Canada can play hardball on softwood

Strong demand and reduced supply is pushing up the price of lumber

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VANCOUVER, B.C. Sept. 22, 2015/ Troy Media/ – For the last half of the 20th century, one could easily and accurately predict conditions in the British Columbia economy using just one number. That number was U.S. housing starts.

The dividing line was 1.6 million starts per year. At this level or higher, the softwood-lumber driven B.C. economy was doing very well, thank you. Much below that and we were in trouble. While B.C. was heavily dependent on one customer, the United States, such a dependent position made us vulnerable.

Softwood lumber agreements have been put into place to provide some certainty for Canada’s lumber industry and protect against hostile moves by the U.S. (free trade notwithstanding). Difficult negotiations led to agreements, but not without limiting Canada’s access to U.S. lumber markets in all but the most buoyant conditions. This history is described in Branching out: Preparing for Life without a Softwood Lumber Agreement, a report released by the Canada West Foundation.

The current softwood lumber agreement (SLA) is expiring on Oct. 12, leaving the U.S. free to renew protectionist measures after a one-year stand still period expires.

But B.C. has not been standing still. As the report points out, Canada and B.C., which is the dominant province in the softwood lumber sector, are in an excellent competitive position. Demand for lumber is strong. U.S. housing starts, while not at their headiest levels, are over a million for the first time since 2007 and rising. The U.S. does not have sufficient domestic lumber to meet its needs.

In B.C., the supply of lumber has decreased because of the devastation caused by the pine beetle. In the interior of B.C., 50 per cent of lodge pole pine, a dominant species, has been affected. It will take more than 50 years to return the forests to the levels they were before the infestation. Twenty-one sawmills in the interior of B.C. have closed and more may be coming as the salvaged wood is used up.

Strong demand and reduced supply push up the price of lumber. These are also the conditions under which the U.S. is most open to lumber moving freely, and when a softwood lumber agreement is least needed. On the other hand, the falling Canadian dollar could be perceived by some as an unfair trade advantage to Canada.

A new SLA is not in the cards any time soon. The U.S. is concentrating on much bigger trade agreements covering many products and nations. Many Canadian lumber producers have also started producing lumber in the U.S., dampening their enthusiasm for arrangements that favour Canada.

The Canada West Foundation report recommends diversifying the customer base for our lumber away from the United States. This seems rather obvious. Canadian lumber producers have looked for and found other markets whenever the U.S. market weakened. However, the movements were not large and, once the U.S. housing market turned up again, they moved right back. We can see that even now.

The latest U.S. economic downturn coincided with very strong growth in China and led to the largest movement yet of Canadian lumber sales to that country. Now growth in China is slowing, the U.S. is picking up and we see hints of reverting to the old pattern. This would be a mistake.

Even at half the growth rate, the absolute annual increase in the Chinese economy is bigger than it was at the beginning of this century and China is trying to move toward more environmentally friendly wood-based construction. Canada should also pay more attention to other Asian economies, such as Korea with which we now have a free trade agreement.

It is also time to add value to our lumber. Even where construction is not wood based, there is demand for window frames, doors, floor boards and other wood-based products. Technology allows us to produce three dimensional wood products in a manner not unlike photocopying. And because technology replaces much of the grunt work, we can be competitive at Canadian wage levels.

Finally, and the Canada West Foundation did not mention this, let us start thinking about what Canada and the West can do beyond being hewers of wood.

Troy Media B.C.’s Business columnist Roslyn Kunin is a consulting economist and speaker..

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