New Brunswick softwood lumber sector braces for fallout from U.S. protectionist measures

New Brunswick softwood lumber sector braces for fallout from U.S. protectionist measures

Tariffs imposed by the U.S. on New Brunswick’s softwood lumber exports haven’t had a deep impact on the sector. But tougher times may be in the offing

It was considered the latest blow in an old fight.

In November 2017, J.D. Irving, Limited—the biggest forestry player in New Brunswick—shelved its plan for a new $25-million sawmill in Doaktown, a village square in the middle of the province. The company blamed the cancellation on American softwood lumber duties, which had come into effect earlier that month. JDI had been hit with duty rates of nine per cent, while other New Brunswick forestry companies were suddenly forced to pay 20 per cent on their U.S. softwood exports.

The Doaktown mill project was seen as the first New Brunswick casualty in yet another Canada-U.S. softwood lumber dispute. The project start date had already been pushed off twice, before the tariffs went into effect, but there was still concern. Would the punishing American softwood tariffs wipe out other such projects or even entire mills in the province?

So far, the New Brunswick softwood industry appears to have weathered the storm largely unscathed. “When you look at some of the data, it’s hard to see much of an impact,” says Fred Bergman, senior policy analyst with the Atlantic Provinces Economic Council. “You’re not seeing a lot of negatives.”

In fact, the value of New Brunswick softwood lumber exports to the U.S. was up about seven per cent between January and November of 2018, compared to the same period in 2017. Since 2017, New Brunswick mills had benefited from high lumber prices, the growth of American housing starts—a major source of demand—and a favorable exchange rate. But the situation is quickly changing. Prices have fallen and the U.S. housing market is slowing, meaning less demand for New Brunswick softwood. “My gut tells me it is going to turn more negative,” Bergman said in an interview, discussing the outlook for New Brunswick’s forestry industry in 2019.

Others believe it’s likely that one or more mills could soon be knocked out of business. In other words: Is the real hurt from the U.S. tariffs yet to come?

A decades-old dispute
The U.S. can typically only supply about 70 per cent of its softwood lumber needs. The bulk of the remaining 30 per cent arrives from Canada. And therein lies great tension. According to Global Affairs Canada, the Canada-U.S. softwood lumber dispute is one of the most enduring trade battles between the two nations. Over the past 25 years, the U.S. lumber industry has frequently sought government restrictions on Canadian softwood lumber imports.

To do so, the Americans have applied countervailing and anti-dumping duties. Countervailing duties are used to fight what the Americans argue are Canadian lumber subsidies. Anti-dumping duties are meant to counter allegations that Canadian wood is sold at prices below the cost of production. The American lumber industry’s main allegation is that provincial stumpage (the price charged to harvest timber from Crown lands) constitutes a subsidy. U.S. claims have, in the past, been found to be without basis, and the Canadian government argues this again is the case.

In past disputes, Atlantic Canada often escaped the U.S. wrath because the Americans deemed East Coast timber pricing to be market-based. This time, New Brunswick softwood lumber products are not excluded from anti-dumping and countervailing duties. (The other three Atlantic provinces are exempt.)The duties, which came into effect during 2017, cover softwood lumber, siding, flooring and other softwood lumber products. Canadian lumber producers pay the duty at the Canada-U.S. border.

The 2006 Softwood Lumber Agreement, which the Canadian government argues had provided stability and predictability for industry on both sides of the border, expired in October 2015. Once again, the Americans have imposed import duties.

“This is an old story,” says Mike Legere, the executive director of Forest NB, which represents forest product manufacturers in the province. “The motivation has never changed from a U.S. industry perspective—it’s to protect and increase market share.”

Legere represents 17 full-producing members, who make pulp, paper, lumber, panels, wood pellets and even lobster traps. That membership includes family-owned sawmills and large international companies like AV Group NB, which owns two pulp mills in New Brunswick and is owned by the India-based Aditya Birla Group. (Notably, JDI, the single biggest forestry company, is not a Forest NB member).

According to Legere, forestry is the single biggest private-sector contributor to the New Brunswick economy. The industry employs more than 24,000 people and the province is home to 39 sawmills, six pulp and paper mills, and 2,500 small-and medium-size enterprises in the forestry supply chain. In all, it’s a $6-billion industry in New Brunswick.

But the softwood dispute is not impacting the entire industry. “The U.S. tariffs are not affecting us at all,” says Jean-Claude Savoie, the owner of Groupe Savoie. His company makes hardwood pro- ducts, including lumber, pallets and cabinet and furniture components, ensuring it remains clear of the softwood mess.

