By Keith Norbury

The recent expiration of the Canada-U.S. Softwood Lumber Agreement (SLA) has come at pivotal time for the Canadian lumber industry. While the agreement’s terms will remain in force for a year after last October’s expiration, negotiating a new deal is going to pose a challenge for Canada, not the least because of the weak Canadian dollar.

What shape such a deal might take, or even if one is possible, is pretty much a mystery, according to industry insiders, academics, and analysts familiar with the lumber industry. In fact, if there’s any consensus among them, it’s that there’s no consensus about the prospects for a new deal or even if a deal would be good or bad for Canada’s softwood lumber sector.

The good news, said Daryl Swetlishoff, a lumber analyst with Raymond James, is that nothing bad can happen between now and next October. Until then, the U.S. cannot impose any countervailing duties or launch any anti-dumping cases as happened when an earlier softwood lumber agreement lapsed in 2001. “Now, I believe that there’s a window, probably heading into the summer months, where a negotiated settlement is most likely,” Mr. Swetlishoff said.

His reason for that optimism is that the last deal, signed in 2006, provides a good framework for a new treaty. “It really gets to the heart of the issue, which is down-market protection for U.S. producers,” Mr. Swetlishoff said. To address that, the previous deal included a mechanism by which Canada would charge an export tax on its lumber or impose alternative measures, with certain exceptions, when the index lumber price dipped below certain thresholds. This time around, Mr. Swetlishoff said, a deal might also have to include trigger points to take into account currency changes.

Current deal expired just before election

The current SLA expired Oct. 12, 2015, exactly a week before a federal election that resulted in a change in Canada’s government. The new Liberal government under Prime Minister Justin Trudeau has been criticized for failing to make negotiating a new softwood lumber deal a priority. Adding fuel to that criticism was the mandate letter Mr. Trudeau sent to his newly appointed Minister of International Trade, Chrystia Freeland. The letter referred to priorities such as implementing the Canada-European Union Comprehensive Economic and Trade Agreement, and consulting on Canada’s potential to take part in the Trans-Pacific Partnership Agreement, as well as implementing trade deals with Chile, Israel, and the Ukraine. But the letter made no mention of lumber.

In mid-February, however, Ms. Freeland told law makers in Ottawa that negotiators from both countries had met the previous week in Washington to discuss a new lumber deal, Dow Jones News Service reported. “We are working very hard on this deal,” the report quoted Ms. Freeland during question period in Parliament. “The forestry industry is incredibly important across this country, and we are very aware of the significance of the softwood-lumber agreement and we are working very hard on it.”

Global Affairs Canada, which now encompasses the ministries of Foreign Affairs and International Trade, did not make anyone available for an interview. However, a Global Affairs spokesperson issued a statement that said the lumber issue is a “top priority for the government.” And the statement added, “We remain focused on maintaining stable access to the U.S. market for the Canadian softwood lumber industry.”

The international trade minister has held “extensive consultations,” including with B.C.’s premier and provincial ministers, the spokesperson said. And Ms. Freeland has discussed the lumber issue with U.S. Trade Representative Michael Froman and U.S. Secretary of Commerce Penny Pritzker.

Global Affairs Canada announced on its website in September that following the expiration of the agreement, Canada would begin monitoring exports of lumber to the U.S. The program would be “administered through the issuance of export permits by the Minister of Foreign Affairs,” the posting said. “The object of this monitoring program is to collect data respecting softwood lumber exports to the U.S. of products first manufactured in all Canadian provinces and territories.”

Consultant nervous about Liberal approach

Russ Taylor, President of the forest-industry consulting firm International Wood Markets Group Inc., said he’s not confident that the Liberal government has the wherewithal to negotiate a good deal for Canada’s lumber industry. “It just seems like this government is going to give everything away really quickly,” Mr. Taylor said. “I’d be nervous with the early signs I’ve seen with this government.” Mr. Taylor said he also suspects that the softwood lumber deal isn’t even “a blip on the radar” of outgoing U.S. President Barrack Obama, whose second and last term expires in January.

In the meantime, the loonie has dropped in value, enabling Canada to move more wood into the U.S., “pushing prices lower and making the situation even worse,” Mr. Taylor said. He fears “something pretty ugly for the Canadians” should the U.S. respond to that wave of wood by initiating tariffs once the stand-still ends next October. “I think trying to make an agreement, at least we’ll know what it is before it’s signed rather than waiting to go through more regulatory channels and not knowing what you’re going to get,” Mr. Taylor said.

