IS MEXICO RIPE FOR THE PICKING—for Canadian softwood lumber producers?

It was smiles all around at the recent “Three Amigos” Summit in Ottawa, hosted by Prime Minister Justin Trudeau, with guests President Barack Obama and Mexican President Enrique Pena Nieto. But the summit has now got some in the industry wondering how they can expand lumber exports to Mexico.

President Enrique Pena Nieto, Prime Minister Justin Trudeau and President Barack Obama during the North American Leaders' Summit in Ottawa (above). The summit spurs the question about why Canadian forest companies are not exporting more lumber to the large Mexican market.

By Tony Kryzanowski

“If you ship softwood lumber to the United States, you can ship it to Mexico.”

That was the conclusion drawn by Carlo Dade, Director of the Centre for Trade & Investment Policy at the Canada West Foundation (CWF), in an interview with the Logging and Sawmilling Journal regarding opportunities to export more Canadian softwood lumber to one of Canada’s partners in the North American Free Trade Agreement (NAFTA), Mexico.

It’s a timely thought considering the recent “Three Amigos” Summit held in Ottawa.

Mexico has a population of 122 million, four times larger than Canada’s, with an annual population growth rate of 1.2 percent. That is double the growth rate of both Canada and the U.S., and its middle class is on a steep growth trajectory. Mexico is the most populous Spanish-speaking country in the world, the second-most populous country in Latin America after Portuguese-speaking Brazil, and it has the second largest population in North America, after the U.S.

The CWF is a Western Canadian-based public policy think tank that took it upon itself to research the issue of the Softwood Lumber Agreement (SLA) that Canada has with the U.S. in its publication entitled, “Branching Out - Preparing for Life Without A Softwood Lumber Agreement,” written by CWF researcher, Naomi Christensen. Their timing was particularly good since the current SLA expired last fall, triggering another request for negotiation coming primarily from Canadian producers.

Christensen says she felt that this report was particularly topical since the SLA was about to expire, “and not a lot of people were talking about it.”

CWF’s document is valuable in that prior to its publication, the organization had not studied Canadian softwood lumber trade patterns, and therefore had no preconceived notions about the industry. So they began with a blank slate. Some of the questions raised in ‘Branching Out’ are bound to ignite discussion for those who take the time to read it. One very pertinent question is why more Canadian softwood is not exported to Mexico. Second, considering the success that Canada has had establishing a softwood lumber export market in China—which has grown from $55 million in 2005 to $1.4 billion in 2014—should Mexico be Canada’s next potential target?

Since 2012, CWF says that exports of Canadian softwood lumber to Mexico have increased minimally, while U.S. softwood lumber producers have managed to capture about half of that market. Mexico’s other major suppliers are Chile and Peru.

Logging and Sawmilling Journal set out to discover why Canada exports so little softwood lumber to Mexico, despite direct land and sea links to this market and our partnership in NAFTA. Dade says that there are no transportation barriers to shipping Canadian softwood lumber to Mexico—both CP Rail and CN Rail offer direct links and have many representatives stationed in Mexico City. According to data provided to LSJ by Export Development Canada (EDC), Canada’s softwood exports to Mexico have actually increased substantially since 2009, going from $4 million to triple that amount, almost $12 million in 2015. However, Mexico ranks 16th on the list of countries where Canada ships its softwood lumber, with nearly $6 billion in softwood lumber shipped to the United States alone in 2015.

While our investigation did not unearth all the answers, it did reveal some ongoing and glaring gaps in Canadian softwood lumber trade patterns, clever business decisions by some Canadian-based softwood lumber producers, and possible paths forward to potentially duplicate the China success story in Mexico.

The first question that should be answered is why Canadian softwood lumber producers should care about the Mexican market? The answer is obvious—demand. Mexican society is changing dramatically, marked particularly by a rise in the middle class. While still struggling with issues like drug-related crime, Mexico has experienced a dramatic rise in the standard of living of many, which as demonstrated in China, fuels consumer demand.

According to a report in the Mexico News Daily published last fall, Mexico’s middle class now accounts for 47 per cent of households, with annual income of between $15,000 and $45,000. This is an increase from only 9.1 per cent of Mexican households being considered middle class 15 years ago.

What has driven the growth of the middle class has been the government’s greater focus on addressing poverty, redistribution of wealth, and greater focus on education. This middle class income level puts Mexico on the same footing as China and India.

