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2009 Industry Looking Forward; Newfoundland Buys Back; US Housing Still Down; 2008 Industry Wrap Up ; Government Aid to Forestry Workers; Closures, Curtailments and Changes; Funds to Expand BC Wood Markets; US Mortgage Bailout; Japanese Housing Starts ; Closures, Curtailments and Changes
The old business model of Canadian lumber companies pumping 2x4’s into the US is rapidly becoming obsolete. While dimension lumber for framing of wood homes will, of course, never go out of style, the decline in the volume of shipments south of the border will continue for some time to come. During times of change it is easy to be gripped in a feeling of panic, or to be at a loss for how to proceed.
But it is also during these times that exciting new technologies, new markets, and a focus on value-added secondary remanufactured products come to the fore.
A New Year
During a time of such drastic change as has occurred for the lumber industry in 2008, people often feel uncertainty and dread. But it’s also an exciting time for new opportunities, new directions and for new business. Canada has been long in the habit of simply sending 2x4’s into the United States, thus the task of developing new contacts seems too daunting to consider. However a large portion of the work of breaking into new markets has already been done by Forestry Innovation Investment, the Council of Forest Industries, the Canada Wood Council and others. It is simply a matter of getting in touch with them for information.
In discussion with a veteran lumber trader recently, Madison’s asked about the often-repeated statement coming from those working in the industry that they “have never seen anything like this before.” He replied that every time something happens, every time there is a change, everyone says they have never seen it before. “This is new and different,” he said “the situation we are in now. But it’s just another change.” Like so many that have come before.
The wood products industry has always adjusted before, become competitive once more, and even thrived. At the time difficulties seemed insurmountable, but in the end there was good business to be done, even prosperous business. Of course there will be some casualties, some familiar company names will not come back. But something new will rise up to take its place. Who would have thought, when the old Fletcher Challenge, or the seemingly indestructible Macmillan Bloedel, morphed into something new, that the industry would continue to thrive? People cried out that the end was nigh. That things would never be the same, that the industry would collapse. But it did not, and it will not now.
‘What’s to be done about it?’, is the question. Waning hope that the essential US housing market will come back even into 2010 is putting a sad face on lumber producers and traders alike. Once the gross over-supply of unsold homes finally gets worked through and building starts up again, the reality that US mills will be the first to to go back online is sinking in to the consciousness of producers north of the border.
It will be a significant amount of time after that before demand will rise to levels beyond what can be serviced within the US, giving Canadian mills a long wait indeed before curtailments and indefinite closures can be reversed. Given that the North American lumber industry started experiencing this downturn two years ago, another three or five year wait for business to pick up is unacceptable. Finding new opportunities and new business may seem impossible given the global economic situation, and the continuing difficulties in securing credit for regular business operations.
However there are plenty of efforts already being done, bringing hope of future prosperity on to the horizon of the North American lumber industry.
Wood Framed Home Building in China
A vital new customer, China needs desperately to rebuild homes and buildings destroyed in last spring’s terrible earthquake in Szechuan province. The Federal Government of Canada announced a large donation to go towards rebuilding, as did the Province of British Columbia. An extensive trade mission was completed this past autumn.
While it is too soon to judge, recent export figures out of the west coast of Canada show a sharp increase in wood products shipments, largely in the utility and economy grades, into China. BC’s Ministry of Forests confidently predicts such exports to continue rising in 2009, filling the yawning gap left by declining demand in the US. FII and COFI have set up a joint office in China, with a staff of 38, to serve the needs of Canadian lumber producers in finding new Chinese contacts and customers.
Fuel from Wood Residue and Biomass
Until very recently considered a “good idea if it could be done economically”, developing a fuel source from wood residue had a major breakthrough in April 2008. A joint research team of two universities in Massachusetts were able to inexpensively create “green gasoline” from biomass. Other efforts are being made elsewhere, including Vancouver’s own Nexterra Energy which has already installed steam boilers fueled by wood residue in several North American industrial applications.