What Canada got in 2006 was a deal that featured export charges that applied on a sliding scale when lumber prices dropped below a certain level. For the first five years of the deal, lumber prices were so low that the tax was usually applied, and mostly at the maximum rate. It was only during 2013 and 2014 that lumber prices were high enough that the export charges didn’t kick in.

Export charges include options and exemptions

According to a posting on the Global Affairs Canada website, Canadian softwood lumber producers pay the export charge when the price of lumber is at or below $US355 per thousand board feet. Each of Canada’s lumber producing regions was given choice of two options on how to calculate the export charge. Option A is a sliding scale of straight percentage charges ranging from five to 15 per cent, with the latter kicking in when the price drops to $US315 per thousand board feet. Option B is more complicated. It involves a scale of percentage charges plus a “volume restraint” or quota on exports as a regional share of U.S. consumption. Option B ranges from a 2.5 per cent export charge plus a regional share of 34 per cent of U.S. consumption at the highest threshold to a five per cent charge plus a regional share of 30 per cent of U.S. consumption at US$315 per thousand board feet. Alberta and B.C. — both the coast and interior regions — chose option A. Saskatchewan, Manitoba, Ontario, and Quebec chose option B. While the regions were free to change the option every three years, they have all stuck with their original choices.

Some Canadian softwood lumber is exempt from the charges. For example, there’s no export charge required on lumber produced in the four Atlantic provinces from lumber harvested in those provinces or from timber certified as originating from Maine. Twenty-nine companies in Quebec and three in Ontario are also exempted because U.S. authorities had found them “not to benefit from alleged subsidies.” Also exempt are logs harvested and produced in Nunavut, the Yukon, and the Northwest Territories.

According to the Random Lengths framing lumber composite price index, compiled by an Oregon-based company, lumber was at US$314 in Feb. 19 compared with US$362 a year earlier, and over US$380 at the start of 2015, although it dipped to US$297 in September. Since March 2015, the price has dipped below the $355 threshold after being above it for most of 2013 and 2014 (June-August 2013 being an exception). For almost all of 2006-2012, though, the index price was below the US$355 threshold, as well as below the US$315 point where the maximum export charges apply.

Reports find new deal “highly unlikely”

About a month before the softwood lumber agreement expired on Oct. 12, 2015, Naomi Christensen, a policy analyst for the Canada West Foundation, authored a report titled, “Branching Out: Preparing for Life Without a Softwood Lumber Agreement.” As the report’s title implied, Ms. Christensen concluded that forging a new agreement “is highly unlikely.” Among her reasons were that Canada’s decreasing timber supply poses less of a threat to U.S. producers; recent lumber prices have been high; housing starts in the U.S. are increasing; and the U.S. government is focusing on multi-national trade deals like the Trans-Pacific Partnership. Following from that premise, Ms. Christensen suggested that Canada should turn its attention to diversifying its lumber trade beyond the U.S. and China to include countries such as Vietnam, Indonesia, and Mexico; and seek more value-added markets in the U.S. Since her report came out, it seems even more likely to her that “we are not going to get another softwood lumber agreement,” Ms. Christensen said in late January. Among the circumstances that have become more pronounced are the further slumping of the Canadian dollar, and the drop off in Canadian lumber exports to China.

“The U.S. is our biggest customer, our closest customer,” Ms. Christensen said. “It’s kind of natural to increase our exports to them as they start picking things up. And it’s good right now with the low dollar for Canadian companies that are exporting to the U.S. But we have to keep it very top of mind that come October (2016) it’s very likely that they’re going to put tariffs on our lumber and so we need to think about what we’re going to do when that happens.”

However Mr. Taylor said the suggestion that Canada can simply diversify its markets is an uninformed one that doesn’t take into account the economics of Canada’s lumber trade. That trade is geared toward the U.S. market, which is next-door and in the same time zones. “It’s the best market we’re ever going to have and it always has been the best market we were ever going to have, even with the previous softwood lumber agreements in place and duties and everything else,” Mr. Taylor said. Mr. Taylor added that export markets are a good idea that every other lumber exporting country is also pursuing. And many of those competitors, like Russia, have a transportation advantage in that they don’t have to ship their lumber across the Pacific Ocean. “So we are under a more competitive situation there,” Mr. Taylor said.

