non timber revenues include communications sites (cel phone towers), mineral rights for water, gravel or gas, wind energy, and biomass,” said La Mont. “There is already a marketplace for these. As far as carbon is concerned it’s too early to tell yet.”

Finally, Bret Vicary,VP of Forestry and Natural Resource Consulting for James W. Sewall Company, went into a detailed explanation of timberland appraisals in the US northeast.

“In the US northeast multiple-use opportunities abound,” indicated Vicary, echoing La Mont. “Wind, biomass, ethanol, carbon equity, even scenic values are added to basic timber values and log pricing. These are non-subsidized marketplaces. The preservationist momentum is gaining strength, as large working forest conservation easements comprised 1.7 million of 2.0 million acres under easement as of February 2010.”

In Sewall’s 2Q 2010 investor survey, responders indicated that Canada’s mixed forest had by far the lowest risk premia over US forestland. Defined as ‘the expected excess return on a security or portfolio, where excess return is the difference between an actual return and that of a riskless security’, earning risk premia means ‘there may be large, infrequent losses from bearing certain risk factors, resulting in a short-option-like return distribution, but the returns over time are sufficient to make the activity profitable.’ On Sewell’s investor survey Mozambique’s plantation forests rated as the highest risk premia, Costa Rica’s teak forest and eastern Europe were in the middle, and New Zealand’s pine forests rated lowest next to Canada.

Wildfire Danger US

The National Weather Service Thursday issued a Fire Weather Watch for the entire state of Colorado through Saturday. Critical fire weather conditions are expected to occur with very low humidity levels around 25 per cent or lower. This very dry air mass combined with increasing northerly winds, especially on Friday and Saturday, will help quickly spread any fires that are ignited or sparked due to the very dry conditions that exist from the lack of any significant rainfall over the last 20 to 30 days.

US Wildfire Warnings

A red flag wildfire warning was issued Thursday morning by the National Weather Service for much of inland San Diego County and Riverside County, CA.

The red flag warning was issued at 7:40 am due to expected frequent lightning strikes that could spark wildfires accompanied by strong gusts, according to the National Weather Service.

With the dangerous autumn wildfire months upon California, the Insurance Information Network of California, the California Department of Insurance and the Vista Fire Department have joined forces to showcase physical and financial preparedness for homeowners in high risk fire areas.

San Diego has been scorched by several catastrophic wildfires, including the Cedar and Paradise fire in 2003 and the Witch, Harris and other fires in 2007. Combined, the 2003 and 2007 fires claimed more than 4,300 structures.

Elsewhere, four East Texas counties are the epicenter of a stubborn drought that has officials warning of increased risk of wildfires and has pastures withering and trees losing limbs.

Over the next few months, wildfire risks in Florida will increase. That state’s Division of Forestry thinks the La Nina effect could cause a jump in the number of fires. As a precaution, The DOF also authorized the burning of a record 2.7 million acres of private and public land over the past year.

Mill and Asset Sales

BioSila Mattawa Inc. purchased the former Tembec sawmill in Mattawa, ON, for $1 from the Mattawa-Bonfield Economic Development Corp. Local shareholders of BioSila Mattawa Inc. include the Mattawa-North Bay Algonquin First Nation and Antoine First Nation.

Future plans for the property include a central biomass plant to provide heat and electricity for future business development. The carbon dioxide emissions from the biomass plant will be used in a 25 acre greenhouse. More than $20 million in capital investment is going into the business plans.

Fraser Papers has terminated the agreement to sell its paper mill in Gorham, NH because the purchaser could not secure sufficient financing to complete the transaction.

Asset Transactions

Fraser Papers also announced that it will close the Gorham mill indefinitely, on or about October 13, 2010, while the company continues its efforts to sell the mill.

AbitibiBowater is seeking the court’s permission to sell its fishing camp at Hunt River and Char Lake in Newfoundland and Labrador. The property was originally appraised at $3.5 million, but a purchaser could not be found at that price.

