British Columbia Interior's AAC to drop to 40 million m3 from 60 million m3 post-beetle, dramatically reducing sawlog availability, forcing continued rationalization of wood-processing sector: report

VANCOUVER, British Columbia , April 25, 2012 (press release) – While more capacity rationalization is inevitable, timber and growth opportunities may be viable in other regions of B.C.

New and updated report outlines the ongoing timber and sawmill impacts in the B.C. Interior resulting from the MPB epidemic, the emerging downstream "supply gap" in North American lumber markets and opportunities that may exist in B.C. "after the beetle".

The mountain pine beetle (MPB) outbreak in the B.C. Interior is responsible for eroding log quality, poorer conversion economics and an expiring sawlog shelf-life of the dead timber that will all result in declining timber harvests and a smaller B.C. industry in the future. While a massive salvage program has been underway for much of the last ten years, the quality of the remaining dead timber is becoming marginal for many sawmilling and plywood operations. As a result, further industry rationalization is expected if the economics of surviving mills cannot afford the rising cost of fibre and/or the alternatives.

The annual allowable cut (AAC) of B.C. Interior timber has already been reduced by government in some areas. The B.C. Interior AAC on Crown lands of approximately 60 million m3 is forecast to eventually fall to a mid-term level of some 40 million cubic metres (m3) by the end of the forecast with the potential coniferous sawlog harvest being even lower. This means that sawlog availability will be dramatically less for existing sawmills and veneer plants. With a current solid wood manufacturing base that can consume 46 million m3 of sawlogs annually, continued rationalization of the industry under the current AAC rationale is an unfortunate but realistic consequence.

These and other issues and perspectives on the mountain pine beetle epidemic in the B.C. Interior are part of the updated assessment contained in a new multi-client report published by International WOOD MARKETS Group. B.C. Mountain Pine Beetle: Evolving Impacts & Opportunities (to 2031) is a strategic analysis that assesses the critical impact of the beetle attack on the key timber and wood products producing regions in B.C. and provides details of where new opportunities are expected. The report is a result of the combined efforts of three B.C.-based consulting firms and five consultants:

* Jim Girvan (Management Decision and Technology Ltd.);
* Murray Hall (Murray Hall Consulting Ltd.); and
* Gerry Van Leeuwen, Alice Palmer and Russell Taylor (International WOOD MARKETS Group Inc.).

Like the 2010 report, this new analysis provides a detailed and comprehensive wood fibre supply forecast for the B.C. Interior over the next 20 years. Also profiled is a 20-year North American lumber outlook showing the impact of reduced lumber supplies from B.C. (and Canada). The proprietary "B.C. Fibre Model" has been applied to those B.C. Interior regions that have been most affected by the MPB epidemic to assess the impact that it will have on key forest products, including: log supply; softwood lumber; plywood; residual fibre (chips, sawdust, shavings and hog fuel) production; and biomass.

Depending on a wide range of market variables, processing assumptions, and proforma results, the B.C. Interior is nearing its peak economic sawlog availability with the consequence that lumber (and veneer) production will decline beyond 2014 (possibly sooner or later, depending on market prices).

A key issue with MPB-killed timber is that the older it gets, the less economic and more marginal logging and sawmilling becomes. When processing older dead MPB pine timber, fewer logs make the sawlog grade, less lumber is produced from each log, sawmilling costs go up, more low grade lumber is produced, and sawmill margins plummet. Higher lumber prices can support the incremental use of MPB timber, but only to a point. As the costs of processing the older dead pine rise and lumber revenues fall, there is the inevitable point where sawmill curtailments may occur as the dead pine log supply becomes uneconomic and there is not enough green timber to support the continued use of the dead pine. Consideration to rebuilding sawmills in the B.C. Interior at time where the timber supply is moving towards a significant decline may reduce operations at neighbouring mills.

And while the report contemplates more sawmill curtailments and/or closures in the B.C. Interior, the majority of sawmill and veneer plant closures related to the beetle have already occurred. Since 2005, over 22 mills have closed in the B.C. Interior but much of the impact has been masked by poor North American markets and low prices. However, few of these mills will likely ever reopen due to the lack of available timber.

But there is good news and some significant growth opportunities in regions of B.C. despite (or as a result of) the beetle! For example, there is a huge supply of forest-based biomass available - if new businesses can afford the cost of the fibre, then new opportunities may develop. In addition, several regions of the province are not impacted by the MPB and significant volumes of fibre remain under-utilized including the Peace and West Prince Rupert regions in the B.C. Interior.

On the B.C. Coast, there are no beetles and a significant undercut volume persists. As the MPB epidemic subsides in the B.C. Interior, however, coastal pulp and paper mills will need to turn to Hemlock as a replacement for the forecast loss of their residual chip fibre from the Interior. Combined with a growing demand for coastal sawlogs and continued log exports, the coastal AAC is forecast to be fully prescribed. However, improved lumber prices could support an opportunity for sawmills to access the significant volumes of sawlogs that are currently being exported to China - as long as the export price can be paid.

And lumber and wood products markets are forecast to improve in North America and overseas. Those B.C. mills that survive the MPB catastrophe should benefit from much higher lumber prices by 2014. The reason is tied to principles that support the potential of a 'super-cycle', where production declines from B.C., Eastern Canada and tight timber supplies in parts of the U.S. will limit the supply and the remaining industry base will not be enough to meet forecast North American market demand. In aggregate, reductions in B.C. SPF lumber production after 2015 will contribute to a massive drop in Canada's U.S. softwood lumber market share by the end of the decade. Much higher product prices may, however, further stimulate more harvesting and output at remaining B.C. mills and potentially in those areas where a timber surplus exists.

With the impacts of the MPB now being felt locally in many communities, options to mitigate the forecast reduction in the AAC are being actively investigated by the provincial government, some of which may hold promise in some regions. However, this move is already under public scrutiny and resistance is mounting as it looks at areas previously outside the traditional timber harvesting land base. Such opportunities may not be available in all regions, so the most at-risk regions are expected to see continued capacity curtailment as the economics of some of this potential new incremental timber supply may not be supported in the face of global market prices.

The MPB epidemic is responsible for one of the largest natural environmental catastrophes and could eventually kill up to 58% or 788 million m3 of pine on the B.C. Crown timber harvesting land base. MPB is endemic to parts of Western North American and it is normally kept in check by periodic, sustained cold winter weather (-30C). Without sustained cold winter temperatures since about 1995, the MPB has devastated the pine forests of the Province of British Columbia (as well as many other regions in the U.S. West). The B.C. Interior is one of the world's largest lumber, pulp and wood products producing and exporting regions.

* All content is copyrighted by Industry Intelligence, or the original respective author or source. You may not recirculate, redistrubte or publish the analysis and presentation included in the service without Industry Intelligence's prior written consent. Please review our terms of use.