Dismal 1Q Results

First Quarter 2008 results for publicly traded Canadian lumber companies have started to be released, with the expected gloomy reports. Of the companies filing so far, Interfor fared the best with losses of only C$1.3 million (compared to earnings of C$0.6 million for 1Q 2007). Before C$2.2 million in restructuring costs, mostly comprised of various severance packages for closure and curtailment at two mills, Interfor showed a net income of C$0.5 million. TimberWest was close behind, posting a loss of C$2.3 million (compared to earnings of C$24.6 million one year ago). That company is working hard to better capitalize on its real estate assets for the balance of 2008.

Norbord announced a loss of C$31 million (compared to a loss of C$16 million one year ago), citing continued low OSB prices across North America. Benchmark central Canadian OSB prices fell by an average of C$28 from 4Q 2007 to 1Q 2008.

West Fraser showed losses of C$69 million (compared to 1Q 2007 losses of C$5 million). The company plans to continue the policy of lowering its cost base while waiting for the US housing market to turn around.

Raw Log Sales

The recent practice of forest products companies of exporting raw logs rather than milling lumber themselves has driven up log costs at a time when companies can ill afford to pay. In addition, British Columbia’s stumpage fees are expected to be adjusted upward accordingly.

In October of 2007 Rich Coleman, British Columbia Minister of Forests and Range, announced the provincial government was going to increase taxes on raw log exports on February 1 2008. In a two-tiered fee program, companies in northern British Columbia are allowed to export up to 35 per cent of logs harvested with no penalty. After that they must pay a 5 per cent tax, while in the south of the province companies pay a 20 per cent tax on Douglas Fir (15 per cent on all other species) provided the tax on softwood lumber exports remains at the 15 per cent level. Export of raw cedar log is, as always, prohibited. Since then the proposal has been delayed as the Ministry of Forests and Range embarks on further study.

The suggestion of a tax penalty, however, did not seem to have stemmed the tide of raw log shipments south, particularly by Canadian companies owning sawmills in the United States. If anything, there appeared to have been an increase in raw log exports over the past year as lumber prices remain depressed and, more recently, the Canadian dollar has gained strength against the American greenback. Reports of log shipments by water or over land were both frequent and widespread.

Wood Chips

In probably the most bitter irony currently facing the North American lumber industry, at a time when Northern Bleached Softwood Kraft pulp prices are very high, wood chips have become dangerously difficult to source. Ongoing and recent mill closures in Canada and the United States have brought such a reduction in chip and sawdust production that some pulp mills are curtailing production as well. Its an unpleasant pill to swallow when in 2007 a strong pulp market was the only thing providing help to the profit margins of lumber companies.

Sawdust demand from other industries, for anything from fuel, building, agricultural or chemical uses, has only served to restrict supply of chips to the market further while at the same time causing prices to rise by 50 per cent from one year ago. A sweet twist to the irony indeed, giving lumber producers an unexpected income boost. Once demand for lumber increases, the price of chips will fall back down.

Lack of Supply

Early figures estimate that in 2007, North American sawmill closures brought a 15 per cent reduction in wood chip production. Pulp mills are being forced to buy more expensive roundwood chips, driving up demand for small sawlog chipping. In a reality repeated across the continent, the threat of supply has become so severe it was cited as the sole cause in Catalyst Paper’s April 30th announcement of 235 layoffs. Their Elk Falls mill in Campbell River and Crofton mill in North Cowichan will be permanently idled in an effort to make production more cost effective. The recent closure of the nearby TimberWest sawmill in particular has hurt Catalysts’ fibre supply.

On a brighter note, Catalyst kept its Port Alberni paper mill running by signing a rather unusual labour agreement with union members in February. The company was able to reduce its production costs by C$45 per metric tonne, and expressed hope in being able to draft similar deals at other plants. Both the Communications, Energy and Paperworkers Union and the Pulp, Paper and Woodworkers Union of Canada objected to the deal, and stated emphatically that such terms (such as rotating shifts giving workers few weekend days or Christmases off, and less vacation time) would not be entertained when negotiations take place for a major contract set to expire April 30.

As chip shortages continue, NBSK pulp prices are sure to be affected. For the moment the regular price cycle has been stable, with sufficient market pulp in the system to keep paper manufacturers - particularly in Europe - running as usual. As the shortage of each commodity in its turn makes its way up the pipeline, however, eventually paper mills are likely to be hit with a price increase of their own. Some customers have turned to shipping chips in from great distances, but are paying a premium so don’t expect to continue this practice for now. Everyone agrees that the only solution is for lumber demand to rise, bringing an eventual increase in the availability of this wood residue.