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Canfor's Prince George Plywood Plant, Lumber Transportation on the Rails, European Timber Imports, PwC Annual Forest Industry Report, BioFuel From Wood Residue, First Nations Strike Lumber Deals in China, BC's New Forest Minister, The New Business of Lumber, Softwood Pulp
After a financial review and a look at some projections of plywood prices into the future, Canfor Corp. has decided not to rebuild its North Central Plywood plant in Prince George. Currently the insurance payout for the burned-down mill is estimated at $36 million above the cost of the lost mill, however that may change for the year-end assesment. The estimated cost of rebuilding the mill has been pegged at about $50 million. 280 employees are to get between 10 and 15 days pay for each year at the mill, and Canfor intends to transfer the majority of staff to its other operations.
The insurance payout pushed Canfor’s 2Q results to a profit of $64 million (compared to a loss of $39 million for 2Q 2007). $16 million of the insurance money will be used to build a wood residue energy facility at its sawmill in Fort St. John, BC.
Mark Feldinger, Canfor vice-president based in Prince George, told Madison’s that the company has been looking into energy systems for its mills and plans to follow this business model long into the future. The energy facility at Fort St. John will use residual bark on site to power a conventional hot oil system as a replacement for natural gas. Canfor expects to be able to generate 100 per cent of the sawmill’s energy needs. Excess sawdust and shavings will be sold to pulp mills.
The constant battle of North American lumber producers, particularly the smaller mills, for a stable supply of rail cars prompted some inquiries by Madison’s around the industry. The expansion of the Port of Prince Rupert, a potential shipping hub in Prince George at the inland port, and the intended purchase of Elgin Rail by Canadian National Railway could all be potentially exciting developments for rail transport.
North American Railway Transportation
According to the Railway Association of Canada, forest products account for a full ten per cent of annual freight transportation in Canada. In 2006, rail transportation of forest products contributed $928 million to rail company coffers (second only to agriculture, at $1,125 million). So why is it that Madison’s hears weekly from lumber producers, especially medium-sized mills, that cars are difficult to source? And why is it that there are significant numbers of centre beam rail cars sitting empty on rail sidings all over the Lower Mainland? We can only assume the same is true across Canada, possibly even in the US.
With increasing disillusionment, lumber producers in Canada and the western United States have witnessed a decline in service in recent years from the combined rail lines. The amalgamation of Canadian National Railway with BCOL in 2005 was held by CN as the greatest improvement in freight transportation history. Skeptical traders opined that the only difference from the old, disorganized process of intersecting lines across Canada, would be a negative one. Not only were the detractors proven correct, but the monopoly on rail traffic in western Canada by the CN has made the company significantly less responsive to customer needs: cars are late; the wrong sizes and types of cars are delivered; the wrong cars are shelved at mills that didn’t order them and they end up paying for them sitting empty. Down the west coast, Union Pacific has nearly as much to answer for as the CN in Canada. Cars end up unexpectedly in places where they are not needed while other mills of the same recipients go begging for cars.
Arrow Reload in British Columbia told Madison’s that lumber reloads generally deal with one rail company, in their case it is Canadian Pacific. Eric Larnder, Operations Supervisor in Kelowna, BC said that their land is owned by CP, so all he has to do is “pick up the phone” and he gets all the cars he needs. When asked about cedar delivery, Larnder said that they see very little of it in their neck of the woods, especially this year. They have moved maybe one car of cedar since last year. The closest cedar producer to their location is Gilbert Smith Forest Products, who have been trucking almost exclusively. Arrow Reload sends their shipments mostly in an easterly direction, generally to Minneapolis.
Mark Thompson, Transportation Group manager for West Fraser Timber, deals with Canadian National Railway. He told Madison’s that all 27 of his mills across British Columbia and Alberta have had no problems sourcing centre beam rail cars at all in the past three months. When asked to compare that with last year, he said there has been a dramatic improvement, however that lumber shipments are down 65 per cent since 2007. Box cars on the other hand are quite difficult to get (in fact he had just got off the phone with CN discussing that very thing when we called), partly due to competition from the agricultural sector.
