¢ Since 1983 the U.S. Coalition for Fair Lumber Imports has tried to curb shipments of Canadian lumber to the

United States.

ae”

In search of solutions for the
British Columbia forest industry

by Doug Smyth
#esearch Director, I.W.A. CANADA

n early October 1998, the
Council of Forest Industries
released 15 proposed options

for reforming the British
Columbia forest system.
Unfortunately, two key proposals
on that list are direct responses to
demands made by the U.S. Coali-
tion for Fair Lumber Imports for
over a decade. The Coalition
demands that the B.C. government’s
current administered stumpage
pricing system be replaced by free
market sales and that the province
eliminate current restrictions on
orts of raw logs from public lands.

t is sad that the economic crisis

in the B.C. softwood lumber indus-
try has pushed some CEO’s and
COFI into such desperation that
they will try anything. Their cause
has been taken up by two industry
analysts who have extolled the
virtues of a free market timber sales
system, including the need to priva-
tize current public timber tenures.
Their goal is simply to satisfy the
U.S. Coalition and secure some
short-term relief from high stu page
costs. However, this proposal will
not provide the panacea that some
industry leaders seek and it does
not deal with the needs of workers

or their communities.

On the political level, the real
roblem that the U.S. Coalition has
Been trying to cure is excessive vol-
umes of Canadian lumber imports
during weak U.S. markets. Until
that irritant has been eliminated,
the Coalition will always find some
way of attacking Canadian lumber,
no matter what concessions are
offered. Throughout three counter-
vailing duty actions since 1983 it
was genera! i known that the root
cause of the U.S. industry’s problem
with lumber imports was the
exchange rates of Canadian and
U.S. dollars, Since that was not
countervailable under U.S. trade
laws, the next best sizeable target

left to attack was stumpage. In
short, the U.S. Coalition will always

find some way to challenge Cana-
dian lumber imports. Moreover, giv-
ing Washington state and northern
Idaho mills access to B.C. public
timber is of no interest to the big
sawmilling companies in the U.S.
South, who totally dominate the
U.S. Coalition. Southern pine
sawmillers have absolutely no inter-
est in obtaining B.C. sawlogs.

The economics of the U.S. Coali-
tion and COFI proposals are also
impractical. They can only work in
an environment of long-term timber
surpluses. However, our major stud-
ies have shown that the North Amer-

It is sad that the
economic crisis in
the B.C. softwood
lumber industry has
pushed some CEO’s
and COFT into such
desperation that
they will try
anything.

ican industry generally lives in a
world of sawtimber shortages. Peo-
ple forget that the current glut of
sawlogs is a temporary development
which was brought on by the col-
lapse of the Japanese market, begin-
ning in the second quarter of 1997.
Loss of that market not only devas-
tated the B.C. Coast and Interior
companies that had shipped heavily
to that destination. The redirection
to the United States of logs and
lumber that would normally have
been exported to Japan also caused
U.S. lumber prices to plummet, in
spite of a projected all-time con-
sumption record of close to 52.4 bil-

lion board feet in 1998. Over the
past year and a half total U.S. and
Canadian lumber exports to Japan
plunged by 1.7 billion board feet
(BBF). And raw logs that would
have been shipped to that country
were sawn into an additional 600
million board feet of lumber for the
U.S. domestic market. Altogether
an additional 2.3 BBF of lumber
that should have been consumed by
Japan wound up in the North Amer-
ican market between January, 1997
and June, 1998. Over the same
period B.C. exports to Japan dropped
by 1.2 BBF, which wiped out the
entire increase in provincial ship-
ments to that market between 1987
and 1996.

The success of the desperate solu-
tions that some B.C. industry lead-
ers are now proposing to embrace in
order to convince the U.S. Coalition
to stop attacking Canadian lumber
imports relies heavily on the
assumption that B.C. and western
U.S. sawlogs will remain in plenti-
ful supply. And that in turn implies
that the Japanese market will never
return to a healthy state. However,
it is clear that the banking reform
and economic stimulus legislation
that is now being passed by the
Japanese parliament will bring
about a gradual improvement in
housing starts and demand for North
American lumber in 1999. When
that happens, the apparent surplus
of sawtimber in British Columbia
and in Oregon and Washington will
disappear.

