Financial Reports & Markets
Softwood lumber: Producers await a new deal
September 29, 2015 By Andrew Snook Canadian Forest Industries
After 9 years of the truce imposed by the Softwood Lumber Agreement, what’s next for trade in lumber between the U.S. and Canada?
With the Softwood Lumber Agreement (SLA) expiring in October, many companies and individuals within the sector have been waiting with bated breath for a new deal to be hammered out between Canada and the U.S. And unlike the last time the SLA was set to expire – in 2013 – the option for an extension is no longer available.
“The way the agreement is structured is that the SLA was a seven-year deal with an option for a two-year renewal, and there was only one of those options built into the agreement,” explains James Gorman, former president and CEO of the B.C.-based Council of Forest Industries, and current vice-president of corporate and government relations at West Fraser Timber. “There is no provision inside the SLA that the two parties can agree to invoke to extend it for another two years.”
At this point, it seems unlikely that both countries will come to an agreement prior to the current expiration date of the SLA. But chaos will not descend upon the lumber markets in North America for at least another 12 months.
“Should the agreement expire, the U.S. government has committed to not initiate trade remedy action for one year upon the agreement’s expiry,” says Diana Khaddaj, a spokesperson for Foreign Affairs and International Trade Canada.
That’s good news for the pulp and paper producers that rely on chips and sawmill residuals as their input.
Flawed but functional
The preferred Canadian position is that there should be free trade in softwood lumber between our two countries, but historically that has not been palatable to the United States, explains Gorman.
“And so our compromise, in our view, is that the agreement negotiated in 2006 should form the basis of a new agreement for 2015,” he says.
Despite the fact that almost every jurisdiction can find flaws within the current SLA, Canada’s forestry sector has come together in favour of the current agreement.
“We support the renewal of the current agreement – the Canadian government’s position – to bring certainty in our trade relationship with the U.S.,” says Susan Murray, vice-president of public relations for the Forest Products Association of Canada (FPAC).
The federal and provincial governments also stand unified in regards to supporting the current agreement.
“The Government of Canada has extensively consulted provinces, territories and industry on future softwood lumber trade with the United States,” says Khaddaj. “We have made it clear to the U.S. government that we support a renewal of the agreement on the same key terms. Our understanding is that the United States continues to be in the process of consulting its stakeholders.”
Between a rock and hard place?
Although Quebec’s industry has publicly come out in support of a renewal of the SLA as is, that’s not say everyone in the forestry sector is thrilled about their current position.
In 2013, Quebec revised its stumpage system and moved to an auction-based system to make it more like the market-based system in the U.S. The move was part of a plan to try and become exempt from the SLA, like the Atlantic provinces, but that has not happened.
Since the changes were implemented, the forestry sector in the province has suffered and now has the worst of two worlds, according to the Quebec Forest Industry Council (QFIC).
“We’re paying at least $10 more per cubic metre, but at the same time we have quotas and we have taxes. We’re caught on both sides and the industry [in Quebec] is just about to give up,” says Michel Vincent, director of economy and markets for the QFIC. “We are dying at the moment. Nobody is making any money in Quebec, and we realize that it’s not the same elsewhere in Canada. The stumpage rate is way too high. We have the smallest wood in North America, but if we compare the stumpage rate for the four provinces subject to the SLA, we have the highest.”
Vincent says that the provincial government sold the industry on the auction-based system as a way to keep the industry out of lumber litigations with the U.S.
“We believe we comply with all the requirements of having a market-based system. And, as such, we should at least have a committee up and running to look at, and review, the merits to exclude Quebec from the next negotiations,” he adds.
Evidence of the economic fallout resulting from increased operating costs can be seen across Quebec, according to the QFIC.
“This last spring, Tembec closed three Quebec sawmills but has kept operating its four mills in Ontario. This says a lot to us,” says Vincent.
Although the official U.S. position on the SLA is currently unclear, at least one association south of the border has expressed its displeasure with the current agreement.
During the 2015 Wood Markets’ Global Softwood Log & Lumber Conference held this past May in Vancouver, the U.S. Lumber Coalition spoke about the U.S. position in regards to the current SLA.
Russ Taylor, president of International Wood Markets Group, the conference organizer, summarizes:
“The U.S. position is that they’re not going to renew the existing agreement, and one of their arguments is that the Canadian provincial stumpage rates have not been responsive to lumber price changes.”
The second argument brought forth during the conference is that Canada’s market position in the U.S. lumber market needs to be constrained.
“We know Canada’s lumber harvest is declining and right now lumber production is flat,” says Taylor. “That should not be a concern going forward, but that’s one of the arguments brought forward.”
Despite the fact that a significant number of mills in the southern United States now belong to Canadian companies (Canfor, Interfor and West Fraser, for example), Taylor expects these players will have little impact on U.S. politics regarding the SLA.
“The SLA members are mainly timberland owners, not sawmill owners,” he explains. “Plus, companies with headquarters outside of the U.S. are not eligible to be part of the U.S. Softwood Coalition. So, there will be little impact.”
If it ain’t broke…
The main reason that Canada’s industry stands unified in favour of the current SLA, is because for the most part, it has been effective.
“Softwood lumber producers and consumers on both sides of the border have benefited from the predictability and stability the agreement provides,” says Khaddaj. “It has also created opportunities for companies to work together to foster innovation and grow the market for softwood lumber products in North America and offshore.”
The agreement also created duties that have played a significant role in the marketplace, which has been to the advantage of our neighbours south of the border.
“The duties imposed have helped protect the U.S. industry in down markets, and that was the primary objective of the U.S. industry,” explains Gorman. “In 2006, Canada’s share of the market was 34 per cent, and today it’s just over 28 per cent. During that same period, the U.S. lumber industry’s share of its own market has gone from 61 per cent to 71 per cent.”
Many analysts and industry members have reported that there are some good years ahead in the U.S. housing market, despite the fact that recovery has been slower than expected. Since U.S. housing starts have been in a six- or seven-year slowdown, Gorman concludes that there is significant pent-up demand in the market.
“Over the coming years, we’re going to see housing recover and we should see a few years of strong housing starts, and that’s certainly going to help the demand for lumber products both north and south of the border,” he says.
While uncertainty remains concerning the future of lumber exports to the U.S., at least the negotiations regarding how to divide the lumber market pie are occurring at a time when that pie is growing.
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