By: The Working Forest Staff
In contrast to the record-high lumber and pulp prices seen in 2018, weaker than anticipated global lumber and pulp demand for much of 2019 in combination with excess inventory levels gave rise to a sharp drop in market pricing for both lumber and pulp products in the current year. The deterioration in market conditions, in combination with ongoing fibre supply challenges and significant log cost increases in British Columbia (“BC”) resulted in extensive temporary and permanent sawmill curtailments across BC, as well as summer curtailments at Canfor Pulp.
On a more positive note, 2019 marked a year of transformational global diversification for Canfor with the acquisition of 70% of the Vida Group (“Vida”) in early 2019, and the Company’s continuing expansion in the US South, including the acquisition of Elliott Sawmilling Co., LLC (“Elliott”). For the 2019 year, the Company reported an operating loss of $294.3 million and a net loss of $2.10 per share, in sharp contrast to operating income of $608.6 million and net income of $2.78 per share reported for the year ended December 31, 2018. For the fourth quarter of 2019, the Company reported an operating loss of $59.6 million, halving the operating loss of $120.3 million for the third quarter of 2019. These results reflected improved earnings in the lumber and pulp and paper segments as global lumber and pulp markets showed signs of bottoming out through the current quarter and supply and demand fundamentals improved at the end of the year.
Reported results for the fourth quarter of 2019 include a net duty expense of $43.7 million, at a current cumulative effective countervailing duty (“CVD”) and anti-dumping duty (“ADD”) accrual rate of 29.24% (versus a combined cash deposit rate of 20.52%), compared to $53.5 million reported in the third quarter of 2019 at the same combined rate. Cumulative cash deposits paid to December 31, 2019 were $421.4 million. News Release 2 In early 2020, the US Department of Commerce (“DOC”) announced the preliminary results for the first period of review, which indicated that the Company’s preliminary CVD cash deposit rate was 2.93% for 2017 and 2.61% for 2018 (versus a cash deposit rate of 13.24%), while the preliminary ADD cash deposit rate was 2.02% for the entire first period of review (versus a cash deposit rate of 7.28% and an estimated accrual rate of 2.6%). Upon finalization of these rates (anticipated in the third quarter of 2020), an additional recovery, estimated at $140.6 million (US$105.7 million), will be recognized in the Company’s consolidated financial statements to reflect the difference between the combined accrual rate of 15.84% and DOC rates for the first period of review.
In addition, once final, the Company’s current combined cash deposit rate of 20.52% will be reset to the DOC rates based on the first period of review (currently estimated to be 4.63% based on the preliminary determination). Despite the reduced preliminary rates for the first period of review, no cash duties will be refunded to the Company until such time as the litigation regarding the imposition of CVD and ADD has been settled. Reported results in the fourth quarter of 2019 also include a net $19.9 million recovery in inventory write-down provisions and restructuring, mill closure and severance costs costs of $3.3 million. Adjusted operating income for the lumber segment for the fourth quarter of 2019 primarily reflected solid results from the Company’s European Spruce/Pine/Fir (“SPF”) operations, offset in part, by a more challenging quarter for the Company’s US South operations, largely a result of seasonally weaker prices across most grades and the impact of capital related downtime at several of its sawmills.
The Company’s Western Canadian operations continued to be impacted by prolonged market-related challenges despite a modest upward trend in Western Spruce/Pine/Fir (“Western SPF”) benchmark lumber prices, taking a further 115 million board feet of temporary production curtailments in that operating region during the current quarter. Results for the fourth quarter of 2019 in the pulp and paper segment principally reflected higher pulp shipments and lower pulp unit manufacturing costs, both factors largely attributable to increased production at Canfor Pulp Products Inc.’s (“CPPI”) Northern Bleached Softwood Kraft (“NBSK”) pulp and Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”) mills, following market-related pulp mill curtailments throughout the prior quarter. To a lesser degree, results also reflected modestly lower NBSK pulp unit sales realizations in the current quarter.