The swiftly-growing industry of wood pellets is also a good avenue of exploration for lumber producers with too much wood on their hands and not enough customers. In 2008 Europe was only able to supply 50 per cent of wood pellets for domestic demand, the rest were imported - mostly from the US. As information circulates and more people convert their stoves and boilers to burn wood pellets, the equation of the cost to bring biomass roadside vs. revenue from wood pellets will become decidedly profitable.
Value-Added and Secondary Remanufacturing into Europe
Russia’s announcement in early 2008 of an increase in raw log export tax to 80 per cent sent panic through importers across Europe and Asia. The recent cancellation of this proposed increase did nothing to quell the fear, especially considering the 25 per cent tax which was enacted in 1Q 2008. European and Asian producers are concerned about the capricious nature of the Russian leadership, and have been looking for new suppliers.
Of course North America is not interested in shipping raw logs, however value-added primary wood products, and even secondary remanufacturing, with assembly left for the destination country, are both viable future avenues of export. Europe, for example, can only produce 60 per cent of the timber needed for current lumber production. While access to timber is relatively easy for Europe, due to the geographic proximity of good wood-growing regions, North American softwoods continue to be an inexpensive choice. In addition, growing concerns of illegal logging in several African and some Asian countries is causing a decrease in consumer demands for formerly popular exotic hardwood species.
Several Canadian agencies, most notably the Forest Products Association of Canada, have been calling for funding so lumber producers can take advantage of these new industry developments. Federal and Provincial governments are making some strides in helping move the forestry community forward, however there are still a lot of old ideas and old mentalities at play. A more rapid embracing of the future of lumber, rather than looking back at “how things have always been” is advisable.
Because if we don’t do it, someone else in the world will. And to lose these burgeoning opportunities due to lack of foresight would be a real shame.
Due to the announced closure of all but one of AbitibiBowater’s mills in Newfoundland and Labrador, Premier Danny Williams announced a buy-back of company timber rights and hydro assets for an amount to be disclosed later. Citing a 1905 agreement for the province’s natural resources, the Premier explained that - as AbitibiBowater ceased to provide gainful employment - the company had reneged on its side of the agreement. Since the merger of Abitibi-Consolidated and Bowater Incorporated, much of the head office operations have taken place at the Greenville, SC location. It is possible that a delicate trade dispute may erupt over the seizure.
Premier Danny Williams stated that his government is looking for a new owner for the AbitibiBowater assets, but acknowledged the current difficulties being experienced by the lumber industry. AbitibiBowater has described its Grand Falls-Windsor operation as the highest-cost mill of its kind in North America, but Mr. Williams said that was because the company has allowed it to deteriorate for years. Company spokesperson Jean-Philippe Cote rejected the premier’s accusation.
The US papermaker warned Thursday that it might launch a trade complaint over the decision to seize the assets next year. Mr. Cote said the company was talking with “high-level” officials in both countries, but he declined to give additional details. “There are definitely discussions going on,” he said. The company would announce its next step soon, Cote said.
Housing starts and permits released this week by the US Census Bureau show a bleak picture for 2009. November starts were at a 24 year low. The US Realtors Association continues to report record numbers of unsold homes, with national inventory currently standing at about one year. Canadian home sales were at their lowest level since 2001. Another round of foreclosures, this time on high-end condos in prime markets like Orlando are about to begin.
Housing Starts
starts in November were at a seasonally adjusted annual rate of 625,000. This is 19 per cent below the revised October estimate of 771,000, and 47 per cent lower than the one year ago rate of 1,179,000. The drop was the sharpest since 26 per cent in March 1984, and carried housing starts to a record low. Building permits in November were at a seasonally adjusted annual rate of 616,000, which is 16 per cent below the revised October rate of 730,000, and 48 per cent lower than one year ago’s rate of 1,187,000.
Recent funds released by the US government for the renogotiation of ballooing mortgage interest rates are expectedto help at least some homeowners lower their monthly payments. However until home prices see a rebound, the average American homeowner will still be paying more than the home is actually worth.
Meanwhile the seasonally adjusted annual rate of housing starts in Canada was 172,000 units in November, down from 211,800 units in October. For the first 11 months of 2008, actual starts moderated by an estimated 7.6 per cent, compared to the same period last year. Year-to-date actual starts in urban areas have decreased by an estimated 4 per cent over the same period in 2007.