For those on the softwood side, the stakes are high. The domestic market for New Brunswick softwood is small, so up to 80 per cent of the province’s softwood lumber is exported to the United States. Legere says there’s little room for diversification, with the Asian market sewn up by West Coast mills and Scandinavian mills dominating Europe. “We are very dependent on the U.S. market. Right off the bat you’re at a 20 per cent disadvantage when you’re taking your product to market,” Legere says. “So that’s basically going to get sucked up by the mill. That affects the bottom line and makes it more difficult to generate revenues to put back into the company.”

Michel Soucy, a professor at the Université de Moncton’s Edmundston campus who specializes in forestry economics, agrees. “(The tariffs are) not sustainable,” he says. “I’m not aware of mills that were making that much profit to begin with.”

JDI an exception
Legere argues that all New Brunswick softwood producers should be paying the same combined duty that JDI secured. JDI volunteered to be investigated by the U.S. Department of Commerce and submitted more than 9,000 pages of material to the department. As a result, JDI received a company-specific combined duty rate of 9.38 per cent, significantly less than the other New Brunswick companies (20.23 per cent).

Still, the company says the tariffs are having an impact. “The current trade case is very disruptive,” says Jerome Pelletier, the vice president of JDI’s sawmills division, in a statement. “It diminishes industry’s capacity to compete and capability to make new investments in our operations.”

The company says it still plans to build a new, $25-million mill in Doaktown, but that the timing depends on market conditions and the resolution of the softwood fight. (Despite the uncertainty, JDI says the mill is now running at full employment and full capacity). The company wouldn’t reveal how much it has paid in tariffs since the dispute began, though Pelletier said New Brunswick companies have, collectively, paid a total of $115 million.

He argues New Brunswick should be excluded from the dispute, as it was in the four previous agreements. “New Brunswick is the only province in Canada facing both high duty and high Crown royalties,” he says, calling for the federal government to negotiate a settlement.

Global Affairs Canada would not comment on the state of negotiations or reveal how much Canadian companies have paid in duty charges since the dispute began. Similarly, most New Brunswick industry players are unwilling to discuss the tariffs. A number of companies didn’t return calls and emails seeking comment on how the tariffs are impacting their business. Others, such as the Twin Rivers Paper Company, a Maine-based company with two New Brunswick mills, declined to comment publicly.

According to Legere, Twin Rivers delayed—for a time—launching a significant new log line at their Plaster Rock sawmill, likely because of the tariff uncertainty. Such investment decisions must now be weighed against the weakening market conditions, particularly the price of softwood lumber, which by January had fallen 42 per cent from June’s high of $850 per thousand board feet of Eastern two-by-four studs (one of the highest prices in recent memory).

“That makes mills very nervous because now you don’t have that cushion anymore to buffer that 20 per cent tariff,” he says. “We see some real volatility in the market. And as of late the volatility has been quite depressing, to say the least.”

The price drop hasn’t pushed any mills out of business yet, but Legere says a further reduction could provide a knockout blow. “It is foreseeable if lumber prices continue to slide,” he says. “Ultimately it’s far too nerve-wracking to live in this type of environment with a 20 per cent tariff over your head.”

But it’s not just the tariffs that are causing strain. Legere pointed to increased workers’ compensation rates, a proposed manufacturing equipment tax, and the impact a coming carbon tax will have on electricity rates. “So it’s death by 1,000 cuts,” he concluded.

No end in sight
So far, the tariffs have caused a bearable amount of pain in New Brunswick. Ironically, the most pain is likely being felt in the U.S.

The tariffs drove up the cost of building materials last year and, as a result, the cost of new homes. That rise in prices has forced some Americans out of the housing market, according to the Washington, D.C.-based National Association of Home Builders, which is lobbying against the tariffs. “The tariffs have unquestionably driven volatility in the market ever higher,” says David Logan, the association’s director of tax and trade policy analysis.

Logan says the tariffs will continue to impact house prices in 2019. With the tariffs in place, the price of framing lumber, the largest material cost faced by builders, will be significantly higher than normal. Softwood lumber in the U.S. hit a record high composite price of US$582 per thousand board feet in June 2018. That was 20 per cent higher than the prior record, set in 1997. The price has since fallen to the US$330 range, in part because of softening housing demand.

Logan says the association continues to lobby for the U.S. to re-enter negotiations with Canada, to ensure builders can access softwood lumber at a stable, fair price. “If the tariffs on Canadian lumber continue through 2019, builders and homebuyers alike will face stronger headwinds than they otherwise would,” he says. “Builders’ profit margins will remain tight and thousands of potential homebuyers will be locked out of the market due to price increases.”

How long will the disagreement go on? Soucy, the Université de Moncton professor, says past disputes have dragged on for years and Canadian mills usually end up being the losers. Like Legere, he predicts some New Brunswick mills might soon close. “The U.S. mills get a better price for their softwood lumber whenever there is conflict with Canada,” Soucy says. “They stretch that conflict as long as they can.”

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