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Big Sawmill Investments for West Fraser
Logging and Sawmilling Journal is introducing a new feature in 2011: View from the Top.
In this series of interviews with the CEO's of Canada's major forest companies, we'll look at the opportunities that lie ahead for the industry, and the challenges as the industry pulls itself out the worst downturn since the Great Depression.
In our first interview, Logging and Sawmilling Journal Editor Paul MacDonald talks with Hank Ketcham, Chairman, President and CEO of Vancouver-based West Fraser Timber, about the company's recently announced $230 million capital spending program, his outlook for lumber markets, and how West Fraser is going to deal with the mountain pine beetle situation in the B.C. Interior, going forward.
Logging and Sawmilling Journal: What is your outlook for 2011 and going into 2012? A lot of people are talking about 2012 in particular being a better year for lumber markets and U.S. housing starts.
The last quarter of 2010 picked up a little bit. But U.S. housing starts are still in tough shape--they've continued to be at the lowest levels since World War II. The exchange rate is close to par. And I don't think anybody that I've heard of can accurately quantify the effect the existing foreclosures and the pending foreclosures in the U.S. are going to have on housing inventory in the next year or two.
So I think it's really hard for anyone to get a handle on what the next 12 to 18 months are going to look like in this business. But it's really the same thing--you've got to have well-capitalized, low-cost sawmills to survive in this climate.
LSJ: The foreclosure situation in the U.S. seems to be this huge cloud hanging over the economy and the lumber business.
LSJ: Are you cautiously optimistic going into 2011, compared with what it has been like the last few years? It's been such a wrenching time for the forest industry.
It started in the latter half of 2006 for the forest industry. When you really think about the depression for our business, it's been unprecedented. In terms of being cautiously optimistic going forward, I would say for our industry, the optimism relates to the fact that we have to be closer to the end than the beginning.
I don't think that anyone can see the light at the end of the tunnel yet, and increased lumber consumption--but that is obviously going to come.
For our company, I'd say that I'm quite optimistic. I think if you have a good strong balance sheet, if you have well capitalized mills, if you have a low cost structure, you can come through this pretty well. All the high cost production has been taken out of the system now, and that's what's giving us some semblance of supply and demand in the market. Though it's hard for me to understand how prices are where they are--at $300 a thousand board feet at the end of 2010--given the state of the housing market in the U.S.
LSJ: What has it been like for West Fraser over the last four or five years? What has the company had to do to make sure that it comes through the downturn?
Due to our cost structure, we have been able to significantly reduce our debt right through this recession to the point where we have an extremely strong balance sheet today. And we have plants that don't need a lot of capital. We have a big capital program going forward, the biggest in our history--$230 million on the wood products side. But we see these as great opportunities--if we did not do them, we would still have a strong, well capitalized group of mills here in Canada.
Our issue is with West Fraser operations in the U.S. South, where we bought a bunch of mills from International-Paper in 2007, knowing full well that we had to spend money to get them modernized and efficient. We closed that deal right when the recession hit hard and we have not spent the money down there, so we are going to be embarking on solid capital programs down there in 2011.
LSJ: There's been a lot of talk about the lumber market in China, especially for B.C. producers. What are your thoughts on the Chinese market, does it have legs long term?
On the margin, China's significantly growing consumption has had some effect on North American lumber prices for SPF, so that has really helped us out with the dependence on the U.S. market. It also looks to me that the momentum is gaining for more wood use in China; they've never had codes and standards for wood construction, and they do now, with the help and encouragement of the B.C. and Canadian governments. We have customers that we are working with to develop new markets, and they are starting to build some homes out of wood there.
We're looking at programs to get wood into four, five and six storey apartment buildings there. There is a lot happening. We're very optimistic about China.
LSJ: A lot of the lumber exports have been lower value wood. Is there a way to move that up the value chain?
