Agreement expected to stabilize lumber market

Small mills still may be vulnerable

A tentative softwood trade agreement with Canada will provide greater predictability and stability in North American lumber markets, according to a Flathead Valley man who participated in the negotiations.

"It's 20-plus years of this dispute," said Hank Ricklefs, vice president of manufacturing operations for Plum Creek Timber Co. "And ultimately, we have only sought one thing, and that is a reasonably level playing field."

Ricklefs said the agreement, developed by U.S. and Canadian negotiators at the end of April, is intended to prevent severe lumber price drops that led to lost production capacity in the United States. Ricklefs has been one of the negotiators for the U.S. Coalition for Fair Lumber Imports for the past several years.

Although the Montana congressional delegation and others have praised the agreement as a remedy to a long and complicated dispute, skeptics exist.

Jerry Hall, president of the Flathead-based Tobacco Valley Lumber Co., predicts trade grievances will continue.

"I don't think this will be the end of it," he said. "I think it was a better deal for the Canadians than the Americans, and I don't foresee all the problems going away for the producers of this country."

Ricklefs said the agreement will be a safeguard for U.S. lumber producers at times when lumber markets drop below certain thresholds. For years, Canadian producers have reacted to declining prices by increasing production, with the frequent result of Canadian softwood flooding U.S. markets to the severe detriment of American mills.

That's possible largely because Canadian producers are granted huge allotments of provincial timber to harvest as they please, whereas American producers must competitively bid for each public timber sale.

"It's not market-based pricing," Ricklefs said. "It's an administered price … There is very little competitive pressure."

That difference has been the common denominator in a dispute that has led to tariffs against Canadian producers. It has been the focus of reviews by North American Free Trade Agreement panels and World Trade Organization panels.

Ricklefs said the agreement reached last month offers Canadian producers two choices when composite softwood lumber prices in the United States drop below $355 per thousand board feet.

One option was designed for lumber producers in eastern Canadian provinces that have been entirely resistant to export taxes but were willing to limit their export volumes.

The other option, intended for British Columbia producers, would set higher taxes but allow unconstrained volume shipments.

The $355-per-thousand trigger is lower than the 10-year average composite price of about $370 per thousand.

Ricklefs said that the 10-year price average is made up of some severely low-end fluctuations.

"When it dips, it dips hard," he said about the U.S. lumber market. "We had times within the last five years when that average was below $300."

Those periods were "disastrous" for U.S. producers, Ricklefs said. Canadians "not only ramped up production, but they were shipping into a smaller U.S. market so their market share was growing."

And those exports occurred even with steep tariffs imposed by the United States to protect American producers.

Under the agreement, Ricklefs said, there is a second price trigger at $315 per thousand board feet and a third at $300, each with steeper taxes or steeper export limits.

Canadian producers will "have to choose one of the two paths," Ricklefs said.

Hall said he remains skeptical about the agreement, partly because the Canadian lumber industry has proven to be wily, even "conniving," when it comes to finding ways to get around trade barriers. After tariffs were imposed on stud and dimension softwood, some Canadian producers got around it by shipping pre-drilled or notched studs. When that was stopped, he said, they started sending angled lumber.

Although the agreement may improve market stability for larger American lumber producers, Hall said small or mid-sized independent mills will remain at risk.

"They could still really get sandwiched between low lumber prices and high log prices" that result from a public timber market that is still short on supply and highly competitive.

British Columbia pushed hard for the ability to ship without volume limits, mainly because about 5 billion board of timber has been killed by a massive beetle infestation.

"It gives them the option to move that bug-killed timber and ship down here," he said.

There are people in the lumber business who believe British Columbia is lining itself for an eventual supply problem, Hall said.

"The key for mills on this side of the border is to survive for five to seven years, at which point B.C. will have a supply problem of their own … because of overharvesting," Hall said.

Another major part of the agreement is the proposed dispensation of $5 billion in tariffs that has been collected from Canadian producers. About 80 percent is being returned to Canada, with the remaining 20 percent retained.

Of the roughly $1 billion that's kept, about 50 percent will be distributed to mills that have been part of the ongoing trade challenge, and the other half is being retained by the U.S. government for what Ricklefs described as "meritorious causes" as defined primarily by the U.S. government in consultation with the lumber industries in the U.S. and Canada.

The meritorious cause technically does not direct the government to spend the money on anything related to the timber industry, but Ricklefs said the intent was for the money to "help build lumber demand in North America."

Of more interest to Hall is what will become of the $4 billion in tariff collections that will be returned to Canada.

"What worries me is how much of the $4 billion plus will go back to the mills in Canada," he said. That money easily could be poured into technology and automation improvements that would make Canadian mills "even more difficult to compete with."

Hall's Tobacco Valley Lumber Co. is a sales agent for three mills, and it used to broker sales for a fourth - the Owens and Hurst mill that closed in Eureka last year.

Jim Hurst, who co-owned and managed the mill, said it's unclear how much money the business will get from the $500 million in tariffs that will be distributed among U.S. producers who were part of the trade dispute.

"That remains to be seen," he said. "I'll believe it when I see it."

He questions what percentage of the money would go to small or mid-sized mills, compared with the distributions to larger producers.

Ricklefs said the agreement will involve a "tremendous amount of details" and he expects it will take several months to be finalized and ratified by the United States and Canada.

Speaking for Plum Creek, he said, "We view this as good news for the North American lumber market. It has replaced a lot of uncertainty with a fairly clearly defined arrangement. We view it as help prevent serious deterioration of lumber prices to the point where [production] capacity in this country is lost," he said.

Reporter Jim Mann may be reached at 758-4407 or by e-mail at jmann@dailyinterlake.com