By: The Globe and Mail
One of British Columbia’s biggest forest companies, International Forest Products Ltd., acquired four new mills in December. The purchase by Interfor, as the company is better known, was a strong demonstration of growth.
Forestry will be one of the bright spots featured in the B.C. budget that will be tabled on Tuesday by Finance Minister Mike de Jong. It will be trumpeted as a comeback commodity that delivers something in the order of $1.4-billion to provincial coffers. After a brutal slump, the province’s forest-product exports have bounced back, up more than 60 per cent over the past five years.
There is one small problem with the storyline: Interfor’s new acquisitions are all in the United States. There is a recovery in British Columbia, but beneath the surface the industry is preparing for new challenges.
The government was happy to take credit for the recovery in the Feb. 10 Throne Speech. “In forestry, your government has focused on forging relationships with new markets. … This strategy has paid off.”
The B.C. Liberal government had originally hoped to have a liquefied natural gas plant in operation by this year, but in the absence of even a solid investment decision, its attention has returned to the industries that are paying the bills. Happily for Mr. de Jong, who is determined to deliver another balanced budget, forestry this year is looking good.
The outlook, however, is not so rosy. The industry is divided into two distinct entities, the Coast and the Interior. Right now, the Interior accounts for almost two-thirds of forestry revenues, but it is sliding over the crest of a roller coaster. The drop has already started, but is about to pick up speed.
Shares in Interfor have risen nearly 90 per cent over the past year. The enthusiasm from the market reflects the company’s diversification and Interfor is not alone in increasing its U.S. footprint.
Ten years ago, three of the province’s largest forest companies owned a total of 38 mills in British Columbia and three in the United States. Today, Interfor, Canfor Corp. and West Fraser Timber Co. Ltd. retain just 24 mills in the province, but their collective U.S. holdings now include 36 mills.
“We are heading out of the biggest salvage effort in B.C. history,” explains James Gorman, president and chief executive officer of the Council of Forest Industries, which represents the Interior. Salvaging the timber ravaged by the mountain pine beetle has kept the industry afloat through some tough times. Now, just as rising housing starts in the United States and a low Canadian dollar combine to boost exports, that wood is running out.
“You have too many mills chasing too few trees,” he said. The annual allowable cut has already started to drop off, but in the next ten years, the supply of timber in the Interior will be reduced by one-third.
“Our industry needs inexpensive power and we need a supply of logs in front of our mills every day,” Mr. Gorman said. “On the fibre side, we are in a crisis,” and cheap power is becoming a fond memory. B.C. Hydro rates have been climbing steadily, but the cumulative impact is a killer. Between 2008 and 2018, if the current forecasts hold, industrial rates will have increased by 80 per cent.
Steve Thomson, British Columbia’s Forests Minister, says the sector is in a “strong recovery mode.” He agrees there is work to be done to help the industry branch out into new markets and products, to squeeze more value out of a dwindling number of trees.
“Volumes are down, but values are up,” he said in an interview. He acknowledged a challenge in the Interior, where many of the industry’s 64,000 workers are located. There, he expects continued “rationalization” as the industry adjusts to fit the shrinking supply of trees.
The province is launching a new forest-sector competitiveness strategy. What is on the table, exactly, is not clear. More help with red tape and support for value-added processing, perhaps. But Mr. Thomson is promising no relief on electricity costs – his government has suppressed BC Hydro rates and if anything, rates will rise dramatically after the 2017 election to pay down the Crown corporation’s debt.
Still, given the focus on developing LNG for the past three years, the industry is grateful for any attention from this government.
“It’s not like forestry had gone away,” said Ric Slaco, vice-president and chief forester for Interfor. But the mention in last week’s Throne Speech that there is a forest industry in British Columbia and that it is kind of a big deal, was a shift from recent years. “We’re quite pleased.”