“Note that at the beginning of the new millennium, Canada posted strong housing start levels given a pent-up demand that existed then. Over the last few years, this excess demand gradually decreased,” explained Bob Dugan, Chief Economist at CMHC’s Market Analysis Centre.
A difficult year signified by closures, curtailments and desperately sagging commodity prices, 2008 draws to a close on a sour note. Expectations for 2009 are for minimal improvement, as the North American lumber industry continues to rely heavily on the US housing market.
Lumber Market
As 2008 draws to a close, lumber prices are at or near record-low levels. The continued unexpected drop in benchmark WSPF KD 2x4’s, to a seemingly impossible US$156 mfbm this week, is doing nothing to instill confidence in lumber producers. Dire economic announcements out of the United States, from the housing market to employment to national debt and everything in between, is sending the stock markets on such a relentless pitch of up-and-down that it’s enough to make even the most seasoned trader dizzy. While Canada’s financial situation might seem a bit more stable than America’s, our national politicians waste precious time bickering among themselves and then taking off during a six week prorogue of the House of Commons.
Throughout 2008, many analysts predicted improvements in the lumber industry by 1Q 2009. We at Madison’s were less optimistic, expecting a turn-around to begin in early 2010. No one, however, predicted the restriction of credit for business operations which materialized in October as part of the fall out from the asset backed commercial paper fiasco. Governments around the world rushed to prop up banks so that working capital could again be made available to the companies that had always used it. Unfortunately the banks decided to horde the money instead, perhaps fearing a run, and businesses were left with no short term capital to pay shippers, suppliers, even employees.
While the North American lumber industry has been suffering since 3Q 2006, its the auto industry that is asking for a hefty bailout. Chrysler LLC recently announced that it will trade-off the closure of plants in Ontario in an effort to keep American workers off the unemployment line. A contact Madison’s spoke with this week pointed out that the announcement was likely a bargaining ploy, intended to squeeze the Canadian government into bailing out the Canadian auto industry as well.
Where does this leave lumber producers? They are in a unique position due to the Softwood Lumber Agreement; Canadian lumber companies can not receive direct bail outs for fear of accusations from the US lumber lobby of government subsidies. Much of the industry has proclaimed to prefer tax cuts, energy rebates and capital infusions for upgrades and research rather than direct bailouts. Most agree that the current system in Canada of retraining workers in aid of lumber communities is a better use of tax dollars. However the help is slow in coming, if it arrives at all, and minimal in comparison to other aid.
Recently a plan by BC’s Ministry of Forests to promote the development of biofuels from wood residue hit a major snag in coming up against BC Hydro regulations. A major stumbling block is the likelihood that the price of biomass will rise over time, which is counter to Hydro’s requirement for a fixed price over a decades long contract for electricity that the wood residue will help to generate. Only four projects out of 22 expressions of interest were accepted by BC Hydro. Bureaucratic interference, the excruciatingly slow, plodding workings of various Canadian agencies, the obstructionist determinations of the Competition Bureau, and the lack of foresight by Canadian political leaders is sending the lumber industry into a dangerous downward spiral.
It is an indisputable fact that it is very expensive, time-consuming and risky, in terms of a loss of employees to other jobs, for a lumber company to close and later reopen a mill. Meanwhile the mill towns that were built around and depend solely upon the industry will stagnate and die as Canadians sit around and “wait for the US housing market to come back”. For instance, in Terrace, BC, since the closure of the old Skeena plant a few years ago, apart from a couple of hearty fellows trying to start an extreme outdoor sports recreation facility, the town has virtually died. The same can be said for innumerable small Quebec forest industry towns that depended on the mills to sustain their livelihoods.
Meanwhile the US Coalition for Fair Lumber Imports announced this week that it will bring new claims against the Canadian lumber industry to the incoming Democrats in the New Year. This time the complaint is against BC interior lumber producers, that they are cooking logs to artificially show cracks thereby reducing the stumpage price to $0.25 per cubic meter. Due to the push in BC to harvest as much of the beetle kill trees as possible while they are still viable to be milled into dimension lumber, producers want to qualify which of those logs are scrap-salvage vs which can still be used. The US lumber lobby accuses that, what it labels “artificially high lumber production in the BC interior” is being encouraged by low timber costs.