Many other circumstances, such as bad weather in the United States which has affected the cycle time for cars returning to Canada, are impacting the availability of box cars. Also distribution changes are having an effect, such as a lot more product (for example pulp) being exported rather than being shipped to customers in North America. Thompson explained that congestion in the ports is causing a delay in the return of cars. In addition, CN is upgrading their service design plan, restructuring their crews and introducing other operational changes, which is having a temporary effect on logistics.
Generally speaking, for this important lumber shipping season, CN box cars are chronically short. One source told Madison’s that rail companies trade cars between each other; if one does not have anything available in a certain location they will use cars from another company. However Thompson explained that this is not the reality (even though the rail companies will tell you it is, he said) because they must then pay a “car hire” or “switching” fee. CN wants a shipment that originated using their cars to keep to their cars only. Consensus amongst those with long-term experience dealing with rail lines is that they “don’t have it together”, and don’t even know where their own cars are half the time.
The Railway Association of Canada publishes annual reviews of railway trends on their website. The latest figures show a 10 year average of 412,000 carloads of agricultural products and 382,000 carloads of forest products annually, generating an average of $888 million and $786 million annually respectively. This begs the question: Why are lumber producers regularly denied box cars in the interest of produce? Thompson explained that transit time for lumber is irrelevant. But a carload of blueberries or peaches can be very sensitive. The two most exciting developments for rail transportation issues in North America of late is the expansion of the brand-new Port of Prince Rupert, and the proposed purchase of the Elgin, Joliet & Eastern Railway Company in Joliet, Il by CN Rail. Integration of that rail line with CN would save 18 hours of travel time from the Port of Price Rupert to the hub in Memphis, TN. However, as Thompson pointed out, a one-day reduction in travel time really makes no difference for a forest products company.
Recently the Port of Prince Rupert welcomed the arrival of the first load from a second weekly vessel by COSCO. Thompson maintains that the port will need to greatly expand its carrier base before it becomes viable as a long-term distribution centre for a company like West Fraser, which uses almost 20 cargo carriers across North America.
An email reply from CN’s Public Affairs department explains that, “Note that the volume of Prince Rupert traffic CN anticipates in future will not change as a result of the transaction [purchase]. If the status quo remains we don’t expect the Prince Rupert / Memphis route harder to market in the short run, but failure to get the expected efficiencies could make the Prince Rupert/CN option less competitive with other ports/railroads over time. "
Basically the Port of Prince Rupert needs this purchase by CN to go through more than CN itself does.
A battle is raging in Europe over the import of timber from so-called ‘questionable’ sources. The World Wildlife Fund on Tuesday criticised the European Union’s illegal wood imports, singling out Finland as the top offender. In 2006, the EU imported some 30 million cubic metres of wood or wood products that were of illegal origin, mainly from Russia, China and Indonesia, according a the WWF report.
Finland, which is home to several of the world’s largest paper makers, is the biggest importer of Russian wood to Europe, but legitimate imports into the Nordic country have fallen since Moscow began gradually ratcheting up export duties in 2006. According to WWF, some 3.7 million cubic metres of Russian roundwood was illegally imported into Finland that year, corresponding to about 14 percent of all EU wood imports “based on products derived from illegal sources.” The conservation group acknowledged that some large Finnish forestry groups have gone to great lengths to exclude illegal wood from their production chain.
WWF meanwhile listed Britain, Germany and Italy as the largest importers of furniture and other wood products from Asia, including China and Indonesia, estimating that about 40 per cent of these products originated from illegal logging.
PricewaterhouseCooper’s 2008 Global Annual Forest, Paper & Packaging Industry survey was released this week. Some negative statistics about the Canadian wood products industry in relation to the international marketplace are highlighted. The section on the rapidly expanding new industry of biofuels from wood residue points out a very lucrative future direction for the forest industry.
PwC 2008 Forestry Report
The total sales of the PwC Top 100 were US $343.3 billion in 2007, up from $317.3 billion in 2006. The 20 largest companies accounted for nearly 60 per cent of total sales. Net income received a boost from gains on asset disposals, notably from Temple- Inland’s $2 billion gain on the sale of its timberlands. One startling finding was that Canada is at the bottom of the entire group for reinvestment ratio (capital investment as a percentage of depreciation) at 0.4 per cent in 2007. This is down from 0.8 per cent in 2006. In contrast, the greatest reinvestment ratio was found to be in China and Latin America (with 3.08 and 2.84 respectively). American wood products companies actually increased their ratio in 2007 to 1.25 per cent (up from 0.9 per cent in 2006).
