Canadian Softwood Lumber Tariff

[Tillaway]

I saw this somewhere earlier.  Any thoughts.
http://www.chron.com/cs/CDA/story.hts/business/1305020

[Bud Man]

Maybe save a few mills, huh?  Maybe get Bush re-election votes in states like Washington, Oregon, Michigan, Maine, California, and Minnesota huh ? and with the Steel Tarrif in Penn huh ?  :P

[Frank_Pender]

Looks like my scrap metal pile will be getting more valuable as well as my sawdust and chips.  8) 8) 8)  But, I will have to pay more when I have to buy  something at the scrap metal yard. :'(   Sounds like a breakeven deal to me.

[Ron Wenrich]

So much for free trade.  My view is that the tariff situation sucks.

Politicians pick and choose who they penalize and who they don't.  How high are tariffs on imported oil?  Wouldn't the co-gen industry benefit from higher oil prices, which could put more chips into electric or methanol production?  But, big oil gives money to politicians, co-gen not as much.

As for softwoods, it has hurt domestic log production in the northeast.  A lot of Canadian mills would buy logs from US producers, and haul those logs back to Canada when making deliveries to the US.  Guess what.  Fewer Canadian deliveries mean fewer back hauls.  Now the northeast is subsidizing those softwood mills by having a limited market.

With higher prices, there are others who will export softwoods to the US.  Primarily the Scandanavian countries.  There is no tariff on them.  I doubt there is any tariff on Chilean or Mexican lumber.  Raising US prices help pay for the transportation of foreign lumber.  Can Russian lumber be far behind?  Isn't a tariff a means of subsidizing your industry?

Steel tariffs are just as absurd.  My dad worked 35 years for Bethlehem Steel.  They have all but folded.  29 of 32 steel mfgs are in backruptcy.  The largest problem was funding all those mandates that unions hit the steel companies for back in the '60s and '70s when there wasn't any competition.   And, the industry made very few capital improvements.  Instead, they made sure that investors got higher dividends to bouy stock prices.

With long term interest rates going up, and lumber prices rising, I see where any economic recovery will stall.  Besides, we weren't really in a recession, just a slowdown.  Factor in the problems of higher steel, oil and lumber with government money going into a war effort, any recovery is pretty well DOA.  

[Corley5]

I've heard that Russian lumber is already hurting American markets.  A lot of basswood used to go to Japan where it was made into window blinds etc.  The Russians have begun flooding the market with something similar to our basswood.  Now basswood isn't hardly worth cutting :(.  I've got a lot of basswood that needs harvesting but it'll have to wait for a better market.

[Bud Man]

Canadians will buy US logs, cut to dimension, ship past international waters limit, make paperwork transaction sale to Scandanavian countries, turn the boats around to US ports and make a killing !!  With 1/3 of US dimension lumber for housing market presently coming from Canada and this new tarriff now in place the little glitches will be worked out swiftly.  It's happened in Cotton and will happen in lumber too !!  :P

[Ron Wenrich]

If they bought US logs, they wouldn't have a tariff on the lumber.

Another factor that makes Canadian lumber cheap is the exchange rate.  Canadian dollar is about 63 cents.  A number of years ago, it was 85 cents.  

Less exports means less foreign money.  Their dollar may come down, making our goods more expensive.  They are our largest trading partner.  Doesn't make sense to push them into recession.

[Bud Man]

If tarriff doesn't apply to US logs bought by Canadians and cut and resold to US then they don't need worry. Makes US logs worth more and may help some US mills I keep hearing about possibly closing, "Better Thee Than We"  Last time I was in Manitoba fishing a pack of cig's were $4 to $5 a pack and they hadn't quit smoking any. I think it's all about the Politicians targeting the profits to where they will get the most milage within the political arena. Canada kinda created their own recession set of problems with their Socialistic Political Wrangling . They'll figure an angle of escaping the hole they dug for themselves.

[Tillaway]

This will hurt B.C. the most.  I had an opprotunity to work for a Canadian firm in B.C. a few years ago.  

Maybe Kevin can shed some light on this but I will try to give you a summary of how I understand the Canadian industry works in B.C.  They have what is called the Community Stability Act.  This requires that the companies that hold licenses to operate and manage crown (national forest) lands in B.C. (and maybe else where) to cut a minimum volume every year to keep as near full employment as they can or they run the risk of losing their license.  In order to keep their companies solvent, the government adjusts the stumpage rate the companies pay for the timber. When I was working up there that rate was something like $65 cdn per cubic meter or I think $175 cdn per MBF.  This is about $128 us MBF at the time.  Those same logs were worth nearly $600 us MBF at the time, here.  That was during a good market.  Since then I can only assume that the price they are paying is considerably less.  This leads to the dumping allegations in an attempt to maintain employment.

Since NAFTA took affect US firms have managed to buy some Canadian companies (Weyco bought MacBlo) and are now in control of the licenses.  Since then, logs have been exported to the US much to the chagrin of the B.C. mill worker and processed here.  There have been mill closures in B.C. because of this.

