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Canadian lumber producers go through the wringer
Lumber prices are now on the upswing, but the past year saw the forest industry going through the wringer,with companies fighting for survival. The only consolation is that the Canadian industry is now in lean shape and ready to benefit from the recovery in lumber markets.
By Peter Butzelaar
Although lumber prices are now on the upswing, our annual survey of Canada's top lumber producers found that companies were fighting for their survival in 2009 against a gauntlet of global economic and market challenges.
While in 2008 most industry forecasters were predicting a contraction in U.S. and Canadian softwood lumber production of 12 to 15 per cent for 2009, the actual results were much more dire.
Total Canadian softwood lumber production dropped from 23.8 billion board feet in 2008 to 19.4 billion board feet in 2009 (a decline of 18.5 per cent), and annual production has declined by more than 45 per cent from the peak Canadian lumber production of 35.1 billion board feet in 2004.
On the heels of the painful curtailments made in 2008, the Canadian lumber industry was forced to cut even further. Some have described the cuts in 2008 as "to the bone" and the cuts made in 2009 as "amputations" to save the patient.
The rankings of the top 10 Canadian softwood producers stayed the same in 2009, compared to 2008. West Fraser remained the top producer, at 2.88 billion board feet, followed by Canfor with 2.76 billion board feet. Tolko, AbitibiBowater and Tembec rounded out the top five producers. They were followed by Weyerhaeuser (Canada), Western Forest Products, Domtar, J.D. Irving and Interfor.
Despite the reductions in production, softwood lumber prices in North America continued their descent to unsustainable, historically low levels. As measured by Random Lengths' Framing Lumber Composite Price Index, the average annual price in 2009 was US$222 per thousand board feet, $30 (11.9 per cent) lower than the average in 2008 of $252 per thousand board feet, and the new low watermark going as far back as 1986.
It had appeared unlikely that the index in 2010 would reach or surpass the US$315 per thousand board feet threshold needed for the export tax paid by western Canadian producers to be reduced to 10 per cent (from its maximum level of 15 per cent). But lumber prices have since rocketed, shooting up to over US$340 per thousand board feet in April.
If the supply-constrained market continues to limit output, then it could be one of the very few times that prolonged high prices have been achieved by low production despite the huge under-utilized sawmill capacities (operating rates are just over 50 per cent in 2010 Q1).
Similar to the contraction in total Canadian lumber production, output among the top 10 Canadian producers dropped by 18.9 per cent in 2009 from 2008 (going from 14.3 billion board feet to 11.6 billion board feet - see table).
Production declines in 2009 appear to have been felt relatively evenly among Canada's large and small producers. This observation is supported by Canada's top 10 experiencing a negligible reduction in market share and maintaining their 70 per cent hold on Canadian softwood lumber production. The fact that production share held steady suggests that, regardless of size or degree of integration, all producers suffered the effects of poor demand and weak prices.
Regionally, however, the results show that eastern lumber producers experienced the greatest average declines: among the major eastern Canadian producers, production was down 21 per cent from 2008. By comparison, the average reduction among the major western producers was 17 per cent.
The U.S. recession, in combination with U.S. housing starts falling to historical lows, had a seriously adverse effect on Canadian (and U.S.) producers alike. And while producers in both countries faced the same challenges in managing mill curtailments and closures (indefinite or permanent), financial obligations forced a few large Canadian companies into bankruptcy protection.
On a more positive note, Canadian companies have achieved new levels of cost-savings through negotiated concessions with their workers and investments in operational efficiencies that bode well for the companies when demand improves. Furthermore, Canadian companies benefited from the Canadian dollar weakening against the U.S. dollar in 2009--slipping to an average of US$0.886 (versus US$0.942 in 2008). Unfortunately, it is now likely that Canadian producers will have to contend with a stronger Canadian dollar for the foreseeable future.
There were some casualties during the year. In 2009, Buchanan Lumber (ranked eighth in 2008 with seven sawmills) did not run any of its mills, and in March 2009 its log harvesting division was placed into receivership. In April, AbitibiBowater went into court protection, enabling it to continue operating 17 of the 23 mills it had running in 2008. It is expected that AbitibiBowater will soon release its restructuring plan, possibly by as early as the beginning of April.
Other Canadian companies that officially reduced their mill counts were Domtar (down by two mills to nine), Western Forest Products (down by one mill to six), and Canfor (down by one mill to 14). It should be noted, however, that these reductions do not include those mills that have been closed indefinitely.
Out of the top 10 Canadian producers, only one company experienced an increase in production, namely, Interfor (mill upgrades and resumption of operations). Two other Canadian SPF mills also recorded small increases in output, both benefitting from improved access to timber as well as from some capital spending.
Looking ahead, although lumber demand is expected to remain well below historical levels, a modest increase in U.S. housing demand, along with rising demand in emerging export markets such as China, may set the course for producers to see some improvement in output and better mill returns. The top job for most producers, both large and small, continues to be stabilizing the hemorrhaging on the balance sheet. Yet the actions taken in 2008 and 2009 will be the precursors of a more vitalized and efficient industry moving forward. Time will tell which companies have best positioned themselves to be among the top Canadian lumber producers in 2010.
The above article is summarized from WOOD Markets Monthly International Report (March 2010), by Peter Butzelaar, Vice President, International WOOD MARKETS Group Inc.
International WOOD MARKETS Group Inc. is Canada's largest wood products consulting firm. Its consulting team has provided industry and market expertise in the solid wood products field to its industry clients since 1993. The company delivers market plans and business strategy as well as other consultative services to companies in North America and to global offshore companies. The firm also publishes a number of strategic industry multi-client reports including its landmark WOOD Markets Monthly International Report (since 1996). Further information is available at www.woodmarkets.com
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