No Canadian company and three American companies made it into the top 10 of PWC’s Top 100 List of Income Earners. International Paper was first on the list at number one, with a net income of over US$1,000 million. The top Canadian company was Domtar at number15 with an annual net income of US$70 million. Finnish, Swedish, Japanese and Irish companies rounded out the top 10. Regarding macroeconomic issues the report states that, “The credit crisis, collapse in US housing starts, Russian log export tax, excess lumber capacity, and the beginning of the end of the British Columbia mountain pine beetle epidemic are all factors having a particularly strong impact on the global lumber industry.”
The continued practice of mergers and acquisitions is helping to keep the Canadian and American forest products industries dynamic, with major steps forward by Brookfield Asset Management in particular. The report contains some fascinating statements on biomass energy projects, notably, “The pulp and paper industry has a unique opportunity to capture value as a result of its access to fibre and existing ability to generate energy, however bio-refining may actually provide the best long-term opportunities. There will likely be a significant first-mover advantage, and choosing the right technology and the right product will be critical. [ . . . ] February 08, BC Hydro issued a Bioenergy Call – Phase 1, soliciting potential projects to provide energy generated from forest biomass. A wide range of companies responded with proposals, including both well-known Canadian forest products producers and smaller players.” It is clear that fuel from biomass will be a long term source of revenue for lumber companies.
A simple change to the current business model needs to take place, whereby recovery of wood residue becomes a priority. Particularly in British Columbia, where a large-scale lucrative product has as yet to be found for the vast amounts of beetle-kill. In addition PWC mentions that wood pellets as a fuel source are also the verge of becoming much more marketable.
The report can be found in its entirety on the PwC website.
In just the three short months since Madison’s wrote about the business of biofuels made from wood residue, there has been an explosion in research, development and technology. So called ‘green gasoline’ is being actively pursued as an inexpensive, carbon neutral and plentiful energy source. Europe is already engaged in education and marketing campaigns while in the United States producers are calling for tax breaks.
Green Gasoline
A variety of universities, agencies and corporations the world over are researching, and rapidly developing, processing technologies for the use of wood residue as a fuel source. A brief search of the internet brought up at least a dozen sites with fascinating information about recent breakthroughs. A July 04, 2008 report by the The Rights and Resources Initiative estimates that demand for food, wood, and biofuels will likely contribute to massive deforestation in developing countries around the world by 2030. If current agricultural land productivity doesn’t increase substantially, by 2030 about 1.2 billion additional acres of land will be needed to meet the world’s agricultural, biofuel, and wood-products demand.
The April 7, 2008 issue of Chemistry & Sustainability, Energy & Materials reports the first direct conversion of plant cellulose into gasoline components by the National Science Foundation (NSF) and the University of Massachusetts- Amherst (UMass). “For their new approach, the UMass researchers rapidly heated cellulose in the presence of solid catalysts, materials that speed up reactions without sacrificing themselves in the process. They then rapidly cooled the products to create a liquid that contains many of the compounds found in gasoline. The entire process was completed in under two minutes using relatively moderate amounts of heat. The compounds that formed in that single step, like naphthalene and toluene, make up one fourth of the suite of chemicals found in gasoline. The liquid can be further treated to form the remaining fuel components or can be used “as is” for a high octane gasoline blend.” Using the current cost of wood in Massachusetts, which is US$40 per dry ton, as an example of the feedstock to be used in this process, researchers estimate that a gallon of green gasoline can be produced with this method for between US$1 and US$1.70.
Meanwhile Stora Enso, a Finnish paper and and timber producer, has joined hands with Neste Oil Corporation to set up a plant that will utilize wood based residues to produce biofuel (July 13, 2008). The project is in part motivated by the ambitious target set by the EU of replacing 18 million tonnes of fossil fuels used for transportation by 2010. On February 18, 2008 the Colorado Department of Energy announced that it would pay $30 million towards the construction of that state’s first cellulosic ethanol plant. The plant will use a technology that will convert beetle kill into ethanol, a technology that has been developed and tested in British Columbia. In addition to ethanol fuel, the Colorado plant will produce lignin as a byproduct, which is a useful ingredient in lubricants and other goods.
