|
Double Whammy
• Back to News
A weak U.S. dollar and a firesale American housing market are punishing the B.C. Interior forest sector. But, so far, temporary sawmill closures have not come
GORDON HOEKSTRA Citizen staff
Most lumber players in the Northern Interior appear to be standing pat as they face the crushing impacts of a loonie at par with the U.S. currency, low lumber prices and a 15-per-cent export tax into the U.S.
There's been no announced temporary sawmill closures since the summer in the Northern Interior, despite the fact lumber producers find themselves in an environment that has been described by some industry players as the "worst they've ever seen."
The lack of production curtailments has come as a surprise to forest industry analysts who say that lumber production is going to have to come off if there is any chance of matching supply to demand and seeing an uptick in prices. The Interior accounted for nearly half of Canada's lumber output through July, according to Statistics Canada.
Small production curtailments announced by Tembec and Tolko in the Southern Interior has been characterized as minor.
"It's complete mayhem," says Salman Partners anlayst Paul Quinn, based in Vancouver. "The U.S. housing market has been getting worse, and there's way too much production, given demand."
Quinn said that, at some point, there is going to have to be more sawmill shutdowns.
In the meantime, lumber producers are going to lose a lot of money, said Quinn.
The U.S. is by far the biggest market for Northern Interior producers, where housing starts have declined significantly since a peak of more than 2 million in 2005. U.S. housing starts are expected to come in at the 1.3-million mark this year.
Lumber prices have tracked downward as a result, and last week were at the $230 US-mark for the benchmark spruce-pine-fir random length two-by-fours, according to Madison's Lumber Reporter. That's well below the highs of $400 US experienced in 2004 and 2005.
The loonie has also climbed above $1 US recently for the first time in 30 years. An increase in the loonie directly impacts the bottom line of Canadian lumber producers selling into the U.S., as their costs are in Canadian dollars and they sell in U.S. dollars.
Last month, the Forest Products Association of Canada urged the federal government and the Bank of Canada to take swift action to mitigate the damage the rapid increase of the dollar was having on Canada's manufacturing sector.
The dollar has increased more than 10 per cent since the beginning of 2007, and is up more than 50 per cent from five years ago, went it stood at the 63-cent US range.
The third-quarter financial results, expected at the end of the month, are likely going to be even worse in the fourth quarter as recently lumber prices have dropped even lower and the loonie tracked upwards to above par, noted Mark Bishop, a forest industry analyst with RBC Capital Markets.
There's also little prospect of a quick-turnaround as forecasts indicate the Canadian dollar is going to continue to remain strong compared to the U.S. currency, said Bishop, based in Vancouver. The U.S. housing market is also expected to remain weak during 2008, with the prospect of a modest turnaround in 2009, he added.
While some forest companies might argue that they need to keep producing lumber to supply chips to pulp mills and to meet fixed costs, that is hard to understand given the Canadian dollar's level, said Bishop.
He believes there is going to be a long, slow process of rationalization, which will include mill closures, consolidations and perhaps some companies going under. Bishop noted that both Tembec and Pope & Talbot are struggling right now.
"We can probably take some comfort in it's as bad as it can get, but the question is how long can it stay here?" said Bishop.
Canfor Corp., a major player in B.C.'s Northern Interior, took a slate of temporary sawmill closures during the summer but has not taken any action since then.
Canfor spokesperson Lee Coonfer said he was unaware of any plans for further production curtailments.
West Fraser Timber, another big Northern Interior lumber producer, hasn't announced any curtailments. West Fraser spokesman Bill Tice said the company has no curtailment plans but is watching the market closely.
Carrier Lumber took some downtime at its Prince George sawmill earlier this year, and has also significantly chopped production at a pair of joint ventures.
Carrier Lumber president Bill Kordyban described the cumulative impacts of the rising loonie, low lumber prices, the export tax on softwood lumber imports to the U.S., and production issues with beetle-killed timber as "the perfect storm."
Kordyban said the scenario is bad as he's ever seen it.
"I really believe the economics would dictate production has to come off to meet the reduced demand in the market in order to stabilize prices," he said.
So, far that hasn't happened, noted Kordyban.
Brink Forest Products president John Brink also says the combination of negative factors in the lumber sector is as bad as he's seen it. "It's unbelievable," he said.
Brink Forest is a small player that produces finger-jointed lumber from low grade lumber or short pieces of lumber.
Brink said he believes that continued production levels are in part tied to a sizable uplift in timber availability because of the pine beetle epidemic.
But major companies, including Canfor and West Fraser, have to show leadership and cut production, he said.
That would push prices up, said Brink.
|