The above conditions serve to lengthen delays, to create unnecessary animosity, to slow down business and to involve politicians and lawyers in aspects of the industry where they don’t rightfully belong. Meanwhile the people working in the mills, the guys on the ground logging and trucking, the people working in the offices of lumber companies are stuck not knowing where to turn or what the future will hold.
The federal government’s $1 billion community development trust fund is being put to good use in Saskatchewan. The province will use $4.8 million of its $36 million share to help one-industry towns that have been hurt by downturns in the economy. Hudson Bay and Carrot River, which lost mills that used to employ a total of about 300 people will receive a large portion of the funds. $3.26 million will go to Hudson Bay for upgrades to its water supply and to refurbish a warehouse, while Carrot River received $1.16 million to build an access road to a peat moss plant and for a feasibility study about a regional park and an industrial park.
British Columbia has put most of its portion of the funds towards retraining workers and creating new employment opportunities. Most recently a $98,000 project will help workers in Powell River. The Job Opportunities Program is one component of the Community Development Trust, which was announced in May. BC’s share of the federal trust is $129 million over three years, with funds also directed to a Tuition Assistance program and Transition Assistance for Older Workers Program, according to the BC Ministry of Forests website.
More annoucements of closures over the holiday season were announced this week by forestry companies all across Canada.
Holiday Closures
West Fraser Timber said it was undertaking “market-related curtailments” at some of its B.C. sawmills, which will reduce production by an additional 35 million board feet. The company had previously announced cuts at Canadian facilities of approximately 435 million board feet over a full year. West Fraser also said it was further curtailing production at its two bleached chemi-thermo-mechanical pulp mills, which are already running at just 75 per cent capacity. The mills are in Slave Lake, AB, and Quesnel, BC. There will also be “further curtailments” at the company’s MDF (panel and plywood) plants, which are also operating below normal capacity.
The AbitibiBowater newsprint mill in Brooklyn, NS, will shut down for five weeks, starting Dec. 21, affecting about 300 employees due to weak demand and high manufacturing costs. The SFK Pulp Fund said it will shut down its mill in Saint-Félicien, QC, for 20 days starting Dec. 19. The closing will reduce output by 20,000 tonnes. Five thousand coastal forest workers face extended winter layoffs this year as companies respond to the worsening economic climate by shutting down mills.
In addition to Western Forest Products’ decision to close its 10 manufacturing plants for an extended shutdown over Christmas, putting 1,230 woodworkers and many loggers out of work for up to a month, another 3,500 coastal pulp and paper employees are being sent home for extended shutdowns as all but one of the coast’s seven pulp and paper mills take additional downtime over the holidays.
Catalyst Paper, Howe Sound Pulp and Paper and Neucel Specialty Cellulose have all announced winter closures.
Forestry Innovation Investment, the international forest products marketing agency for the Province of British Columbia, is providing $11.5 million for market and product development and research to boost demand for BC wood products in Asia-Pacific and other key markets.
Export Developments
Industry and federal contributions are expected to increase total spending to more than $27 million in 2009/10. The Province, in partnership with the forest industry and federal government, has been working for several years to diversify and broaden international demand for BC forest products. More than 80 per cent of BC wood products are sold outside Canada.
Asian markets have grown rapidly and continue to show the most potential in replacing the US housing market as a customer for BC wood products. Sales to China more than doubled in 2007 over the previous year and from January to September 2008 have already surpassed the volume sold in all of 2007. BC is the number one supplier with almost half of the import market in South Korea.
Long discussed plans to help protect American home owners from foreclosures were announced Thursday. The US Federal Reserve intends to use $600 billion to back risky mortgages, and force rates on refinanced mortgages down to 0.8 per cent. In addition it will subsidize 30-year fixed mortgages, forcing interest rates down to 4.5 per cent. Critics decry the plans as a bailout for home builders, rather than help for home owners or potential buyers.
