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BC Forest Industry in Crisis – A Contractor’s Perspective

November 1st 2019




BC Forest Industry in Crisis – A Contractor’s Perspective,

Greg Munden is the owner of Munden Ventures Ltd., a 4th generation log harvesting, trucking and commercial vehicle maintenance operation based in Kamloops, British Columbia. As a Past Chairman of the British Columbia Trucking Association (BCTA) and current Secretary/Treasurer of the Canadian Trucking Alliance (CTA),Greg spends a good deal of his time working on industry issues, including the current crisis in the BC forest sector.

Over the past several months, the forestry sector in British Columbia has been enduring what is, arguably, an unprecedented crisis. With announcement after announcement of mill closures and curtailments, even the most astute and knowledgeable players in the industry are finding it hard to predict the future, or present solutions.

 One thing is for sure, the “new normal” will be a smaller forestry sector. The impact to direct employment, from mill workers to harvesting and trucking contractors, will be significant. What will be even more significant is the long term impact to spin-off employment that stems from the forest sector, as well as the impact to small town British Columbia.

A 200+ log truck convoy made up of trucks and forestry workers from around the province converged on downtown Vancouver in September 2019 and brought a physical reality to the scope of the problem facing BC.

Issues

While there is not one single issue creating the problem, there are a few key things creating the perfect storm in forestry. This blog provides one 3rd generation harvesting and trucking contractor’s perspective on the current situation, and what should be done about it.

Countervailing Duties

Once again, the US has imposed significant tariffs on the Canadian lumber business – as much as 24\\\\\\\% assessed against some BC producers this summer. And…once again, the NAFTA panel responsible for reviewing the validity of the US claim of a subsidized lumber industry, has found in favour of Canada. Of course, that isn’t enough for the US to remove the tariffs, it is only the opening round in what inevitably becomes a delay tactic as the decision is appealed and likely ends up in front of a panel of the WTO (World Trade Organization).

It doesn’t matter that in every past example the ultimate decision has sided with Canada, the damage to the Canadian lumber business in an environment of modest lumber prices is done – and the sector contracts.

Timber Supply

After a decade of record harvesting activity as a result of the end of the mountain pine beetle epidemic, the government’s recent reassessment of the long term timber supply, coincidentally at the same time as modest lumber prices are combined with US countervailing duties, is the 2nd element contributing to the perfect storm.

Of course, we all knew this day was coming. What the harvesting and hauling contractor group, in many cases, didn’t realize was the scope of the cut reductions coming. The contracting group didn’t recognize, or were not provided the information, to expect up to 45\\\\\\\% cut reductions in the Caribou and Interior regions of BC. A number of licensees (arguably much more aware of what was coming) were disingenuous in encouraging contractor growth, or even creation, as late as the 2018-2019 season, putting many contractors in serious jeopardy given the size of the rollback in volumes.

Contractors, generally speaking, support the need to balance cut levels with long term sustainability. In fact, contractors are likely the most environmentally sensitive groups of people in the province – after all, not only do they depend on the forest for their livelihood, they are often outdoors people at heart, playing in the forest during their time off.

Many of those contractors have seen significant reductions in what has been one of their most valuable assets – their harvesting contracts, with no compensation for the loss of volume and no prospect for replacing the work. Of course, this is the inherent risk in owning a business. Unfortunately, this is a business where most of these contractors have paid significant amounts for their harvesting/hauling contracts (in most cases $8-$12/m3 for harvesting volume alone),not to mention the capital intensive, high cost equipment needed to actually produce logs.

BC Stumpage System

Arguably the most serious and unique situation facing the BC forest industry is the stumpage system. Comparing the BC forest sector to the Alberta forest sector, given the same economic realities of the current market conditions described above, still sees the the Alberta sector booming and running flat out. No Alberta mill curtailments or closures. The big difference? The calculation of stumpage.

The BC stumpage system, a complicated formula that I won’t try to explain in detail in this blog (nor do I totally understand),has one fundamental issue – it trails the market by 300 days. Conversely, the Alberta stumpage formula trails the market by only 30 days.

This very significant fundamental difference allows the Alberta system to adjust to current market pricing within a month. In the current environment of dramatically lower prices than 12 months ago, the Alberta forest industry is presented with a significant advantage over the BC forest sector which is paying stumpage based on record market prices from a year ago.

Seems simple – let’s change to match the Alberta system, right? Unfortunately, our government is so concerned about the US perception of a change to our stumpage system, they are frozen and won’t act. A change to the BC stumpage system would, no doubt, attract negative attention from the US and certainly provide fodder to their “contention” that the Canadian lumber business is subsidized.

Of course, failing to act, may mean that there is very little happening in forestry to worry about going forward.

The Solution?

There is no single solution – no silver bullet. Certainly, the fundamental laws of supply and demand are the most significant influence on pricing, and the ability for the BC forest sector to be profitable. Demand is not what it was a year ago, influenced mostly by the US housing market. That said, demand is still reasonably healthy; the US economy reasonably robust. Even lumber prices, absent the US tariffs, would be manageable for most mills.

The annual allowable cut, while reduced to levels most contractors would never have contemplated, is set at a level that provides for sustainability. This is a concept that, while certainly hard to navigate from a contractor business perspective, is understandable and conceptually supported by the industry. Unfortunately, the timing couldn’t have been worse. Phasing those reductions in over a period of 2-3 years, rather than 2-3 months, would allow the licensee and contractor base to adjust to new cut levels in a responsible way, over time.

What is not understandable or acceptable is a stumpage system that is out of touch with the realities of the market place. What is also not acceptable is a government that refuses to make the tough decision to fix the problem for the long term betterment and sustainability of the industry. Sure, we will endure the wrath of the US lumber lobby, but our system and industry is currently broken and the pain is already at unconscionable levels.

Many would like to blame the current government for the stumpage issues we are enduring. This is not a one party issue, and equal responsibility can be placed on previous governments in failing to proactively deal with this issue. Regardless, it is incumbent on the party in power to be bold in making decisions to address the issues that the province faces.

In the meantime, the BC forestry contractor base has sat idle, in some cases, for months. Many have been forced to renegotiate their equipment loan agreements with their financial institutions to add skip payments – and many have now gone in to request round 2 of financial reprieve from the banks. A large number of contractors have been forced to relocate their operations to Alberta and Saskatchewan in order to find work and survive (did I mention that we have the same market conditions with the major difference being how stumpage is calculated from Province to Province?).

Major BC forest products companies continue to acquire US-based assets and reduce their investment in BC. Can you blame them? BC is not providing a positive environment for investment. Many of these companies now have as much or more US milling capacity as they have in Canada, diversifying their risk away from the BC system.

Action is needed now by our provincial government in order to salvage a forest sector which is running perilously close to devastation. A fundamental change to the BC stumpage system would be an excellent place to start

 

Interested in chatting more about this or other industry topics? Email me at gmunden@mundentrucking.ca 

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