BY GORDON HAMILTON, VANCOUVER SUN JULY 12, 2012
When Canfor Corp. president Don Kayne talks to customers, whether in the United States or in China, they all ask the same question: who has the fibre to supply them with lumber in the future?
Customers follow the news. They have seen the annual timber harvest in British Columbia reduced because of the mountain pine beetle infestation. They know the B.C. government is considering controversial measures such as logging in forest reserves to keep mills supplied with timber. It raises questions about B.C.’s ability to supply global markets in the years ahead.
“Who has the fibre. That’s what they are asking now,” Kayne said in an interview at the company’s Marpole head office.
That’s the defining question for the B.C. forest industry as it moves into the post-beetle future.
Canfor management asked themselves that question a number of years ago. The company has 14 wood manufacturing plants in B.C. and has been making lumber from beetle-killed wood at some of its mills for 15 years.
“We have learned how to process it,” said Kayne.
The future of the B.C. forestry sector was cast in 1994 when the tiny mountain pine beetle began showing up in unheard-of concentrations in the forests along the eastern slopes of the Coast Mountains. It quickly spread east, moving into forests where loggers harvested timber for sawmills, which in turn produced lumber and wood chips. The chips were sold to pulp mills, which made a long-fibred commodity pulp in high demand on global markets. When lumber prices were low, pulp prices were generally high.
Since then, the beetle has killed almost 60 per cent of the pines in the province and has changed everything in the process.
Besides learning how to mill it efficiently, companies have diversified. Both West Fraser Timber and Canfor have bought mills in the southern U.S.
Canfor has also diversified in B.C., buying timber tenures in the province’s southeast, which was spared most of the impact of the beetle. It is some of the best timber in the province.
Companies also have been investing in their mills. Canfor is spending $300 million on new equipment alone.
As a result, Kayne has no doubts that Canfor will not only be making enough lumber when the recovery finally comes, but it will be producing a higher-quality product from mills that are in the global top quartile for cost and efficiency.
“We can demonstrate that we can be sustainable into the future.”
Companies like Canfor are proving that despite the challenges that face the forest industry — from the beetle, to the collapse of the U.S. housing market and softwood lumber taxes on American exports — it is not only surviving but has used the downturn, the worst in memory, to develop a sustainable industry.
It will be smaller but more diversified, with new customers like China playing a much larger role.
Lumber is the largest sector in the B.C. forest industry on a value basis. Despite depressed prices, sales of B.C. wood products still brought in $5.9 billion in 2011. Pulp, the second component of the industry, produced sales of $5.2 billion in 2011.
The industry as a whole contributed $7.62 billion to the provincial GDP in 2011, five per cent of the province’s $157.5 billion GDP for all industries.
Industry CEOs say never again do they want to be tied to only one market. When the U.S. housing sector imploded in 2007, B.C. lumber sales dropped from a high of $12.4 billion in 2004. Prices fell 54 per cent and production also declined by 25 per cent over the same period.
Kayne is not counting on the U.S. ever recovering to the pre-2007 level, when housing starts surpassed two million units a year.
But one million starts a year is achievable. That market, coupled with new markets in China and other Asian countries, is the foundation for the future, he said.
Forest companies saw the downturn coming and prepared for it. Canfor’s Plateau sawmill at Vanderhoof has been cutting beetle wood for 13 years.
The mill was modernized over that time period as management and employees learned how to best cut the logs. The company also made investments in kilns for drying the wood evenly at many of its mills and focused on the finishing end of the manufacturing process to produce the highest quality lumber possible.
Canfor is not alone in preparing for a future where timber supplies are in decline, but its strategy demonstrates that B.C. forest companies are making the transition successfully.
Although the pine beetle is an Interior pest, it is expected to have an impact on the coastal forest industry as well — except the industry is betting it will be positive.
The coast’s largest forest products company, Western Forest Products, is sitting on the largest pine beetle-free supply of timber in the province: 3.1 million hectares of forest that provides an annual harvest of 7.5 million cubic metres of timber.
In 2004, when Brookfield Asset Management engineered the restructuring of Western, it had a long-term strategy: let the beetle eat its way through the Interior timber supply. In the face of timber shortages, those who have logs, like Western, will thrive.
The coastal forest industry — unlike the Interior where high-speed mills turn out lumber from generally uniform logs — produces a wide range of specialty lumber products from species like cedar, fir and hemlock.
They are generally manufactured in custom mills, where the emphasis is on extracting the highest value from each log.
But the fibre crunch created by the beetle is expected to raise all lumber prices, not just the prices of two-by-fours.
Diversification has not been restricted to seeking new fibre supplies or new markets alone. In both the sawmilling and the pulp sector, diversification has also meant developing new revenue streams.
Mills are turning to bioenergy to fuel their own energy needs and, in the case of pulp mills, selling the green power they generate into the grid.
At Mercer International’s Celgar pulp mill at Castlegar, for example, the company spent $102 million in capital investments, mostly to increase its power generation ability to create a dual revenue stream: one from pulp and one from clean energy sales.