A mining company, 1512513 Alberta Ltd., has agreed to purchase the camp for $1.4 million plus sales tax. The camp had been used primarily for corporate entertaining. Operating the camp costs AbitibiBowater $480,000 annually.

Québec Forest Industry Council New CEO

André Tremblay will take over as CEO of the Québec Forest Industry Council (CIFQ) on January 1, 2011.
Tremblay takes the reins from Guy Chevrette, the outgoing CEO, and will also oversee the CIFQ’s communications and public affairs portfolio. Chevrette will be retiring after a five-year stint at the helm of the Council during a period of upheaval for the industry.
The CIFQ is the voice of Québec’s forest industry.

Québec’s softwood and hardwood lumber, veneer, pulp, paper, cardboard and panel companies each year generate $12.9 billion in business and close to $4 billion in wages and benefits.

October 08, 2010

Pine Beetle Damage and Fuel from Wood

Madison’s was out of the office all last week, first at the timberland investment conference in Portland which was featured in the September 24 issue of your Reporter, then Wednesday to Friday touring a research team from Fukuoka University in southern Japan around the Vancouver area.

The tour’s mission was sustainability and green energy with a focus on port facilities. Wednesday was devoted to seeing an intensely affected pine beetle kill forest first hand, in Manning Park, BC. With eight members plus a translator a mini bus and driver were hired, which gave Madison’s the opportunity to hold a seminar of sorts on the three hour drive from downtown Vancouver to the centre of Manning Park.

Cellulostic Gasification

The tour then proceeded five kilometers to the most commonly used day area, where there is a lake with picnic tables, campground, large lakeside grassy field, and canoe rentals. Madison’s wasn’t sure how involved the search for evidence of the mountain pine beetle would be.

However, concerns that a stand would be located at all, or quickly, were unfounded.

Immediately upon exiting the van Madison’s easily identified various stages of beetle kill, but frankly most of the trees affected were grey and long dead. The Japanese tour group, having over the previous hours had a discourse on the beginnings and progress of this beetle infestation and the scope of the current dead and dying timber problem in British Columbia, was aghast at how easy and plentiful examples were to find. Clump after clump of pitiful, drooping, grey pine trees interspersed with juicy, healthy spruce, fir and the occasional hardwood were everywhere. Some trees still had bits of red pine needles clinging desperately to the stoutest branches. These red needles flew off at the slightest touch landing on the forest floor to join their dried out siblings that had fallen in the months and years previous.

Across the lake were visible strips of dead grey pine trees running through the healthy, gorgeous green spruce and fir. While the mountain pine beetle’s march across Canada seems, to date, to have been halted in Alberta, the fact that this beetle population is thriving in Washington State, Oregon, Montana and Colorado is terrifying to anyone concerned about the future of our forests.

All efforts to utilize the biomass left behind after the mass destruction in BC’s forest by the pine beetle are to be applauded, as Madison’s has been staunchly doing at every available opportunity. Another such opportunity was presented this week by the Canadian Bioenergy Association’s annual conference in downtown Vancouver. Panel topics ranged from district heating, small heat and power, biochemicals, micro-algea, anaerobic digestion, and more. A significant proportion of time at the conference is allotted to various methods of getting energy from biomass, specifically forest residue.

As an adjunct to the conference, Nexterra — about which Madison’s has kept Reporter subscribers up to date — provided an industry tour of the Kruger tissue plant in New Westminster. That tour was preceded by detailed presentations about the facility.

By way of introduction to the tour, Alan Potter, VP of FP Innovations, offered encouragement to others in the forest industry to use alternative forms of energy.

“The Kruger facility proves gasification technology is reproducible. It reduces mill greenhouse gas emissions and energy costs. Using fixed bed gas, the facility transports and direct fires syngas. [ . . . ] FP Innovations is benchmarking the existing equipment, currently there is still some natural gas burning but the hog fuel boiler was decommissioned several years ago,” explained Potter. “This plant now uses twice the energy from half the material,” said Potter of the remarkable success.

