Potential import duties in 2017 could marginalise Canadian sawmills

After the expiry of the nine-year Softwood Lumber Agreement, Americans are still claiming that Canadian sawmills are subsidised by government timber pricing. The differences between mainly public timberland ownership in Canada compared to mainly private timberland ownership in the U.S. will always draw conflicting conclusions. However, the answer to this is to compare sawmill margins (earnings on an EBITDA basis) from different producing regions to a specific market destination, said Russ Taylor, president of WOOD MARKETS and author of a new report Bi-annual Global Timber/Sawmill/Lumber Regional Cost & Revenue Profiles.

“Our Q3-2016 analysis yields a similar answer to our other cost benchmarking surveys,” Mr Taylor said. “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.”

Q3/2016 delivered lumber costs & margins by supplying region

The report compiles 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

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 rationalise. Any export tax at just 12.5% would benefit U.S. timberland owners and penalise U.S. consumers and Canadian mills. And an export tax would curtail Canadian sawmills and reduce Canada’s share of U.S. consumption. While the issue is complex, it is appears that the American position is prepared to use elements of U.S. trade law to marginalise its largest competitor.