Another good use for wood residue besides ethanol is wood pellets, which conveniently can also be very easily made from beetle kill. On June 03, 2008 New Hampshire-based American Biomass announced an ambitious project to widely market pellets using US$4 million in funding from .406 Ventures. Taking advantage of a European surge of interest in the new energy source, a major forest industry group in Finland is actively pursuing the future of biofuels. From their website (http:// www.forestindustries.fi/), Research objectives associated with wood biomass and its properties:
• Develop methods and solutions for the management of the properties of wood biomass as well as for influencing the raw material properties of wood grades being allocated for different uses;
• Develop cost-effective, sustainable and acceptable ways to produce, harvest and transport wood biomass;
• Know and exploit timber resources and the properties of forest biomass as well as the materials and compounds produced by different wood species over their lifespan;
• Establish the preconditions for new ways to produce wood competitively.
On May 16, 2008 Auburn University engineers gave Alabama Power Co. executives and employees a peek at the future with a demonstration of its mobile biomass gasification unit, which converts wood chips into power. The US$250,000 gasification unit sits on wheels and houses a 5-foot steel drum. A conveyor belt empties wood chips into the top of the drum. Inside, the wood burns, releasing carbon dioxide, carbon monoxide, methane, hydrogen and oxygen. The gases are then filtered into a V6 engine and used to generate electricity. The generator consumes about 50 pounds of wood chips per hour. A ton of wood could generate a megawatt.
The Natural Resources Canada government webpage on bioenergy states that, “Canada has millions of hectares of managed forests and extensive tests have shown that only a small percentage of forest growth is harvested for forest products. Nutrient balance experiments have shown that forest residuals can be removed for fuel without adversely affecting the forest ecosystem. [ . . . ] The technology and resources exist to provide a significant percentage of Canadian energy demands. And the demand can be met without impacting on the production of food or traditional products.”
Quick to take advantage of the 25 per cent tax levied by the Russian government on raw log exports earlier this year, a seven person First Nations delegation has just returned from a trip to China. Trade representatives with the B. C. First Nations Forestry Council signed a letter of intent with Qingdao Liangmu, the largest forestry remanufacturing company in China’s Shandong province, and a memorandum of understanding with Zhongchuan International Mining Holding Co. Ltd.
Qingdao Liangmu operates 14 factories in the province of 100 million people, and has in the past relied heavily on logs and processed wood imported from Russia. The company is hoping to find new supply sources, and is interested in British Columbian wood, such as western hemlock, spruce, pine, subalpine fir and Douglas fir.
Detractors raise concerns that most of the product crossing the ocean will be raw logs. B.C. First Nations hold 155 forestry licences totalling up to an annual timber harvest of more than 13.5 million cubic meters. Since 2003, the B. C. government has handed out harvesting rights to 33.2 million cubic metres of wood -- about half the province’s entire annual harvest -- to the First Nations. However only approximately seven million cubic meters has actually been harvested.
The First Nations group says that the challenge is to create the right projects to turn the allowable annual cut covered by First Nations forestry licences into jobs and revenues. The trade delegation also returned with leads from other major forest and wood-producing companies, including Canlum which specializes in importing Canadian wood species, Jiangsu Overseas Corporation which is one of the world’s largest importers of wood, and some others. The delegation also began talks with the Zhejiang Forestry University with the intent of sending B.C. First Nations students to China on language and forestry university exchanges.
With a background in timber harvesting and originally from Prince George, BC, the MLA for Prince George North is fully aware of the challenging state of today’s lumber market. As the new Minister of Forests and Range, Pat Bell has wasted no time getting to work, and already has plans for policy changes as well as some major initiatives. The basis for his plans is the understanding that there is a lot of value in the woods that is not presently being utilized.
Pat Bell Interview
Liberal MLA for Prince George North Pat Bell has had his sights on the Forests and Range portfolio since first getting into politics. Madison’s caught up with him while he was on the road from a meeting with the ILA (Interior Lumbermen’s Association) in Vernon, heading to Kelowna for another information session. Feeling bright and chipper in his new post, Bell immediately launched into a commentary of how he sees this as an “exciting time for new opportunity”. While the industry will continue to incorporate dimension lumber, panel and pulp products, there is a whole new world out there to explore. Most notably bio-fuels (from the bio-refining of wood residue) and pellets.
