Mauro Calabrese

Mauro Calabrese

INDUSTRIAL UPDATE: Softwood Lumber and West Fraser

The Softwood Lumber dispute between Canada and the United States dates back to 1872.

  • Mar. 21, 2017 5:00 p.m.

Mauro Calabrese

Special to the Tribune/Advisor

The Softwood Lumber dispute between Canada and the United States dates back to 1872.

The dispute is based on claims by the U.S. Lumber Coalition that the Canadian lumber industry is subsidized through the system (known as stumpage) that allegedly sets publicly owned timber prices below market value.

It is claimed that Canadian lumber producers displace U.S. production and jobs by shipping lumber during market low points and when U.S. producers have curtailed their production.

The U.S. does not produce enough softwood lumber to meet its own demand and is reliant upon imports to provide sufficient lumber for the house construction industry.

Canada also regulates and limits raw log exports. The U.S. lumber producers would prefer to have access to Canadian logs in order to manufacture the lumber themselves.

One large difference between Canada and the U.S. is the arrangement of forest land ownership.

Ninety-five per cent of the timberlands in Canada are publicly owned in contrast to the U.S. where only 40 per cent are publicly owned (the remaining 60 per cent being privately owned.

Private forest landowners, therefore, have a large influence on log prices (which makes up over half of the cost of producing lumber). The price of lumber also affects the value of their land with higher lumber prices equating to a higher value of their main asset (their land).

The first modern day tariff was imposed on Canadian software lumber in 1982.

A series of trade actions involving countervailing duties have since been imposed by the U.S.

These have been ruled on by various joint Canada – U.S. trade tribunals over the years — all in Canada’s favour. The latest agreement expired on October 12, 2015 and included a provision for no trade action until Oct 12, 2016.

The imposition of duties on Canadian lumber are enabled through U.S. domestic trade law aimed at protecting the U.S. producers; however, the net effect will be to raise lumber prices and ultimately the cost of purchasing a new house to the U.S. consumer.

Canadian producers, along with the Canadian and provincial governments, have done a number of things to try to reduce the dependency on the U.S. market and the effect of a countervailing duty.  Markets to China, India and the rest of Asia have been explored resulting in increased shipments to those countries.

Lumber shipped domestically within Canada is also not subject to any U.S. trade sanctions.  Plywood and other value added products to the U.S. are not subject to the duty either.

It is interesting to note that almost all of the plywood produced in B.C. stays within Canada and that the U.S. exports plywood into the Canadian market.

Some companies, including West Fraser, have invested in U.S. lumber mills.  West Fraser is the second largest softwood lumber producer in Canada and the fourth largest in the U.S.  Only wholly owned U.S. lumber producers are part of the trade action against Canada.  Canadian based international companies like West Fraser do not benefit directly from the countervailing duty.  However, with almost 40 per cent of its lumber production based in the U.S., the financial penalty of an increased duty to West Fraser may be mitigated by the higher lumber prices received by the West Fraser U.S. sawmills.   West Fraser has also diversified into non-tariffable products such as bio energy with wood waste energy plants in Fraser Lake and Chetwynd, four plywood plants located at Williams Lake, Quesnel, Slave Lake and Edmonton; a laminated veneer lumber plant at Rocky Mountain House, a medium density fibre board plant in Quesnel, a treated post plant in Sundre and a value-added forest products plant in Edson, Alberta.

In B.C., the Market Pricing (Stumpage) System was created in 2004 to deal with the concerns by the U.S. that the stumpage paid by Canadian companies was below market value.

To create this system, major licensees had 20 per cent of their license annual allowable cut taken away by the provincial government.

This volume is now auctioned to the highest bidder by B.C. Timber Sales and the data collected in these auctions is used to calculate the stumpage rates on the companies cutting permits.

However, the U.S. Lumber Coalition claims there are too few bidders and not enough of the log supply is under auction.

Despite this claim, major forest licensees have experienced higher stumpage rates with the new system than the system it replaced.

Currently, West Fraser along with Canfor and Tolko are being audited by the U.S. Commerce Department as they look to make a preliminary duty determination which could be as high as 30 per cent.

West Fraser would like a resolution to the softwood lumber dispute to return certainty to its operations and those communities that are supported by its economic activities.

Under managed trade, West Fraser does not support a lumber quota, but prefers a duty system similar to the previous agreement that allows access to the anticipated growth in the U.S. lumber market and allows the company to leverage increases in manufacturing efficiency.

Williams Lake Tribune

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