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Eastern Mills Feeling Impact Of US Quota Allocations

By Richard Turtle
Copyright 1997. Contact publisher for permission to use.

The year-old Canada/US Softwood Lumber Agreement has resulted in some discontent on both sides of the border as suppliers and consumers face market volatility, higher prices and increased demand. But as producers adjust to the impact of the recently imposed quotas, some analysts see this as a golden opportunity for Canada to prove and improve its competitiveness in supplying lumber and other forest products around the world.

A review of the five-year agreement, which was reached in April 1996, has resulted in some changes to allocation in an effort to ensure the system within Canada remains as fair and equitable as possible for lumber producers in BC Alberta, Ontario and Quebec.

The US Coalition for Fair Lumber Exports has always contended that Canada's industry is subsidized, arguing that large shipments of Canadian softwood lumber have resulted in the loss of thousands of jobs. In an effort to avoid countervailing duties against the Canadian industry, the federal government reached an agreement which allows 14.7 billion board feet of quota-free softwood lumber to be exported to the US annually over the next four years. Lumber shipped in excess of the quota is subject to a two-stage export tax of $50 (US) for the first 650 million board feet and $100 (US) for any additional shipments.

The allocations were given out to a total of 494 companies in the above four provinces based on questionnaires filled out by the producers regarding shipments to the US. The remaining provinces which are not bound by the agreement had total exports to the US in 1995 of 1.04 billion board feet.

"If you've got to be under a quota, it's more equitable now," Milton explains, but adds the imposition of quota "has left a feeling of powerlessness for us (lumber producers) in Canada. Says Quebec Lumber Manufacturers Association (QLMA) Executive Director Gaston Dery, "free trade is not true for the forest industry anymore." Quebec was unhappy with its original quota allocation (23 per cent of the duty-free total) and, says Dery, the agreement has also resulted in protests over lumber price increases in the United States. Some companies in Quebec were unable to continue operations as before because of lower-than-expected quotas and that has resulted in increased demand south of the border, he explains.

"He can do anything work-related, except think about running that harvester," says Brown.

Putting quotas in place is no easy task, says Dery, but a fair and equitable system is necessary to ensure the continued viability of the industry in all areas of the country. "Presently some parameters have had a major effect on the industry," he says.

Milton agrees that a transparent, visible and fair system is necessary where quotas and duties are imposed. He says one way of doing that is to review allocations annually based on performance with the allocation of quotas passed down to producers, rather than to the provinces.

Jake Kerr, chairman and CEO of Lignum Ltd. in Vancouver and vice-chairman of the Canadian Forest Industries Council, says producers in BC would have preferred free trade, but the lumber agreement is preferable to other alternatives such as countervailing duties. One of the primary negotiators in the agreement, he notes that while the west was satisfied with the original allocations, dissatisfaction among other players led to potential changes in the original formula.

Kerr adds the provinces and federal government did well to create an agreement which was viable for all those involved. "We had to make this up as we went along," he says, as Canada was forced to create a system which was palatable to both Canadian exporters and the United States. "The problems are now getting ironed out," he says.

In the original agreement, the first duty-free 14.7 billion board feet was divided among lumber producers "with each province getting a number," says Milton. And, he says, Ontario was not treated fairly in relation to its exports..

Ontario's corporate provincial allocation had been 10.3 per cent of the tax-free total, a number which should have been at least one per cent higher based on provincial lumber exports, says Milton. When final adjustments were made in April, Ontario did in fact receive 11.3 per cent of the total, says Milton. The one per- cent increase is significant to Ontario producers, he says, and represents a 10 per-cent increase in duty free shipments south. According to Milton, Quebec increased from 23 per cent to 24.7 per cent and Alberta remained unchanged at 7.7 per- cent. British Columbia's total allocation dropped from 59 per cent to 56.3 per-cent.

While lawyers representing the QLMA could not confirm the changes in quotas, Brenda Swick-Martin, a lawyer with Ogilvy Renault states, "we are confident Quebec will have a quota that will be a true reflection of performance." She describes the process of quota allocation as a living system designed to ensure quotas are distributed fairly on an ongoing basis, reflecting swings in production. According to Milton, Alberta and BC were content with the original allocations while Quebec was in favour of imposing the duty on lumber exported on a first- come first-served basis. The Ontario government was opposed to the quota from the outset.

What did become clear throughout the process, says Milton, is the need for united, national industry representation to provide a voice for Canada's interests, rather than a fragmented group speaking out on behalf of specific regions. Milton added all the provinces involved, with the exception of Ontario, had a provincial advisory committee. The industry in Ontario, he says, can also benefit from additional support from the provincial government.

But the imposition of the export tax will mean a change in the way the Canadian forest industry does business if it is expected to remain a world leader, concludes a report completed by TD Securities Inc. In the report completed in November of last year, entitled Strategic Impact of the Lumber Quota: Canadian Producers at a Crossroads, Forest Products Analyst Anna Torma looks at the long-term and short-term impact of the Canada/US agreement on both lumber producers and remanufacturers.

The agreement leaves Canadian producers re-evaluating their products and markets, Torma says, but the short-term pain may ultimately improve the global competitiveness of the Canadian industry. While the quotas discourage modernization or expansion of commodity sawmills, they could result in an increase in remanufacturing or value-added products. As well, producers are forced to explore new markets or expand existing ones outside North America in order to maintain production levels. The quota has already resulted in increased lumber shipments overseas, Torma says. "And in the long run, producers who can adapt will become better global competitors."

But the different lumber producing regions face different hurdles in the coming months. "The east," explains Torma, "was put in a much more difficult position (as a result of the agreement)." Mills in Eastern Canada are not as well positioned to offset reduced exports south and must look to developing overseas markets, adjusting product mixes and extending downtime. As well, in order to combat anticipated reduced shipments to the US, mills are also expected to expand sales within Canada.

Most western Canadian mills fared better, receiving allocations which would reduce sales to the US by 10 per cent, says the report. They too will have to increase offshore exports and increase value-added production to make up for the lost sales. But, explains Torma, the west may do well as a result by aggressively pursuing increased exports to Japan and other Pacific Rim countries.

The report also states that "remanufacturers will be forced to move up the value chain to more finished end products not subject to the quota." Torma also states in her report that the lumber-producing provinces not affected by the quota allocations are expected to increase exports to the US by 20 per cent, taking advantage of anticipated increased demand and potentially higher prices.

"Quota has an important effect on prices," explains QLMA's Dery. And while Canada respects what is now a quota system, some were happy with the original allocations while others were not, he says.

Among those who may find themselves feeling a negative impact are the consumers south of the border who could face increased demand and higher prices, particularly for low-quality wood as Canadian companies attempt to maximize returns by shipping their highest-quality products south.

Kerr explains increased prices are a result of simple economics as supply decreased, demand rose. And prices are at good levels now, he says. Where prices will go from here is somewhat of a guessing game but he notes that interest rate fluctuations south of the border will have a greater impact on future prices than the softwood lumber agreement will.

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