High lumber prices mask long-term concerns for B.C. forest sector

Canada’s forest industry faces a host of challenges that could erode investment and competitiveness against international rivals

B.C. sawmills, logging companies and other forestry operations contribute $8.6 billion in wages to the provincial economy, according to PwC  | Constantine Androsoff/Shutterstock

It’s estimated that about 140 communities in B.C. depend on forestry.

Logging and sawmilling account for one out of every 17 jobs in B.C. – 60,000 direct jobs and 81,000 indirect – generating $8.6 billion in wages, according to a 2016 PwC report.

It is a sector that is generally doing well right now, thanks to record high lumber prices in the U.S. But it’s an industry is that is becoming increasingly anxious about its longer-term prospects.

U.S. duties on imported softwood lumber represent just one of a host of challenges facing the Canadian forestry industry, and not necessarily the one that concerns the industry most.

It’s Canadian policies, not American, that really worry the industry, shaking investor confidence in long-term competitiveness.

“These are family-supporting jobs in lots of communities, so it’s really important that our industry remains competitive,” said Susan Yurkovich, president and CEO of the Council of Forest Industries. “There are things that are moving on that front, and the government needs to be mindful of that, if this industry is going to continue to pay lots of the bills.”

The oil and gas sector in Canada has been ringing alarm bells that regulatory uncertainty and inertia in Canada has triggered flight of capital. The forestry industry is now echoing those concerns.

“These are not normal times,” said Derek Nighbor, CEO of the Forest Products Association of Canada.

“In Ottawa here, we’re talking a lot with our colleagues in oil and gas, our colleagues over at the mining association, in chemistry, fertilizer – all of us in the natural-resources sector are feeling the same kind of pressures.”

Resource industries of all stripes in Canada are facing three major challenges, Nighbor said: uncertainties in international trade, eroding tax competiveness with the U.S. and regulatory delays and uncertainties at the federal and provincial levels.

Canada has seen several multibillion-dollar energy projects cancelled over the last couple of years due, at least in part, to a sclerotic regulatory regime, he said, adding that Ottawa’s decision to buy the Trans Mountain pipeline and expansion project has underscored just how serious the problem is.

“What kind of message is that sending to the global investment community. We’re even to the point now of saying, ‘Get us to fail faster, if need be. Let us know sooner if a project cannot go forward.’”

At the federal level, Ottawa has overhauled the environmental assessment process, plans to add new reporting requirements for the Species at Risk Act and is working to implement national carbon pricing.

Meanwhile, south of the border, the U.S. has been easing regulations for industry and introducing radical tax reforms. Three of B.C.’s biggest forestry companies already own more mills in the U.S. than they do in Canada, and the fear is that investment will continue to head south.

“We need the government to look at the overall tax burden, both on the personal and the corporate tax side,” Nighbor said. “We’re not saying we need to emulate exactly what the U.S. has done. But we’ve lost our advantage and the government needs to, in some way, respond to that.”

In B.C., forestry companies face additional challenges such as a shrinking timber supply, lack of rail access, comparatively high carbon taxes, a shifting tax bur-den in the form of a new health payroll tax, and numerous program and policy reviews.

Hanif Karmally, vice-president and chief financial officer for lumber producer Teal-Jones Group, said the cost of doing business in B.C. is going up. He estimates the new payroll tax alone will cost Teal-Jones an additional $600,000 in the first year of implementation, for example.

But his biggest concern is simply getting access to logs.  The annual allowable cut has shrunk for the coastal region over the last decade, and wildfires and mountain pine beetle infestation has taken out about half the harvestable timber in the Interior. If he could persuade the B.C. government to do one thing to help ensure the long-term viability of the industry, it would be to enact working forest legislation, he said. Such an act would protect working forests for logging in the same way parks protect forests against logging.

“That’s the biggest issue we have in the coastal industry today,” Karmally said. “There is not sufficient wood supply. Why would you attract investment if people can’t get raw materials for it?”

One other new worry for B.C. forestry companies is uncertainty over Crown tenures. On June 20, the B.C. government announced that salmon farm tenure holders would be given four years to get First Nations consent to continue operating or have their tenures cancelled. In doing so, it invoked the United Nations Declaration on the Rights of Indigenous Peoples.

If the government applies the same standard to forestry tenures and woodlot licences, it could create enough uncertainty to deter the investment needed to stay competitive, Yurkovich said.

“What you need to have for people to make investment is certainty, and the decisions that were taken [on June 20] have created a whole level of uncertainty, ostensibly for fish farms,” Yurkovich said. “But there is a question mark about whether those will apply to all tenures.

“Being competitive is critical because, of course, if you are not, you are operating in a global business, and there are lots of people who will be able to eat your lunch.”

That certainly seems to be the case in China, where Sweden and Finland have captured a good chunk of the market that had recently been supplied by Canada. Canadian lumber exports to China have hit an eight-year low, according to Wood Resources International.

“The Nordic countries have filled the gap where Canadian suppliers have pulled back,” Wood Resources International reports, adding that those two countries have doubled their market share in China since 2015.