LSJ: How do you see the Chinese lumber market as part of the mix going forward? Traditionally, the U.S. market has been the main market for Canadian lumber.
There is also potential in the North American market. We have let the commercial/light industrial market slip away on us over the years. We can start getting market share there, just as we have in China, if we put the same effort into building our reputation in those markets.
And the home building business in North America is going to come back, big time. It was overbuilt, and now it is significantly being underbuilt, just to get the inventories in line. When it comes back, we'll get back to a trend in housing starts that will make lumber production a very good business to be in. I think, when things turn around in the U.S., we'll end up with a very strong U.S. market, with offshore opportunities that weren't there when we went into this downturn. So I think it's going to result in a very strong market down the road.
LSJ: What do you see U.S. housing starts rebounding to?
The other factor is a reduced timber supply. Canada is not going to be shipping as much wood into the U.S. in the future because we won't have the timber assets. There is the mountain pine beetle in British Columbia, there is reduced supply out of eastern Canada. And I think we are going to get to a tipping point at some point where the North American market is going to need more lumber than we can supply.
LSJ: As the North American lumber market recovers, how can Canadian companies deal with the competition from other countries?
The fast growing plantation regions also have economies that are starting to grow, and use their wood internally. But it's a different species--I think that SPF out of Canada is always going to be a preferred species for what it's used for, construction products.
LSJ: Going forward, how is the mountain pine beetle going to impact the market, the B.C. Interior and West Fraser in particular?
We've been able to develop and install technology that's really helped us deal with the significantly declining wood profile. But eventually, we're going to get to the point where the wood is just not going to be there, economically or physically, to get the cut at the level that it is at now. So we'll drop back, over time to the cut levels that we saw in the B.C. Interior more in the 1980s, or the early 1990s.
LSJ: There may not be opportunities in other areas of Canada, but where does West Fraser go from there when it has to take a step back in the B.C. Interior, due to impact of the pine beetle?
That's one of the reasons we moved as aggressively as we did into the U.S. South, to offset the effects of the eventual beetle falldown for our company. We're a significant player in the U.S. now. And we're a significant player in Alberta. We're just going to keep looking for opportunities around North America that make sense to us, where we think we can add value and make money.
LSJ: West Fraser has now launched the biggest capital spending program in its history, with $230 million. Where will that be going?
The $230 million will be spent in all three areas, B.C., Alberta and the U.S. South. We will be doing high payback projects, going through all of our mills where we get the best payback, the most return, and are the most strategic.
LSJ: You talked about getting through the last four or five years with the company's solid financials. Can you talk about the importance of being resourceful at the mill level and the importance of the company's people?
With our hourly employees, we have great people, people who have 35, 40 and 45-years' service with West Fraser.
LSJ: There are all kinds of things that contribute to being a low cost producer. What are the particular things that West Fraser does to help it be a low cost producer?
Number two is we have just had a culture of cost control since 1955, when West Fraser was founded by my Dad and his two brothers. There's a real sense of frugality and it really started with the three brothers who started the company. We're very frugal, low key and modest--and we try not to let that change.
You can go down to the mills and our people know that we stand for low cost, efficient production and our people buy into it. How does that manifest itself in better margins? Well, when we get into a downturn, we really have not had to do much in terms of how our employees do their jobs. We work really hard on working capital and some other things during the recession. But essentially, we have not had to change our operating mode much at all.
Finally, you have to have a strong balance sheet going into a recession which we did. And we had relatively strong cash flow right through the downturn, so we were able through the recession to pay down a significant amount of debt. Through the worst recession this industry has ever known, we've produced significant cash and come out with a very strong balance sheet.
LSJ: It seems to be a hallmark of the company that, good times and bad times, it works away at being a solid producer.
We all sell the same product for the same amount of money. When the market needs over 100 per cent of what you all make, you're going to do fine. But when it only needs 65 per cent of what you all make, someone is going to be in trouble, and someone is going to be OK.
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