January 16, 2012

China's effect on softwood lumber in BC

The forest industry was the backbone of the economy of Terrace decades ago when it had several mills operating.  In 2001, the United States had a dispute around Canadian subsidies and USA imposed a countervailing duty tariff on all lumber from Canada, which is now known as the softwood lumber dispute, one of the most significant and enduring trade disputes in modern history. In other words, the United States felt that their domestic producers of softwood lumber couldn’t be competitive because of Canadian Government subsidies on softwood lumber so to even the playing field, taxed all Canadian lumber as it entered the country.  This had a huge impact on the City of Terrace, now all of the major mills are currently shut down and dismantled.  The closure of mills had the negative repercussions of residents being laid off and industrial tax revenue to Terrace declining.

In 2002, the Provincial Government began to explore China as material market and began developing this market.  The ground work by the Provincial Government has proven successful with their strategy of finding a new market in China.  In 2001, BC had zero lumber being exported to China and in 2011 exported close to $1.5 billion of lumber to China.  China now represents 30% of BC’s lumber exports.

China has been a sustainable market, even through uncertain economic times. In 2007, before the United States housing collapse, Tolko exported only 10% of their lumber and the remaining 90% stayed within North America.  In 2011, Tolko exported 47% of their lumber and North America only accounted for 53% of their lumber sales.  British Columbia actually exports more lumber to China than China’s direct neighbour, Russia.

As the BC softwood lumber industry advances, there is no doubt that China will be the most important market.  There are over 1.3 billion people in China with that number growing every day.  It is expected that there are over 218 million people in China moving from the country to a City.  With the infrastructure requirements and improvements required to satisfy this move, the demand for lumber will increase.

China has recently released a white paper, which is an authoritative report, which demonstrates how wood products will be used.  The Chinese Government recognizes that lumber is the most environmentally sensitive way to build and have become accustomed to BC lumber quality.  China uses all lumber regardless of quality. Hardy Wentzel, the Vice President of Sales, Marketing, and Logistics at Tolko states, “China has this stigma of being a low quality type of country, with low quality products.  But this is certainly not the case today where many of our consumable goods are manufactured in China from all qualities.  They have really adopted into the value proposition of using the full quality of the range by using the right quality of lumber into the right quality of product.”

Some economists theorize a hard landing for the Chinese economy, predicting a bursting housing bubble that will be far worse than the one in the United States, banks that are over leveraged and exposed to bad debts forcing failures, and inflation that spirals out of control. 

Many economists would disagree with this theory, China is a central communist government that controls the economy and manages and influences housing market.  There is strict household registration and lending practices, housing prices have controls and caps, and the government limits speculation by controlling number of units purchased with considerable down payments, often a 30% down deposit is required.  Major state banks are required to have cash reserves of approximately 21% - compared to US banks which had cash reserves of approximately 10%.

With China being the most important market for the softwood lumber industry in British Columbia, this will have significant effects on Terrace and the Northwest BC region.  Terrace is ripe with economic opportunity bolstered by support from Federal, Provincial, and municipal governments. With distinct advantages in: geography, industrial infrastructure, deep water ports and a highly experienced professional and technical labour force particularly in the logging industry; the region is ideally positioned for sawmill, pulp and/or paper mill, pellet mill or other wood processing investment.