By Janet Plume
Canada’s forest products industry represents 2 per cent of Canada’s gross national product and employs some 235,000 workers. Of the $8.3 billion of forest products exported from Canada last year, raw logs comprised a bare 8.6 percent of that total.
While raw log exports remain a minor cog in Canada’s biggest export trade – forest products – the geopolitics of faraway places have more than doubled the value of log exports in the past decade, compared to an overall growth of only 25 per cent in the value of lumber exports.
The global trade of softwood logs has been shaken in the past decade by factors largely outside the industry’s control. The number of global manufacturing plants in need of raw logs has been growing. Last year, global softwood log trade reached an eight-year high of about 85 million cubic metres, according to Wood Resources International, an international forest industry consulting firm based in Seattle.
The single greatest determinant of global softwood log trade is China. The meteoric rise of its housing market in the past decade created a huge demand for softwood logs and lumber. In softwood logs alone, China’s import volume has ballooned from 15 million cubic metres in 2003 to 35.6 million cubic metres last year.
As neighbours with increasingly compatible interests, China spent the early years of this century increasing softwood log imports from Russia. Log imports shot up from 12.6 million cubic metres in 2003 to peak at 21.1 million cubic metres in 2007. That compared to between 1 million to 2 million cubic metres from New Zealand during that period, and negligible amounts from China’s other main log suppliers – Canada, the U.S. and Australia.
“Hardwoods were the only appreciable volumes flowing in the 1970s and 1980s” to China, said Russell Taylor, President of International Wood Markets Group, a Vancouver, B.C.-based research, analysis and strategic planning consultancy. “But after Tiananmen Square, China’s log imports were zero for about 10 years.”
When China’s housing market started heating up in the early 2000s, Russia quickly became China’s major source for softwood logs. Then in 2007, Russia levied a 6 percent tariff on lumber exports. In April 2008, the tariff leaped to 25 percent. That year, China’s softwood log imports from Russia fell 25 percent to 15.1 million cubic metres.
“Putin’s plan was to increase the tariff to 80 percent in January 2009 and thereby attract mill investment into Russia,” Mr. Taylor said. “But the global recession kicked in, and no one would invest.” China’s reliance on Russia for log imports declined precipitously, much to the glee of all other log export nations. Canada’s exports of logs to China – almost all from British Columbia — climbed from less than 400,000 cubic metres in 2009 to nearly 4 million cubic metres last year.
“The problem with Russia is they are politically disorganized, corrupt, lack infrastructure, financial strength and investor interest,” said Hakan Ekstrom, founder of Wood Resources International. “Even though they have the trees and are close to China, their problems are not going to be solved in the near future.” Despite the challenges, Russia’s log and lumber supply remains a wildcard. The heavily depreciated ruble last year pushed up Chinese imports of softwood logs nearly 7 percent to 9.9 million cubic metres. During the same period, Canada’s log exports to China climbed more than 10 percent. “Just as we didn’t see much of a supply response to Russia’s removal of those tariffs in 2011, there is doubt that Russia has much capacity to significantly increase its wood exports,” Ekstrom said.
The other factor that regularly cramps log imports into China is the world’s most populous nation’s propensity for stockpiling, especially when businesses are shut down during the Chinese New Year every spring. In late March, log stocks at the 25 major Chinese ports that handle forest products had swelled to nearly 4.3 million cubic metres, more than 10 percent of all log imports during 2014.
Other factors are hurting Chinese log imports from Canada this year. China’s cooling economy and property bubble, the severely depreciated ruble and a lower U.S. dollar cost-and-freight (CFR) price have combined to reduce softwood deliveries this year from North America. “Up until the middle of last year, the log export trade was fantastic for everybody,” Mr. Taylor said. “But now the currency valuation has hurt all the exporters – particularly U.S. exporters – with the strengthening dollar.
Lumber versus Logs
While China provided relief to Canada’s forest products exports when the U.S. housing market tanked in the 2008 global recession, this year’s warming U.S. construction market could help lumber exports offset a cooling China market. However, Canada’s raw log exports are not likely to benefit from this scenario.
“The U.S. housing market, which has always been the largest market for Canadian lumber, has turned up this year,” said Doug Mills, Senior Account Representative for Trade Development at Port Metro Vancouver. “We see the volume of log exports as a function of the way timber is licensed to be cut in B.C. As demand rises for lumber and other finished products, there are fewer logs for export. It depends on when the cut licenses are due, and now the market for finished timber is strong.”
Softwood log exports were not initially hurt by the decimation of 18 million hectares of Canada’s forests by the mountain pine beetle. That’s because the beetle plague occurred mostly in Canada’s interior, where logs are sent to local sawmills and exported as lumber. In the west (British Columbia), there is a coastal forest products market that is separate from the interior market,” Mr. Ekstrom said. “Some of the older growth is further back in the hills. It’s more expensive to bring the logs down the slopes. They have to use cables and helicopters. Coastal sawmills cannot compete with those in the interior because of the high transportation costs. So their best option is to export the logs, which garner a higher price to foreign buyers.”
Port Metro Vancouver’s Mills sees another trend developing due to the beetle plague: Fiber is everything that is milled from the raw log; lumber only constitutes 60 percent of the fiber in a log. The residual fiber produces fiberboard, wood pulp, pellets, etc. “In the last 3 to 4 years, the pine beetle decimation has hurt a lot of growth in exports,” Mr. Mills said. “Now we are near the end of that period and there is a shortage of residual fiber. While prices will remain strong, the amount of fiber available will be curtailed until the trees regenerate. All the fiber available in Canada is already spoken for. “What we are seeing is the major forest products producers like Canfor and West Fraser are buying and building U.S. mills to hedge against the lack of fiber in Canada,” he said.
In 2014, British Columbia exported more than 6.1 million cubic metres of logs. The volume represented a small percentage of B.C. forest products exports, but they amounted to the lion’s share of the coastal harvest. Despite Asia’s demand for B.C. logs, exports are restricted by both the provincial and federal governments. In most cases, to export a log from the coastal region, the owner must secure federal and provincial permits by first offering the log to domestic buyers. At that point, if no buyers step forward, a government committee applies a surplus test to decide whether the log is deemed surplus to domestic needs, and then decides whether any domestic offers are fair.
The provincial government also prohibits exports of certain species of trees such a red cedar and some higher grades of logs. In June 2014, public policy think tank the Fraser Institute published the “Log Export Policy for British Columbia,” which found that the export restrictions caused coastal logs to sell for substantially more to foreign than domestic buyers. “Furthermore, the current export approval process, and the surplus test in particular, adds significant delays and uncertainty to the operations of logging companies,” study author Joel Woods said. “The current log export process prevents log owners from securing long-term contracts with foreign buyers to shelter them from price volatility, prevents log owners from sorting logs per customer request, and imposes delays that increase log-handling costs and tie up capital.”
U.S. & Softwood Lumber Agreement
Canada and the U.S. are major competitors in the forest products industry; both countries have battled for scores of years to find an equal footing on lumber prices and subsidies. Now the clock is ticking on the 2006 Softwood Lumber Agreement, known as SLA, which expires in October. The SLA prohibits the Canadian federal and provincial governments from subsidizing the Canadian lumber industry, and caused the U.S. to revoke antidumping and countervailing duty orders. With the impending expiration of the Softwood Lumber Agreement, both governments are discussing a new agreement. Canada is in favor of resigning the current agreement with few, if any, alterations. The U.S. Lumber Coalition, which represents most of the U.S. industry, has indicated it wants to see more changes. Should the SLA expire without a new agreement in place, no trade cases can be filed for at least a year.