When the recovery of the Japan-
ese lumber market does generate
another shortage of sawtimber in
British Columbia and the U.S.
Pacific Northwest, shifting the B.C.
public tenure timber sales program
to a privatized free market system
will introduce an enormous amount,
of instability into the softwood lum-
ber industry. A case in point is the
U.S. West in 1996. As lumber prices
skyrocketed that year, the entire
public timber sales system was ram-
pant with speculative overbidding,
as sawmillers desperately tried to

line up log supplies so that they
could sell into the robust lumber
market. In many instances, winning
bids dramatically exceeded those
offered by the second highest bid-
der. As a result, some companies
wound up in bankruptcy proceed-
ings, while others were hard-pressed
to pay for the overpriced timber,
particularly after the lumber mar-
ket began to slip in 1997.

It is clear that under the prevail-
ing long-term trend of sawtimber
shortages the U.S. Pacific North-
west free market system of public
timber sales leads to pertain
excesses. As a result, the numbers
of sawmill closures and job losses
during some years increased dra-
matically. If such a system were
introduced in British Columbia, the
same problems would be encoun-
tered. Mill closures and job losses in
British Columbia have already sur-
passed unacceptable levels. A free
market timber sales system would
only exacerbate that situation. Fur-
ther tightening of environmental
restrictions on harvests in British
Columbia and the U.S. West will
continue to hold back timber sup-
ply, as total North American and
Japanese demand recovers.

The second U.S. Coalition demand
to permit unrestricted cross-border
flows of public timber is even more
impractical. Although there are few
restrictions on exports of private
timber from Canada and the United
States, the volumes of sawtimber
that have been exchanged between
the two countries have been quite
smal — even in the hot early 1994
and 1996 lumber markets, when
timber supplies were tight. Part of
the reason that the U.S. Coalition
wants unrestricted American access
to Canadian public timber is the
belief that British Columbia enjoys
a large surplus of cheap timber. If
northern U.S. mills could gain access
to that fiber, they would not only be

able to satisfy their own needs for
logs, but they would also be able to
bid B.C. timber values up to the cor-
rect higher levels that would be set
ina free market system.

Unfortunately, several B.C. indus-
try leaders have the naive impres-
sion that they can successfully com-
pete with U.S. mills for B.C. public
timber. However, it is possible for
currency exchange rates to shift
enough in one afternoon to over-
come any efficiency advantage that
the B.C. mills may have enjoyed. A
surge in the value of the U.S. dollar
relative to that of the Canadian dol-
lar would let American companies
take B.C. logs at will. Moreover,
they would be able to cream the
higher grades, leaving B.C. mills
with lower quality fiber.

Additionally, allowing the Ameri-
cans and Canadians to have unre-
stricted access to each other’s public
timber would certainly raise an out-
cry from the Japanese if they were
excluded. Currently U.S. log exports
from all public lands — both federal
and state — are banned by federal
law. Industry support for that law
is so intense that it could never be
amended to permit export of raw
logs to Japan. And it is unlikely
that the U.S. Pacific Northwest
industry would be able to change
the law to permit unrestricted log
flows between Canada and the
United States — even if Japan did
not object. Given the high probabil-
ity of a Japanese protest, however,
amending the U.S. federal log export
ban law just for the Canadian mills
would be a high stakes game. Under
international trade law the Japan-
ese would have a strong case. Dur-
ing the past three years the relative
values of the Japanese yen and the
U.S. and Canadian dollars have
been subject to dramatic fluctua-
tions. If the Japanese were to win
the international trade law case
and the yen took a sharp jump in
value, both U.S. West and British

Continued on page ten

LUMBERWORKER/DECEMBER, 1998/9