Canada leads world in sawn wood exports

In 2014, Canada was the world’s biggest exporter of sawn wood (HS product classification 4407, which includes softwood lumber but also various hardwoods), according to the International Trade Centre, a joint agency of the United Nations and the World Trade Organization. In fact, Canada has been the world’s biggest exporter every year since 2001, as far back as the ITC statistics go.

Complete figures weren’t available for 2015, although it appeared that Canada would easily hold its position. Canada exported US$7.8 billion in sawn lumber, 20.3 per cent of the world’s total, in 2014. That compared with US$3.7 billion for second place Russia, and US$3.5 billion for third place U.S. Global sawn wood exports totalled US$38.6 billion in 2014, up from US$35.9 billion in 2013. However, exports from the top three countries declined in 2014 so it’s very likely global figures will also show a decline once reporting is completed.

Canada exported 31.4 million cubic metres of sawn wood to the U.S. in 2015. That was more than the 28.9 million cubic metres in 2014, although the U.S. dollar value in 2015 was lower. The U.S. also accounted for 68.2 per cent of Canadian sawn wood exports, the highest proportion since 2008 when it was 69.2 per cent. China’s share meanwhile dropped to 14.2 per cent in 2015 from a high of 21.1 per cent in 2011, when the U.S. share was just 53.4 per cent. Total sawn wood exports from Canada were 42.6 million cubic metres in 2015, the fifth straight year they had risen since 2010 when the figure was 30.9 million cubic metres. In 2004, however, Canada exported 56.4 million cubic metres.

U.S. hints at lumber concerns

As for a new lumber treaty with the U.S., Mr. Taylor said everyone in the industry seems to be in the dark about the prospects for a new agreement. But he anticipates that the U.S. is going to be tough to bargain with. “It will not be good for Canadian lumber exporters to the U.S.” Mr. Taylor said. “It’s as simple as that.”

However, based on past experience, no deal would be even worse, he said. “Then it goes to the U.S. Department of Trade and Commerce and they will then set duties or whatever based on their own internal research that may have nothing to do with the facts,” Mr. Taylor said. “So it would be the worst of anything.”

Hints of what arguments U.S. authorities will use in negotiating a new agreement can be found in a December 2015 report on softwood lumber subsidies that the U.S. Department of Commerce submitted to Congress. The 15th such annual report, it notes that the “vast majority” of timber harvested in Canada comes from Crown land for which producers are charged “stumpage” fees. The 16-page report states that the department found that the provincial governments provided a subsidy by selling timber “for less than adequate remuneration.”

Aside from stumpage, the report mentions a litany of government programs that the commerce department also considers to be subsidies. They include federal initiatives like the Western Economic Diversification Program, and Natural Resources Canada marketing programs like Canada Wood Export Program, Value to Wood Program, which expired in 2011, and the National Research Institutes Initiative.

Also considered subsidies are B.C.’s Private Forest Property Tax Program, and Ontario’s Northern Industrial Electricity Rate Program. The U.S. Commerce Department even considers the harvesting of pine-beetle damaged wood to be unfair.

“Since 2007, British Columbia has sold increasing amounts of publicly-owned timber in its interior for salvage rates, providing a benefit to softwood lumber producers,” the report said. “While the mountain pine beetle infestation has caused extensive damage to forests in British Columbia, the majority of the damaged timber is usable for softwood lumber products.”

However, the report concluded that a subsidy’s inclusion in the report — or its absence — “is not an indication of whether the subsidy is countervailable under U.S. law, is in accordance with the relevant WTO agreements, or is actionable under any other international agreement.” No wonder Mr. Taylor observed that, “the whole thing is about what kind of peace the Americans want. And they want to have their cake and eat it too.”

Too early to predict outcome

Joel Neuheimer, Senior Director for International Trade and Transportation and Corporate Secretary for the Forest Products Association of Canada, said it’s very difficult to predict what will happen between Canada and the U.S. on the softwood lumber file. However, he did note that Mr. Trudeau was scheduled to meet with President Obama in March. “Unfortunately for our membership, given that it is across Canada, there is really no consensus position on how to resolve it,” Mr. Neuheimer said of the lumber impasse. “The one thing that we always talk about is that we are very supportive of the least trade-restrictive solution possible. So that’s really the focus for us.”