Presented with these results, an audible murmur passed through the room.

Next Andrew Goodison of FP Innovations described Canada’s Bio Pathways II project, involving the Forest Products Association of Canada, the Canadian Forest Service, Natural Resources Canada, Western Economic Diversification Committee, FP Innovations, and BC’s Innovative Clean Energy Fund, which together provided about 15 per cent of the funding for Kruger’s facility.

Focussing specifically on the financial aspects, Goodison explained, “Examining BC we found a 5 per cent return on capital invested (ROCE) over a 3 to 5 year projection on prices in the marketplace. Solid wood operations succeeded profitably, pulp mills struggled, and heat and power plants also benefitted from the technology. There was a heavy weighting to pyrolysis, pellets, and gasification facilities for the ROCE figure. Large scale sawmills, at least 650 MMfbm annual production, which combined heat and power facilities, were the most successful. However these large plants may have to rely on roadside residuals, even chipping in the bush for hog fuel, which could present transport problems. [ . . . ] Given BC’s fibre advantage, energy pricing, and carbon credits market, lumber mills running on natural gas power beyond the province’s the green energy conversion deadline are going to be losers.”

Duncan Meade, Nexterra’s Product Development Engineer, then took the floor to further explain the technical process. Nexterra’s gasifiers can take chipped biomass from zero to 60 per cent moisture content, the residual fuel is discharged as ash through the bottom of the gasifier, the gas rises and is then delivered to boiler or lime kiln. There is high conversion of fuel to syngas, with less than 1 per cent of ash (carbon).

“Syngas is comprised of methane, carbon monoxide, carbon dioxide, hydrogen, water vapour, and nitrogen,” detailed Meade. “The technology is fully automated, responding to the energy needs of the user. The emissions are cleaner than EPA guidelines for natural gas, it is a particulate free, tar free, moisture free process.”

Rick Scammell, Utilities Manager for Kruger, spoke next, wearing the reflective safety vest that all embarking on the tour would also don. Producing 90,000 metric tonnes of tissue annually, Kruger’s New Westminster plant employs 550 people. Previously the energy came from three natural gas boilers, one hog fuel burner responsible for 27 per cent of steam production — from the 1940’s — and a 2003 modern-style electrostatic precipitator (ESP).

“We put in 450 feet of conveyor directly from the trucks to the hog fuel pile. The hog fuel storage hold two days of production, using six or seven 53-foot truck loads per day,” outlined Scammell. “We had to switch to clean wood waste from the municipality in the early stages because pure hog fuel from sawmills became more difficult to find.” Scammell was referencing the number of mills along the Fraser River which have closed in the past few years.

Finally Len Komori, Director of Nexterra, explained the project’s execution. The facility currently uses two 16-foot gasifiers, but put in a bigger capacity boiler in order to accommodate a third gasifier which will be added for future growth.

“In terms of building and infrastructure, Nexterra took responsibility for the burner side while Kruger took care of the steam side. We use a tub grinder. Because the feedstock from the municipalities was in such large pieces at first we had to put it through two grinds but then found a problem with the conveyor because some of the material was too fine, was not heavy enough,” Komori explained. “We have since been able to go back to a single grind because the supplier has been providing smaller feedstock, and have had no further problems with moving the material into the gasifier.”

In their examination of BioPathways II, FP Innovations looked at British Columbia, Quebec and northwest Ontario, analyzing any biomass fuel operations beyond the lab stage, which were already out in the marketplace. Of the total 35 facilities examined, 19 could be considered traditional while 16 were emerging technologies. Each region has its own long term green energy plan, including funding and assistance with research and development, in addition to programs already in place from various federal Canadian agencies.

Nexterra’s gasifiers were being installed at Kruger’s New Westminster tissue mill in July and August of 2009 and started running in December 2009. Soon there will be a full year of success to show for it, and Kruger will be removing at least one, if not three, old back up boilers. Upon the addition of the third gasifier, the mill will be close to 60 per cent powered by green energy from cellulose.

