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Falling dollar benefits forest sector
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By Gordon Hoekstra Citizen Staff
Thursday, January 4, 2007
The recent slide in the Canadian dollar will benefit the B.C. forest industry - including players in the Northern Interior - but it’s not an immediate cure-all for low prices and high lumber export taxes, says an industry analyst.
Some predictions last year pegged the Canadian dollar reaching parity with the U.S. currency in 2007, but analysts have retreated from that position. The Canadian dollar hit at an all-time low of 62 cents US in January 2002 and climbed more than 40 percent by 2006. It broke the 90-cent barrier in May last year.
At the end of October the dollar was still trading at 89 cents, but slipped to the 85-cent mark on Wednesday.
The Canadian-U.S. currency exchange directly impacts the bottom line of companies shipping forest products to the U.S. - including lumber, panels and pulp. A one-cent change in the exchange rate can impact the B.C. forest industry by more than $150 million.
While the lower loonie will help, particularly in reducing lumber mills’ break-even costs, which can allow them to hold off shutting down in the face of low prices and the 15-per-cent export tax, the change is a double-edged sword, explained Kevin Mason and analyst with B.C. based Equity Research Associates.
Fewer temporary shutdowns means continued lumber production and downward pressure on prices.
"So, a lot of benefit here is how (lumber) producers act collectively," said Mason. "And to be honest, there’s no indication they’re going to change their behavior. They’re still going to turn it to whatever they’re personal break-even level is on a Canadian dollar basis."
If the Canadian dollar weakens further, that simply means sawmills can run at lower and lower prices, while they hope that producers in the U.S. will have to shut down, said Mason. That would mean there’s less chance the 15-per-cent export tax would decrease, he said.
The export tax was implemented as part of Canada’s seven-year softwood lumber deal with the U.S. The tax decreases as lumber prices increase.
However, the next jump, to a 10-percent export tax, doesn’t kick in until the Random Lengths framing lumber composite hits $316 US a thousand board feet. The last price posted by Random Lengths was $290.
The low lumber prices have been tied to sliding housing starts in the U.S.
Recently, the U.S.-based Western Wood Products Association, forecast that U.S. lumber consumption would drop by 7.5 per-cent over last year, and a 10.6-per-cent decrease from 2005’s peak.
While there have been some shutdowns in reaction to the low prices, high loonie and 15 per-cent export tax, it has not been a lot, observed Mason.
Brink Forest Products President John Brink has a different take on the dropping Canadian dollar, saying it has more to do with the strength of the U.S. economy. That’s a good sign because it means the slowing U.S. economy - including its housing market - will recover faster than some are predicting, said Brink.
He said he expects the turnaround to begin to take off in the second half of 2007.
Another factor that is not being taken account enough, said Brink, is there have already been considerable lumber curtailments in eastern Canada and quietly in B.C.’s Interior where, for example, third shifts have been eliminated.
There is also the impact of the pine beetle epidemic, which will cause permanent lumber closures, he said. That will also help in balancing the supply and demand over the longer term, said Brink.
"There is nothing that indicates a recession in the U.S. - the economy is very strong, inflation rates are relatively low, and there’s no indication of interest rates going up," he said.
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