November 2006 - The Logging and Sawmilling Journal
Battening down for the “The Perfect Storm”
Industry experts speaking at the recent Alberta Forest Products Association conference said they see significant challenges—with conditions some have called “The Perfect Storm”— ahead for the Canadian forest industry.
By Tony Kryzanowski
It’s taken on names like “The Perfect Storm” and “tsunami” and encouraged phrases like “the wolves are at the door” and “fasten your seatbelts.” Any way you term it, the winds of change are howling at the Canadian forest industry—and all individual companies can hope to accomplish over the short term is to avoid the falling debris.
The biggest contributor to this situation is an oversupply of both softwood lumber and panelboard for the North American market, at a time when the housing boom in the United States has subsided. Although the US housing market is still robust by historical standards, there has been a significant decline in US housing starts.
Exacerbating the impact of a decline in US housing starts is an escalating volume of softwood lumber that is expected to flood the market, resulting from the mountain pine beetle epidemic in British Columbia.
At the current pace of softwood lumber production in Canada, the North American market could well be oversupplied for more than a decade, unless new markets are developed.
The forest industry in Canada’s western economic powerhouse, Alberta, is suffering to the same degree as other provinces because it exports 80 per cent of its forest products to the US. “We are entering a period of depressed market conditions that will reshape the North American forest products industry,” says Alberta Forest Products Association (AFPA) executive director, Neil Shelly. “With North American housing starts slowing and warnings of further economic slowdowns in the US—combined with the effects of the Softwood Lumber Agreement—the entire industry will undergo a period of production rationalization. Alberta will not be exempt.”
Jamie Lim, the president of the Ontario Forest Industries Association (OFIA), agrees that the fortunes of the Canadian industry are changing and that there is a need for immediate action to reduce input costs for the industry to remain viable over the long term.
Speaking about the state of that province’s forest industry at the recent Alberta Forest Products Association annual general meeting and conference, she said: “The valley we find ourselves in today is deeper and different than anything than we have ever seen before.”
The typical response to an oversupplied market is to reduce supply to realign it with demand—and that is already happening given the number of sawmill, pulp mill, and panelboard plant closures that have already occurred. For example, Domtar recently closed four sawmills in Quebec and Ontario, removing 400 million board feet of softwood from the market. Abitibi-Consolidated has also closed four sawmills in Quebec. Ainsworth Lumber recently closed two oriented strand board plants in Minnesota and has suspended production on one line at a third plant.
With its relatively modern forest product manufacturing infrastructure and historically lower wood fibre costs, Alberta has not experienced the same number of casualties as other provinces. However, escalating fuel, wage and construction costs—partially due to the booming oil and gas sector—is diminishing the “Alberta Advantage.”
Alberta Sustainable Resource Development Department Deputy Minister Brad Pickering put it bluntly: “The oil and gas industry has a tendency to eat everybody else’s lunch.”
Pickering is co-chair of an industry/ government committee that is in the process of drafting the “Alberta Industry Competitiveness Report.” In a preliminary draft recently presented to AFPA members, the industry is asking for immediate government concessions to help it survive, and if the tone of government leaders speaking at the AFPA convention is any indication, the industry has earned a sympathetic ear.
The government seems to be getting the message that many of the challenges facing the industry, such as the high Canadian exchange rate relative to the American dollar, a new softwood lumber export tax structure, and escalating energy costs are beyond the industry’s control. They are also aware that the industry is Alberta’s third largest economic driver and employs over 33,000 workers.
While Alberta already operates a stumpage system that is supposed to fluctuate with market prices for forest commodities, industry says it needs to be maintained and updated on a more regular basis, with the use of more realistic benchmarks. Sustainable Resource Development Minister David Coutts promised a review of stumpage rates and to implement adjustments by April, 2007. Coutts also promised that the government “will not implement any new costs, without consultation. This is a pivotal time and moment for Alberta’s forest industry.”
Other recommendations from the industry included the downloading of reforestation costs to government in cases of natural disturbance, giving an unconditional right of first refusal on cheaper industrial fibre salvage to quota holders, harmonizing log export rules with neighbouring BC, and allowing cost recovery for roads based on the amount of public use. These measures could deliver between a $5 and $12 per cubic metre immediate cost saving to the industry.
There was a $130.3 million reduction in the value of forest products produced by Alberta companies up to the second quarter of 2006 compared to the previous year. Some may argue this is simply a reflection of a downward trend in the North American business cycle. A forest industry analyst with PriceWaterhouseCoopers, Craig Campbell, points to a variety of ingrained industry constraints that simply don’t make the forestry sector an attractive buy for investors over the long term. He delivered his state-of-the-industry reality check to a captivated audience at the AFPA convention.
Campbell’s findings were based on interviews conducted with 17 forest industry CEOs around the world.
One recurring observation was how the industry seems to be trapped in a vicious cycle of only achieving a four to five per cent return on capital employed, when 10 to 12 per cent is a much more favourable target.
“That performance is very frustrating compared to the return on capital that is being achieved by other industries,” Campbell says. While the forest industry appears trapped in a cycle of low profitability, other sectors are “blowing the lights out.” He adds that the industry as a whole is under intense pressure because of increases to its cost structures, and that these come without the ability to pass on higher input costs in the form of price increases to its customers.
“You have a big, heavy product and it has to be transported long distances,” says Campbell, making reference to some of the input costs hampering today’s industry. Yet there is considerable resistance from forest product consumers such as publishers to accept price increases, believing that the industry should be satisfied with its historic four to five per cent return on capital employed.
There is also a need to optimize the supply chain, and this relates specifically to the need for consolidation. Campbell points out that in comparison to other industries, the forest industry is still highly fragmented. This contributes to inefficiency.
The CEOs interviewed by PriceWaterhouse-Coopers also recognized that the fibre supply, particularly for pulp, is shifting further south. “Expect closures in North America and Canada in hardwood pulp to continue, because of new South American production coming on stream,” says Campbell. This does not bode well for Canadian solid wood product manufacturers who have come to depend on a steady income stream from chips sold to pulp and paper manufacturers.
Greater market demand is shifting east to Asian markets, and Campbell says there was a general sense of optimism regarding consumer demand among the CEOs, particularly as it relates to emerging markets. One clear advantage Canadian producers have over foreign competitors is that both Russia and China are still struggling with transportation infrastructure challenges.
In this approaching era of massive change, Campbell concludes that it will be critical for forest product manufacturers to know their customers’ needs and understand the dynamics of both established and emerging markets.
This page and all contents
©1996-2007 Logging and Sawmilling
Journal (L&S J) and TimberWest Journal.
last modified on
Sunday, June 03, 2007