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Getting into recovery mode
Recent announcements about sawmill capital investments illustrate that the Canadian forest industry is working hard, and smart, to get into recovery mode--and meet the need for lumber in fast-growing markets, such as China.
By Paul MacDonald
The economic downturn is over.
That was the news item in mid-September, when the National Bureau of Economic Research said that the U.S. recession has officially been over since June 2009.
The pronouncement left business people all over North America scratching their heads, wondering about the validity and value of this information, considering that the economy remains fragile.
Statistics Canada has weighed in with its own set of numbers. It reported that Canadian industries operated at 76 per cent of capacity in the second quarter of this year, up 1.6 percentage points from the previous quarter. Good news, since this was the fourth consecutive quarterly increase.
The industries contributing to the higher rate for total manufacturing were transportation equipment, primary metal, machinery manufacturing and, yes, wood products manufacturing.
Capacity utilization by the wood products manufacturing industry advanced from 74.4 percent to 78.1 percent. The main contributing factor was higher production by sawmills and by veneer, plywood and engineered wood products manufacturers, says StatsCan.
In the forestry and logging sector, capacity utilization rose 9.9 percentage points from the previous quarter to 89.9 percent in the second quarter.
So what does all this mean? As the saying goes, this information and a buck-and-a-half will buy you a cup of coffee at Tim Horton's.
But that said, things are improving for the forest industry, though at times the progress may be painfully slow. And sometimes it seems like the industry moves three steps forward, only to move two steps back.
After a truly wrenching couple of years--which saw many sawmills close down permanently and dozens of logging contractors exit the business--there finally seems to be some light at the end of the tunnel. And that light could be recovery, rather than a logging truck.
There were certainly signs of a recovery earlier this year, with lumber prices shooting up in April and May, hitting $320 a thousand board feet at one point. Lumber prices have fallen since, but there still look to be a number of signs of an industry recovery out there.
For the last several years, sawmillers have pushed out lumber without spending a dime on capital expenditures--or spending as little as possible. And who can blame them, since there really wasn't any money for making mill improvements, since companies simply were not making any profits.
While the floodgates of sawmill spending are not exactly breaking open now, there are positive signs.
Take West Fraser Timber, for instance, Canada's largest lumber producer. The company has announced a new $125 million capital spending program which will focus on expanding and upgrading solid wood operations in the B.C. interior, Alberta and the U.S South. The program will be carried out over the next 18 months.
The reason for the spending? It's simple, really. They are now making money. "As a result of our strong balance sheet we are able to begin making significant capital improvements to our facilities to keep them at the forefront of technology and efficiency," said Hank Ketcham, West Fraser's Chairman, President and CEO, in announcing the upgrades.
Another sign of improvements came when Vancouver-based forest company Interfor confirmed that feasibility planning is underway for a sawmill overhaul and the installment of a co-generation plant --representing an investment of $100 million--at the company's operation in Grand Forks, B.C. The company purchased the Grand Forks operation back in 2008, from Pope & Talbot, which went out of business.
Interfor said that it is "definitely" looking a building a new sawmill in Grand Forks. The co-gen plant could produce upwards of 20 MW of much-desired green power, at least part of which would be sold into the grid.
The Grand Forks project aside, Interfor has its own separate capital spending program happening, designed to increase the efficiency and cost structure of a number of its plants. The program totals $24.4 million and will be undertaken over the next 18 to 24 months, the company says.
This includes a $4 million allocation to Adams Lake, which will build on the success of the company's recent project at that facility. The new investments at Adams Lake will increase the effective two-shift capacity at that plant from 315 million board feet to 350 million board feet. The Adams Lake sawmill resumed operations in April 2009 following a $100 million rebuild.
Still with Interfor, the company's Castlegar sawmill, which has been curtailed since it was acquired in April 2008 (also from Pope & Talbot), resumed operations on a reduced scale in July. The company reports the results have been encouraging so far, with productivity levels better than expected.