United States' Housing
The stark reality of another round of home foreclosures in the US, expected to last a year and a half, has caused yet more uncertainty for an already shaken North American lumber industry. As the volume of data; mortgage defaults, falling home prices, unsold homes, sawmill closures, etc., hammer the mainstream news weekly, political leaders work hard to find ways to stop - or at least slow - the relentless downhill slide of the economy.
One such plan was announced Thursday, in which the US Federal Reserve will use $600 billion to back mortgages, and cut interest rates on restructured mortgages to 0.8 per cent. Critics immediately pointed out that such a cut leaves little room for further interest rate reductions should the US economy continue to stagnate. In a $50 million plan, the Treasury would subsidize rates so home buyers pay 4.5 per cent for a 30-year fixed-rate mortgage. Rates have not fallen below 5.37 per cent for 45 years. After the announcement, one-year adjustable rate mortgages, or ARMs, fell to an average of 5.02 percent from 5.18 percent last week, the lowest since January of this year.
The Fed also said it will buy up to $100 billion of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The goal of the proposal would be to take advantage of the unusually large difference, or spread, between mortgage rates and yields on government debt. On Thursday, the yield on the 10-year Treasury note sank to a record low of 2.56 per cent, while the national average rate on a 30-year fixed rate mortgages was 5.54 percent, according to financial publisher HSH Associates.
In recent years, there has been about a 1.8 percentage point difference between the yield on a 10-year Treasury note and a 30-year mortgage rate, but that spread currently hovers around 3 percentage points. Both moves are intended to get more buyers into the market in hopes of stabilizing home prices and reviving the economy. Potential buyers remain spooked by falling home prices and rising unemployment. And even those who want to buy cannot find loans with reasonable downpayments and terms.
“The problem is not interest rates,” said Kenneth Rosen, chair of the Fisher Center for Real Estate at University of California, Berkeley. “It’s the availability of credit.” Banks should make mortgages available with a 5 or 10 per cent down payment, Rosen said. Credit Suisse on Thursday boosted its forecast on US home foreclosures over the next four years to 8.1 million from 6.5 million, warning of a “subprime society” as economic weakness and falling home prices take a larger toll on homeowners. However, a scenario where half the loans facing foreclosure are modified, and 40 per cent of those default again, total foreclosures could fall to 6.3 million from 9 million, they said.
As the economy continues to weaken, however, some economists say the answer to the housing crisis lies in stabilizing the job market. As more people lose their incomes, more fall behind in their mortgages and lose their homes. This trend will accelerate the number of foreclosures and keep prices in a downward spiral. As many as 20 per cent of borrowers owe more than their homes are worth, said Fed Chair Ben Bernanke. Lenders appear to be on track for 2.25 million foreclosures in 2008, compared with an annual pace of 1.0 million before the crisis. Steps that stabilize the housing market will help stabilize the broader economy, he added.
The National Association of Realtors also issued a statement Thursday saying that, “Lowering the mortgage interest rate by 1 to 2 percentage points can result in up to an additional 800,000 home sales. Housing has always led our economy out of downturns and lower interest rates are key to bringing home buyers back to the market.” The recent plunge in rates contributed to the nearly 150 per cent jump in conventional mortgage applications over the Thanksgiving week, led by almost a 300 per cent surge in refinances, according to the Mortgage Bankers Association.
Roughly three out of four mortgage applications were for refinance transactions, up from around half during the prior week. These efforts are being put forward in order to preserve the American Dream of easily accessible, comfortable - or even luxurious - homes for all. The reality, however, is that the plans are really just a “bailout for the home builders”, says Nouriel Roubini, economics professor at NYU Stern School. As Roubini points out in his online publication, RGE Monitor, the current housing crisis in the US was not caused by faulty mortgage lending practices, but rather by over-inflated home prices. Roubini claims in an interview with Yahoo Finance that house prices need to fall another 15 per cent before the current market correction is complete.
The principles of a free market system dictate that the United States should allow the real estate market to adjust back to more realistic home price levels. At the moment, the rate of home sales continues to fall faster than do housing starts. A further reduction in home building needs to happen before the balance of supply and demand returns to healthy levels. A major problem with this particular stimulus package is that the criteria for the new, lower interest rate are so strict that very few people will qualify. Of those, even less will likely be willing to take the risk of major purchases like homes given that economic problems in the United States look to go on for a while, and the jobless rate is expected to rise dramatically. As Roubini points out, “It is not profit policy to subsidize mortgages.”
