Study on BC Logging Costs
its yearly review, industry analyst Price Waterhouse reports a 1996 profit for lumber
producers - but the industry as a whole lost money and faces more of the same.
By Robert Forrest
Copyright 1997. Contact publisher for permission to use.
The BC forest industry as a whole had a bad 1996 and can look
forward to an even worse 1997, according to the prognosticators at the 10th annual British
Columbia Forest Industry Conference held by Price Waterhouse in Vancouver. While some of
the reasons for the poor performance were unique to the West Coast industry, some of them
are causes for concern in the rest of the country and may be indicators of underlying
weakness in the industry across Canada.
The Price Waterhouse conference is an annual event that draws
about 450 industry watchers and leaders. What they heard this year was not good. Mike
MacCallum, a Price Waterhouse partner and chairman of the company's World Forest Industry
Group, laid out a grim picture. The BC forest industry as a whole lost $250 million in
1996 and is projected to lose about $450 million in 1997, according to MacCallum. These
red-ink estimates follow on 1995, a year when the industry had earnings of $1.3 billion on
sales of $17.7 billion.
What has happened?
Except for the lumber sector and the paper sector, the forest
industry lost money. The biggest loser was the pulp sector, which lost an estimated $625
million in 1996. Even plywood and veneer, a perennial money maker, fell victim to rising
wood costs in 1996 and only broke even. Newsprint showed a small earnings level of about
$25 million. Lumber had 1996 earnings estimated at $475 million.
When MacCallum divided the lumber sector into a coastal and
Interior regions, the figures showed that the Coast lost $35 million while the Interior
(or rest of the province) had earnings of $510 million. Estimates for 1997 show all
sectors but newsprint will be in the red.
Discussing the difference in earnings perbetween the Coast and
Interior regions of the province, MacCallum supplied his audience with comparative export
figures for the two lumber sectors. While almost 50 per cent of all Coastal wood products
go to Japan and only 18 per cent are shipped to the US, more than 70 per cent of Interior
wood goes to the US and only 7 per cent to Japan.
The major factor affecting all sectors of the West Coast industry
is cost of wood, according to MacCallum and others at the conference. "Logging costs
were almost flat until 1993,'' he told his listeners, "when the increased regulation
caused them to take off. Since 1992, costs have risen, in (constant) 1996 dollars, by 70
per cent. This has added some $2.2 to $2.5 billion to the industry's costs through
increased regulation and stumpage.''
MacCallum went on to point out that industry costs did not
increase due to harvesting in remote areas. He points out that increased costs from a 1987
regulatory change were offset by cost efficiencies five years later.
The costs of implementing the Forest Practices Code, higher
stumpage and declines in the harvest levels were cited as reasons for the higher wood
costs. Two factors have contributed to the lowering of harvest levels: the downsizing of
the annual allowable cut to "sustainable'' levels and bureaucratic delays in approval
of cutting plans. This latter problem is being corrected, according to the government.
The lumber sector was also adversely affected by lower chip
prices resulting from the decline in the price of pulp, which in turn resulted from a
global stagnation in demand for and an oversupply of kraft pulp. Low pulp prices are
likely to continue as long as overcapacity remains a problem. With more new capacity
scheduled to come online in tropical countries, supply will continue to outstrip pulp
demand, according to Roger Wright, managing director of Hawkins Wright, London, England.
The result will likely be an extended period during which chip prices will not rise
significantly. This will adversely affect chip supplier profitability.
To become more competitive, excess capacity will have to be
removed from the system, according to John Chrysikopoulos, director of the paper and
forest products group of Salomon Brothers, New York. In down markets, that has meant the
closure of mills in Eastern Canada. Chrysikopoulos suggested that necessary
rationalization of the BC industry would shrink the province's pulp sector significantly.
He told the conference that, if there were 10 pulp producers in the province today, in
five years there may only be two or three. The implication may well be that, along with
unprofitable producers, some unprofitable mills will have to be closed in BC.
Chrysikopoulos also suggested that equity investors were
reluctant to invest in BC because the province is seen as politically unfriendly to
Bob Findlay, president and CEO of MacMillan Bloedel Ltd. of
Vancouver, told the Conference that lack of reinvestment is threatening the BC forest
industry. Speaking during a panel discussion of company presidents, Findlay said that the
lack of investment resulted from the inability of shareholders in BC companies to earn an
acceptable return on their investment.
According to some industry observers, institutional investors are
reported to feel companies like MacMillan Bloedel are underperforming. The same
institutional investors are credited with forcing Avenor Inc. of Montreal to reshape its
offer for Repap Enterprises Inc., also of Montreal, which saw the latter's Repap BC
orphaned and forced to seek bankruptcy protection the day before the Price Waterhouse
Conference. Wright pointed out that there was no potential relief in higher prices for
pulp producers as long as tropical producers can deliver pulp for US$300 per tonne while
BC producers face a break-even cost above $450 per tonne.
MacCallum pointed out that 1997 could also be a tough year for
the industry with labour negotiations for both pulp unions and IWA-Canada. He observed
that while unions in Eastern Canada and the US have been accepting three per-cent
settlements, at least one of the pulp unions is asking for 12 per cent over two years.
Coupled to this is the announcement from the IWA-Canada that it will make a shorter work
week, perhaps 30 or 32 hours, the major item in its 1997 negotiations.