Canadian lumber producers have inoculated themselves for years from U.S. trade risks by ramping up sales to China and buying sawmills in the southern U.S. The Trump administration's action this week on softwood lumber now puts that strategy to the test.
Of all Canada's commodity sectors, forestry is best acquainted with the risks posed by protectionist leanings and policy uncertainties of the sort that now dominate Washington's political landscape -- highlighted by the Trump administration's decision to slap a 20% tariff on softwood lumber, used widely to build houses.
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U.S. tariffs and other trade barriers were the norm for decades until Washington and Ottawa reached a truce with a 2006 breakthrough pact. The positive impact of that accord, however, was soon thwarted when the subprime-mortgage crisis flared up and the U.S. housing market entered a yearslong tailspin, weighing heavily on Canada's wood sales to its biggest customer.
"Anybody working in the Canadian lumber industry has realized the risks of exporting into the U.S. market," said Harry Nelson, professor at the University of British Columbia's forest-resources department in Vancouver. "The forest sector has realized its vulnerability, and has attempted to diversify its markets."
Even so, this week's softwood tariff represents a setback for Canada, which relies heavily on trade with the U.S. to drive growth. The new U.S. levy will likely lead to job losses and squeeze small and midsize lumber and forest-products firms. "It is going to result in some tough times for some operators across the country. We're aware of that," Canada's Resources Minister, Jim Carr, said at a news conference.
The tariff also sets the stage for bigger changes to the North American Free Trade Agreement as they pertain to Canada. Early Canadian concerns were partly allayed after U.S. President Donald Trump spoke of America's "outstanding" trading relationship with Canada, and how only "tweaking" would be required for its trade links with its northern neighbor.
The U.S. remains the top destination for Canadian lumber exports by a comfortable margin, capturing over 77% of sales abroad. But lumber sales to China have surged in a decade, from 65.9 million Canadian dollars ($48.5 million) in 2006 to C$1.03 billion last year. China now buys 13% of all Canadian lumber exports, as opposed to 0.6% a decade ago.
"It's in Canada's interest to expand its exports markets in softwood lumber," Mr. Carr said. "And if you look at the statistics and the growth of the Canada-China lumber relationship, it has grown exponentially in the last decade, and there's every prospect it will grow more."
Mr. Carr plans to lead a delegation of forestry industry officials to China in June in an effort to drum up further sales. As it happens, Canada's finance and trade ministers are in China this week for a series of meetings with senior Chinese officials about increasing bilateral trade and investment.
While such efforts may reduce the sector's vulnerabilities in the longer run, they are hardly a panacea. "For those companies who are now facing what we would consider unfounded duties, China's not going to help them meet payroll by the end of May," said Derek Nighbor, president and chief executive of the Forest Products Association of Canada, an Ottawa lobby group.
Meanwhile, bigger companies -- led by West Fraser Timber Ltd., Canfor Corp. and Interfor Corp. -- have increased their U.S. production capacity through acquisitions over the last decade, during what amounted to a truce period between the U.S. and Canada on trade.
"The big Canadian producers now have sizable southern U.S. operations that should benefit from higher prices and/or volumes as tariffs kick in, " said Steven Chercover, a Portland, Ore.-based wood-products analyst with boutique investment dealer D.A. Davidson & Co. Smaller mill owners, he added, don't enjoy such a "hedge, and thus might suffer or exit the export market."
TD Securities estimates that for the seven major Canadian lumber producers it covers, the percentage of lumber volume subjected to the new duty ranges from a low of 15% to a high of 50%.
Duncan Davies, president and CEO of Interfor, said about two-thirds of the company's production capacity is now located in the U.S. Nevertheless, he warned the 20% tariff would hamper the company's ability to reinvest in its Canadian operations.
"This is just the way of the U.S. government putting political pressure on the Canadian industry, and on the Canadian government, to find a longer-term deal that would be more favorable to the U.S. industry," Mr. Davies said.
(END) Dow Jones Newswires
April 25, 2017 19:26 ET (23:26 GMT)