The impact of U.S. duties on Canadian lumber exports will make
Canada the high cost and low margin producer in North America
After the expiry of the 9-year Softwood Lumber Agreement, Americans are still claiming that Canadian sawmills are subsidized by government timber pricing. The differences between mainly public timberland ownership in Canada as compared to mainly private timberland ownership in the U.S. will always draw conflicting conclusions. However, WOOD MARKETS latest analysis in its just released Biannual Global Timber/Sawmill/Lumber Regional Cost & Revenue Profiles (with current-quarter cost profiles of 20 countries/regions) tells the real story.
The bottom line answer to any question about competitiveness is to compare sawmill margins (earnings on an EBITDA basis) from different producing regions to a specific market destination. “Our Q3-2016 analysis yields a similar answer to our other cost benchmarking surveys,” indicated Russ Taylor, President and author of the report. “Since 2008, the U.S. South has made the highest sawmilling margins in North America, and since 2002, the lowest margin region continues to be in Eastern Canada.” How the U.S. South region could have any claim any unfair advantage against Eastern Canada seems incomprehensible, but that is one take in the current chapter on the U.S. – Canada softwood lumber dispute.
Q3-2016 DELIVERED LUMBER COSTS & MARGINS BY SUPPLYING REGION
WOOD MARKETS has compiled timber (log) and sawmilling costs and revenue results from Q1/2015 to Q3/2016 in North America and in 10 other major exporting countries for softwood sawmills. This data and analysis on top-quartile (lowest-cost) sawmills has been combined with published lumber prices to selected destinations to provide some insight on how different producing regions compete on a delivered cost basis relative to delivered prices in the U.S. market.
For the North American structural lumber cost analysis, delivered log and sawmill costs were compared to the FOB mill lumber sales average plus the freight to destination – in this case it was to Houston Texas. The supplying regions considered include six regions in Canada, six regions in the U.S., selected European countries and Russia. While the analysis is based on the expected delivered market price for 2×4 #2 Structural & Better, the analysis does ignores the revenue contribution of other products produced at sawmills in terms of widths and grades.
In the analysis, two regions had the lowest delivered costs to Houston Texas – the U.S. South (with the lowest by far) and Western Canada. The other supplying regions in North America and Europe had much higher costs, and interestingly enough, they all had similar delivered costs.
IMPACT OF EXPORT DUTIES ON CANADA
The analysis assumes that the US Department of Commerce will conduct its investigation into anti-dumping and countervailing duties on Canadian costs and these duties will be in place in late Q1 or early Q2/2017.
The analysis uses two scenarios: a 12.5% and 25% CVD/ADD on Canadian lumber exports.
At a 12.5% Canadian export duty, the cost curve to Houston Texas flattens out, but Eastern Canada moves into one of the highest cost positions and the B.C. Interior’s costs rise very close to the level of most other supplying regions. Sawmill margins erode in Canada and become the lowest of all supplying regions to Houston Texas. For delivery points further east in the U.S. South, such as Atlanta, the extra freight costs would further disadvantage the B.C. Interior’s weaker margin position.
At a 25% export duty, Canada’s delivered costs increase further to where Canada becomes the highest cost producer delivered to Houston Texas and move close to break-even levels as compared to U.S. South’s lumber margins at over 40% – is this what Americans are trying achieve?
While some of the tax will be absorbed by the market, this will take time to occur. And during the slow winter months, eroding prices could likely push most or all of the full duty back on to Canadian mills. “As a result,” said Russ Taylor,” the WOOD MARKETS analysis indicates that a 25% tax is highly unlikely as the penalty will be too severe. Even a 12.5% tax could be too punishing, as the Canadian lumber margins would be the lowest on a delivered basis – even lower than those from European exporting countries.”
Combined with reduced lumber production from the B.C. Interior and a peaking of Eastern Canadian output in the next few years, the basis of any American complaint becomes even more difficult to rationalize. Any export tax at just 12.5% would benefit U.S. timberland owners and penalize U.S. consumers and Canadian mills. And an export tax would curtail Canadian sawmills and reduce Canada’s share of U.S. consumption and that seems to be the end game. While the issue is complex, it is appears to WOOD MARKETS that the American position is less interested in looking at the facts and instead is prepared to use elements of U.S. trade law to marginalize its largest competitor.
How a Canadian offshore lumber export strategy might work to reduce lumber shipments to the U.S. is another analysis that was conducted by WOOD MARKETS in its new “Biannual Regional Profiles Report”. The report includes analysis of delivered lumber costs to China and Australia, two of the other major import markets for softwood lumber and the results are also very revealing.
The Q3-2016 edition of the Biannual Global Timber/Sawmill/Lumber Regional Cost & Revenue Profiles (with current-quarter cost profiles of 20 countries/regions) benchmarks delivered log costs, sawmilling costs, lumber and by-product revenues, and EBITDA margins annually from 2010 and quarterly from Q1-2015 for 20 producing countries and/or regions around the world for both “average” and “top-quartile” sawmills. The report also profiles delivered lumber costs in the U.S., China and Australia from key supplying regions. This report is available by subscription every six months – as a single copy or as an annual subscription (2 reports per year).