As a former log harvester and native of Prince George, Bell is exploding with ideas to help keep the industry current and profitable into the future. He intends to encourage better utilizing of timber resources, plus foster research and technology. In particular there will be an impetus to creating products, including pellets, from the beetle-kill wood. One of his prime objectives is to promote more efficient harvesting. At the moment the beetle-kill harvest is saddled with low sawlog volumes (Bell estimates 20 per cent). He plans to “create economic opportunities to get those areas harvested.”
Pat Bell also has plans for changes to silviculture practices. The figures show that fewer trees harvested in recent years equals fewer trees planted. If that policy continues through the end of this year, there will be significantly less trees put into the ground. He will focus on “how we grow fibre”, to get more value than simply from wood products. He remembers a time when even pulp was considered residue; clearly those days are long over. While actual silviculture practices will remain the same, there will be implementation of planning regimes to lower costs.
With an eye to the future, Bell thinks of the “incremental value”; where and when to plant, and the process of tending. The current ministry “Free to Grow” campaign will continue. Bell wants to introduce a life-cycle management regime. He believes that society is “willing to pay”, thus will introduce a Cap & Trade initiative. For example, to other industries like auto manufacturing that do not currently have opportunities to offset carbon. In that regard, Pat Bell believes there are “long term opportunities and solutions” available from related industries. Currently there are strong fundamentals in place that he intends to build upon. In addition there will be partnerships between the federal, provincial, and municipal governments and industry, agencies, universities etc. There will be a focus on “growth and yield” opportunities.
Some changes will happen quickly, for example to BCTS (BC Timber Sales), and regarding pulp mills. Former Forest Minister Rich Coleman started a task force on pulp, that should be ready to table a few solutions soon. Bell’s basic principle is that “when industry gets challenged, people get innovative” and his ministry will support the industry as a whole. Current government policy of no direct subsidies will continue. While he plans to use the same principles to the coast forest products industry, Pat Bell realizes that there will have to be some different applications. For example, he plans to encourage “quality (high end) products” for specialty species such as Douglas Fir, rather than a focus on quantity. He maintains that there are lessons to be learned around stand utilization and farm licenses, and that there will be no financial penalty for mixed-species logging. Second growth logging will also rigorously studied. Replanting of Cedar will need to be carefully examined; with climate change upon us old models will no longer hold.
Bell is aware of the terms of the current Softwood Lumber Agreement, and intends to “not mess with what works”, particularly with regard to value-added products and remanufacturing. When asked about the government funding slated to help communities impacted by the Mountain Pine Beetle devastation (very little of which has actually been distributed to date), he said that a lot of work has been done by both levels of government for the Community Development Funds in receiving applications from various towns, industry and associations. While there are not likely to be any news before Madison’s press time, Bell assures that there will start to be “announcements of a dispersal of funds” very soon. On a final note, the imminent danger of a massive forest fire this year had to be mentioned, especially considering the fires raging across northern California right now.
Mr. Bell explained that that emergency response personnel across the province are in close communication with each other, and that his office receives daily updates of the BC fire situation. There is good technology for recognizing lightening strikes and a system of fast response already in place. However, the greatest danger comes, he said, from humanmade fires. New BC Forest Minister Pat Bell reminds us all not to leave any fire unattended, even for 30 seconds. Let’s not forget what happened in Barriere in 2003, a fire that was started by the discarded cigarette of a volunteer fire fighter.
As everyone is by now aware, the current slump in the US housing market will not soon be over. Despite what some analysts predicted earlier this year, there is clearly at least two years’ worth of fall-out from the zero-interest mortgage fiasco before the market can even start to turn around. Japan, Europe and other importers can only pick up a portion of the slack in lumber demand. Wood products companies across North America are coming up with innovative ways of protecting their bottom line, most notably sales of timberlands. This week Madison’s explores the financial viability of this activity, looking closely at two British Columbia companies that have already embarked on such measures; TimberWest Forest Corp. and Western Forest Products.
A New Era
2007 proved that continued production of 2x4’s and other dimension lumber in the face of clearly eroding demand is a bad idea. This year lumber and wood products companies are faced with the difficult task of finding new ways to help their bottom lines. Particularly since America, the number one lumber customer, is not likely to come back to the market until mid 2010 at the very soonest.