As expected, stock prices of major US home builders, including Beazer Homes USA, Hovnanian Enterprises, and Lennar Corp. saw large gains at the close of trading Thursday. An example of government intervention that does little more than delay the unfolding of market forces, is the continued rise of foreclosures in the Los Angeles area after a law was passed to hold off foreclosures for 30 days to give lenders and home owners a chance to find alternative financing. The number of newly scheduled auctions on foreclosed properties in Los Angeles county rose 51 per cent in November compared to one year ago, and up 54 per cent from October, after falling by half from September to October.
Housing starts in Japan fell in October to an annual increase of 20 per cent, or 92,000 units, year-over-year, the Japanese Ministry of Land, Infrastructure and Transport said on Friday. Economists had expected a 30 per cent gain, following the 54 per cent rise seen in the 12 months to September. Seasonally adjusted annual starts were 1.027 million units. Total units built were 16 per cent lower than average monthly starts for the past five years, except 2007 which was an anomoly due to major changes in building standards.
Wood based units were 5.2 per cent less than the previous month, the first decline in four months. 2x4 framed homes actually rose by 0.1 per cent, while traditional post and beam units decreased by 6.3 per cent and prefabricated units were down by 14 per cent. In non-seasonally adjusted terms, the number of housing starts rose 9.6 per cent year-over-year in October compared to the same month in 2007. September had seen a gain of 41 per cent, up 97,184 over the year. Nevertheless, Japan’s 50 largest contractors saw construction orders rise 47 per cent compared to one year ago, up from the 10.3 per cent rise recorded in the year to September.
Soon the equation of reducing production to balance wood product supply and demand will no longer be helpful in adjusting prices. Forest products companies must come up with alternative solutions to heal their financial losses.
Mill Downtime
As falling newsprint prices continue to hammer AbitibiBowater’s bottom line, the company announced major closures and curtailments Thursday. The Montreal-based company is the eighth largest publicly traded pulp and paper manufacturer in the world, operating 61 pulp, paper and wood products facilities in the United States, Canada, the United Kingdom and South Korea.
Company CEO Dave Paterson acknowledged Friday that the efforts to stop falling newsprint price by lowering production had angered AbitibiBowater customers. Projections are that a large number of US cities will have no daily newspaper as soon as 2010. The business model of closing mills to meet lower demand, thereby firming prices, is beginning to show cracks. Lumber industry leaders and organizations have been calling for a reduction in taxes, more funding for research and development and rebates on mill upgrade costs instead of being forced to curtail.
The North American pulp industry has been hit particularly hard. Brazilian and New Zealand eucalyptus pulp is fast overtaking long fibre NBSK pulp as the most desired market pulp product globally. Meanwhile Canadian pulp mills are woefully outdated.
When discussing AbitibiBowater’s Grand Falls-Windsor, NL, newsprint mill with the Globe and Mail, Gary Healey, the Communications, Energy and Paperworkers Union national representative in Newfoundland lamented, “The newest machine was put in here in 1968 and they haven’t done much to it since. Abitibi has spent very little money on infrastructure over the last 20 years - just took a lot of profit out of here - so the writing was on the wall.”
The company is slashing about 1,100 jobs and dramatically cutting production in a bid to reduce costs and address market volatility. About 830,000 tonnes of newsprint and 180,000 tonnes of various grades of paper will be removed from the marketplace, it said. AbitibiBowater will close its newsprint mill in Grand Falls, NL, early next year, after having closed its paper facility in Covington, TN. The company also has initiated a further 20 per cent reduction in its selling, general and administrative costs in 2009, a measure that will surely have an impact on head-office staff in Montreal. Abitibi estimates that every 1-cent movement up or down in the Canadian dollar exchange rate means US$29 million in additional costs or benefits on an annual basis. As long as the Canadian dollar remains close to US$0.80, further closures will likely happen at its operations south of the border.
