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Hang On and Enjoy the Ride

After four years of deep industry recession, there are signs that a rebound is in sight. Lumber prices increased steadily during Q1, up over 20%. Pulp and newsprint prices are also up significantly, explaining the black ink among integrated forestry companies this past quarter. Single-family housing starts were also much higher than expected this spring. The increased numbers were in part due to the expiry of the U.S. home buyers tax credit as consumers tried to beat the deadline, but that may also mean that without a tax credit in the offing, the rest of 2010 could be a bumpy ride. Still the stage is set for an accelerating recovery in 2011, with some predicting starts likely to top one million.


November 10, 2011
By Scott Jamieson
After four years of deep industry recession

In fact, lumber prices were high enough for B.C. producers to bid adieu to lumber duties starting June 1. This may be a mixed blessing, as mills restart to cash in on this extra margin, possibly sending pricing back down for a while. At the same time there is encouraging news on the market diversification front, as western producers are making real inroads in Asian markets. Canfor restarting its Quesnel, B.C. sawmill, solely to supply Chinese clients with 200 million bf of lumber annually, shows how this market is maturing.

So if the editors at Canadian Forest Industries are at last comfortable in predicting a recovery, we’re a little less confident in predicting its form. It’s safe to assume it will differ in many ways from the last recovery starting in 1993 and running all the way to late 2005. For starters, no one expects the U.S. housing market to repeat its credit-fuelled climb to over two million starts anytime soon. But we’ve also changed as an industry, and these changes will both limit and shape our recovery. Critical factors include:

Fibre supply: We’ve heard how the drop in fibre supply from beetle-ravaged B.C. will likely play out (www.canadianwoodproducts.ca/app/newsletter/view_article/335,1,2,,2.html). Yet there will also be limits in other key regions. The reality of Quebec’s sharp AAC drop hit just as the current recession took root, so we have not yet seen its full impact on a healthy market. Ontario’s supply is constrained by increasing political pressures, while Saskatchewan’s lumber industry is all but gone.

Biomass: This emerging sector will affect fibre supply, but will also offer opportunities for regions to replace a vanishing pulpwood market, diversify client bases for logging contractors or landowners, create markets for unmerchantable wood using the same road network, set a floor for residue prices, allow more revenue to suppliers, and challenge traditional sectors for investment money. In short, it will change many of our old assumptions about where and how wood should be used.

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Staffing: Our workforce has been devastated by four years of shutdowns. In some regions the skilled workforce has all but vanished. Can we get them back to restart shuttered mills or add second and third shifts? Are they even still living in our mill communities? The answers will be “no” in some cases, and the challenges will be even greater for logging contractors than sawmills. If our recovery coincides with a sustained recovery in other commodities, as seems likely, staffing will be harder still.  

Suppliers: This key link in our supply chain is merely a shadow of its former self. In many cases survivors have diversified, and may not rush back in. As mills look to invest in key areas (see below), this will be a major bottleneck that may take years, and a new slate of startups, to get through.

Credit: Few financial players have been courting forestry companies or logging contractors of late. How long until the taps open again?

Lumber pricing: With all of the above limiting our ability to ramp up production as we did in the ’90s, look to some erratic, and for the most part high, lumber prices through 2011 and 2012. The current recovery in pricing has been supply driven; it may remain that way for years.

Retooling: Watch as mills invest not in line speed, but in lumber recovery (value and volume), automation, and new logging gear, the latter to limit downtime and maximize production per operator.

It may comfort you to know that some things never change. Many of the startling cost efficiencies of recent years will be lost as we “do what it takes” to cash in on higher prices. Lumber diverted to other markets, even the impressive gains in China, will start flowing south again as the margins will be hard to resist. And all of the above challenges will be managed by innovation. Hang on and enjoy the ride.

 

Scott Jamieson is the former editor and current editorial director of Canadian Forest Industries.


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