Industry News Markets
A Capital Idea

Sawmills in that province are far from out of the woods yet, as uncertainty in the all-important U.S. housing market continues. Still, financial results for the last quarter reported were encouraging. PricewaterhouseCoopers (PwC) reports that net earnings for Q3 2010 among western Canadian producers were up $380 million over the same quarter in 2009, with mills reporting a combined profit of $179 million. While results were far from positive for eastern producers, the Conference Board of Canada reported at year end that the wood products industry has finally turned the corner. Despite a number of uncertainties, the board expects wood products production to grow by almost 4% in 2011 and producers to post profits even higher than the almost $500 million made in 2010. Factors in that optimistic forecast include the recent mini-boom in domestic housing and growing exports to China.

Certainly the U.S. market is no longer the only game in town. As B.C.’s forest minister Pat Bell recently gloated, China and Japan overtook the U.S. in the value of lumber imported from the province for the first time last October. The two Asian powerhouses imported $143.7 million worth of B.C. lumber in October 2010 versus $124 million going south of the border. In fact, Canada (mostly B.C.) became the largest supplier of lumber to China in 2010, surpassing Russia in Q4. Bell and others predict an increasing percentage of B.C.’s lumber going offshore through 2011.

Investments Coming
Fed by this relatively buoyant atmosphere, B.C. sawmilling companies have been announcing capital spending programs that have both suppliers and employees breathing easier. Canfor and West Fraser have announced budgets of $375 million next year, and while some of that will certainly go to U.S. operations, it still compares very favourably to the combined $78 million they spent in 2009. While we don’t have news from all the players, with some more tight-lipped than others, here is a quick glance at some of these programs, which still tally close to $500 million.

Canfor: The board of directors approved 2011 spending of $145 million, and Dave Lefebvre, director of public affairs and corporate communications told Canadian Wood Products that at least $120 million of that will go to “mill improvements and not the cost of running the business.” The remaining $25 million will be spent on key maintenance projects.

Over the next few months the company will analyze each of the proposed projects among its mills both in Canada and the U.S., and select those with the highest ROI. Even better news? This is simply one part of a three-year mill improvement project in which Canfor will invest $300 million.

Conifex: This up and comer is in the midst of implementing a $30 million capital investment at its Fort St. James, B.C., mill, and recently restarted its newly acquired mill in Mackenzie, B.C., where it also has investment plans. At a biomass conference in late September, Conifex chairman and CEO Ken Shields announced plans to invest some $32 million in upgrading and expanding the facility’s biomass boiler, almost doubling its power output.

Interfor: The company restarted the old Pope & Talbot sawmill in Castelgar, B.C., in July 2010, a mill that had been shuttered since 2008. That decision was based in part on stronger Chinese sales. The company approved a $24.4 million capital spending program in July that will target high-return projects over the coming 18 months. Production at its brand-new Adams Lake sawmill in central B.C. is also steadily increasing after a shaky start.

Western: No announced plans for major capital expenditures, but the coastal player reopened its Vancouver Island Ladysmith mill in September to service the growing Chinese market. It also restarted its Nanaimo sawmill late in 2010.

West Fraser: Vancouver-based West Fraser Timber Co. Ltd. is also investing in its mills with the company’s board of directors approving a $230 million capital expenditure program for 2011. Most of the funds are expected to be spent on West Fraser’s solid wood business as the integrated forest products producer says it will be taking advantage of “green transformation credits” to improve efficiency at its pulp operations.

“Although our industry is still in a fairly fragile state, we believe that this is the time to focus on improving our current operations,” said Hank Ketcham, West Fraser’s chairman, president and CEO. “We have not had cash available or the confidence about future cash flows since midway through 2006, and as part of our cash preservation strategy we substantially cut back on capital spending.”

Ketcham said “previous significant investment” in the company’s operations has allowed the mills to run well over the past few years, despite a lack of available capital. “We now have a strong balance sheet and we believe that the worst of the depression that our industry has suffered through is behind us, so we are returning to our basic strategy of reinvesting in our operations to ensure that we remain highly competitive.”

Although a significant portion of the company’s capital will be invested in its B.C. and Alberta mills, Ketcham said they will also “carry out the kinds of improvements we had always planned” at the company’s U.S. southern yellow pine mills. West Fraser acquired 13 mills in eight U.S. states from International Paper in early 2007 for US$325 million.

The company is focusing on “low risk, quick payback” projects, said Ketcham. “We will mainly be introducing technologies and processes that currently exist in some of our mills to other facilities. Because of the length of the downturn we have had a lot of time to consider where to best allocate our capital once available so we have a high degree of comfort with our current plans.”

As for timing, a number of smaller projects are already underway. However, Ketcham noted that several major projects require engineering design and the manufacture of equipment, so the bulk of the expenditures are likely to occur in the second half of 2011, with some projects being carried over to 2012.

“We are a strong believer that the application of new technologies throughout our operations will result in significant productivity gains,” Ketcham concluded. “We have a very dedicated group of employees who, with the right tools, can achieve great results.”