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Canadian lumbering: in east, more than paper profits; in west, losses

It's as if a big wedge had been driven through the middle of Canada's forest industry. Wood-products companies in the eastern part of the country are piling up profits, while their counterparts in the west have become so efficient at producing lumber that some are on the brink of going broke.

British Columbia produced a record amount of lumber last year -- and the loggers all lost money doing it. Lumber prices have continued to fall, but loggers still cut trees into lumber and they still lose money.

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"It's one thing when one firm becomes productive," says forest industry observer Ross Hay-Roe, who publishes the PaperTree Letter in Vancouver, British Columbia. "But when everybody does it, it drives the prices down to where no one can make money." The ruler used in the woods is the spruce two-by-four, the favorite cut of home builders in the United States, the largest market for British Columbia lumber. In the fall of 1982 the price of the spruce two-by-four was about $1.25; it hit a high of $2.43 in June of '83. Now it is back down to about $1.25.

The western companies continue to churn out lumber because they need the chips from the lumber to make pulp. And they need pulp to make paper. These last two markets are strong. Without pulp and paper, the British Columbia companies would be in even worse trouble.

Western Canada's forest-products companies continue to lose money while their counterparts in eastern Canada have been making handsome profits. The reason is that the western producers, the ones with the bigger trees, are primarily lumber producers. They make money on pulp and paper, but lose selling two-by-fours. The eastern producers, using toothpicks by comparison with some of the big western trees, are primarily pulp and paper producers.

In the first half of this year Macmillan Bloedel lost $12.2 (Canadian) on sales of $946 million. Canfor lost $10.3 on sales of $498 million and BC Forest Products lost $5.3 million on sales of $434 million. Only the smaller Weldwood made $800,000, but on sales of $298 million.

Macmillan Bloedel has an operation in the Alberni Valley on Vancouver Island that runs with 1,000 fewer people than it did just three or four years ago. It was all part of a cost-cutting measure in which the company sold its head-office tower as times got really tough. But although the forest companies in British Columbia are getting more efficient, the wood is getting more expensive to cut.

Flying over Vancouver Island, one can see that parts of the coast have few trees on them. Higher up the hill there are logging roads and stands of trees being cut. It costs more to build a mile of road on a hillside to get at smaller trees near the top. Smaller trees also mean less lumber and more man-hours to cut.

The loggers are driven to work in a rugged bus. It can take as long as three hours to get to the job site, and the loggers are paid all the way. That makes labor more expensive, even though the wage rates did not go up after a strike last year.

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In eastern Canada everything is rosy, or as rosy as it can get. Eastern pulp and paper producers are basking in a rising pulp and newsprint market. Pulp prices are at $545 a ton, just $5 off the record high. Newsprint is at a record

To top it all off the falling Canadian dollar keeps the money rolling in. Pulp and newsprint (and lumber, for that matter) are all sold in rising US dollars, although the European Community buys Canadian newsprint in local currencies. That has made for better-looking balance sheets for the producers based in Ontario, Quebec, and the Atlantic provinces. Domtar earned $53.4 (Canadian) million in the first half of this year on sales of $1.03 billion. Consolidated Bathurst made $47.6 million on sales of $833 million, and Abitibi-Price rolled up a profit of $31 million on sales of $1.05 billion.

The reason for the upturn in sales of Canadian pulp and newsprint is the boom in the United States, where advertising linage is up. Ads in US newspapers were up 5.5 percent in 1983 and are running 6 to 7 percent higher this year. Fatter papers need more newspring -- hence the bigger market for Canadian producers.

"Newsprint is going to be strong right through '86 because US demand is at record levels," says Nicholas Keane, vice-president of marketing at Reed Inc. in Toronto.

Adding to the increased demand is a drop in supply from the eastern Canadian mills, which are shutting down older, inefficient machines. "Competing with the Scandinavians with their devalued kroner means Canadian machines have to be efficient or shut down," Mr. Keane says.

There could be problems for the profitable eastern producers. If the Canadian dollar starts a comeback, they would be in trouble. And protectionism in a post-election United States could hurt Canadian sales.

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