Conifex Timber Inc. CEO Ken Shields’ rationale for his company’s decision to spend US$21 million to buy a mothballed Arkansas sawmill sounds like a wake up call to a British Columbia forestry sector grappling with mounting challenges.
“The U.S. south has overtaken the interior region of B.C. as the dominant, low-cost lumber supply region of North America,” Shields said to analysts on the call.
The reasons why have to do with the aftermath of the mountain pine beetle infestation, Shields said. It is increasingly expensive to secure decent saw logs from B.C.’s shrinking short-term timber base, while U.S. southern-yellow-pine plantations planted in recent decades are coming into their prime.
“It is no surprise B.C. lumber producers are now directing a majority of their discretionary capital to achieve higher returns in the southern U.S.,” Shields said.
Reviving the mill in El Dorado, Ark., however, will require refurbishment on the same scale as the $100-million upgrade Conifex is considering for its Mackenzie sawmill.
That a B.C. company would buy a southern U.S. sawmill is no longer a new development. Major B.C. producers have bought more than 30 southern U.S. facilities in the last half-decade as they adjust to an immediate future that will include more constrained timber supplies at home thanks to the mountain pine beetle.
However, the trend continues to draw the capital of B.C.-based companies at the same time the province is trying to devise strategies to develop more secondary manufacturing of wood products to make more out of a dwindling harvest.
The Conifex purchase came as a surprise to industry analyst Paul Quinn at RBC Capital Markets, considering that the company also needs to upgrade its Mackenzie mill, but he said it makes sense to take advantage of better conditions in the southern U.S.
“The reality is, there is too much (mill capacity in B.C.) chasing too few saw logs,” Quinn said. “Everybody’s bidding up saw logs to keep their mills going,” and he estimates another couple of mills will have to close to restore more balance to the market.
Canfor Corp. and West Fraser Timber Co. Ltd. each closed mills, in Quesnel and Houston, respectively, that eliminated 430 jobs in the last round of rationalization in 2013.
In an interview, Shields said the company plans to refurbish both mills, but its board is undecided which will go first. However, he said the decision would be helped along if the province were to signal that it will fight for an end to export taxes on B.C. lumber shipments to the U.S. after the Canada U.S. softwood lumber agreement expires this fall.
“The key variable that determines our spending is the program and strategy the province adopts,” Shields said, and the most helpful development would be an end to punitive export taxes that kick in when commodity lumber prices are low.
Forest Minister Steve Thomson said negotiations to replace the expiring softwood lumber agreement happen at the federal level, but those have been difficult to advance because of the Canadian and U.S. election cycles.However, Thomson said he has been “encouraged” by discussions that are taking place between industry trade associations from both countries and “everybody would like to move toward free trade in lumber.”
Thomson added that while B.C. remains the world’s biggest exporter of softwood lumber, he is aware of the need to improve the industry’s competitiveness, which is something his ministry is working on.
“We’re not surprised that companies are expanding operations and strengthening balance sheets through that process (of buying American assets),” Thomson said.
Among the key initiatives the province has underway is a forest fibre working group, Thomson said, which has been working with industry to increase the utilization of lower-quality, beetle-damaged timber from B.C.’s forests.
Thomson added that B.C. companies are still spending money at home while investing outside of the province, whether it is to upgrade existing mills or build new facilities aimed at using more of the fibre from beetle-damaged trees.
“The business opportunity (in B.C.) is now different,” said Doug Routledge, vice-president of the industry group the Council of Forest Industries.
Routledge added that all B.C.’s major lumber producers are investing in sawmills that they are going to retain, but they are still rationalizing operations, as they increase spending on alternative operations such as pellet manufacturing for biomass power, or their own electricity production generated from burning residual wood products.
“When (the province) can make that fibre more affordable, it begins to flow,” he said.
Routledge said such new ventures don’t provide “one-for-one job replacements” for a sawmill that might close in a forest-dependent community, but are still “growing areas of opportunity.”