Selective Cuttings

Unexpected consequences of interior super-mills on coastal log exports

June 17, 2014

In the early 2000’s, B.C. Interior softwood lumber producers were faced with an interesting problem: the Softwood Lumber Agreement had expired and significant anti-dumping duties were levied but U.S. softwood lumber demand was starting to boom. How could they take advantage? Their solution was to capitalize on high U.S. market cash deposit rates and make heavy capital investments in their existing facilities—increasing their capacity and shifting them down the cost curve to the 1st quartile in North America. Though a relatively straightforward solution to their problem, it created unexpected ripples throughout B.C. that continue to impact the sector today.

Consider, for instance, Canadian log exports.

Log exports by species 2003-2013 (12-month moving total million m3)

This graph shows the 12-month moving total in million m3 of log exports by species. By 2003, SPF, (then the major species export group) starts plummeting while Douglas fir exports explode. Until 2002, log exports focused almost exclusively on the U.S. and Japan and Spruce-Pine-Fir species (SPF), fir in particular (92%). Since 2002, Canada’s main log markets have shifted to Asia and consist almost exclusively of Douglas fir and hemlock.

Long description

Before 2004, Canadian log exports consisted primarily of true fir logs shipped from B.C. to the U.S. and Japan. However, significant changes in these markets were afoot: the U.S. housing boom was beginning, which demanded lumber, rather than logs, and both China and South Korea began to enter a cycle of nearly insatiable lumber demand, while the Japanese market for coastal species collapsed.

As Interior B.C. softwood lumber producers started to ramp up production at their new supermills, SPF chip prices started to drop, leading coastal pulp mills to increasingly use SPF chips. This new competition hammered Coastal lumber mills already struggling. Coastal sawmills lost substantial revenues from chip sales to local pulp facilities, which were either shutting down or were turning away from the relatively more expensive hemlock chips. The profitability of these Coastal sawmills was already squeezed by high logging costs, low efficiency (4th quartile mills) and large countervailing and antidumping duties after the expiration of the Softwood Lumber Agreement in 2001. This disastrous conjuncture caused a string of sawmill closures on the coast. In one 12 month period, five sawmills closed which had previously used 10% of the 2001 coastal log production.

There were now more Coastal logs available than domestic sawmill capacity to process them. At the same time logging on private lands was ramping up: between 1996 and 2003 private land harvest increased by 53%, almost all of it on Vancouver Island.  With coastal sawmilling downsizing, log exports of the premium-commanding Douglas fir took off in 2003. Conversely, with interior SPF sawmilling running fast, exports of true fir logs plummeted.

This pattern has held since 2003: high exports of Coastal logs and low exports of Interior logs. When taken in isolation, this could be considered an interesting footnote in the history of the Canadian forest industry. Looked at more broadly, however, it challenges us to consider the overall significance of forest industry capital investments being made today. In the complex and interdependent world of the forest industry of 15 years ago, even relatively “neutral” investments in increased capacity and improved efficiency have had far ranging effects. It is likely that the more “transformative” investments being made today will have similarly wide ranging, and unanticipated, implications for the sector.