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BC forest and paper companies cope with turmoil

Amidst market havoc, economic uncertainty and trade disputes, British Columbia-based lumber companies have managed…

Amidst market havoc, economic uncertainty and trade disputes, British Columbia-based lumber companies have managed to adapt themselves to currency rate fluctuations, over capacity issues and depressed market conditions.

Preliminary 2002 forest and paper industry performance results were released by PricewaterhouseCoopers (PwC) at the PwC 16th Annual Global Forest and Paper Conference in Vancouver. Results show that BC interior lumber companies are proving they are the leanest and most efficient operators in the continent when dealing with over capacity. These companies have lowered costs by 5-10% by shifting production to lower-cost mills and closing higher-cost facilities.

PwC’s research shows that public forest industry companies with operations based in BC earned $150 million in 2002, compared to break-even in 2001.

Return on capital employed (ROCE), an important indicator for the capital-intensive forest industry, measures profitability against the capital invested. ROCE for BC-based operations was 3.4 % in 2002, up from 1.8% in 2001. Globally, the industry’s average ROCE in 2002 was 4.3%. It was 4.6% in 2001, down from 6.6% in 2000, and far below the generally accepted minimum return of 8% to 11%. Eastern Canadian-based public companies saw ROCE fall slightly to 3.8% in 2002 from 4.0% in 2001. Overall, for both BC and eastern Canada, the ROCE was significantly lower than the average Canadian ROCE of 6.0% in 2001 and 10.7% in 2000.

“We estimate the BC interior lumber industry earned over $400 million in 2002, an amazing result given the intense competition and excessive duties. Despite these impressive gains in lumber performance, we also estimate that the BC pulp industry has lost almost $300 million in 2002, down from breakeven in 2001,” says Craig Campbell, a Vancouver-based partner with PwC’s Global Forest and Paper practice. “It is worth highlighting that the BC pulp industry has only been profitable once in the past 10 years (1995).”

Further data exhibits that BC experienced reduced wood costs of approximately 5%, partly through lower stumpage and partly because of massive quantities of wood infected by the pine beetle that needs to be harvested quickly. The beetle is having a catastrophic impact on BC’s forest resource. It has infected more than double the entire volume harvested in BC in a year. On a converted-to-finished product basis, that is over $35 billion in potential economic impact. Lower log prices are also the result of a free market situation.
“In the last three months we’ve seen the Canadian dollar rise to almost 68 cents. For Canadian producers this 5% change just in the first few months of 2003 means a revenue reduction of $2.6 billion on an annual basis,” says Campbell. “BC producers will experience a decline of over $1 billion in annual revenue. Most of this impact flows to the bottom line because the majority of expenses are in Canadian dollars.”