Forestry demand forecast to soar
VANCOUVER - The head of the Forest Products Association of Canada is predicting the current slump in his sector to turn around in a few years as demand for wood products soars due to growth in the world's population and gross domestic product.
"The industry has fallen down a hole," Avrim Lazar, president of the association representing Canada's forestry companies, told a conference Thursday.
"If you stay in the hole you can't see the horizon. We see a horizon that is quite golden."
Lazar said growing demand coupled with land scarcity to grow crops for food and biofuel will lead to future growth in the forest industry. He believes the while the costs of food, wood fibre and oil won't be the same, they "will be equally influenced" by soaring demand.
Lazar was speaking at an annual forestry conference held by business consultants PricewaterhouseCoopers. The conference is being held at a time when forestry firms are reporting big losses due to low lumber prices, as a result of the collapse of the U.S. housing market, and a soaring loonie.
In a study released Thursday, the consulting firm said that the forestry sectors in the southern hemisphere and other emerging markets are prospering "due to their use of new technologies, fertile soil and low wood costs."
Those markets, which include countries in Central America, South America and Asia, are buying leading edge technology giving them the lowest production costs.
In particular, PwC said emerging markets are generating 40 to 50 per cent cash on sales versus less than 10 per cent for Europe and North America.
"South American producers have made significant investments in silviculture and production facilities in recent years and are especially apparent in the pulp sector where low-cost fibre has propelled the region into the forefront as a key supplier of market pulp," PwC said.
It also said low wood costs have become a prime competitive advantage in world markets for globally traded forest products, particularly in pulp.
The good news for Canada is that pulp prices are at their highest level since the 1995 peak. The catch is that those prices are in U.S. dollars, and the strong Canadian dollar has eroded much of the increase, along with higher chip prices, caused by sawmill shutdowns.
PwC also notes that newsprint is going through a "significant transformation" due to slower sales because of reduced newspaper circulation across North America.
However, U.S. newsprint prices are now sitting around US$634 per tonne, compared to US$558 last fall and US$604 a year ago.
The volatility in lumber and pulp has meant huge losses for the forestry sector.
PwC estimates that the industry in B.C. alone lost almost $750 million in 2007, before unusual charges of a further $500 million. West Fraser Timber (TSX:WFT) and Canfor (TSX:CFP), the two biggest operators in the province, together earned $1.3 billion less than 2006.
"It's not all doom and gloom for Canada," said Craig Campbell of PricewaterhouseCoopers.
"The demand is there, with global paper consumption expected to increase by almost three per cent per annum for the next 10 years. The tough economic times have reduced the number of producers, especially in North America, but those that focus on cost reductions and manage to weather the storm are poised to take advantage of the eventual turnaround in the sector that is expected sometime beyond 2009."
Overall, the Canadian forestry sector has been battered for about two years by job cuts, mill closures and widespread streamlining. Lumber producers have sought to cut costs and close money-losing mills in the wake of slumping demand from the battered U.S. housing market and rising costs of everything from gasoline and electricity, which has raised the cost of operations from coast to coast.
Giants such as Vancouver-based Canfor and Montreal-based Tembec (TSX:TMB) have cut production and laid off hundreds of mill workers to help whittle down unsold wood inventories.
Meanwhile, some companies - including AbitibiBowater (TSX:ABH) and Domtar (TSX:UFS) - have restructured or merged paper operations with major U.S. players in a bid to become more efficient.
This week, about 800 workers at two B.C. pulp mills owned by bankrupt U.S. forestry company Pope & Talbot Inc. (Pink Sheets:PTBT) are expecting to lose their jobs after the company's proposal to sell them to an Asian company fell through. The mills are currently being idled as the company plans to put them into the hands of a receiver.
Speaking on the economic outlook of the industry at the forestry conference, Patricia Croft, chief economist at investment company Phillips, Hager and North, said she believes we are only half-way through the downturn in the U.S. housing market.
Croft said the U.S. housing "recession" is at its worst level since the Great Depression of the 1930s. She also calls the housing market the "single biggest risk" in the current credit crisis, and believes the U.S economy itself has been in a recession since December.
Croft also believes the U.S. recession will be "longer and deeper than the consensus."
Meantime, in Canada, Croft believes the housing market is cooling, but that prices will rise an average three per cent in 2008 compared with 11 per cent last year.
She doesn't believe Canada's market faces the same threat as the U.S.
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