Log Exports

New Forestry Investments Mean Stronger Competition for BC Logs

Island Timberlands terminal

Island Timberland’s expanded terminal in Nanaimo, BC.

“Coastal forestry companies in British Columbia are re-investing in their operations”, says the first line of a recent post by Rick Jeffrey, president and CEO of Coastal Forest Products Association.

The story goes on to explain that “over the past five years, during some of the darkest economic times in the history of our industry, Coast Forest companies invested an estimated half a billion dollars in operations and systems upgrades and improvements.”

Island Timberland’s recent upgrade to their log handling facility in Nanaimo, B.C. is a perfect example of the positive impact re-investment has on the future of coastal forestry.

The goal of the terminal capacity expansion project was to increase the open area of the dock and create the option of loading logs directly from the dock onto ships. The usual practice of loading logs from the water in British Columbia limits operation time to a single daylight shift.

Now, for the first time in British Columbia, logs can be loaded over two shifts, increasing efficiencies and reducing vessel turnaround time to something comparable to global competitors.

These kinds of investments bring a competitive edge that has a positive impact across the sector. It helps businesses, employees, suppliers and contractors operate with a more efficient business model that better serves their customers, and ultimately, increases competitiveness on a global scale.

The investment decisions forestry companies make create ripple effects across coastal communities. Rick Jeffrey explains, “Increasing efficiency means coastal forestry companies in BC are more competitive and can survive through tough business cycles to live another day. When these competitive forestry companies stay in business, the jobs they support remain and communities stay vibrant.”

Island Timberland’s expansion project is no small accomplishment. According to a recent article, by the Chamber of Shipping BC, the project involved “37,000 cubic meters of dock infill created by blasting rock behind the terminal to create 5,900 square meters of new yard space. This was supplemented by 5200 tons of riprap rock and 6500 tons of filter rock. A further 5000 square meters of dock yard area was created using rock from the upper yard blasting. Total fill required over 3000 trucks of material and paving new yard space required 1100 cubic meters of asphalt in 105 trucks.”

PFLA warmly welcomes any new investments, or wood processing business ventures, that bring the fair value of international log prices closer to the individuals, families, and communities who work, or have a stake, in the responsible stewardship and investment of BC’s private forest lands.

Log Blocking—Log export restrictions cause grief for B.C. loggers

Brian Frank, President and CEO of TimberWest, talks about log export restrictions in the July/August 2014 edition of Canadian Forest Industries magazine. We’ve excerpted the article below for your interest, but you can find it online at the Canadian Forest Industries official website.

 

The topic of “Log Export Restrictions” (LERs) has long engendered strong opinion and emotion in B.C. As a recent recruit to the B.C. forest sector, I’ve been focused on trying to understand this complex issue. My company is the largest owner of private forestlands in Western Canada and relies on log exports for survival.

The reality is that LERs are wrapped around a complex set of issues in Coastal B.C. that most people don’t want to talk about – let’s call them inconvenient truths. Those inconvenient truths include government price controls, subsidized saw and veneer mills, and subsidized harvesting on public lands.

Both the B.C. provincial and Canadian federal governments have a log export restriction policy designed to support a “domestic first” approach to log supply – which, on the surface, sounds like a fair and reasonable approach. The policy uses a “surplus test” to provide domestic buyers the first right to purchase or “block” logs proposed for export.

But dive a little deeper and you’ll find that, under this policy, proposed exports and domestic log prices are reviewed by a non-transparent, government-appointed committee. There is no negotiation on price with the seller, the domestic buyer simply makes an offer on a proposed export and the committee considers whether that offer is “fair” without regard to international log or lumber prices.

In some cases the domestic log price deemed “fair” by this committee is less than half of what the international market would pay for the same log in the same location.

Perhaps even more troubling for my company, and others, is that the price for a log in the domestic market, in most cases, is below our cost to produce.

So why would we harvest trees that take sixty years to grow, and sell them at a loss into the artificially depressed domestic market? Because, only after we satisfy domestic demand are we able to obtain an export permit and sell to international customers at a substantially higher price and profit. Only export sales generate a profit margin that supports investment and jobs.

Domestic sales from public lands are also transacted at this artificially depressed domestic price. This contributes to an artificially low stumpage rate, which deprives the B.C. government and citizens of much needed tax revenue. The citizens of B.C. and private landowners are subsidizing log processors in Coastal B.C. Furthermore, we are all subsidizing the harvesting of logs on B.C. public lands through artificially low stumpage rates.