October 04 , 2010

US Economic Outlook

The sixth installment of the World Forestry Center’s annual Who Will Own the Forest? conference took place this week at its facility in Portland, OR. Not only did attendance greatly exceed expectations, but the general mood was significantly more buoyant than similar events Madison’s has attended even this year, not to mention in the past two years. Participants included a glittering slate of US and international timberland investors, pension funds, bankers, analysts, specialty and hardwood timber and wood suppliers, representatives of foreign timberland assets, and wood processors.

Wood Demand and Forestland Values

As always with such events the networking hours, whether revolving around coffee or drinks, are the best opportunity to get real insight into current perceptions and future projections on the minds of investors, market players and pundits.Madison’s floated around like a butterfly listening to snippets of conversation, plunging in either to get a better earshot or inform about particulars of the future timber supply situation in British Columbia.

The agenda started off with a bang. The first panel was charged with discussing The Big Picture: US Economic Outlook, Wood Demand and Forestland Values. Speakers Tim Leach of US Bank and Deutsche Bank’s Mark Wilde, otherwise known as Dr. Paper and often quoted in Madison’s, each tackled different aspects of this topic.

As chief investment officer for US Bank Wealth Management, Tim Leach oversees his group’s investment management business. Taking a “Macroview Economic Outlook”, Leach plunged right in at the beginning of his presentation to declare the recent US economic crisis and recovery as consistent with those of the past, meaning it is following “normal historic patterns.”

“A typical recession is like a severe flu; the recovery pattern is brief and the residual effects are few. A real banking recession is like a heart attack; recovery takes much longer, and there are different expectations in terms of residual effects,” explained Leach in a rather lucid comparison. “From the global point of view, there is disparity between recoveries in the developed and the emerging worlds.”

Leach employed the same 50-year history graph of financial crises, all other recessions, and the current US economy, several times throughout his presentation to illustrate that the recent financial crisis was not altogether that different from those in the past five decades.
Going back to his sick patient analogy, Leach explained that 2Q and 3Q 2010 are the transition period for the effects of the massive US stimulus package, where “a heavy dose of medicine helps to stabilize the patient, but there still needs to be time before the patient can walk on their own power.”

Leach’s data demonstrates that the next four quarters will not show growth as the US economy struggles to gain momentum without help, and projects a small amount of growth starting in 4Q 2011.
Running a few models to test the chances of a declining economy, of an improved economy, or the chances of no change at all, over ten years showed a 28 per cent probability of slow growth.
As confidence in the US economy returns, Leach’s data shows expectations of a shift from safer, higher-yield securities to more risky growth-oriented securities.

Globally, Leach’s data indicates that emerging economies will be responsible for over 55 per cent of global GDP growth, of which China will be almost 16 per cent and all other emerging economies except India, Russia, and Brazil will account for over 26 per cent of that growth.
In terms of commodities, Leach terms them “overweight”, and expects that a “resumption of global economic growth may likely place upward pressure on commodity prices.”

After all this good news Madison’s could hardly wait to hear what Wilde, Deutsche Bank’s senior analyst on the paper, packaging, and forest products sector, was going to say in his presentation, “What’s Ahead? The Economy, Forest Products Markets & Timberland”. Ranked #2 in the Wall Street Journal’s 2010 stock pickers for the general industrial sector, and #1 analyst in Reuters/Financial Times’ 2010 survey for paper and forest products, Wilde has repeatedly been recognized as among the industry’s best stock pickers.

Wilde’s research also found that the economies of emerging markets are currently stronger than those of developed countries, which are still struggling. This view, it turns out, was echoed by almost every speaker at the conference.

“One of the common themes of industrial economies is ten years of very accommodating credit,” explained Wilde. “Overheated real estate market valuations were hardest hit, resulting in fall-out across the financial sector, specifically in huge write-downs. This put pressure on government budgets, especially given lower tax revenues followed by long-term government responsibility, specifically pensions. Coming out of the recession, recovery is slow. This summer many were still worried about recovery. Currently there are concerns about the US economy backsliding but various reports out in the past few weeks are encouraging.”

