At first blush, year-end financials and stock prices for B.C.’s largest forest companies would suggest the province’s forestry sector is well on the road to recovery after a decade-long slump.

Interfor Corp. (TSX:IFP), for example, posted record sales of $1.4 billion in 2014 and record production of 2.2 billion board feet.

Stock values and market caps of B.C.’s three largest forestry companies – Interfor, Canfor Corp. (TSX:CFP) and West Fraser Timber Co. Ltd. (TSX:WFT) – have soared since the end of 2011.

Canfor’s share prices have increased almost 180%, West Fraser’s more than 220% and Interfor’s a whopping 410% since the end of 2011. Based on market cap ($6 billion), West Fraser is now B.C.’s seventh-largest publicly traded company.

But that increase in production and stock value is largely attributable to recent acquisitions of sawmills in the U.S., not to a boom in their B.C. operations. In fact, Canfor and Interfor have both closed mills in B.C. in recent years.

Warmer winters that led to a massive die-off of pine from the mountain pine beetle infestation are largely to blame.

B.C.’s largest forestry company, West Fraser, now owns 15 American sawmills, compared with just seven in B.C. and five in Alberta. About 36% of its shipments of lumber now come from its U.S. mills, said Rodger Hutchinson, West Fraser’s vice-president of investor relations.

Interfor owns five sawmills in B.C., nine in the U.S. and will add another four U.S. mills this year. About 43% of Interfor’s current production capacity is in B.C., 57% in the U.S.

Canfor owns 12 sawmills in B.C., one in Alberta and 10 in the U.S. It also owns four pulp mills in B.C., one wood bioenergy plant in Alberta and one in B.C.

While B.C. companies were buying up mills in the U.S., they were closing or selling mills in B.C. West Fraser’s B.C. head count has dropped from 3,700 in 2009 to 3,100 today, thanks largely to closures of its Houston sawmill and Eurocan paper mill in Kitimat. Last year, Canfor permanently closed its Quesnel sawmill and earlier closed oriented-strand-board and plywood mills in Fort Nelson.

The U.S. acquisitions come down largely to log supply. In B.C., it’s shrinking – thanks to a mountain pine beetle infestation that wiped out roughly 60% of B.C.’s merchantable timber, reducing the provincial annual allowable cut by 20% – whereas in the U.S., there is a substantial undercut, thanks to a prolonged recession and a steep drop in new housing starts.

“You have contracting supply in B.C.; you have growing supply for logs in the U.S. South,” said Martin Juravsky, Interfor’s senior vice-president of corporate development and strategy. “The cost of log supply in the U.S. South is more attractive than it is in Canada right now.”

West Fraser bought its first two American mills in 2000; since then it has bought another 13.

“We could see back then the challenges that B.C. would have with the mountain pine beetle,” Hutchinson said, “although we never … thought it would be as extensive as what it’s turned out to be in terms of the damage.”

However, there are other advantages to owning American sawmills than just access to a good log supply: lower shipping costs, for one, because the lumber is closer to buyers. (The U.S. is still the largest market for B.C. lumber.)

Owning American mills could also be a hedge against tariffs that could be levied after the current softwood lumber agreement expires later this year.

Building a bridge over troubled housing waters on the backs of mountain pine beetles

Ironically, the mountain pine beetle infestation helped the B.C. forest industry bridge one of the worst downturns in its history.

As new housing starts plummeted in the U.S. during the subprime mortgage meltdown and recession, a new market for junk wood was created in China, which bought beetle-kill lumber in large volumes, mostly for construction framing.

In other words, the B.C. forestry sector managed to build a lifeboat made of beetle-kill wood. But that timber supply has run out, and the industry now faces decades of constrained timber supplies in B.C., which has begun to drive up costs of logs. In addition to a shrinking timber supply, the industry also laments other high operating costs in B.C.: property taxes, the PST and rising electricity costs.

“In terms of increasing costs, B.C. has gone from probably the most competitive region in North America to one of the least competitive regions,” said Rodger Hutchinson, West Fraser Timber’s vice-president of investor relations.

The one advantage Canadian sawmills have over American mills is the low Canadian dollar. It’s been particularly beneficial for Canadian pulp mill owners like Canfor.

B.C. is still a major player in the pulp and paper industry, said Stewart Muir, executive director for Resource Works. In 2014, B.C. producers shipped $4.3 billion worth of pulp and paper compared with $8.2 billion in wood products (lumber, logs, plywood, etc.).

Pulp prices, which fell below US$700 per tonne in October 2012, have been steadily rising and now sit at a 14-year high of US$1,060 per tonne. A 20% difference on the Canadian dollar is a bonus for Canadian pulp producers like Canfor.

“For the Canadian side of production, it has the impact of being $1,200 Canadian,” Muir said. “So that’s a significant increase in income and profitability here.”

Despite a decade-long slump, and despite the investment B.C. companies have been making in the U.S., forestry products remain B.C.’s top export, generating $15.7 billion in revenue in 2013, according to a January economic impact study of the B.C. forest industry. The sector accounts for 63,000 direct jobs and another 82,800 indirect jobs in B.C.

Forestry will remain an important part of the B.C. economy, according to Council of Forest Industries CEO James Gorman, but it will contract as more mills close, due to the shrinking timber supply.