So what have log export restrictions done to support the domestic sawmill industry? Over the past twenty-five years, almost sixty per cent of the sawmill capacity on the coast of B.C. has been permanently closed. Moreover, B.C. companies are buying sawmills throughout the U.S. Canadian companies that have abandoned or avoided investing in Coastal B.C, now control almost 20 per cent of the sawmilling capacity in the U.S. south. It’s not a pretty picture.

At TimberWest, we sell over 50 per cent of our production into the domestic market at a loss, so without log exports we would have no cash flow, no operating profits, no business, no economic activity and no jobs. We sell over three million cubic meters of logs per year and support almost 3,000 direct and indirect jobs.  We are prepared to serve the domestic market on a preferential basis at true market prices. But our business model is imploding under the existing government policy.

As our export sales decline, we will soon face the prospect of curtailing our operations to protect the value of our trees. One of the unique features of private forest land management is that you can do nothing and still generate a return on investment while watching your trees grow and waiting for better times.

Please visit the Canadian Forest Industries website for the original version of this article.

NEW STUDY: The Fraser Institute on Log Export Policy for B.C.

Screen Shot 2014-06-24 at 9.57.59 AMFair trade for logs is one of PFLA’s 4 Key Policy Priorities. Because part of our mission is to encourage informed discussion on important policy matters, from time to time, we draw your attention to relevant materials that add depth, nuance and information to the discussion.

On June 24, 2014, the Fraser Institute released a new study by Joel Wood, Log Export Policy for British Columbia. For your interest, we’ve included the press release below with links to the complete document.

Ban on Log Exports from British Columbia May Cripple Industry, but Export Quotas May Help

VANCOUVER—A ban on log exports would likely hurt B.C.’s forestry and logging industry, concludes a new study released today by the Fraser Institute, an independent, non-partisan Canadian public policy think-tank.

“An outright ban on log exports from B.C., as advocated by many union leaders, environmentalists and politicians, would likely cause economic damage, particularly to B.C.’s coastal regions where the majority of B.C. log exports originate,” said Joel Wood, study author and senior fellow at the Fraser Institute.

Instead, the study, Log Export Policy for British Columbia, highlights a possible “export quota policy,” which would allow log producers to export a fixed amount of logs, and notes the many restrictions on log exports and their impact on the industry.

The provincial government owns most of B.C.’s forests and sells timber to the private sector for processing. Therefore, as an active business partner, the government should seek the highest price for its product. But government restrictions limit exportation.

For example, before exporting a log, log producers must first offer the log to domestic buyers, then a government committee decides whether the offer is fair.

“The current log export process is wasteful, adds significant delays, and creates uncertainty for logging companies. An export quota policy, however, would streamline the process and eliminate delays and uncertainties,” Wood said.

Moreover, limits on log exports increase supply in the domestic market and drive down domestic prices.

For example, in 2011, B.C.’s forestry and logging sector contributed $1.77 billion to the province’s GDP (the total dollar value of all goods and services produced in B.C.). That year, coniferous logs sold domestically on the Vancouver log market for $74.28 per cubic metre while exports sold for $108.35. Only seven per cent of the 2011 log harvest was exported, despite foreign market demand for B.C. logs.

Finally, the study notes that removing restrictions on log exports as part of a trade agreement with China, for example, could provide leverage for negotiators and benefit both British Columbia and Canada.

“A complete ban on log exports, while politically beneficial for many politicians, may cause unnecessary damage to one of British Columbia’s premier natural resource industries,” Wood said.

“If policy-makers in British Columbia want to maximize logging’s potential, they should measure the costs of delay and uncertainty imposed by the current export approval process and work to reform the process for the benefit of British Columbians,” Wood said.

The goals of the paper are three-fold:

  1. Provide an overview of British Columbia’s current place in the global market for logs.
  2. Provide a concise overview of the many rules and regulations, both provincial and federal, that restrict log exports in British Columba.
  3. Focus on the Coastal region and compare the welfare effects of three possible new policy options for exporting logs from British Columbia: an export ban, an export quota, and free trade in logs.

You can find the complete paper online: Log Export Policy for British Columbia.

Douglas-fir Log Prices: International vs. Domestic Markets

In response to an earlier post, comparing hemlock price changes with corresponding forest products, one reader asked: “What’s the deal with Douglas-fir?”

We thought it would be interesting to consider what kinds of log prices can actually be obtained selling logs at local BC prices, or at the international market rate.

This article features the best available real prices during the first quarter of 2014.

