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February 2004

SPOTLIGHT

Big
BC deals

With a big lumber company deal in the offing— Canfor taking over Slocan Forest Products—and CN Rail taking over the operations of BC Rail, changes are in the wind for the BC forest industry, but it’s still not clear what those changes might be.

By Jim Stirling

The big got considerably bigger in British Columbia during 2003. Large and small forest companies, logging contractors and communities are taking cautious—sometimes apprehensive—wait and see approaches to assessing how the latest rounds of consolidation might affect their futures. In November, Canfor Corporation, already Canada’s largest producer of softwood lumber, announced its intention to buy Slocan Forest Products Ltd in a deal valued at $450 million. Canfor will also assume Slocan’s $175 million debt.

Canfor Corporation’s takeover of Slocan Forest Products will transform Canfor into the world’s largest spruce-pine-fir producer with production capacity in excess of 5.2 billion board feet.

The merger, if approved by company shareholders and government regulatory agencies, will transform Canfor into the world’s largest spruce-pine-fir lumber producer, with a production capacity in excess of 5.2 billion board feet and annual sales of $3 billion. Canfor-Slocan would control about 10 per cent of the North American lumber market, second only to US-based Weyerhaeuser Co. And in the same month, BC’s Liberal government confirmed Canadian National Railway will take over the operational rights of the province’s BC Rail. Precise details of the deal remain murky. But CN spent $750 million for the right to operate BC Rail’s freight business for the next 90 years. Assuming BC Rail’s operating losses is expected to provide the national rail carrier with about $250 million of tax credits against federal and provincial payments.

The Canfor/Slocan marriage was no surprise. The two have been courting for years. They have much in common, including the SPF focus in the BC Interior and a commonality of lumber markets. The consummation comes at a time when forest companies are looking to run large efficient sawmills 24/7, to drive down unit costs and produce a global competitive punch. The impact of the merger on jobs and forestry-dependent communities is unclear. As is the connected issue of the number of the merged companies’ 20 sawmills that might survive into the mid and long term.

The logging community also has more questions than answers at this point. Groups like the Interior Logging Association, the North West Loggers Association and the Central Interior Logging Association are keeping close tabs on the complex, overlapping issues. They’re keeping the lines of communication open with the provincial government and Canfor/Slocan, says Roy Nagel, the CILA’s general manager. “Nothing is clear at this point,” he says. “The process continues.” One unanswered question swirling around the merger’s impact focuses on how logging rates will be established.

Photo pg 6 - CN says taking over BC Rail operations will allow it to put together a rail combination that will offer lumber producers extensive routes to major NAFTA and international markets.

Canfor and its wholly owned subsidiary of Slocan would control about 13 per cent of the provincial Annual Allowable Cut (AAC), much of it in BC’s central and northern interior SPF zone. The concern among the logging fraternity is a take-it-or-leave-it rate that won’t adequately reflect different operating conditions and the rising cost of equipment. Frustrated log haulers in the Williams Lake area have had discussions with the IWA union to act as their bargaining agent for rate negotiations with logging contractors and, indirectly, with the licencees. Some observers believe the Canfor/Slocan deal signals a move toward mega companies farming their logging contracting and services business out to a small number of large contractors. On the BC Coast for example, Weyerhaeuser signed a million cubic metre annual harvesting contract with Hayes Forest Services.

The structure and history of BC’s coastal and interior forest industries are very different. But achieving economies of scale is appealing to all large, cost-conscious companies. How forest licences held by Canfor and Slocan might be blended is a further cost cutting possibility, again with implications for jobs and the economic health of communities. Overriding the Canfor/Slocan scenario are the much anticipated policy changes the provincial government is expected to flesh out in the near future. One proposal involves using a yet-to-be-determined mechanism to take back 20 per cent of major licencees’ AAC and re-distribute it to First Nations, woodlot owners and community forests.

The idea is that wood will increase the amount of timber sold at auction in the province. The government believes the move would help create a new market-based timber pricing system and establish a benchmark price for the rest of the Crown’s timber. Critics wonder how a market value pricing system can be fairly established with Canfor/Slocan the dominant corporate buyer in the region. The US insists a market-based timber pricing system in the provinces is the key issue to settling the bilateral softwood lumber dispute. At press time, the BC government was still pondering its official stance on the latest US offer.

The proposal caps Canada’s duty free exports at a 31.5 per cent share of the market and a return to the much-maligned quota system. The US would also receive—to distribute amongst its forest companies—about US $770 million worth of the duties paid so far by Canada. The governments of Alberta, Saskatchewan, Ontario and Quebec have serious reservations about the deal. The BC government seems to be inching toward acceptance, with Canfor/Slocan on board providing the companies receive a quota allocation acceptable to them. First Nations are another potential fly in the ointment for the Canfor/Slocan deal. Regional native groups say they want to be involved before any deal because the land base in question is subject to aboriginal title claims and treaty negotiations. They haven’t specified what level of involvement they have in mind.

The way the provincial government handled the sale of BC Rail’s freight business to CN has created a tumult of controversy. Groups like the Council of Trade Unions on BC Rail opposed the original premise. They claimed BC Rail was making money and its operations should have stayed in government’s hands. Union jobs will be lost by the deal but it’s unknown how many and where. Unsuccessful bidders for the BC Rail freight rights called the process unfair, claiming CN was given the inside track early on in the process. The government commissioned consultant Charles River Associates of Boston to evaluate the fairness of the bidding process. Not surprisingly, the government’s consultant concurred that the process was fair and represents good value for BC.

The Competition Bureau is reviewing the sale, a routine move. Its findings aren’t expected until spring. But funding cutbacks to the provincial auditor-general means that office hasn’t the resources to conduct an independent review of the BC Rail deal. In the meantime, forest companies who use BC Rail—and indeed located their mills to have access to it—will have to wait and see what happens to shipping rates for their lumber products and service levels offered by CN. Concerns were aired leading up to the sale about the availability of the right rail cars when they’re required and at competitive rates, especially for the smaller volume shippers. Meanwhile, it doesn’t appear the numbers of lumber trucks on BC’s highways are likely to decrease in the near term.

The disturbing news of RCMP raids on ministerial offices in the BC Legislature has cast an additional pall of uncertainty on the BC Rail sale. One of the offices raided was transportation. The RCMP have been mum on details about the raids and what they expected to find in documents seized from the government offices and from other sources close to government. But there are reported links between senior government bureaucrats, the RCMP investigation and the BC Rail deal. The police have allowed the raids were an offshoot of a complex and long-term investigation involving organized crime, drugs and money laundering.

The RCMP raid constituted the last straw for Don Thorne, a BC Rail union spokesman in Prince George. “This is all the more reason we said the sale should have been halted for two years—for stuff like this—to make sure the sale was a good one, to make sure everything was upfront and transparent as possible.”

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