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Cross-border mill flow

The US countervail on Canadian lumber has resulted in some American companies setting up mill operations in Canada, and some Canadian companies choosing to do the same south of the line.

By John Clarke

Despite strong housing starts in the United States, the market for housing components—such as trusses—has been very competitive. Some American truss manufacturers are now at a competitive disadvantage compared to their Canadian counterparts due to the countervail, and are looking to set up manufacturing facilities in Canada.

Nothing will rip the pages out of a textbook market economy quicker than the law of unintended consequences, as the struggles to find a solution to the softwood lumber dispute so aptly illustrate. By making Canadian lumber producers pay an average 27 per cent to export their goods into the United States market, countervailing and anti-dumping duties have made big losers of the Americans. That added charge encouraged the Canadian industry, where it could, to go for all-out production to cut unit costs, with reduced lumber prices on the open American market being the end result.

Duties intended to push prices up and pad the bottom line for efficient operators across the line—while saving marginal producers—in fact led to the closure of a lot of those marginal mills. One of the more irrational results of the countervail/anti-dumping strategy was to put US remanufacturers with product outside the scope of the duties at a disadvantage against their competitors north of the border. In their own market, US makers of doors, pallets, wood trusses, wall panels and, of all things, complete house kits—all outside the scope—are facing very stiff Canadian competition.

The US countervail on Canadian lumber has truss manufacturers in Michigan and Washington state either deciding or looking to set up truss manufacturing plants in Canada.

The cheap loonie is one factor. But another is lower cost Canadian production which the US Coalition for Fair Lumber Imports had not parsed into the context of the market conditions afforded by the countervail exemptions. The US International Trade Commission is examining these exemptions to see if some can be legitimately removed, a process difficult to manage in the midst of on-again/off-again softwood negotiations. The real devil in this arcane poker game is in the details.

Some American remanufacturers are moving north, others are thinking about it and still others are in a nervous quandary about what to do. All in search of the survival intended by the countervail. Jack Louws, the mayor of the town of Lynden in Washington state, has taken out a business licence to set up a roof truss plant in Sumas, BC. Sumas is only 25 kilometres from his main operation, an easy jump to cheaper Canadian wood and skilled labour, and from which to ship to the US through the countervail net.

Raw lumber from Canada used in his Lynden plant pays the 27 per cent duty. The Canadian truss exports he’s competing with don’t pay the duty. “I buy the majority of my lumber from US producers,” says Louws. “But when you buy from a broker you don’t necessarily know what you’re buying, whether it’s from a Canadian or a US mill. “I have some good Canadian wood in the yard. I have some US wood. But wood is more expensive (by 16 to 18 per cent) in the US than in Canada.”

Louws is reluctant to make a final decision about a move north, although he is putting together the pieces of a plan. “I had a lease in my hands ready to sign and I just couldn’t do it,” he says. “I don’t like it. But I don’t like seeing Canadian trusses going up on government buildings here in Whatcom County. “I am hoping the US and Canada can come to a long-term settlement. When that happens, I will make a decision based on the outcome. If the advantage is substantial in Canada for a period of years, I will probably move my cutting operation at least to Canada.” A border tax would not change his mind. If the tax were to become a permanent solution, the advantage, he says, would still be with Canada and he would have to consider seriously moving his operation across the border.

The border crossing isn’t entirely one way. International Forest Products Ltd (Interfor) has already moved its McDonald cedar mill operation “down the road” to Sumas, Washington. There was a little more to this move, but again the counter vail was a factor. The McDonald mill was on property slated for redevelopment. When Langley municipal council okayed the change, the mill had to be closed. Interfor initially looked for other sites in the BC Lower Mainland. But nothing suitable materialized.

The mill had been paying $800,000 a month in duties on product that was not exempt, and it made sense to move south. With an existing vacant plant available in Sumas, Interfor was able to enter into a lease agreement. Raw lumber is shipped across the border from the company’s Hammond and Squamish mills at a quarter of the cost in duties of the processed cedar siding going into the US market. “Over the course of a full year, the McDonald plant would have been paying $10 million a year in duties,” says Interfor communications director Steve Crombie. “That was not sustainable. Our choices were to go south or shut down. “It was a tough decision. We don’t particularly want to move down there. We don’t want to lose Canadian jobs. But we have protected 400 other jobs at Hammond and Squamish. The jobs in those mills would certainly have been in jeopardy without this move.”

By using the Sumas plant, Interfor didn’t need to start from the ground up. Relocation costs were $2 million, which will be recovered in eight months. There is hush-hush word around that a truss manufacturer from Boise, Idaho, is looking for a site for a mill in or near Abbotsford in the Fraser Valley. The company has not been named lest its identity gets back to Boise, where there’s an “oversupply” of truss companies in a tight competitive environment. Moves like these are dependent on the price of lumber. When the price was high in the US, cheaper Canadian wood had a well-defined advantage.

But increased Canadian production to counteract the duties helped drive the price down for everybody. For the moment the steam may have gone out of the Boise factor. But if a long-term softwood deal serves to restore lumber values in the US a Fraser Valley location may be attractive again, even for American manufacturers, despite shipping distances. Then there’s the case of the Century Truss Co of Brighton, Michigan. In the town of Corunna near Sarnia, Ontario, Century is building an 8,000-square-metre manufacturing plant on 10.4 hectares of land. That’s a huge operation by any measure. Ontario is able to supply the labour that Michigan can’t.

The problem for Century is that the automobile industry in Detroit and environs is the first choice of young Americans entering the labour market. “It’s difficult to get labour to do the hard work (in truss manufacture) on this side of the border,” says chief executive officer Randy Bergeron. “There just aren’t that many people to be trained to work that hard any more. “We’re away from the metropolitan areas and we get mostly rural people.

About one in 10 people has the work ethic we have.” Century hopes eventually to export 60 per cent of its Corunna production to the States. There are admitted costs in setting up outside Michigan, such as longer shipping distances. But with the countervail duties, a Canadian operation saves money. Bergeron is dead against the countervail strategy anyway.

“I think competition is wonderful,” he says. “I don’t think the government should get involved in restraining any trade between two countries. “The US has a sheltered lumber industry. It (trade restraint) doesn’t do that industry any good. It lets them stay inefficient and it hurts other lumber users in the US.” Precisely, says David Gray, vice-president of Mill and Timber in Surrey, BC and co-chairman of the Free Trade Lumber Council. The biggest anomaly, he says, is what has happened to the supply-and-demand market itself. “Every remanner making something that is not dutiable would naturally have an advantage in Canada. But here we have a very good market, we’ve got these lower prices and we have mills that are actually closing down,” he says. “When you listen to people, they are all talking about downsizing.”

A market managed by countervail duties encourages desperate and inventive producers to do strange things that make it unmanageable. That’s what happens apparently when you invoke the law of unintended consequences, unintentionally.


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