We believe trees deserve respect, and that wood is valuable and that the risks and challenges faced by tree growers during decades of care and nurturing should be rewarded. Bottom line, the message here is that current BC log export policy significantly suppresses the log prices available to tree growers and unnecessarily complicates the business of growing and harvesting trees. Our job is to illustrate how bad policy negatively impacts the stewardship of private forest lands and subsidizes mills, and we hope to raise awareness and stimulate some further discussion.

Each photo below is an image of a particular Douglas-fir log sort. We pinned information to the logs to identify the species, what kind of log it is and what kind of forest product (end use) it will potentially become. We also included domestic and international prices, to illustrate the point that every log sold domestically below the international price is a direct transfer of value from the tree grower to the buyer, and hence a direct subsidy to BC mills.

Douglas-fir log

 

Douglas-fir log

 

Douglas-fir log

 

The Federal Surplus Test: How Policy Becomes Subsidy

The first post of our “Fair Trade for Private Logs” series asked the question: How is it domestic log prices flat line while forest product markets rise? Because this is an important question for BC’s forest owners we went back to the drawing board, crunched some more numbers, and arrived at an up-to-date graph to help illustrate the point further.

graph shows price change for hem gang logs and 2x4s

What does the graph show?

The above graph depicts price changes (in percentage) from February 2012 to January 2014.

The lines at the bottom of the graph represent the prices log producers receive from local mills for Hemlock gang logs. ‘Gang’-sized logs are small (8 to 11 inch) second-growth Douglas-fir, Hemlock and Cedar saw logs that typically account for about 60% of coastal private land harvest production.

The lines at the top of the graph represent the international prices domestic mills receive for the forest products they produce from the Hemlock gang logs. If you’re not familiar with the language, 2×4 # 2&Btr refers to common construction grade 2x4s.

The linear series represents general trends, while the dynamic series charts actual data points.

This brings us to our original question: why is the trend for logs only slightly up, while the trend for lumber is significantly up?

The surplus test artificially suppresses domestic log prices.

The disconnect between lumber and log prices, illustrated above, is a symptom of a policy framework that suppresses BC domestic log prices and provides a direct subsidy to domestic log processing industries. By imposing government intervention in place of supply and demand market forces, the policy results in a direct transfer of value from BC tree growers to BC mill operators.

The surplus test is outdated and unnecessary.

The rationale for the most recent (1998) iteration of the federal log export restrictions (Notice to Exporters 102) was fear of a shortage of available logs for processing in BC. The data below shows the coastal log harvest in 2013 significantly exceeded processing capacity. In other words, there was a significant log surplus.

Total coastal log harvest:       18.6 million cubic meters

Coastal mill consumption:     12.0 million cubic meters

Harvested timber volume exceeds coastal mill consumption by 6.6 million cubic meters and confirms there is more than enough timber available to meet coastal mill needs.

Under log surplus conditions, to maintain a surplus test for logs from private land, using domestic not international log prices, serves only to:

  • suppress log prices
  • transfer value from growers to mills
  • provide a direct subsidy to lumber and veneer producers

Private growers are happy to sell logs into the domestic market at competitive international prices, but selling our products at a loss, and subsidising other sectors, is not sustainable.

The surplus test subsidizes lumber producers at the expense of log producers.

By cooperating to maintain a federal surplus test program that allows domestic buyers to use artificially suppressed domestic log prices to block export permit applications, both the federal and provincial governments are complicit in a massive price suppression program.

If BC mills were competitive, and BC domestic log prices were internationally comparable, we would have a thriving, healthy log processing industry. Instead, we have a situation where private forest operations are forced, by outdated policy, to directly subsidize BC lumber producers.

The surplus test contradicts the federal government’s position on free trade.  

This short-sighted policy not only suppresses the value of private land, the trees we grow and the logs we harvest, but it also aggravates the ongoing softwood lumber dispute between Canada and the U.S.

“We’re in an era where we are not going to win by trying to protect sectors. We have got to get out there, we’ve got to compete with the best and we’ve got to win.”

Prime Minister Harper, Vancouver, March 13th, 2014.

Encouraged by the recent steps government has taken towards free trade, we look forward to joining grain farmers, and other sectors, who enjoy the opportunity to compete with the best. BC’s private forest owners aren’t asking for a subsidy from other sectors, or a government handout, or any taxpayer support. We just want fair trade for logs and the chance to compete.

Domestic Log Prices Flat Line While Forest Product Markets Rise

How is it domestic log prices flat line while forest product markets rise? The short answer: Log export restrictions continue to hurt log producers, even though the market for forest products has improved considerably.