Dr. Roger Hayter, a geography professor at Vancouver’s Simon Fraser University, said the Canada-U.S. softwood lumber dispute has had “a major impact” on Canada’s lumber industry over the decades. “It’s been a tremendous shock and disappointment to the industry,” said Dr. Hayter, who co-authored a paper published last year on the most recent phase of the dispute — what he calls phase 4 — that preceded the 2006 agreement. In that paper, he traced the origins of the lumber dispute to a recession in the early 1980s, labelling the dispute “unusually long and acrimonious.” He also noted that Canada traded lumber freely from 1947, with the introduction of the General Agreement on Tariffs and Trade, until 1981 when a U.S. lumber lobby group called the Coalition for Fair Canadian Lumber Imports began claiming that Canadian lumber exports were unfairly subsidized. (Ms. Christensen tracks a similar history in her paper, although she traces the battle back to border dispute in the 1820s between Maine and New Brunswick.)

“Overall, Phase 4 was expensive, convoluted, and rancorous, fuelled by unilateral U.S. action to collect punitive duties and taxes from Canadian firms,” Dr. Hayter and his co-authors wrote.

The dispute was taken to the World Trade Organization, which ruled that the U.S. had illegally collected duties from Canada since 2002. The U.S. International Trade Commission agreed to pay the duties back but by 2006 the new lumber-treaty had been negotiated. Among the terms of the deal were that the U.S. would return only 80 per cent of the duties. Of the $1 billion that the U.S. kept, it gave half to the Coalition for Fair Canadian Lumber Imports, the paper said.

That support, Dr. Hayter said, has enabled the Coalition — now called simply The U.S. Lumber Coalition — to become “basically a permanent watch dog organization of the U.S. government.”

Canada blamed for not negotiating

Zoltan van Heyningen, the Coalition’s Executive Director, didn’t respond to a request for comment. However, in a news release issued on the expiration of the agreement, the Coalition applauded the deal but alleged that “the Canadian government has so far been unwilling to enter into negotiations on a new trade agreement.” The release also quoted Coalition President Charlie Thomas as saying that “world timber and lumber markets have evolved and the 2006 agreement is now outdated.”

One thing that has changed since 2006 is that the Canadian dollar has tanked, which Dr. Hayter expects the U.S. lumber lobbyists will cry foul about. But that could backfire “because in a year’s time, or two years’ time, it could be higher than the U.S. dollar.”

Another recent change has been in the health of the U.S. housing market, which slumped to 554,000 starts in 2009 from 2.068 million starts in 2005. The starts edged up to more than a million in 2014, and continued trending upward to 1.1 million starts in 2015. They slipped in January by 3.8 per cent, a decline attributed to cold weather, according to news reports. But the seasonally adjusted annual rate was still 1.1 million starts.

Mr. Swetlishoff said Raymond James is predicting a 12 per cent year-over-year increase in U.S. housing starts, “which I think is low on the street.” However, he said he doubts that U.S. housing starts will ever return to the 1.8 million annual levels where they hovered from 2002 to 2006.

Lumber looking promising — eventually

The prospects for 2017 look more promising, Mr. Swetlishoff said, as does the 2016 U.S. repair and renovation market, “which consumes a lot of lumber as well.”

Mr. Taylor said he subscribes to the thesis that by 2020, U.S. housing starts will pick up to the point where they offset the effects of the weak Canadian dollar. “But in the short term there’s a glut of lumber,” he said, adding, “U.S. mills are taking downtime because prices are too low.” Mr. Taylor said his organization expects a modest increase in housing starts of about 10 per cent. The problem is the industry is setting up for a 15 to 20 per cent increase and oversupplying the markets, which are weak in China, slow in Japan, and flat in Europe. “So that’ll be our story this year as it was last year,” Mr. Taylor said. By around 2020, though, constraints on the timber harvest in Ontario and Quebec, as well as in the U.S. will lead to an imbalance in supply and demand, he said. “That’ll bring in the imports from more expensive places like Europe to balance things out and that’ll cause prices to go much higher,” Mr. Taylor said. “So looking out four or five years, things look pretty good but that’s assuming that the U.S. softwood lumber agreement is not too penalizing for the Canadians.”