From a housing and building construction standpoint, where is current demand? Mexican housing currently is dominated by concrete and brick. The primary immediate markets identified by CWF for Canadian softwood lumber would be in construction for use in such items as concrete forms, scaffolding, packaging and furniture. But that’s today. It may be worth testing the market for more Canadian softwood lumber consumption in Mexico for use in building construction because of their familiarity with Canadian softwood. About 28 per cent of workers employed in U.S. building construction are Hispanic, primarily of Mexican origin. It is closer to 50 per cent when the renovation market is factored in.

This familiarity of building with Canadian softwood lumber matters because of reverse migration. Many Mexican construction workers employed in the U.S. return to their homes in Mexico, with knowledge of building with Canadian softwood and living in wood frame homes.

“We have this bizarre situation where Canadian producers will sell softwood to Mexicans in the United States, but not to Mexicans in Mexico,” says Dade.

BC Wood, a not-for-profit trade organization that hosted a trade mission to Mexico in the fall of 2014, made some interesting observations about the potential for Mexican demand for lumber products. First, they point out that the downturn in the softwood lumber market did have a dampening effect for more Canadian lumber shipments to Mexico, but that did not diminish the country’s demand.

“Even during the downturn, Mexico’s dependence on imported wood products, now at U.S. $1.4 billion per year, has been increasing at 5.5 per cent annually,” BC Wood says. “Softwoods comprise the vast majority of wood products imported into Mexico with some hardwoods used primarily in the furniture industry.”

It predicts growing Mexican demand for wood products.

“Deforestation remains a severe problem and Mexico’s substandard infrastructure compels the country to rely on foreign sources of wood products,” BC Wood says.

So, why have the Americans been so much more successful at penetrating the Mexican market than Canada? Until recently there was a serious trade barrier for Canadian softwood lumber producers to ship to Mexico. Until January, 2015, Mexico did not recognize Canada’s heat-treated lumber certification program, requiring companies wanting to export to Mexico to acquire a phytosanitary certificate. Now, however, Canadian producers accredited under Canada’s heat treatment program overseen by the Canadian Food Inspection Agency (CFIA) can export SPF lumber to Mexico without that certificate. This removes a significant trade barrier, as Mexico finally has come on board with countries like the U.S., the European Union, Australia, and Korea who recognize the CFIA accreditation.

Yet LSJ’s investigation shows that even with NAFTA, Canadian softwood lumber producers have essentially ignored the Mexican market, with the major focus over the past decade being on the U.S. and Asia.

American softwood lumber producers, however, have focused a good part of their attention on its neighbor to the south. The American softwood lumber industry has a major presence in Mexico through an office administered by the Softwood Export Council. Its goal is, “strategic export market development for American-made softwood products.” This office not only opens trade doors to Mexico for American softwood lumber producers, but also to the Caribbean, Central America and South America.

What’s interesting is who supports the Softwood Export Council. Its members include West Fraser, Canfor Southern Pine, and Interfor US Inc. All three are among Canada’s largest SPF softwood lumber producers, but over the past decade, they have invested heavily into Southern Yellow Pine (SYP) sawmills in the American South. The latest count indicates that West Fraser owns 15 sawmills, Canfor has 13 sawmills, and Interfor has nine sawmills in that region, all producing primarily SYP softwood lumber. It would seem that tapping the Mexican market would be a natural move by these Canadian forestry companies, but in at least two instances, that would be incorrect. Following an information request from LSJ, Canfor responded that, “our operations do not export in any material way to Mexico.” West Fraser said, “it’s not a major market for us.”

The question is why? Their current lack of interest in the Mexican softwood market supports the view by some industry experts that the market within the U.S. for SYP softwood is so strong right now that there is no motivation for U.S. producers, including Canadian companies with sawmills in the U.S. South, to export to Mexico.

“The U.S. does not export a lot of softwood because they can’t meet their domestic demand,” Christensen says.

That in itself could represent an opportunity for Canadian SPF producers if a Mexican supply void does in fact exist, with countries like Chile and Peru taking advantage while Canada sits on the sidelines. But the issue is whether Canadian softwood lumber producers can get over their obsession with the American market and all the risk that entails, as demonstrated by the U.S. housing crash, to even consider Mexico as a new export opportunity.