The Conifex-owned Site II sawmill in Mackenzie, B.C. resumed operations in early-November. Members of the United Steelworkers local 1-424 at the mill there have ratified a new four year agreement.
Over on Vancouver Island, Western Forest Products re-started its Ladysmith sawmill, after a two-year shutdown.
Moving east, Alberta forest products company Millar-Western says the rebuild of its Fox Creek sawmill is progressing, and is on schedule for a late 2011 start-up.
The $60 million rebuild project, likely the largest sawmill project underway in North America right now, involves replacement of the sawmill, upgrades to the planer mill, the addition of two kilns, installation of an automated lumber-grading system, and yard improvements to enhance log storage/handling and fire suppression capability. The mill will produce 117 million board feet per year, up 52 million board feet from the previous mill's capacity. The original Fox Creek mill was lost in a fire in 2008.
And as some have chosen to exit the industry, others see opportunities ahead. EACOM Timber has become one of the largest lumber producers in Canada now that it has finalized the acquisition of seven sawmills and an equity interest in an eighth sawmill from Domtar, all located in Eastern Canada. The mills are Timmins, Nairn Centre, Gogama and Ear Falls in Ontario and Val-d'Or, Ste-Marie and Matagami in Quebec. The price tag? Some $127 million.
The sawmills transferred as part of the transaction represent approximately 3.5 million cubic metres of annual logging rights and a production capacity of close to 900 million board feet.
Much of the lumber produced in Canada is loaded onto railcars and trucks, and shipped directly to the U.S. for use in home construction. But the numbers there are not encouraging. There were a record 2.15 million housing starts nationwide in 2005--remember those golden days? But that has dwindled to just 554,000 housing starts in 2009, the lowest total since World War II.
Earlier this year, industry officials projected a slight improvement, to between 650,000 and 700,000 starts in 2010.
But as we recounted in the June/July issue of Logging and Sawmiling Journal, the Canadian forest industry is increasingly looking beyond the U.S., to markets such as China for future growth.
In 2008, 700 million board feet of lumber was shipped to China, and in 2009 this increased to 1.6 billion board feet of lumber. In 2010, the number is expected to increase again, to 2.6 million board feet for the Chinese market.
B.C. Forests Minister Pat Bell recently noted that there are now three mills
Bell has said that the goal for 2011 is to send four billion board feet of lumber to China, and six billion board feet by 2013.
Clearly, the market growth is there.
In a strategic report released this past summer, The China Book – Outlook to 2015, consulting firm International WOOD Markets Group said that B.C. and Russia are considered to be the two biggest winners as China's ongoing demand for lumber imports continues to expand. China's lumber imports almost doubled between 2000 and 2007 and are expected to double again in the period 2007 to 2010. By 2015, China's lumber imports are expected to almost double yet again.
Since 2008, Canada's lumber market share in China (almost all from B.C.) has grown faster than Russia's share, but Russia has still dominated the Chinese market through 2009, says the report.
"In 2010, however," said Russell Taylor, President of WOOD MARKETS and co-author of the report, "Canada is expected to overtake Russia by a wide margin with a leading softwood market share in China's lumber market of between 40 to 45 percent. In 2010, Canadian shipments to China could represent up to 13 percent of Canada's total softwood lumber exports and up to 20 percent of B.C. total lumber production, potentially reaching close to 2.5 billion board feet. "
There really is no underestimating the market in China. Frank Clemente, a Professor at Penn State University, says that the country is in the midst of the largest infrastructure build in history--and it will continue for decades. The move of almost 500 million Chinese to cities in a single generation is the largest internal migration in human history. The rural to urban movement in China will lead to 221 Chinese cities with over one million people--Europe only has 35 cities over one million people, says Clement. And all those new city residents are going to require homes--built of materials, including lumber.
All of the above considered--from the growth in the Chinese market to the mill improvements to the new investments in the industry--we may not be anywhere near to the boom times the industry has seen in the past. But we're quite a ways away from the bust times of the last couple of years.
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