The Ottowa government probably won't stand for the tariff since B.C. is their best cash cow as far as taxes collected.  The tariff is targeted at the B.C. timber industry IMHO.  

[woodman]

  Let's here more from the Bud Man, I like the way he thinks.

[PeterRennie]

Its interesting how the media try and simplify and create simple solutions for a very complex problem. Judging by some of the emails, there needs to be clarification of facts.

The Cdn Constitution gives the right to manage Crown (public) lands to the provinces, to distribute, sell, manage, exploit in any way they choose. Ottawa has no authority. But Ottawa has authority in negotiating international trade agreements.

So we have 10 provinces (I know there's 11 but the last one doesn't have trees) and each has its own agenda. The Atlantic provinces (which have little crown land and are mostly private) have been excluded in past agreements. The dispute is really aimed at the big four, BC, Alberta, Ontario and Quebec.

My gut feeling listening to the negotiators and analysts is the whole issue is about market share and lumber price. The US is not self sufficient in lumber, never has been, never will be. Historically, about 32% has been imported, primarily from Canada. Right now, due to a variety of forces, the market share is being pushed up to 38%.

Some of the forces pushing up the Cdn share include currency exchange. The $Cdn has dropped about 20% in the past 5 years. It's the price of a strong $US all your imports become cheaper. Another is mill efficiency. Most Cdn mills (except the BC Coast) scream out production. I would suspect this is similar to the large mill/timberland owners, but this charge is being led by the smaller less efficient mills.

So what is the ramification of effectively cutting off Cdn supply. Immediately prices will go up, benefiting the inefficient US operator, but then the void will quickly be filled by other sources of supply. Canfor, one of the major suppliers of Home Depot, was buying wood from the Baltic states (Latvia etc) and then reselling it to fulfill their contracts (and made a profit doing it). Now someone will get smart and cut out the middle man and your markets are going to be flooded with Scandanavian, Russian, Chilean and Eastern European wood -duty free. (Fine way to treat a friend)

You can't compare stumpage prices from BC to other parts of NA without comparing operating costs, including planning, engineering, road construction, harvesting, cleanup, and regeneration to a free growing state (usually 8 yrs). It is interesting to note that every stick of wood harvested in any US National Forest is subsidized because the stumpage returns don't come close to operating costs.

I don't think wood will be shipped out to a foreign port, remarked and shipped back. Species are too easy to determine and are very regionally specific.

Another interesting factoid I just learned was the Canada imports more raw logs than it exports to the US. However this is regionally based. Most of our exports go from BC to the PNW mills whereas most of the imports are in Ontario and Quebec.

This dispute has been simmering since the early 1800's when there were military contingents eyeing each other over the Saint John's river in a dispute of log exports. There will some form of negotiated settlement, but I think that GWB is not secure enough in his political power to fight the US lumber lobby. And why would they want to negotiate. Any duty recieved goes straight to the US producers - early Christmas presents. Ultimately, I think there will some form of linkage that will force GWB to stand up, whether its natural gas, oil, electricity, water or some form of political support.

Interestingly, Weyerhaueser got hit with the largest duty. What many analysts expect is value of the Cdn companies will plummet and will the major difference in exchange, they will be bought up by American interests.

[swampwhiteoak]

Thanks Peter for the detailed info.  It is very difficult to compare the differences in pricing.  I have wondered if there are there barriers to entry in BC to forest products companies?  What about logging companies?

Bringing up National Forests is hitting below the belt.  I think less than 5% of our domestic softwood comes from NF anyway so it is pretty much a non-issue.  Some forests' timber programs turn a profit, so it is incorrect to say that every stick is subsidized.

I thought Bush was supposed to be for free trade.  If the US is really going to be for free trade than we are going to have to accept that other countries don't necessarily operate the same way we do.  Can't pick and choose among products.  I rather be giving Canadians $$ over the Russians or Scandanavians.    When Bush was in South America this last week he talked about opening up free trade to them.  I guess I wonder why we would give Chileans a free ride and stick the tariffs on Canada.

[L. Wakefield]

   This is a very good opportunity to investigate the agendas at work in international financial and political maneuvering. With countries where we are at definite odds on religious or cultural grounds (or on the verge of armed conflict) it is difficult to separate out the financial and political threads. But there is not that distance with our neighbors to the north. One feels that dishonesty or inconsistency in policies will become more obvious, and can be exposed and possibly corrected (yes, I can hear you saying 'as if!'..)

   I am not very sophisticated in this arena at all. But I feel that bad feelings and conflict increase on any level if there is not good faith dealing and integrity. It is true at your level of business- it's a very predominant theme in our threads. I would like to think that we could have international commerce- including competition- that yet allows for good-faith dealings and trust. (I guess soft fuzzy thinking like that is why part of me is a bunny wabbit and not a shark..)  :-/  lw

[PeterRennie]

The ability to purchase quota in BC is really pretty easy. Find someone who has quota to sell (everyone has a price). Make application to the Minister of Forests that you want to buy the quota and that you are going to be a good corporate citizen and follow the laws of the land. Pays your money and lets go logging.