Meanwhile in the emerging markets, continued strong economies suggest downstream demand for commodities. Wilde pointed out that commodity demand and prices remain healthy, and that Australia and Canada have benefitted from this strong commodity demand.

As an aside, and as several birdies have chirped into Madison’s ear over the past year, Wilde said the fact that Norbord and Ainsworth have significant overlapping shareholders points to a merger, which would give those two companies a 30 per cent share of North America’s OSB market.

Analyst projections being what they are, Wilde’s assessment that US housing starts remain at all-time record lows was blown out of the water by a 10 per cent rise in August housing starts released that very day by the US Commerce Department. Thus demonstrating the difficulty of making projections.

Wood and pulp producers are facing capital rationalization at the mill, and pension deficits are high so companies are going to have to make substantial cash pension infusions.
Wilde took a longer-term outlook of demand, suggesting that US demographics are positive and 1.25 million or more annualized housing starts are likely. Increasing demand for wood products out of Asia will continue to divert a significant portion of BC exports away from the US.

However a longer-term outlook of supply shows some potential difficulties for customers. In the US many timberland owners deferred harvest while waiting for a recovery of lumber prices, causing concern that there is a lot of inventory left on the stump and whether that timber has passed the optimal harvest point. In addition the ongoing reduction in timber supply due to the mountain pine beetle in BC will be an increasing threat to log inventories.

According to the first two speakers at Who Will Own the Forest 6? this week in Portland, OR, the emerging economies are going to show consistent strength while the developed world will come out of recession slowly. Demand for commodities in particular from emerging regions are expected to be strong enough to send prices higher.

This can only be good news for Canadian lumber producers in the short term, while in the longer term US and European demand for commodities is also expected to strengthen.

Other speakers at the conference gave presentations on more specific topics such as Timberland Drivers, Appraisals, and Forestland Investment, which Madison’s will cover in a future issue.

Madison’s Timber Preview: WY Exits Wood Products

This week’s issue of Madison’s Timber Preview examines Weyerhaeuser’s conversion to a REIT and exit from the wood production sector.

Contact us any time for a subscription.

US Home Building and Economy

Commerce Department figures released Tuesday show US housing starts grew by an unexpected 10.5 per cent in August – the highest growth in four months. Housing starts reached a seasonally adjusted annual rate of 598,000, the highest level since April.Housing starts are still at a relatively low level, and last month’s growth may well be temporary. Building permit data underlined continued housing market fragility; while the total number of permits increased by 1.8 per cent, single-family permits dropped by 1.2 per cent between July and August.

Financial market analysts point out that multi-family dwellings, where most of the housing start growth is taking place, represent the smaller segment of the housing market, indicating a weak market recovery.

“With the number of new homes for sale at the lowest level in four decades and mortgage rates at record lows, some demand for construction is being sparked,” Jennifer Lee, a senior economist with BMO Capital Markets, noted in a commentary.

US Economy, Real Estate

Two regions recorded especially large month-over-month home-start gains in August: the West with an increase of 34.3 per cent and the Midwest, up 21.7 per cent.

The US Commerce Department released August new home sales data Friday at 288,000, flat in month on month comparisons. July sales upwardly revised to 288,000 units from 276,000. Sales were off 29 per cent in year over year comparisons. Median prices were off 0.6 per cent against July levels to US$204,700. Unsold home inventories fell slightly to 206,000 units, with months supply essentially flat at 8.6 months.

Among stocks in focus, KB Home gained 3.3 per cent in premarket trading. The US homebuilder’s 3Q loss narrowed significantly on sharply lower write-downs, while orders declined again following the expiration of a federal tax credit. Deliveries rose 3.6 per cent, the second-straight quarter of year-on-year growth following 14-straight quarters of declines.

US stock futures rose Friday morning despite a bigger-than-expected drop in US durable-goods orders as concerns about the euro zone eased following an unexpected rise in German business sentiment. Durable-goods orders declined by 1.3 per cent to a seasonally adjusted US$191.17 billion, the biggest drop since August 2009.

