The controversial Canada-U.S. softwood lumber deal comes into force today, a day after Domtar announced the closure of four mills in Quebec and Ontario and two days after Abitibi announced the closure of some mills in Quebec. The closure of these mills will result in the loss of about 2,000 jobs but, in a place like Matagami, Que., where Domtar is shortly to exit, there really is no other employer and that means these layoffs could result in the deaths of entire communities. BMO Nesbitt Burns analyst Stephen Atkinson warned earlier this summer that, if the softwood lumber deal passes, it would make it more difficult for forestry companies to maintain operations in Ontario and Quebec and he predicted some would cease operations.
The Softwood Lumber Agreement, if enacted as is, could have a signiicant detrimental impact on the Canadian Paper and Forest Products sector. We would expect shutdowns of both lumber and pulp and paper facilities, especially in the East.
– Atkinson, “The Bad and the Ugly”, analysis of the Softwood Lumber Agreement, published for clients of BMO Nesbitt Burns on July 11, 2006.
Atkinson elaborated on that point when he spoke to the Commons Standing Committee on International Trade on July 31.:
… I don't have any political affiliation. I look at North American stocks. The weighting of my U.S. stocks that I follow is eight times that of the Canadian. A good reason for that is that the Canadian sector has been shrinking, as we all know.
My job is to find companies that can earn their cost to capital; it's not a responsibility I take lightly. The business has to be viable. We are in a global economy or global environment, and what it says is that you've got to be low cost; if you're high cost, you go bankrupt, and that's what we've been watching.For instance, in eastern Canada the wood costs are more than double what they are in the U.S. south. At the same time, the margins on pulp, for instance, while they are resilient, are over 40% higher, so it's only a matter of time before they continue to get squeezed out . . .So what do I expect to happen? Well, we have what appears to be the export charge, where B.C. is going to run flat out, and you have the volume restraint, which will be the rest of Canada. When I say B.C., I just mean the B.C. interior, which is about half of our production.
So it's the worst of all worlds. You can't be half pregnant. It's either that you have a quota or you don't. If you have one running flat out and the other part of the world doing, shall we say, volume restraint, it's not going to work. You're just going to have low prices; that's all it is.The way I look at it is that, yes, Canfor and the companies with the pine beetle will run flat out. Canfor will shut down the lumber mills in the non-beetle region. Northern Ontario and Quebec will get beaten up, especially in pulp.You see, the insidious thing about all of this is that when you knock out the lumber mills, you reduce the chip supply. When you reduce the chip supply, the wood cost goes up. When the wood cost goes up, down go the newsprint mills and bankrupt go the pulp mills. So the way I look at it right now is that something has to give on the wood costs. Canada has to have the flexibility to be able to lower the wood costs, because as you just think about it, if you knock out the lumber mills and the wood costs keep going up, then that's it: northern Ontario, and certainly the pulp mills in the region, won't be around.To summarize where I am, then, it is that looking at the agreement doesn't make me feel very good about recommending stocks to investors, so basically I'm going to have to wait for another day.
Today, at a press conference in Toronto, Prime Minister Harper was asked, essentially, if the softwood deal was a factor that led to the closing of the mills. Here's my transcription of his response:
“No. It's quite the opposite. This is really due to two things. It's due to the softening of the lumber market in the United States which is one of the reasons we had to get the softwood lumber deal signed otherwise things were going to get a lot worse a lot more quickly. There are also some long-term trends in the forest industry that are troubled. There are challenges in the industry particularly on the pulp-and-paper side and we said all along the softwood lumber deal is necessary to provide stability for our industry in the future but it's not sufficient. The government will be coming forward with additional measures to help the industry.”