B.C. Mountain Pine Beetle Epidemic
The mountain pine beetle (MPB) epidemic has now infected and/or killed over 17.5 million hectares (43.2 million acres) of B.C. lodgepole pine forest (an area roughly double the size of New Brunswick or Austria). B.C. government reports indicate that 51% of the merchantable lodgepole pine volume in the province had been killed by 2010, and the most recent estimates are that 58% will be killed by 2016 as the epidemic tapers off. As the rate of new infection finally winds down, the mid- and long-term impacts are coming into focus.
It has now been 10 years since the B.C. government released its first mountain pine beetle action plan. Sawmills in the hardest-hit regions of the B.C. Interior are now facing the challenge of cutting logs that have been dead for eight to 10 years (or more). Some timber supply management areas have begun to see MPB-related reductions in the allowable annual cut (AAC). From the current (2012) Interior AAC of 60 million m3 (both public and private land), the AAC is expected to decline to about 40 million m3, a reduction of 20 million m3 (33%). For perspective, the AAC prior to the beetle impact was about 50 million m3.
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Mill Closures Forecast
During the peak years of the MPB epidemic (2001-2005), the B.C. government increased AAC levels to encourage salvage of dead pine. However, while logging and sawmilling grew during the North American housing boom of 2000–2006, they later declined as U.S. lumber demand and prices crashed in the latter half of the decade. As a result, much of the available ACC has gone unharvested (and the MPB-killed portion has been growing progressively older and less economical).
Between the peak of the housing boom in 2005 and early 2012, 18 sawmills and four veneer mills (not including the late April fire at Lakeland Mills in Prince George) closed in the B.C. Interior, for a variety of reasons: lack of mill profitability; rationalization of mill assets; catastrophic fires; and reduced log supply. These closures have resulted in a reduction of about 12 million m3 of sawlog demand annually, leaving current annual sawlog volume demand still substantially above the mid-term AAC projected in 2025. The silver lining is that the corresponding reduction in log demand accounts for about two-thirds of the inevitable Interior AAC falldown. In other words, because the sawmill shutdowns between 2005 and 2011 have preceded the eventual reduction in AAC, by the time this reduction eventually occurs, fewer mills will need to close over the next 10 years as a result of the reduced economic sawlog supply.
The greatest number of additional mill closures are expected to occur in the Cariboo Forest Region (on a map, the large area surrounding Williams Lake and Quesnel), because few mills have closed there to date. The Prince George/Vanderhoof area and the Thompson/Okanagan will likely also see some closures. However, the Kootenay, Peace and Mackenzie regions are not expected to see mill closures, as timber supplies are good to ample. Note that not all log volume reductions may result directly in closures – in some cases, mills may instead opt to operate at a reduced capacity (i.e., by running fewer shifts).
Aging Logs & Rising Costs
A key determinant of a mill’s ability to continue operating with MPB-killed logs is the concept of log “shelf life.” As the number of years progress after a forest is killed, the wood fibre of the dead forest gets drier and more brittle, and then starts to rot at the base of the tree. This has a negative impact on both costs and revenues in that:
- Logging costs rise, since more “non-sawlog” timber must be left in the woods and harvestable stands get farther away from the mills;
- Sawmill lumber recoveries drop as wastage due to rot/checks becomes more common;
- Difficulties in sawmilling expand (e.g., more saw changes, clog-ups, breakage and wood dust); and
- Lumber grade yields decline.
Unfortunately, while older logs have higher associated costs, they also have lower associated lumber revenues due to the lower grade-outs. For average mills in the analysis, costs surpassed revenues near the four to five years’ dead mark.
Thus, sawmills harvesting older logs must process a mix of different-aged logs in order to break even. Top-quartile mills performed better, but still lost money when processing the oldest categories of logs. Many mills will not be able to afford increased log or sawmill costs unless lumber prices improve from their current low levels. However, if prices rise, mills may be better prepared to saw increasingly older logs.
Supply Versus Demand
As mills scale back production or shut down entirely by about mid-decade, B.C. Interior lumber production is likely to start declining permanently. From a peak of 15.0 billion bf in 2005, Interior output dropped to 9.0 billion bf in 2009. Since then, it has recovered to 10.7 billion bf in 2011. With continued improvement in U.S. housing, B.C. Interior production is forecast to expand during 2012–14 to about 12 billion bf before log supply tightness and/or sawmilling economics affect overall production levels. From there, output will decline steadily to fall by 20-30% near the end of the decade, depending on a number of assumptions.
