Survivor scenario for Top Lumber Producers
By Peter Butzelaar
The latest annual survey of Canadian softwood sawmills carried out by International WOOD MARKETS Group Inc comes at a time when the forest industry is struggling to adjust to a lumber market that has been variously described as “turbulent,” “unprecedented,” being in “lumber meltdown,” and “the worst in recent memory.”
Given these descriptions, if there was ever a time to step back and take measure of the state of the industry, that time is now considering all that transpired in 2007. Unfortunately, 2007 may not be the low-water mark for producers in Canada or the USthe first-quarter of 2008 is looking even less promising. As has been well documented, the downturn actually began in early 2006, when total housing starts peaked at 2.3 million units (January 2006, seasonally adjusted). But demand started to recede due to house prices becoming increasingly unaffordable.
Further exacerbating the oversupply situation has been the sub-prime mortgage fiasco that came to light in mid- 2007, resulting in additional homes being put on the market through foreclosures or distress sales. By the end of 2007, unsold inventories of new homes had climbed to 10 months’ supply, far exceeding the 3.4 months’ supply of one year earlier.
Builders caught in the fray of falling home prices and slowing sales began to cut back dramatically on their building activity (2007 total starts were off 25 per cent from the previous year and 50 per cent from 2005). This reduced consumption of building materials created a massive oversupply situation throughout the distribution channels. Having ramped up to produce enough lumber to build 2.1 million homes per year, the lumber industry was unprepared for the magnitude of the demand correctionin fact, it has not yet come to grips with a US housing market projected to be below one million units in 2008.
With lumber prices at record low levels, it is obvious North American lumber producers have yet to shed enough capacity to bring lumber production in line with consumption. Canada’s 2007 total lumber output of 30.1 billion board feet was down by 3.4 billion board feet (-10.2 per cent) from 2006, and well off the 2004 record high of 35.2 billion board feet. In combination with some of the lowest sales realizations in more than a decade, a strong Canadian dollar, an export tax and persistent high log costs, mills across the country were taking extensive market-related downtime. The Canadian regions with the greatest reductions in 2007 were as follows:
• Eastern Canada down 1.72 billion board feet (-13.7 per cent);
• BC Interior down 1.04 billion board feet (-6.9 per cent); • BC Coast down 766 million board feet (-31 per cent), involved a 15-week strike;
• Prairies up 119 million board feet (+3.4 per cent). The BC Interior was less affected than other regions, in part because of its low operating costs and the fact that companies were accelerating their logging of beetle-killed timber. Yet by late 2007, many Interior mills were bleeding so much cash that they had no choice but to curtail.
The top 20 Canadian companies manufactured 70 per cent of the country’s total lumber output in 2007, down from 74 per cent in 2006 (please see table). The 10 largest Canadian companies saw their per-sawmill production decline by almost 10 million board feet per mill (172 million board feet in 2006 versus 163 million board feet in 2007). Further, the top 10 Canadian companies accounted for a 58 per cent share of Canadian production, down from 60 per cent in 2006.
Unlike 2006when many of the larger Canadian companies were strategically focused on expansion through acquisition and/or upgrading of existing operationscompanies in 2007 were focused like a laser beam on sheer survival. Across the country, companies sought innovative ways to improve cash flow and meet their debt obligations; the actions taken included cutting administrative and operating costs, reducing shifts, and, where necessary, closing mills indefinitely or permanently.
Our survey results for 2007 indicate that Eastern Canadian mills were on average operating at about 65 per cent of capacity on a two-shift basis, with some companies running as low as 35 per cent to 45 per cent, and others as high as 75 per cent to 80 per cent of capacity. In Western Canada, companies on the BC Coast reported operating on average at around 55 per cent of capacity, as they had all been significantly impaired by a 15-week strike. Mills in the BC Interior and Prairie regions were running on average at 87 per cent of capacity, ranging from lows of 66 per cent to a high of 100 per cent.
Given the difficult market conditions projected for 2008, operating numbers will likely be even lower when we report the results next year.
Of the limited number of Canadian transactions to take place in 2007, most were completions of deals struck or announced in 2006. The most significant of these were the amalgamation of Abitibi- Consolidated and Bowater to create the entity AbitibiBowater, consisting of 25 Canadian and two US sawmills.
In first-quarter 2007, Domtar purchased three mills from Weyerhaeuser in Eastern Canada (one in operation and two closed), raising the former’s total number of sawmills to twelve. The other Domtar news was the cancellation in January 2008 of the company’s intention to sell all 10 of its Ontario and Quebec sawmills to Conifex.
In late 2007, Interfor was involved in the purchase out of receivership of Pope & Talbot’s two BC sawmills, plus one sawmill in South Dakota that Interfor later spun off into a local private company. Interfor also then cancelled its offer to buy one of Weyerhaeuser’s BC sawmills. When Weyerhaeuser permanently closed the mill and sold the timber rights to West Fraser, Interfor purchased a portion of that mill’s timberlands from West Fraser. By their actions, it appears that Pope & Talbot, Domtar and Weyerhaeuser haveor are looking foropportunities to exit the Canadian sawmilling business. AbitibiBowater has consolidated and is expected to downsize its sawmill operations, while Interfor and West Fraser have taken steps to further entrench themselves.
Factoring in the curtailments and acquisitions in 2007, Canfor remained Canada’s largest lumber producer for the eighth straight year. Canfor’s output was 4.11 billion board feet, down 350 million board feet from 2006 but still ahead of second-place West Fraser Timber’s 3.53 billion board feet (down 270 million board feet).
The third-largest Canadian producer was AbitibiBowater at 2.38 billion board feet (down 430 million board feet in comparison to the combined production of the two separate companies in 2006), followed by Tolko, which slipped from third to fourth place with 1.95 billion board feet (down 470 million board feet). Holding on to fifth position in Canada was Tembec at 1.30 billion board feet (down 430 million board feet). Weyerhaeuser remained in sixth place with Canadian production of 1.20 billion (down 350 million board feet). For 2008, Weyerhaeuser’s volumes will be down significantly due to the sale of its Ontario mill and the permanent closure of two BC mills, leaving it with just three sawmills in Canada (as opposed to eight only two years ago).
Rounding off the last Canadian company in the “billion board feet club” was Buchanan Lumber in seventh place, with an estimated 1.0 billion board feet (down 200 million board feet).
The annual list of the top 20 Canadian softwood lumber producers is researched and compiled by WOOD MARKETS Monthly Report, and every attempt is made to obtain the most accurate information from the sawmills.
In review, it’s evident that Canadian producers experienced a strategic paradigm shift in 2007. In 2006, companies were focused on gaining a larger share of what looked to be an expanding market; however, by 2007, their focus had switched to survival.
Although the 2006 Softwood Lumber Agreement has its faults, the results of our survey show that it is starting to have the desired effect, with Canadian mills reducing output in 2007. Given the announced curtailments already reported in Q1/08, it may be that Canada’s 2008 volumes will actually contract at a faster pace than those in the US, achieving the Coalition For Fair Lumber Imports’ ultimate goal of retrenching market share from Canadian imports.
Obviously, 2008 will be another tumultuous year that will reveal new winners and losersand changes in the order of our list of Top Canadian Lumber Producers. Until then, stay tuned.
Peter Butzelaar is a senior consultant and associate editor with International WOOD MARKETS Group Inc of Vancouver, BC, publishers of WOOD MARKETS monthly newsletter. Phone: (604) 801-5996 e-mail: firstname.lastname@example.org www.woodmarkets.com