Still, there were gains in machinery, computers and fabricated metal products. Also, a barometer of capital spending by businesses rose; orders for non-defense capital goods excluding aircraft increased by 4.1 per cent.
Meanwhile, the Ifo index in Germany, a closely watched gauge of business sentiment, unexpectedly rose in September, easing near-term worries over a possible growth slowdown in Europe’s biggest economy. The Euro climbed following the sentiment data.

Japan Wood Utilization Law

Japan’s promotion of wood utilization for public buildings law, announced in May, comes into effect October 1. Japan’s forest industry, lumber and plywood manufacturers, and building material manufacturers are all interested in this law, which is meant to stimulate demand for wood, according to the Japan Lumber Reports.

The majority of stakeholders are demanding use of wood for public facilities such as shopping malls, department stores, theatres and sports clubs, and of course government funded public buildings, says the Reports.

Japan’s Wood Building Law

Japan’s wood products and building industries are also calling for the promotion of solid wood use and deregulation of building codes for the further use of wood.

The basic idea of the law is to increase the degree of self-sufficiency of wood in Japan, to contribute to the prevention of climate change by using more wood, and to deregulate the Building Standards Act, says the Japan Lumber Reports.

The new law further recommends the use of wood for biomass power generation, pulp and paper manufacturing, and even wood guard rails for highways.

New architecture standards and the development of high strength bearing walls, and connecting metal fittings are expected to be developed. Much larger lumber sizes, such as 135, 150, and 180 mm square will be required, while the usual 105, and 120 mm square sizes will continue to be used in wood framed home building, concludes the Reports.

Wildfire Activity

Longtime landfill operator Kevin Williams stopped a racing wildfire Monday that threatened to envelop Utah’s Herriman neighborhood, outside Salt Lake City. Williams stripped away the slope above Rose Summit Drive and saved 32 homes, according to the Unified Fire Authority.

A fire fueled by strong winds spread across more than 1,000 acres of Colorado farmland Thursday, destroying one vacant residential home and three other outdoor structures less than 10 miles southeast of Greeley.

Wildfires, US

Weather conditions and heavy smoke from the Antelope Fire prompted the extension of a road closure in Yellowstone National Park, WY, Wednesday.

Virginia’s Tri-Cities is suffering from what the US National Weather Service classifies as an “extreme” drought, and the lack of moisture in the area’s soil puts it near the top of the scale for wildfire risk. The state’s autumn wildfire season doesn’t officially start for another three weeks, but fires have been breaking out around the area.

Heather Dowling, Dinwiddie County area forester with the Virginia Department of Forestry, said the area is almost at the top of the scale according to one widely used measure of wildfire risk.

The National Weather Service also says an emerging heat wave will increase the danger of wildfires in San Diego County, CA, this weekend as temperatures spike, the humidity falls and winds turn gusty.

Dry conditions and above-average temperatures have North Carolina fire officials on alert for the possibility of wildfires. Late September and early October are not traditionally months in which the wildfire danger is high due to the cooler temperatures and fall rains. But so far, this year, temperatures have been above normal and rainfall below normal.

Forest managers in northeastern Oregon are planning some prescribed burns this autumn after a mild summer wildfire season. Forest managers use fire to get rid of limbs and twigs that accumulate naturally, and kill some smaller trees known as “ladder fuels” that might let wildfires kill larger, mature trees.

The BC Forest Service has been rethinking its wildfire strategy in the wake of another bad year for wildfires across the province. Forests Minister Pat Bell says more than 1,600 wildfires have consumed nearly 340,000 hectares of forest and grassland.

The plan aims to strike a balance between management and suppression and tapping into the natural benefits of fire. Bell says the province is looking at what it can do to help local communities who need to reduce the wildfire risk in built-up areas but provided no dollar figure. He says there may also be changes to land use plans to ensure the wildfire risk is taken into account.