With the B.C. Interior historically having contributed some 40% of Canada’s overall lumber production and some 15% of the U.S. lumber supply, the forecasted reductions in output will eventually influence North American lumber prices. While U.S. lumber demand is still close to historical lows, it will eventually return closer to normal trends. However, at about the same time as demand begins to pick up (around 2014–15), B.C. lumber supply should begin to decline, limiting the total Canadian supply and pressuring prices. Growing demand from Asia (particularly China) is also contributing to an increase in demand. Recovery in Japan and eventually Europe will add additional demand, not to mention opportunities in other developing markets. In aggregate, the increase in demand from many wood-consuming regions of the world, combined with supply reductions in B.C., Quebec and Ontario, should contribute to a “global lumber super cycle” in which prices could soar.
Areas of Opportunity
As well as providing an assessment of the impact the MPB will have on B.C. Interior logs, softwood lumber and plywood, the report uncovered some interesting, and perhaps surprising, results:
- As lumber production decreases, B.C. Interior pulp mills and other facilities that rely on sawmill residuals will need to rely more on fibre from other sources, such as pulp-grade logs and forest biomass. By the end of the decade, coastal pulp mills that currently rely on chips from the Interior will also need to rely more on whole-log chip sources. (No B.C. Interior pulp mills are forecast to close as a result of declining fibre supply, however.)
- The Peace and Mackenzie regions (northeastern B.C.) have surplus volume that could support incremental mill output, as do the coastal and northwest areas of the province. Development in these more remote areas will be largely dependent on lumber prices.
- Industrial users of sawdust and shavings, such as producers of MDF, sawdust pulp, and pellets, will see first an increase and then a decrease in raw materials as sawmills expand, and then reduce, production. Forest-based biomass, pulp logs and even hog fuel are all potential substitutes for some of these applications; however, hog fuel will also be in increasingly short supply as logging and sawmill production drops, and given that forest-based biomass (e.g., tops and branches from the roadside) may be too expensive to utilize except in areas that are closer to mills
While the MPB epidemic has created challenging operating conditions for many mills and communities, sawmill operators have been working on solutions. For example, one positive fact about “beetle wood” is that it requires less kiln time. Some mills have begun sorting dry pine from the wetter species (fir/balsam) to reduce cost and improve product quality. Many mills are also investing heavily in improved sawmill optimization technology in order to get the greatest volume/grade recovery possible.
There has been some recent media attention focused on a B.C. government report that discusses options to mitigate the reduction in AAC by relaxing regulations regarding non-timber forest values (e.g., visual quality objectives, wildlife corridors, etc.). Perhaps less media-worthy, but more promising under the right economic (i.e., lumber pricing) conditions, would be the harvesting of logs from stands traditionally considered uneconomic, such as low-volume stands, unmerchantable forest types (e.g., Interior hemlock), and young forests. The objective is to find incremental timber that can go back into the AAC so that more mills can operate.
While the impact of the MPB epidemic will be significant, the future may not be as dire as it would appear at first glance.
Because 22 mills (not including Lakeland) have already closed, the drop in sawlog availability will not be as high as the peak-to-trough decline in AAC. Over the next decade, there will be an increase in residual fibre and pulp logs, eventually followed by a decline. Prices will be the key determinant in how long sawmills can operate using drier timber, and also in what percentage of biomass will be economical to harvest.
The next few years will doubtless be challenging. Low lumber prices and increasing processing costs may cause more mills to close (even before the log supply is reduced). However, in 2014 and 2015, demand and prices are forecast to improve, boosting producers’ bottom lines and opening up timber options that would otherwise be uneconomic. A tighter Canadian timber supply is expected to see sawmill operating rates soar. The North American lumber industry’s 2011 operating rate of 71% is projected to move much higher in 2014 – towards 85% – on stronger demand and higher U.S. housing starts. As operating rates move into the 85-90% range, much higher prices and price volatility can be expected. So, by 2015, there appears the prospect of tighter timber and lumber supplies coupled with resurgence in North American and Asian demand – this is setting up the potential of a lumber “super cycle”!
Extracted from B.C. Mountain Pine Beetle: Evolving Impacts and Opportunities (released May 2012). Researched and written by Jim Girvan (MDT Ltd.); Murray Hall (Murray Hall Consulting Ltd.); and Gerry Van Leeuwen, Alice Palmer, and Russ Taylor (WOOD MARKETS). The report is published by International WOOD MARKETS Group Inc., Vancouver, BC Canada (www.woodmarkets.com). The report forecasts both B.C. Coast and Interior wood fibre supply to 2031 as well as the effects of upcoming B.C. Interior timber supply reductions, both from a regional and a North American lumber supply perspective.
August 13, 2012 By Jim Girvan Murray Hall Gerry Van Leeuwen Alice Palmer and Russ Taylor
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