Companies & Industries

A happy, duty-free New Year for the lumber industry

Sawmills to receive double bonus

The last time the tax hit zero, B.C. mills flooded the market. (Photo: John Lehmann/The Globe and Mail/Canadian Press)

In late November, an obscure wood-price index nudged up to $355. Most people didn’t even notice, but you could almost hear champagne corks popping in forest-industry executive suites. That’s because when the random-length framing-lumber composite price index hits $355, the softwood lumber export tax—part of the current Canada-U.S. softwood lumber agreement—drops to zero. That’s exactly what will happen on Jan. 1 if the index holds.

The elimination of the export tax would be a nice bonus for a forest industry that is quietly returning to health, says University of British Columbia forestry professor David Cohen. “That 5% goes straight to the bottom line,” he points out. The tax has already notched down to 5% from 15% thanks to the steady rise in lumber prices in 2012. Production is ramping up, too. In November, Canfor reopened its mill at Radium Hot Springs, while Interfor reported its highest quarterly lumber production ever.

Best of all, it’s unlikely there will be a repeat of 2010, when the tax hit zero and B.C. producers flooded the U.S. market with so much wood that the index crashed to $245, almost instantly resurrecting the entire 15% levy. There are three factors pointing to a more measured response this time around, says Cohen. One is simple seasonality; it’s tough to increase the tree harvest in winter. The other two relate to transformations within the industry. Some of the worst offenders in 2010 are no longer in business, and those that are don’t have the labour to boost output, due to a lost half-decade of career starts and the drift of forest workers to the mining and energy sectors.

Demand appears solid too, with U.S housing starts forecast to rise another 30% in 2013. “There’s a lot more upside potential than downside risk,” says David Elstone, an analyst with Gibsons, B.C.–based ERA Forest Products Research, who notes that those improved 2012 housing starts were still less than half of historical norms.

Meanwhile, the freshly opened Chinese market is holding up. “It’s interesting,” Cohen says. “Chinese imports dropped 12% this year, but B.C. wasn’t down.” Customers there are now entering into long-term agreements, rather than simply snapping up bargains. Yet the Chinese are mostly interested in low-quality wood for scaffolding and moulding concrete, which is less profitable than framing lumber. Some companies could abandon China as the U.S. comes back.

Choosing between customers is a problem that forest companies rarely experienced even in the good old days. Analysts have taken note, with lots of Buy ratings, even though profitability at many companies remains slim and share prices aren’t far off their bottoms. The misery of the pulp-and-paper sector presents a drag on profits. That highlights the volatility of the forest sector, Cohen says. “Just two years ago, the situation was the reverse.”