The hardest step is the first one.

I don't know what the procedures are to transfer quota or licences in any of the other provinces are.

To be a logging contractor in BC requires very little except a contract with a timber licencee (the hard part) and some regulatory paperwork (the easy part). The regulatory part would include things like Worker's Compensation (a gov't agency). This would much easier as a BC company (buy a shelf company from a lawyer) than as a foreign company working here, but that can be done as well. But I don't know the details.

Appurtancy, this is the part of the BC Forest Act that requires that wood cut from a specific licence is to be cut at a specific mill. In practice, what really happened was the mill had to operate as the wood produced from the timberlands never fully matched the desired diet of the mill so lots of trading between companies occured. The purpose of the clause was really regional economic expansion, to force the companies to build and operated mills in the smaller centers to prevent all the wood from leaving an area to a larger center. This concept has been challenged and I don't think that there is the political will now to enforce it.

Cut control was another clause designed to ensure year round employment in both the woods and the mills.
  
Here are a couple of opinions from the Boston Globe:
http://www.boston.com/dailyglobe2/085/oped/Bush_s_crony_capitalism+.shtml

The Washington Post
http://www.washingtonpost.com/wp-dyn/articles/A59280-2002Mar20.html

[Ron Wenrich]

It is interesting to note that both the Canadian dollar and lumber futures dropped on the news of the softwood tariff.

The reason for the Canadian dollar drop would probably be due to lower trade with the US.

The reason for the drop in lumber would probably indicate a drop in the demand for lumber.  That could mean fewer housing starts.

[Tillaway]

I think one of the biggest reasons there is a calling for a tariff is that simply the US firms, with the west coast in particular, operate with more capital risk than the B.C. counter parts.  There are many if not most companies operating in this region that expanded their timber land holdings after the our National Forests stopped selling logs.  At this time land and stumpage prices sky rocketed fueled by Japans booming economy and a shortage of National Forest timber for the domestic market.

The result is that the US firms paid allot more for the stumpage than it is worth now.  The pacific rim economy has greatly slowed down with soft demand for logs and lumber produced by both Canadian and US firms.  The US firms are trying desperatly to stay out of bankruptcy and need higher lumber prices to stay solvent.

The Canadian firms don't have this risk since their stumpage is sold to them at a price that reflects the market and their operating efficientcy.  As Peter stated with the "cut control", they want to maintain year around employment.

[Ron Wenrich]

But, that is the way US businesses have been running for years.  Its a pretty lame excuse to say that you have blown a business forecast and expect someone else to pay for it.

In my area, there have been 6 mills that have shut down.  They paid too much for timber.  They bid on the timber and didn't expect the prices to drop off.  It was cheaper to go out of business then to cut the timber.  Its part of the learning curve and most of these mills were pretty new to the business.

In hardwoods, we have a pretty accurate forecast by looking at the softwood markets.  When they drop, we are about 6 months behind.  I knew things were going to get ugly when the softwoods dropped like a stone.

The large mills knew that their markets were sagging, since inventories were going up.  Japan has been in recession for nearly a decade, so the Asian rim market should not have been a factor.

What I didn't realize about the tariff is that there will be payments to US producers.  Will that money go for plant modernization, higher timber prices, or stock dividends?  I vote for the dividends.

[PeterRennie]

But the dumping charge is not being leveled by the timberland owners. It is being brought forward by the small independent sawmills of the South.

I'm still not totally sure how they will benefit. Higher prices will now make wood from the US marginal suppliers ie PNW more viable putting pressure back on the Southern mills.

I'm sure Regosta and his cohorts have thought through the long term ramifications of this action, but they have been pretty quiet about it.

A lot of analysts I have seen call this and the steel duties a tax on the American consumer to support inefficient industry players. Which is fine, lots of industries (agriculture) are supported. Why do the politicians have to try and hide it behind smoke and mirrors? Because their actions go against their principles?

[L. Wakefield]

   I hate to expose my vulnerable side by continuing to ask dumb questions, but the habit is so engrained by now :-[  

   Wood is NOT a perishable commodity. Where you were talking about the mills going under and the prediction of this being available by seeing inventories go up..the question is why not sit tight? The answer of course is that a going concern with employees and a debt structure can't do that. But that is precisely where the small business person can have a better advantage. Less risk.

   What I'm trying to get at is that the threat to the business is not one based on the condition of tangible, perishable goods- but rather resulting from a man-made problem. I can't quite call it artificial because the loss of jobs and threat of bankruptcy is real enough. But the basics are the forest, the harvestor, and the consumer. My feeling with the shipping out, turnaround, tariffs etc. is that there is an entirely needless and cumbersome superstructure loaded on the backs of both producer and consumer- who would be better off without it.  lw

[PeterRennie]

Debt payments - cash flow

Overhead payments required whether you operate or not.

These are some reasons why a company just can't sit and wait out the problems. True the trees keep growing, but the banker still wants his money.