Canada’s Timber Industry Cuts Out the U.S. In Favor of China

by Tony D'Altorio

Canada's Timber Industry Cuts Out the U.S. In Favor of China

by Tony D'Altorio, Investment U Research

Friday, February 4, 2011

Provincial governments in western Canada have spent the past few years promoting Chinese use of timber. Cement, they say, doesn't work as well to build houses, schools and even apartment buildings.

In the past, the Canadian timber industry relied heavily on the United States. But it's sick of depending on its southern neighbor.

  • Last month, for example, the Obama Administration accused British Columbia of unfairly subsidizing sales of diseased logs from provincially owned forests.
  • It also recently ruled that Canada must impose almost $60 million in new taxes on lumber exports to the U.S. to offset other illegal subsidies.

Fortunately for Canada, it seems to be making headway in China. And both nations are coming out ahead as a result...

Chinese Timber Demand

China trails only the United States in importing timberland and lumber products.

For several years, it has depended on imported logs to meet demand for pulp and paper, construction lumber and industrial uses. And that need grows at about 10% every year.

Domestic production is expanding through government-sponsored tree farms. Companies such as Canada's Sino-Forest (PINK: SNOFF), which owns millions of acres of land there, automatically benefit from such efforts.

But even that can't match demand, which continues to outstrip domestic supplies by about 40%. Official data pegs China's 2009 lumber usage at 423 million cubic meters.

This year, it faces a 100 million cubic meter shortfall in domestic wood fiber production. And over the next several years, that deficit will likely grow to 150 million cubic meters.

So China has to import its timber from Russia, New Zealand, Canada and such. More than likely, its reliance, especially on Canada, will only grow further going forward.

Canadian Timber Suppliers

In August, the International Wood Marketing Group gave Canada more good news about timberland.

In a report, it highlighted how shipments to China could make up some 20% of the total Canadian lumber production this year. And by 2015, China's annual logs and lumber shortfall should equal Canada's total timber harvest in 2008 and 2009 combined.

That works out very well for places such as British Columbia. The provincial government says its lumber exports to China have soared over tenfold since 2003.

Exports hit an estimated 2.5 billion board feet last year, with a 2011 target of 4 billion.

China's market share has climbed from a miniscule 1.3% to about 20% of shipments from British Columbia, propping up prices too. Estimates show that without those sales, North American softwood lumber would cost about $250 per 1,000 board feet instead of $300.

Oddly enough, China's 2008 earthquake in the Sichuan province greatly aided that rise.

After that, Canada's three biggest exporters supplied 2x4s, the basic plank size for home construction, for some 600 homes there. Those efforts by Canfor (PINK: CFPZF), West Fraser Timber (PINK: WFTBF) and the privately held Tolko Industries really paid off.

Backed by the Canadian and British Columbian governments, the companies erected demonstration projects. And that helped show how wood could be used for bigger buildings such as schools and retirement centers.

Impressed with the results, a joint Canadian government-industry group joined forces with the Chinese TEDA Development. Together, they are erecting the first wood-frame, five-story apartment block in the city of Tianjin, a city of about 3.75 million people.

That is likely just the start of a very profitable trend for Canadian timber companies.

Canada's Lumber Industry Cuts Out United States

It may also signal the end of the U.S. and Canada's testy lumber relationship.

Thanks to the slumping U.S. housing market, Canadian shipments have already sunk. Specifically, those coming from British Columbia sank from over two-thirds to just about 40% today.

And it's still falling.

Pat Bell, British Columbia's Forestry Minister, isn't very worried though, thanks to the surge in sales to China. He even sees it as valuable leverage over Washington ahead of the 2013 expiration of the two nations' current softwood lumber agreement.

If you listen hard, you can almost hear him cutting down that traditional relationship.

Timberrrr!

Good investing,

Tony D'Altorio

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