Solutions

Continued from page nine

Columbia log export restrictions on
public timber would be at risk.

In short, the political and legal
impediments to an unrestricted
cross-border exchange of B.C. and
U.S. logs would be difficult to over-
come. But even if they can be, such
a system would exacerbate the spec-
ulative bidding excesses that already

characterize a free market timber
sales system during a long-term
period of sawtimber shortages. When

the recovery of the Japanese econ-
omy takes place, beginning in 1999,
North America and Japan will return
to a situation of relative shortfall. If
USS. mills are also allowed to com-

pete for B.C. timber, additional

British Columbia sawmills will close.

The two industry investment ana-
lysts who have been promoting the
free timber sales and log export
market solutions admit that those
closures will indeed take place. They
believe that the job losses will be
acceptable because the industry will
wind up being much more efficient
and competitive. Both of them state
that the costs of union collective
agreements are too high. Since mar-
ket forces under the new system
will determine the prices that B.C.
companies will pay for timber, they
say that any sawmill or logging
operation that has uncompetitive
labor contracts will go out of busi-
ness.

However, direct labor and benefit
costs represent just 17 percent of
total manufacturing costs in B.C.
sawmills, while net delivered wood
costs account for 63 percent. Com-
pared to other major producing
regions in Canada and the United
States, lumber recovery per unit of
log volume consumed and productiv-
ity are very high. During the severe
downturn in 1998 employees in sev-
eral large companies have pushed
productivity to new heights in order
to reduce manufacturing costs.

With some exceptions the B.C.
industry is by-and-large still the
most efficient in North America. It
suffers not from inefficiency, but
high wood costs. In the fourth quar-
ter of 1998 B.C. Interior average

stumpage costs are still $10.82
(Canadian) per cubic meter higher
than the level in neighboring
Alberta, $9.24 greater than the
Ontario average, and $7.52 per cubic
meter higher than in Quebec. If

B.C. silviculture costs are added,
the gaps are much wider than that.
And B.C. Coast average stumpage
rates exceed the Interior number by
$1.78 per cubic meter.

For the U.S. Coalition to insist
that British Columbia must move to
a privatized free market public tim-
ber sales program in order to allow
stumpage to rise to its correct level
is inaccurate and hypocritical. B.C.
sawmill wood costs, as well as freight
costs to market, are already well
above those in all other major pro-
ducing regions in Canada and the
United States. That differential pri-
marily explains why, between Janu-
ary, 1997 and June, 1998, B.C. soft-
wood lumber production plummeted
by 1.03 billion board feet, while

It is important to
correct the errors in
the Statistics
Canada index that
are used to set the
stumpage target
rates for the Coast
and the Interior
regions of British
Columbia.

eastern Canadian output jumped by
an identical and offsetting 1.03 BBF.
And that is why the drop in B.C.
production equalled two-thirds of
the 1.5 BBF combined increase for
the U.S. South and the West over
the past year and a half.

It is clear that high B.C. wood
costs have forced lumber production
to drop by the same volume that
eastern Canadian output rose. More
importantly, the large jump in U.S.
production could not have taken
place if B.C. wood costs had been
competitive with those in the United
States.

The key question is, how much
more uncompetitive does the B.C.
industry need to become to satisfy
the U.S. Coalition? Given the fact
that stumpage and total wood cost
levels in the other 3 provinces that
are covered by the U.S.-Canada
agreement are much lower than

10/LUMBERWORKER/DECEMBER, 1998

they are in British Columbia, the
U.S. Coalition should be focussing
on their rate setting policies. How-
ever, the U.S. industry has chosen
-to attack the B.C. system simply
because British Columbia accounts
for roughly one-half of total Cana-
dian softwood lumber production.

It is unfortunate that some B.C.
industry leaders and investment
analysts have chosen to jump on the
U.S. Coalition bandwagon in the
mistaken belief that doing so will
provide a panacea for U.S.-Canada
lumber trade relations problems.
Reaching out for those types of solu-
tions reflects a desperation with
current economic circumstances. It
is true that the industry’s condition
is serious. However, there are other
potential answers to this dilemma,
including correcting the errors in
the Statistics Canada index that
are used to set the stumpage target
rates for the Coast and Interior
regions of British Columbia, and
increasing our efforts to secure exist-
ing as well as emerging markets for
B.C. timber and wood products.

A shift to a free market stumpage
system and unrestricted log exports
to the United States may appear to
be feasible in the short term when
sawtimber is in excess supply. And
such a move may call the U.S. Coali-
tion’s bluff. But over the long term
when Japan recovers and sawtim-
ber returns to being in short supply
relative to demand, those solutions
will only exacerbate the high rate of
mill closures and production and job
losses that have taken place in
British Columbia over the past year
and a half.

Some analysts have suggested
that, at least in the short term, the
B.C. government small business
program (SBFEP) auction sales
prices should serve as the proxy for
open market stumpage for all public
timber sales. Unfortunately, because
the small business sales represent
incremental wood, during times of
sawtimber shortfall bid prices have
soared because the large companies
were able to average in the high
costs with relatively lower cost wood
from other sources. However, since
small business sales prices are not
adjusted for swings in the end-prod-
uct market, the dramatic drop in
lumber prices during 1998 left many
small logging operators unable to
harvest because they could not afford
to pay the high timber costs on sales
that they had successfully bid on.
Given the sharp fluctuations that
characterize the small business pro-

gram, using the bid prices as a proxy
for province-wide public timber
sales is likely to adul substantially
to the high wood costs that the indus-
try currently pays. Moreover, even
if the small business program were
acaoten for this purpose, the U.S.
Coalition is likely to insist that B.C.
public timber market prices are still
understated because the log export,
restrictions pEeveny U.S. competi-
tion from helping to bid up sales to
their correct higher level. As a result,
the Coalition would insist on unre-

stricted access to B.C. public tim-
er. =

In the long term, neither solution
will assist the B.C. industry to over-
come its high wood cost disadvan-
tage in the North American market.
In the short term, even if both
demands were acceded to it is doubt-
ful that the U.S. Coalition will erent
substantial concessions on B.C.
stumpage rates. ‘

Retaining an administered public
timber sales program in British
Columbia does not mean that the
log allocation system has to be inef-
ficient. The B.C, Coast industry is
characterized by a substantial pro-
portion of log purchases and trades.
Everything should be done to encour-
age greater log shifts between com-
panies in order to ensure that “the
right log gets to the right mill.
When log qualities and sizes better
match the product mix in a specific
sawmill, the resulting wood cost
savings and improvement in the
quality of the product will make
B.C. mills more competitive in U.S.
and global markets.

Solutions that will truly solve our
current problem must also include
better, more stable and more secure
access to markets. This includes a
long-term fair solution to the soft-
wood dispute between Canada and
the U.S. It also means measures to
fight off the unfounded, single-issue
campaign by environmental extrem-
ists in both the U.S. and Europe.
Federal and peers governments,
workers and communities must all
enlist in this fight, working together
to convince foreign buyers and con-
sumers that we have worked dili-
gently to improve our forest man-
agement and timber harvestin,
methods. In this effort, after all,
nothing less is at stake than the
future of the Canadian forest sector
— our largest single source of for-
eign exchange; our largest single
source of jobs and the backbone of
local and regional economies from
coast to coast. +