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The clock is ticking

There is a united front on the part of Canada’s lumber producing provinces for extending the Softwood Lumber Agreement, but the U.S. government—and the U.S. lumber industry—have yet to say where they stand, even though the agreement expires this October.

By Jim Stirling

It can be rare to have a number of Canadian provinces agree on any one thing, but Canada’s lumber producing provinces are united in their position on the Softwood Lumber Agreement (SLA): they favour a continuation of managed trade through a SLA.

The U.S. government and the industry there officially remain preoccupied with other trade issues and have made no public declarations on the SLA. Unofficially, the word from the U.S. is one of dissatisfaction with the SLA in its current form. Uncertainty, therefore, is the key word as the expiry of the existing SLA signed by the two countries in 2006 approaches this October.

There is, however, a rider in the agreement preventing any trade action by either party for one year from the expiry date. That means it could be October 2016 before things can turn really nasty.

There really is nothing new under the sun with lumber trade disputes with the U.S. Canadian lumber shipments to the U.S. were first subjected to a U.S. imposed tariff in 1789. The current deal imposes tariffs on Canadian lumber entering the U.S. market when prices are less than U.S. $355 per thousand board feet. It’s something that’s happened very infrequently in recent years. The 2006 soon-to-expire SLA has delivered a modicum of stability, allowing both countries to go about their business with relatively few wildfires.

“The position of the forest industry in Canada, including British Columbia, along with the perspective of the federal government and the views of provincial governments is that while it is not perfect, the Softwood Lumber Agreement should be extended and renewed for another nine years,” summarizes James Gorman, president and CEO of the Council of Forest Industries and president of the B.C. Lumber Trade Council.

B.C. produces more than 50 per cent of Canadian softwood lumber production. “The reason we take that position is that we are of the view that the SLA has worked for both countries,” explains Gorman. “We believe managed trade provides greater certainty to both sides and produces stability in the marketplace.

“Managed trade,” he added, “also contains mechanisms for dealing with disputes.”

Canada’s share of the U.S. market in 2006 was 34 per cent with the U.S. meeting 61 per cent of its domestic demand. Those respective figures are now around 28 per cent and 71 per cent. “It’s an indication that the Softwood Lumber Agreement has worked for the U.S.,” Gorman notes.

The growing Asian market has changed the Canadian dynamics of lumber marketing, especially for producers in B.C. The explosive growth in Chinese lumber demand has boosted exports from barely registering on a bar chart in 2005 to 3.35 billion board feet in 2013. Final shipments for 2014 are expected to show a dip from the previous year as the rate of the middle class expansion in China slows somewhat.

The move to diversifying markets and to open trade with China is because the Asian market is real and extremely valuable to Canadian lumber manufacturers.

Another factor that’s real—unfortunately so, in this case—is the legacy of the mountain pine beetle epidemic in the B.C. Interior.

“One of the most important issues for both parties (in the SLA) is that interior B.C. lumber production is set to decline because of the mountain pine beetle epidemic,” explains Gorman. “We anticipate the AAC will come down and it will change the industry for decades to come in B.C.”

And, as pointed out, B.C. produced more than 50 per cent of Canadian softwood lumber production and the majority of that has traditionally been harvested in the B.C. Interior.

At the time of writing, while characterized by volatility, the value of the Canadian Loonie had slipped marginally below U.S. 80 cents. As noted economist Roslyn Kunin recently remarked, the currency gap doesn’t make reaching a deal with the U.S. any easier. She says the currency gap makes Canadian lumber cheaper to buy for American consumers. And that fact, Kunin added, is likely to further fan the flames of American protectionist sentiment.

That factor may need little enough encouragement as it is. The balances of power have shifted under the U.S. system recently. The Republican party now controls both the House and the Senate in the U.S. which could well indicate a more protectionist attitude in many of its trade relationships, including a lumber deal agreement with Canada.

A further factor has changed since the existing SLA was signed in 2006.

Canadian investment in the U.S. forest industry has increased. Canfor Corp., West Fraser Timber Co. Ltd., and Interfor are the three major companies to expand their holdings in the U.S., mainly in the southern yellow pine manufacturing belt. “Canadian based companies now own about 15 per cent of the U.S. lumber market,” estimates Gorman. “It’s of interest,” he agrees, “but it doesn’t change the fundamentals (of SLA renewal).”

It does, however, mitigate those three companies’ individual exposures to any punitive measures instigated against Canadian imports by the U.S. 80 cents.

Not all groups in Canada want to see a renewal of the SLA. For example, the Independent Wood Processors Association of B.C. (IWPA) reckons its members have been effectively forced out of reliable and affordable access to Crown timber through the province’s timber auction system and the consolidation of forest tenures in B.C. The IWPA is unlikely to sway Canada’s position going into formal SLA discussions with the U.S. But the B.C. Ministry of Forest, Lands and Natural Resource Operations is apparently working on a position paper investigating options for boosting the viability of secondary manufacturing wood processing businesses in the province.

A byproduct of the present SLA has been the bi-national Softwood Lumber Board. “Its key focus is to grow the use of softwood lumber in North America in non-residential markets,” explains Gorman.

The U.S./Canada cooperative approach takes on competitive building materials used in mid and high rise buildings both internally and externally. The six-storey Wood Innovation and Design Centre in Prince George is a standing showcase for what can be achieved with all wood construction. The Softwood Lumber Board builds relationships between the two countries, he notes, but that cooperation could be at risk without a new SLA.

Although at press time the U.S. had not made public its official position on SLA renewal, Gorman remains hopeful in the ability of the two countries to extend the agreement. The likelihood for that might be clarified when the U.S. makes clear its opening gambit in the high stakes negotiations. “It is going to be an interesting year,” understates Gorman.