There is no doubt about the current importance of China to B.C.’s softwood lumber industry.
The province’s recent rapid growth in sales to this new market is a welcome lifeline – for B.C. companies and investors alike. The U.S. market is the worst it has been in decades and will take time to recover. Will China continue to take up some of the slack?
Research points to a significant need for softwood lumber imports into China and several other emerging Asian markets. Actual demand occurs at certain price points. The reality is that future demand in these markets at much higher prices than today’s depressed levels has yet to be tested.
An equally relevant question is whether Canadian sawmills will continue to service the needs of their new customers in China and emerging Asian markets once the U.S. market bounces back?
A decade ago, the answer might have been “no.”
After all, it’s well known within the industry that North American lumber and building materials suppliers have a history of chasing offshore markets when the U.S. market falls into a down-cycle. But as soon as it recovers, more often than not they forsake offshore commitments and return to pursue the large – and easier to supply – U.S. market.
Will it be any different this time?
Only time will tell. Prudent observers of the industry are taking note of indicators which suggest that, yes indeed, times are changing.
Emotionally, some British Columbians would love to stick one back to the Americans for all the hassles and punitive trade actions inflicted on the Canadian softwood lumber industry over past decades. Wouldn’t it be nice, that vein of thinking goes, to have a substantial alternative market to the United States?
With diminishing supplies of softwood lumber on the horizon from B.C. as a result of the pine beetle devastation, firms could charge much higher prices to U.S. buyers – when the Americans are again ready to buy big volumes, which eventually they will.
Set the emotion aside. B.C. needs the American market!
Just as importantly, though, B.C. needs continuity in its developing markets in China and other Asian countries. B.C. has a long and successful relationship with Japan. Top quality and service will be essential if B.C. firms want continued access to the slow-growing, but still significant, two-by-four and traditional Japanese post-and-beam housing markets.
In today’s conditions, it’s hard to visualize that substantially higher lumber prices are not far around the corner. The reasons are global as well as regional and relate to rapidly diminishing supplies of economically accessible higher-quality saw logs. Until recently, softwood lumber was traded regionally. Now it’s increasingly globally traded. Transportation cost differentials aside, the industry is moving toward global price levels. This is no different than what market pulp and many grades of commodity papers have been for years.
The drivers of supply-driven anticipated price increases in softwood lumber are well known, but global demand recently has been too soft for them to become apparent. Major players in the industry know it. Several “pure play” new entrants, such as Conifex and Eacom Timber, appear to believe it, too.
With significantly higher prices, shouldn’t the survivors in Canada’s lumber industry just sit back and cash in on the anticipated good times?
Higher market prices provide an opportunity for improved profit margins. There are no guarantees. The bogeyman is wood costs. They account for up to 50% of mill costs, depending on the product. As lumber prices rise so, too, do the costs of delivering suitable saw logs to the mill.
Fortunately, it’s not a zero sum game. Profit margin prospects look promising. Investors should be aware, however, that this depends on continuing with the well-tried-and-tested manufacturing model. It has been developed by B.C.’s export-focused sawmills over many decades. The core of the model is large volume, high productivity, low unit-cost production.
B.C.’s success is that it’s able to adapt this model to new products – and to new markets, such as China. Instead of North American dimension lumber two-by-fours, the products that China and other offshore markets want are what they have been using for years – essentially, metric sizes and lengths.
B.C. firms are responding.
Canfor, West Fraser and Tolko, among others, are shifting some of their spruce-pine-fir production. Canfor has dedicated its Quesnel mill to cut solely for the China market. Traditional suppliers to Asia, such as Western Forest Products and Interfor, are having success in developing new markets for hemlock. Quarterly earnings results for the public firms show that these approaches are starting to pay off.
Every market has its characteristics. Japan demands high-quality softwood lumber. It has a wood culture in its construction industry. China traditionally has purchased on price. In recent times, at least, its construction industry has been dominated by concrete and non-wood materials. Much of B.C.’s lumber supply to China so far has been in lower grades, effectively No. 3.
Intensive marketing and building technology development efforts are being directed by the industry through the B.C. government, Canada Wood and others. The goal is to increase demand for higher grades, notably No. 2 and above.
It’s not an easy task.
Traditional suppliers of logs, such as Russia, are keen to sell high-quality lumber to China. New Zealand and Chile are content, for the moment, to continue supplying logs to China. B.C. has lots of competition.
Apart from China’s aging population demographic, the sheer size of emerging Asian markets is impressive. Even small per-capita gains for softwood lumber in markets such as China imply large import demand volumes.
It’s doubtful, especially after years of punitive trade measures by the U.S. against Canada, that B.C. sawmillers’ memories will be short. Even so, firms are too smart and will not pursue offshore diversification just in spite. They know that huge and ultimately positive structural changes are underway in the U.S. market. The good news is that, although demand and prices are low today, U.S. buyers will return to the market and buy significant volumes. They will be welcomed by B.C.’s softwood lumber producers.
Times indeed are changing. B.C. sawmills will have to continue to work hard hustling whatever business is available in the U.S. That’s the immediate market reality ahead.
The time may come when U.S. buyers have to wait in the lobby until B.C. firms have completed volume and price negotiations with their customers from China and other offshore markets. Before that prospect becomes a reality, B.C. has a long way to go.
B.C.’s offshore lumber market diversification is a success story. But so, too, is its marketing strategy in the vital U.S. market – despite arduous and ongoing trade actions. Within a few years, both are likely to pay off. After many years of being incredibly patient, investors finally might be rewarded.
Peter Woodbridge (www.woodbridgeassociates.com) is president of Woodbridge Associates Inc. His column appears quarterly in Business in Vancouver.