As mentioned, during the fourth quarter of 2019, global lumber market fundamentals showed a modest improvement, particularly in the US, where favourable macro-economic indicators, a moderate up-tick in North American home construction activity and steady demand in the repair and remodeling sector supported a measured recovery in lumber demand. US housing starts, on a seasonally adjusted basis, averaged 1,441,000 units, up 12% from the previous quarter. Single-family starts, which consume a higher proportion of lumber, were up 9%, while multi-family starts were up 20% compared to the third quarter of 2019. In Canada, housing starts averaged 202,000 units on a seasonally adjusted basis, down 10% from the previous quarter primarily due to low-trending multi-family starts in Eastern Canada. The modest improvement in overall demand was tempered by the impact of increased US South capacity and additional imports from Europe.
Offshore lumber demand for Western SPF lumber products remained muted through the current quarter, particularly in China, primarily reflecting the uncertainties resulting from the ongoing trade dispute between the US and China, while demand from Japan and other Asian markets remained steady. European lumber demand remained subdued through the current quarter, reflecting both Brexit uncertainty and weaker economic activity in several European countries, which together with increased supply of lower-cost fibre related to the spruce beetle outbreak in central Europe, resulted in continued pricing pressure for European SPF lumber. The average benchmark North American Random Lengths Western SPF 2×4 #2&Btr price was up US$24 per Mfbm, or 7%, from the previous quarter, at US$380 per Mfbm, with similar increases also seen across most Western SPF widerwidth dimensions. As a result, Western SPF lumber unit sales realizations also experienced a moderate up-tick quarterover-quarter, further aided by a higher-value sales mix. Southern Yellow Pine (“SYP”) lumber unit sales realizations were modestly lower than the prior quarter as a relatively flat SYP East 2×4 #2 price, at US$406 per Mfbm, combined with more pronounced declines in certain wider SYP dimensions.
The average European indicative SPF lumber benchmark price (an internally generated benchmark based on delivered price to the largest continental market), at 3,540 Swedish Krona (“SEK”) per Mfbm, was down SEK 112 per Mfbm, or 3%, from the previous quarter. The Company’s European SPF unit sales realizations for the fourth quarter of 2019 were moderately lower than the previous quarter reflecting this decline in the European benchmark pricing. 3 Total lumber shipments of 1.22 billion board feet were broadly in line with the previous quarter, principally reflecting increased production in Western Canada and at the Company’s European operations in the current quarter, partially offset by a build in inventories in Western Canada arising from an eight-day rail strike later in the period.
Total lumber production, at 1.25 billion board feet, was up 6% from the previous quarter largely reflecting reduced market-related downtime in BC and increased operating days at the Company’s European operations, following the seasonal downtime taken in the prior period. Production in the US South was down slightly as improved productivity was offset by capital-related downtime at the Company’s Camden and Conway sawmills in the current quarter. Lumber unit manufacturing costs in the fourth quarter of 2019 were broadly in line with the previous quarter, as the incremental effect of lower production volumes in the US South, was largely offset by lower European lumber unit manufacturing costs, reflecting a combination of log cost declines (correlated with European SPF lumber prices) and the benefit of lower unit fixed costs due to increased operating days in the current period. Log costs in Western Canada and the US South remained broadly in line with the previous quarter. In June 2019, the Company announced its agreement to sell its forest tenure associated with its Vavenby sawmill to Interfor.
Final approval and completion of the sale is currently anticipated in the first quarter of 2020. Global pulp prices remained at depressed levels through the fourth quarter of 2019, with weak pricing in Asia spilling over to North America and Europe as the quarter progressed. Purchasing activity from China picked up during the quarter, but elsewhere demand remained weak, particularly in Europe, contributing to a slight increase in global inventory levels by year end to 37 days of supply.
US-dollar NBSK pulp list prices to China averaged US$588 per tonne, broadly in line with the prior quarter, reflecting the aforementioned demand and supply factors. CPPI’s NBSK pulp unit sales realizations were modestly lower than the prior quarter, principally reflecting lower prices to North America, where list prices (before discounts) declined US$55 per tonne, or 5%, quarter-over-quarter. BCTMP unit sales realizations showed a modest increase from the previous quarter as BCTMP prices edged upwards in the latter part of the quarter. Energy revenues increased quarter-over-quarter, principally reflecting seasonally higher energy prices combined with an increase in operating days in the current quarter, due to the pulp mill downtime taken in the summer months.