As U.S. construction activity increases, and the demand from Asia holds, media stories report a strong resurgence in the forest products industry after a long lean period. With this resurgence comes an increased demand for forest products, and a rise in lumber, veneer, board and pulp prices.

Given such encouraging news, you might assume things look good for B.C. mills in the business of processing these forest products. By logical extension, you might also assume, if things are good for the mills, they must be good for the people in the business of producing and selling the logs necessary to make the products.

Unfortunately, this is not the case. Despite a significant rise in forest product prices (especially lumber and veneer markets) the domestic prices offered for the logs used to make these products have barely budged.

How does this happen? Currently, the log export permitting surplus test enables domestic mills to obtain all the logs they need at domestic, not international prices. This is a substantial barrier to a healthy, competitive log market on the B.C. coast.

PFLA continues to actively advocate for progressive changes to log export policy to allow B.C.’s forest owners to obtain internationally competitive prices for our products.

We’re putting together more detailed information to fully illustrate the problem, but in the mean time, here’s one example that clearly shows how B.C. log producers are prevented from reaping the benefits of a worldwide price increase for forest products.

graph shows changes in hemlock prices

The graph above depicts price changes (in percentage) from February 2012 to February 2013.

The bottom, flatter line represents the price log producers receive from local mills for a particular Hemlock sort. The top, dynamic line represents the international price mills receive for the forest products they produce from the same Hemlock sort.

Because the log export permitting surplus test enables domestic mills to purchase certain Hemlock sorts at almost half the international price, forest owners are prevented access to competitive, international prices and the kinds of gains represented by the top, dynamic line.

Stark disparities like these are unsustainable for forest owners on the B.C. coast. We look forward to the day we can sell logs domestically to competitive, thriving mills without being penalised.

Log Exports: More Food for Thought

log exports Log export markets play an important role in sustaining BC’s forest economy. Log exports are, and always have been, an integral part of a complex mix of factors that make up the coastal forest industry. Here at the PFLA blog, we post about log export policy because it’s an issue that directly affects our membership.

Because part of our mission is to encourage informed discussion on important policy matters, from time to time, we draw your attention toward articles we think you’ll find interesting—articles that add depth and analysis to the discussion or do a particularly balanced job portraying the nuance and complexity of log export policy.

Recently, we’ve come across three articles that match this description. The first two are from the January/February 2014 issue of “BC Forest Professional”— a bi-monthly publication produced by the Association of B.C. Forest Professionals — and the third is printed in the December/January 2014 issue of “Take 5″— a monthly news magazine published for mid-Vancouver Island communities.

For your interest, we’ve included a short excerpt from each article below with a link to the complete text documents.

Log Exports: Perspectives from a Generalist (pg. 12)
by Rick Monchak, RPF

… “There are two basic, important points about log exports that I find most folks are not aware of. First, most logs that are exported, including those from private land, must first be offered to the domestic market; they need to pass a surplus test. In other words, no BC mill wants to purchase these logs. No other province has this test; only in BC do we put up this hurdle. And it’s important to note the offered price is the domestic price, not the export price. This brings us to the second point — there can be a 100% or more difference between these two prices. And usually, the cost of supplying logs to the market is somewhere in between these prices. For the most part, companies lose money selling to the domestic market and make money selling to the export market.” …read more…>>

 

Export Report: An Overview of Coastal BC Log Exports (pg. 10)
by Dan Higgins, RPF

… “The ability to export logs at a premium allows the forest industry to log more of the timber profile profitably. Prior to the opening of the Chinese log market, second growth hemlock was undesirable as a species to harvest due to its low market value, so hemlock was generally avoided in favour of higher-value red cedar and Douglas-fir stands. Today, export China prices are on equal footing with China grade Douglas-fir, opening up more harvest opportunities and restoring the species balance of the coastal timber supply.” … read more…>>

 

Log Exports BC
by Rick Koslolofski

… “If a forest company or land owner wishes to export timber from provincial land of any kind, be it private land or a provincial forest tenure, the timber must be harvested and contained in a parcel, then the information on the parcel is submitted to an electronic system managed by the Ministry of Forests where the parcel is advertised as surplus for domestic production. If a domestic sawmill wishes to purchase this timber, they have first rights to do so, at fair market value, based on the past three months average domestic selling prices (not the higher export selling price). If, after a two-week advertising period, no domestic mills offer to purchase the timber the owner can sell the logs to an exporter. The owner pays the province a “fee in lieu of domestic manufacture” of approximately seven dollars per cubic meter (roughly $210,000 for one full freighter of logs).” …read more…>>