Western Forest Products Inc. (TSX:WEF) CEO Don Demens will be in Washington today, May 7, speaking to a NAFTA panel to argue that American softwood lumber duties should not be applied to the cedar products the company makes.
The North American Free Trade Agreement (NAFTA) does not cover softwood lumber, which was excluded from NAFTA and was not included in the recently renegotiated agreement.
However, chapter 19 of the agreement allows companies to challenge U.S. trade findings and restrictions they disagree with – even for goods and services not explicitly covered by NAFTA.
The Canadian government will also be making a petition to a NAFTA panel in Washington today. Its arguments will be broader, however.
Demens will zero in on appearance-grade lumber made from Western Red and yellow cedar. These products are not construction grade lumber, which is the heart of the softwood lumber dispute that has prompted the U.S. government to levy duties of more than 20%.
“Cedar products represented about 3% of the volume (exported to the) U.S. from Canada in 2018, but 9% of the total duties,” Demens said. “So we’re being impacted disproportionately by a dispute that really isn’t anything to do with cedar.
“We’re going to continue to press the fact that cedar and redwoods are separate products from construction lumber, and therefore they should be investigated separately. They’re not the cause of the dispute because they’re not injuring any U.S. producers. Why should we be penalized and have cedar in what is largely an issue around construction grade lumber?”
“Our argument is it’s a small volume, it doesn’t injure U.S. producers and is not part of the cause of the dispute.”
The market for red and yellow cedar is small compared to the construction grade spruce, fir and pine that is at the heart of the softwood lumber dispute.
About 20% to 25% of the products Western Forest Products makes are cedar products, but 85% of the market for those products are in the U.S.
The company operates six sawmills on the B.C. coast, and just recently acquired a mill in Vancouver, Washington.
American softwood lumber duties have cost the company $71 million, as of the last quarter.
Until last year, the duties were mitigated somewhat by record high lumber prices in the U.S. But prices have dropped, and at the same time B.C. producers are finding it harder and harder to even supply logs to their mills, thanks to a shrinking timber supply and high stumpage rates. (Stumpage is the rate the provincial government charges companies to harvest trees on Crown forests.)
Like other forestry companies, Western Forest Products has had to curtail production in recent months.
The company has taken one shift off of its Cowichan Bay sawmill, took a six-week shutdown at its Port Alberni mill, and a two-week shutdown at its mill in Ladysmith.
According to Western Forest Products, stumpage rates in B.C. have gone up 120% over the last two years. Demens argues that there is no shortage of logs on the coast, unlike the interior of B.C., where a physical shortage has resulted from forest fires and the Mountain pine beetle.
“The challenges here on the coast are centred around costs and access to markets,” Demens said.
Part of the access to markets problem now stems from duties on Canadian softwood lumber.