TIMBER TROUBLES

Opportunities are in the north and in the niche as the sector rationalizes mill capacity RATIONALIZING B.C.’S TIMBER TROUBLES

NELSON BENNETT A sk any forestry industry executive what the best investment opportunity in B.C. is these days, and he or she might flippantly answer, “Alabama.”

Opportunities are in the north and in the niche as the sector rationalizes mill capacity B.C.’s forestry majors continue to spend capital on mills and equipment – they’re just not making those investments in B.C. Mostly, they have been curtailing production in B.C. and investing in American lumber mills.

While B.C.’s forestry sector remains a major economic anchor in B.C. and the province’s largest export sector, it is an industry that is in the throes of rationalization, as majors scale back milling capacity that now exceeds timber supply and lumber demand.

Smaller, private companies continue to invest in new plants and equipment, and there are niche markets that could be developed – engineered wood product plants and pellet production, for example. And there is more than enough timber in the Fort Nelson area to support new specialty mills.

But the bread and butter of B.C.’s forestry sector – dimensional lumber and pulp – is in a long-term contraction. For two decades, the sector burned through a bonanza of dead and dying pine, the result of the mountain pine beetle epidemic.

But pine beetle timber is pretty much gone, and investment opportunities in B.C.’s forestry sector have fallen off. Six sawmills were permanently shut down in B.C. in 2019 and they are not coming back, industry analysts say. “Given potentially low returns and heightened risks, in the absence of change we expect lumber companies will deploy capital to regions outside of B.C.,” a report by Forest Economic Advisors concluded in August 2019.

Impediments to investment in B.C.’s forestry sector basically come down to high operating costs and a shrinking supply of merchantable timber.

B.C. simply doesn’t have enough affordable timber to sustain all the sawmills and pulp and paper mills that were built over the years. So any new investments will likely be in niche markets, not the traditional dimensional lumber or pulp and paper sectors. And those investments will likely come from smaller private companies, not the majors. For example, Hampton Lumber in Oregon recently acquired a sawmill and tenure in Fort St. James from Conifex Timber Inc. and plans to build a new sawmill there. The San Group Inc. is investing more than $70 million in a new sawmill in Port Alberni, and Kalesnikoff Lumber Co. Ltd. is building a new $35 million cross-laminated timber (CLT) plant in Castlegar.

The provincial government has been playing up the opportunities for CLT plants in B.C. since it adds an additional link in the value chain.

“The overall focus is we need to go from being a primary producer of dimensional products to a producer of dimensional and value-added products,” says B.C. Minister of Forests, Lands and Natural Resource Operations Doug Donaldson.

But Russ Taylor, analyst for Forest Economic Advisors, says the market for CLT – tall wood buildings and bridges, for example – is still fairly small. He’s not expecting to see CLT mills popping up in place of every dimensional lumber mill that shuts down.

“It’s a very niche-y business,” he says.

He adds that there is still a fair amount of wood waste available from existing sawmills in B.C., which could feed new wood pellet plants. The pellets are exported as a renewable fuel – an alternative to coal – and burned for thermal power generation in places such as Japan and Europe.

“There is a lot of waste wood, and that’s going to maybe create another opportunity for a couple of pellet mills, but they’re not a lot of jobs,” Taylor says.

One government policy that doesn’t get a lot of attention, but drives some fairly significant investments in energy efficiency by lumber and pulp mill operators, is a government carbon policy that provides carbon credits.

It has resulted in a number of mills investing in fuel switching: reducing or replacing natural gas – typically burned in drying kilns – with wood waste (bioenergy), which can be used in cogeneration to produce power.

Forestry analyst Russ Taylor says investment opportunities in B.C.’s forest sector may be limited to “niche” areas like pellet

plants • ROB KRUYT

Not only do these fuel-switching investments result in some notable greenhouse gas reductions, but also the companies can earn revenue from selling surplus power to BC Hydro. In 2018 alone, the government awarded $1 million in credits to Canfor Corp. and Kruger Products for ongoing investments in bioenergy.

As for the fundamental resource at the heart of the sector – trees – both the Interior and coastal forest sectors are facing a long-term reduction in the allowable annual cut. The one region that has an ample supply is the Northern Rockies timber supply area (TSA) around Fort Nelson.

Mike Gilbert, regional development officer for the Northern Rockies Regional Municipality, has been trying to lure investors to the region with the prospect of ample timber, rail access, a willing and able workforce and low housing costs.

“There is an absolutely prime resource here waiting to be used,” Gilbert says. “We’ve just established the largest community forest in B.C., in conjunction with our partners, Fort Nelson First Nation. We think that anybody that’s going to operate a significant operation here will need to use that as part of the portfolio.”

Fort Nelson used to have a dimensional lumber sawmill and plywood and oriented strand board (OSB) plants. Since they were shut down in 2008, the Northern Rockies TSA has built up an undercut – a surplus of trees created by unused allowable annual cuts. As a result, the provincial government recently bumped up its allowable annual cut to 2.6 million from 1.6 million cubic metres.

The region has a mixed forest composition of 60% deciduous (mainly aspen and cottonwood) and 40% conifer (primarily spruce) that was untouched by the mountain pine beetle epidemic. The high-quality aspen in the area could support OSB, veneer, plywood and hardwood lumber production.

“You’ve got an abundant resource that has been examined by objective, expert third parties and qualified as possibly the best aspen in North America in terms of quality,” Gilbert says.

While the B.C. government has implemented policies aimed at freeing up more logs and wood waste, what is really needed are policies to reduce operating costs such as stumpage rates, says Susan Yurkovich, CEO of the Council of Forest Industries.

“That is a key driver,” she says. “If we can get that right, there are opportunities. The forest sector will look slightly different, but there are opportunities if we can get that right.” É

YOU’VE GOT AN ABUNDANT RESOURCE THAT HAS BEEN EXAMINED BY OBJECTIVE, EXPERT THIRD PARTIES AND QUALIFIED AS POSSIBLY THE BEST ASPEN IN NORTH AMERICA

j Mike Gilbert regional development officer, Northern Rockies Regional Municipality