Pulp production was 286,000 tonnes for the fourth quarter of 2019, up 112,000 tonnes, or 64%, from the previous quarter, largely reflecting phased summer curtailments taken in the previous quarter, offset in part by an extended market-related curtailment in early October at CPPI’s Prince George NBSK pulp mill (“PG Pulp mill”). To a lesser extent, improved productivity at CPPI’s PG Pulp mill and at its Taylor BCTMP mill, which set a new record-high for production in the current quarter, largely offset kiln-related operational disruptions at CPPI’s Northwood and Intercontinental pulp mills in December. CPPI’s pulp shipments totaled 267,000 tonnes, up 54,000 tonnes, or 25%, from the previous quarter, principally reflecting the aforementioned increase in pulp production quarter-over-quarter, offset in part by a rebuild of pulp inventories to more normal levels in the current quarter after a material drawdown in the previous quarter.
Pulp unit manufacturing costs were down significantly from the prior quarter, primarily reflecting increased production offset, in part, by seasonally higher energy costs. Fibre costs were slightly lower than the previous period, principally driven by lower market-based prices for sawmill residual chips (linked to falling Canadian dollar NBSK pulp sales realizations), which more than offset an increased proportion of higher-cost whole log chips, reflecting ongoing sawmill-related fibre supply disruptions.
Commenting on the Company’s 2019 and fourth quarter of 2019 results, Don Kayne, Canfor’s president and chief executive officer, said “The challenging global lumber and pulp market conditions of 2019, particularly across all our BC operations, overshadowed the transformational global diversification undertaken by the Company during the year, with the acquisition of Vida and the expansion in our business in the US South. As we move into 2020, BC continues to face difficulties on many fronts, and we remain focused on working diligently to minimize the financial impacts of these constraints to our BC operations and overall business. In addition, we look forward to further leveraging benefits from our diversification strategy, while maintaining a focus across all our operations on improving productivity, maximizing fibre utilization and reducing costs and debt levels, so that we are well positioned to fully capitalize on improving market conditions through 2020.”
Looking ahead, the recovery in demand in the US housing sector experienced late in the fourth quarter of 2019 is anticipated to continue into the first half of 2020, in part reflecting strong US housing starts coupled with seasonally stronger demand during the traditionally busy spring building season, steady projected demand in the repair and 4 remodeling sector and growing demand for mass timber. Increased supply into the North American market is projected to somewhat temper North American lumber prices for 2020, reflecting the combined impacts of incremental European lumber imports into the US and further incremental capacity coming online in the US South.
For the Company’s offshore lumber markets in Asia, particularly Japan, demand is anticipated to remain stable through 2020 and prices are projected to return to more normalized levels. In Europe, pricing in the first quarter of 2020 is anticipated to remain broadly in line with the fourth quarter of 2019, with a modest up-tick in pricing projected during the second quarter of 2020, reflecting improved demand. While global softwood kraft pulp markets are projected to remain fairly challenging for the first part of 2020, market conditions and prices should gradually improve through the balance of the year as global inventories become more inline with demand.
The potential impact of the emerging coronavirus on global pulp demand, particularly from China, is uncertain, and CPPI continues to monitor the situation. Bleached kraft paper demand is currently anticipated to stabilize in the first half of 2020 as inventories within the market return to more normalized levels.
Given the fibre dynamics in the BC Interior, fibre costs are projected to remain under pressure, particularly for incremental pulp log supply. On a more positive note, however, as a result of additional sawmill residual and pulp log fibre supply secured in the latter part of 2019, CPPI is not currently anticipating any material fibre-related curtailments in 2020. CPPI has no maintenance outages planned for the first quarter of 2020. A maintenance outage is currently planned at the Northwood NBSK pulp mill in the second quarter of 2020 with a projected 30,000 tonnes of reduced NBSK pulp production. In addition, maintenance outages are scheduled at the Intercontinental NBSK pulp mill and the Taylor BCTMP mill in the third quarter of 2020 with a projected 10,000 tonnes of reduced NBSK pulp production and a projected 5,000 tonnes of reduced BCTMP production, respectively.