While wood pellets and biofuels from wood residue are seen across the industry as excellent future products, they are currently not cost effective. Consumer demand and production technology both need to improve before these products can be put out to the marketplace on a large scale. So what is to be done in the short term? Using examples from the United States, there are two major lumber companies in British Columbia embarking in the real estate business. Both privately own significant timberlands, and have been looking at ways to capitalize on the resource beyond simply sawmilling.
TimberWest Forest Corp., the single largest private landowner in BC, hired John Hendry from The St. Joe Company (FL) as their VP of Real Estate in May of 2007. Using the successful business model of his previous employers, Mr. Hendry identified 134,000 acres (54,000 hectares) of forestland as “higher and better use” than from timber management alone. Of that, 39,000 acres (15,700 hectares) is being actively sold off over the next 10-15 years. This quantity of land amounts to 17 per cent of Timber- West’s property holdings. The other 83 per cent is still deemed most profitably used for lumber. TimberWest’s web site describes the land to be sold as “provid[ing] a wide range of sustainable real estate opportunities, including mixed use, residential, commercial and resort development”.
Stephen Bruyneel of TimberWest’s communications office told Madison’s that the company works very closely with communities immediately surrounding the real estate land to determine its best use. Direct consultation helps decide what kind of development will take place on the land, whether it be residential, parks and trails, airport or other kinds. Often people who have moved out to the forest do not want their viewscapes marred by logging activity, and are open to alternatives. Mr. Bruyneel acknowledged that - being uniquely positioned on the west coast - TimberWest is probably in possession of more valuable real estate than a lumber company situated in a remote inland area, however he maintains that the business model is sound and that similar valuations should take place across North America. In these changing times it would be unfortunate to miss out on such an opportunity.
Similarly, Duncan Kerr - CEO of Western Forest Products - sees timberland sales for real estate as an irrefutable aspect of the future of lumber industry. He told Madison’s that even five years ago this was not the case. The company assessed 2,500 hectares of land on southwest Vancouver Island to have a “better use potential than ongoing forest land”. Western Forest Products also started conversations with the community to develop a vision for the best future use for that land. In the interim a slight hitch has been put into place by the Capital Regional District (not to mention no small amount of outcry from some public groups), however WFP is still in a conditional deal with the potential buyer.
Mr. Kerr also holds the opinion that real estate activity is an obvious choice for future potential revenue, particularly as “non forestry people move into the forests”. Given the rampant and continuing mill closures across Canada, the hardest-hit communities must look to other avenues for an income source. Tourism, eco or otherwise, is one possibility. Another is intelligent development and land use management to capitalize on the interest of city-dwellers in moving out to the country. The United States has already embarked on such ideas.
About 4.5 million acres of timberland, worth about $3.3 billion, were sold in 2007, according to Chris Lyddan, editor of Timberland Markets Report in Richmond, Virginia. Lumber and paper companies unloaded about 70 per cent of that total. Land that had previously been considered too remote, too wild or was lacking in infrastructure or services is now becoming more attractive. Of course in the US more lumber companies are also landowners. However in Canada 15 per cent of timberland is privately owned. During the past 15 years, the NCREIF Timberland Property Index climbed at an annual rate of 14 percent, exceeding the 12 percent gain of the Standard & Poor’s 500 Index. Often the pension fund, universities or other investors that are buying up timberlands in the US have little or no intention of development. They plan to simply hold the land for its value, and as a future source of timber revenue when the market does turn around. With new interest in forest land coming from all kinds of sources, it seems only logical for Canadian wood products companies to jump into the game as well.
For the first time in a year and a half, European NBSK pulp price is down, due to a slowdown in both the European and US economies. Despite pulp mill closures in North America and Finland, continued weak demand for paper is causing a turn-around in the pulp market.
This week European Softwood Kraft pulp was selling for US$903.70 per metric ton, down US$0.94 from last week and up US$32.54 from the beginning of 2008. (SOURCE: www.foex.fi). In a sign of potential future pulp oversupply, Europulp reported a 7 per cent increase in May pulp inventory at European ports (to almost 1.4 million tons) when compared to April, and up almost 27 per cent from May of 2007. US NBSK pulp stayed firm at US$880 per metric ton, due to very low North American sawmill activity. Wood chips are in short supply, prompting producers to announce an expected price increase of US$20 for July.
