IN THE NEWS ~ Eastern Canada lumber producers suffer most from U.S. duty and West could be next

PUBLICATION: New Brunswick Telegraph-Journal
DATE: 2009.04.09
SECTION: Business
BYLINE: Brenda Bouw and Ross Marowits THE CANADIAN PRESS
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Eastern Canada lumber producers suffer most from U.S. duty and West could be next

Softwood lumber producers in Central Canada will be hardest hit by a new U.S. duty on Canadian exports and some believe western producers could be next as the government seeks new ways to generate cash in the troubled sector.

With the United States set to slap a 10 per cent duty on Canadian imports of softwood lumber next week from four provinces - Ontario, Quebec, Manitoba and Saskatchewan - industry players believe the British Columbia and Alberta could be penalized next.

NDP critic Peter Julian said the anti-circumvention clause in the Canada-U.S. softwood lumber agreement provides ammunition for the United States to challenge many Canadian lumber practices.

"Although it hasn't been formally filed yet, it's a matter of time," said Julian, whose opposition party opposed the deal signed in 2006.

In particular, he said stumpage rates in B.C. could be a target and the penalty could be in the "hundreds of millions of dollars."

Rick Jeffery, president and CEO of Coast Forest Products Association, said the American lumber industry has been pointing to the B.C. stumpage system for years as a source of subsidy, something that is not allowed in the softwood deal.

He agreed the recent tax ruling "creates an incentive" for the U.S. government to launch more ligitation, even though stumpage fees are supposed to be covered in the deal.

Chris McIver, vice-president of lumber sales at Vancouver-based West Fraser Timber Co. Ltd (TSX:WFT), said while he hasn't heard or seen anything that says there is another challenge pending, the Americans "continue to look for opportunities."

"I wouldn't be surprised if they would look at anything that would generate a penalty," said McIver.

John Allan, of the Canadian Lumber Trade Alliance, said the United States has complained in the past about timber pricing policies in B.C. and Alberta, but taken no official action.

He said the Bush administration sent a letter a year ago requesting further discussion around the price and volume of mountain pine beetle wood being shipped to the United States.

Allan said the Obama government has been in touch on the topic, but so far has only set up site visits of the forest where the beetle wood is harvested.

When asked about future penalties against Canada, a U.S. Trade Representative spokeswoman said it "cannot speculate on possible future action."

The are currently two arbitrations between the U.S. and Canada on softwood lumber. The first is the one involving the four provinces and the second involves just Ontario and Quebec.

In February, an international tribunal found Canada failed to properly calculate quotas on exports to the U.S. for the first six months of 2007, and ordered the country to fix the breach.

Canada offered a payment of US$36.66 million, but the U.S. said Tuesday it is owed US$54.8 million. It is imposing the 10 per cent tax starting April 15 until it has collected the full amount.

In the second arbitration, the United States alleges Quebec and Ontario put in place assistance programs that provide grants or other benefits to softwood lumber producers. A decision on that matter is expected later this year.

The new tax is expected to cause even more jobs losses at mills, primarily in Ontario and Quebec, which are already suffering from a collapse in the U.S. housing market and a slump in demand for paper products, such as newsprint.

Michel Vincent, director of economics, markets and international trade for the Quebec Forest Industry Council, said the industry is already on the verge of a major bloodletting.

He predicted Quebec will be hit hardest by the tax because it is the largest exporter to the U.S. of the four provinces involved. Saskatchewan and Manitoba aren't exporting now, he said.

"At the end of the day, Quebec will pay more than its fair share," he said.

Tembec Inc. (TSX:TMB) said Wednesday it is assessing the impact of the ruling on the company, but wouldn't say if it might lead to layoffs.

"We are disappointed, but frankly, not surprised," said John Valley, executive vice-president of business development and corporate affairs.

"This decision is consistent with the heavy-handed approach taken by the U.S. government on behalf of the lumber coalition throughout this entire dispute. It is particularly disappointing to see this action, given the positive settlement option proposed earlier by the government of Canada."

AbitibiBowater (TSX:ABH), which is working on a last-minute effort to recapitalize its debt to avoid having to seek bankruptcy protection, said the tax comes at an already troubled time for the industry

"All of this contributes to what is already an extremely difficult market and economic situation. So this isn't anything that any of us need to happen right now," AbitibiBowater spokesman Seth Kursman said.

"We believe that the federal government's proposal for remedy was sufficient and it's unfortunate that the U.S. didn't let that process see its way through before taking this unilateral action."

Paul Quinn, a forestry analyst at RBC Capital Markets, said eastern producers will bear the brunt of the new tax, especially since lumber margins have dropped significantly since the deal was signed in 2006.

"Additional export taxes on Eastern Canadian lumber producers would be negative for paper and forest products companies with Eastern Canadian sawmills, including Tembec, AbitibiBowater and Domtar, but would result in a relative advantage for Western-based lumber producers, including Canfor, West Fraser and Interfor," Quinn said.