Thursday, August 17, 2006

You call this an economic boom?

Some sectors of British Columbia's economy may be in an upswing, but the forestry industry faces continued challenges

Jock Finlayson

National Post

Can a province look forward to a sustained economic boom when profits are disappearing and thousands of jobs are at risk in its most important industry? That is a question British Columbians might usefully ponder as they watch the forest industry struggle in the midst of what most forecasters see as an extended upswing in the province's economic fortunes.

Despite some diversification, including the emergence of a growing upstream oil and gas industry and vibrant technology and film production sectors, forestry in many respects remains the workhorse of the B.C. economy. The value of the industry's sales -- including both solid wood and pulp/paper products -- should top $18-billion this year. Forestry supplies more than 40% of B.C.'s international exports and manufacturing shipments. It accounts for some 85,000 direct jobs, plus many more indirect ones once multiplier effects are taken into account. Even in the population-rich Greater Vancouver region, estimates suggest that forestry supports up to 120,000 direct and indirect jobs. Outside of southwestern B.C., it is the leading source of private sector income in scores of communities.

Governments also get their pound of flesh, and then some. Taken together, the myriad taxes, resource levies and fees paid to all levels of government by B.C.'s forest industry and its employees amount to about $4-billion per year.

As discussed in a recent report from the B.C. Competition Council, British Columbia's forest sector actually consists of three distinct but inter-related industries.

The Interior lumber industry is world competitive, with production costs in the first quartile and large, modern and highly efficient sawmills. It currently accounts for roughly four-fifths of the province's lumber production. Both shipments and revenues have increased since 2000. Thanks to the efficiency gains achieved through restructuring and new investment, until recently most Interior lumber companies were performing well, notwithstanding U.S. softwood tariffs and a 35% appreciation of the Canadian dollar since 2002. Looking ahead, the Interior lumber industry must prepare for a dramatic drop-off in timber supply as the still-spreading Mountain Pine Beetle infestation leads to lower harvest levels in the next decade.

In contrast to the Interior, B.C.'s Coastal lumber industry is in crisis. Revenues have sagged by 25% since the start of the decade, the industry continues to bleed jobs, and returns to shareholders have been virtually non-existent. With operating costs among the highest in the world, Coastal sawmills are underutilized, outdated and poorly configured to process the second-growth timber on which the industry increasingly must rely. The Coastal industry's productivity also suffers because it enjoys less labour flexibility than lumber companies based in the Interior.

Pulp and paper manufacturing is the third key component of the forest sector. Like their counterparts elsewhere in Canada, B.C.'s pulp and paper producers are grappling with the most difficult economic conditions in living memory. The rising loonie, higher costs for energy and transportation, punitive property taxes and ferocious foreign competition make for a painful combination that has taken a heavy toll on profits. There is also uncertainty over the industry's long-term fibre supply.

On top of this litany of challenges, tougher market conditions are in store for some parts of the forest sector. Export Development Canada predicts back-to-back declines of 4% to 5% in the value of B.C. forestry exports in 2006 and 2007, on the heels of 6.5% slump last year.

As U.S. housing starts downshift, B.C. lumber mills are feeling the pinch. In mid-August, lumber prices (spruce, pine or fir 2-by-4s) stood at US$280 per thousand board feet, down from US$365 in early January and an average of US$348 for all of 2005.

Few analysts anticipate an upturn any time soon. Current lumber prices, coupled with the impact of continued U.S. softwood tariffs, mean many BC Interior producers will soon be posting losses, increasing the likelihood of layoffs and temporary mill closures.

The near-term outlook is better in pulp/paper. Chinese demand is providing some price support. And most B.C. mills are getting a lift from access to huge volumes of low-cost wood chips generated by record timber harvests in the Interior, as the province strives to extract some value from vast stands of beetle-damaged trees. But domestic chip supplies -- the biggest input into pulp/paper production -- will dwindle as Interior harvest volumes are rolled back in a few years' time.

British Columbia today is characterized by a surfeit of government and business community cheerleading over buoyant job and real estate markets and a generally sunny economic outlook.

While most B.C. industries are enjoying favourable business conditions, it is time to pay more attention to the longer-term structural problems confronting the province, beginning with those afflicting the forest sector.

Jock Finlayson is executive vice-president of the Business Council of British Columbia.

>> Latest lumber prices can be found here: http://www.madisonsreport.com/keyprice.html <<