BC Forestry Industy

Deep Sandhu

Jamie Walgren

Contents

• History of Forestry Industry• Tariffs• Pine Beetle• Housing Market Boom• Housing Market Crash• Canadian Dollar Appreciation• BC Forestry Today• Future Outlook

Overview

• In 2001:– Contributed $27 billion to Canadian economy

(2.9% of GDP)– Generated trade surplus of $36.4 billion (57%

of Canada's total trade surplus– 80,000 workers, 35,000 of which are in BC– 71% of production is exported– 53% of Canada's forestry exports from BC– 82% of exports to US, 12% to Japan, 3% to EU

Overview

• BC Lumber Industry in 2005:– 3,142 million board feet shipped to Canada

(18%)– 12,265 mbf to USA (71%)– 1,748 mbf to Asia (1,360 to Japan) (10%)– 136 mbf to Europe (0.8%)– 89 mbf to everywhere else (0.5%)– 17,363 total

Main Players in BC Forestry

• Weyerhauser– $23,238 m assets– $18,561 m sales

• Canfor– $4,679 m assets– $3,842 m sales West Fraser:– $4,018 million assets– $3,325 m sales

• Many other small companies

Tariffs

• Definition: A duty levied on goods transported from one customs area to another either for protective or revenue purposes

• 19.3% Countervailing Duty• 5-9% Anti-Dumping Duty=24-27% CVD/AD DutiesTotal of $5Billion was collected by the US

Department of Commerce from 2002-2006

April 1, 1996 to March 31, 2001

• Under this agreement, the U.S. guaranteed market access to Canadian exporters for five years and permitted the import of 14.7 billion board feet per year of lumber without fees. The agreement applied to $10 billion worth of lumber produced in British Columbia, Alberta, Ontario and Quebec.

At Issue…

• The dispute centered on stumpage fees – set amounts charged to companies that harvest timber on public land. Many in the U.S. see Canadian stumpage fees as being too low. A U.S. coalition of lumber producers wants the provincial governments to follow the American system and auction off timber rights at market prices.

• The U.S. responded by levying tariffs on incoming Canadian lumber in May 2002.

Softwood Lumber Agreement

• April 26, 2006, Canada and the United States had reached a framework agreement that could form the basis for an end to the dispute.

• The framework agreement called for the U.S. to return about 80 per cent of the $5 billion in duties that U.S. Customs has collected in the previous four years. Canadian-sourced lumber would also be kept to no more than its current 34 per cent share of the U.S. softwood market.

• Canada will also collect an export tax on softwood lumber exported to the United States if the price drops below $355 a thousand board feet.

Softwood Lumber Agreement cont’d

• Import duties of $4 billion the U.S. charged Canadian companies since 2002 will be returned. But the U.S. keeps $1 billion.

• A seven-year term, with a possible two-year extension.

• A ban on the U.S. launching new trade actions. • Restrictions on Canadian exports will kick in if

prices fall too far. • Neutral trade arbitrators will provide final and

binding settlements of disputes.

Market Conditions

• 1,000 board feet costs about $265 Canadian to produce. But that same 1,000 is only selling for $204 Canadian, and there is a 15% duty tax to pay as well (approx $30) so what you are really getting for the lumber is $174 dollars per one thousand feet. That means a mill is losing about $90 dollars (Canadian) for every one thousand board feet that crosses the border.

( Not including currency appreciation)

Pine Beetle

• Since 1997, mountain pine beetles have infested over 300,000 hectares of lodgepole pine forests in BC's central interior, around the cities of Prince George and Quesnel. In previous outbreaks, mountain pine beetles have killed as many as 80 million trees distributed over 450,000 hectares, making them the second most important natural disturbance agent after fire in these forests.

Pine Beetle

• The mountain pine beetle will have killed 40 per cent of British Columbia's pine forest by the end of the year, most of it in the central Interior, and is moving into the southern half of the province

• The timber supply report shows that 530 million cubic metres of pine, covering 130,000 sq. km of forestlands, are either red, meaning they are under attack and dying, or dead.

• In eight years, by 2015, more than a billion cubic metres of pine will be dead. (A telephone pole has the same volume as one cubic metre of wood.)

Housing Market Boom

• Aftermath of Tech Bubble in early 2000’s• US Federal funds rate drops from 6.5% to 1.75%

in 2001• From 2000 to 2003, 30 year mortgages fell from

8% to all time low of 5.5%• Caused mortgage rates to reach historic lows,

fueled increase in homebuilding/buying• In some areas, home prices appreciate by 10%

per year in 2002, 25% in 2004-05• Lasts from 2001 to 2005

Housing Market Boom

• High demand for houses leads to high demand for lumber

• By far largest use of lumber is for housing

• Largest industry for BC lumber is US

• BC lumber was hugely affected by the housing boom

Lumber Prices in Housing Boom

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Housing Market Crash

• Eventually the boom led to a bubble, which led to a crash

• Boom ended in August 2005, crash began in the beginning of 2006

• Housing sees it’s steepest decline since 1989

• Home sales decrease and prices flatten, then fall

Housing Market Crash

• Housing slowdown leads to subprime mortgage crisis, where many subprime borrowers default on their loans

• Massively reduced demand for lumber

• Reduced demand leads to lower prices

• Overall leads to severely depressed lumber market

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Canadian Dollar Appreciation

• Canadian dollar has gained spectacularly against the US dollar and most other major currencies over the past several years

• Reasons for this include high commodity prices (Canada exports many commodities), high oil prices (Canada exports oil), strong Canadian economy (partly due to oil and commodities), and weak US economy (partly due to housing market)

Canadian Dollar Appreciation

• Overall, a high Canadian Dollar hurts the forestry industry: most sales are in USD, results in lower revenues once converted back to CAD

• Every one cent increase in CAD, BC forestry industry loses ~$160 million in sales value

• Dollar has increased from $0.63 in 2002 to a high of $1.10 in 2007

Current Situation

• Lumber prices lowest in 10+ years

• CAD at 30 year high

• Housing construction at 15 year low, no recovery for at least 1 year, and probably longer

• All comes together to make the worst market for forestry in a very long time

Future Outlook

• Challenges from foreign timber: South American, Russian

• Pine beetle threatens long term production• CAD and housing market will remain poor

for short, maybe medium term• Stock market has yet to see the whole

picture• May be a good value investment in the

future, once industry becomes undervalued

Future Outlook

• Canadian lumber industry is in a “race to the bottom” where companies will lower their costs as much as they can, and those that cannot will become bankrupt

• Only those that can lower their costs the lowest will survive

• US lumber industry is not in as bad of shape• US lumber producers will purchase Canadian

producers once Canadian producers hit bargain basement prices

• Invest in US lumber companies!

Questions?