After five years of acrimony with the United States, the Canadian forest industry finally abandoned its battle for free trade in lumber in 2006.
It accepted a deal that guarantees access to the world's largest building products market in exchange for a tax on Canadian wood and the return of only $4.3 billion US of $5.3 billion in duties.
The free trade agreement, which quietly received royal assent Dec. 14, was by far the largest event in the forestry sector last year. For five years it had dominated the economic and political landscape, spawning an industry of its own peopled by trade lawyers. Their fees alone have drained $100 million from federal and provincial coffers and at least as much again from their forest industry clients.
On top of the costs, there was a huge pot of money, $5.3 billion US in duties, being held by the United States. In the spring of 2006, a growing number of politicians and corporate leaders were beginning to accept the fact that a tax on Canadian products -- even though the North American Free Trade Agreement and America's own courts find there is no cause for it -- was a way to heal the festering trade wound and repatriate most of that $5.3 billion.
In the U.S., battle fatigue was also evident.
"[Word] trickled down even to my level that [U.S. President George W. Bush] was quite keen . . . to resolve the dispute in a way that was equitable to both sides and to move on," U.S. State Department official Elizabeth Whitaker told The Vancouver Sun in October.
So on a Friday afternoon in March, when B.C. Forests Minister Rich Coleman was driving along the Coquihalla Highway, and his phone beeped, displaying the number of Michael Wilson, Canada's freshly appointed ambassador to the U.S., he suspected a breakthrough had been achieved.
"They are serious about talking," Wilson said of the Bush administration.
Coleman met with Premier Gordon Campbell later that day and the decision was made to send softwood negotiator Ken Dobell to Washington to negotiate.
It signalled the beginning of a month of talks with industries on both sides of the border setting up electronic "boiler rooms" where executives kept abreast of the diplomatic progress through daily conference calls.
It was a tough negotiation, said Coleman, who, as forests minister for the largest lumber producing province, played a leading role.
The day before the deal was finally reached, Coleman believed the Americans would not budge on a crucial demand: the price at which the tax would kick in. Its intent was to make Canadian lumber more costly in the U.S. and Coleman wanted the cap to be lower than the Americans had been willing to go.
"It was Wednesday night of April 26 -- it's amazing how you remember some dates -- and I was talking to Wilson and I told him that I didn't think it could get done because they weren't giving me the high-value cap and I didn't like the price structures they had," Coleman said. "I went to bed that night figuring nothing was going to happen."
Then, at 5 a.m. on April 27, Wilson called with the news the Americans had moved.
Coleman spent the rest of the morning briefing the premier and industry. He walked into cabinet that afternoon convinced the majority of B.C. industry players supported the deal although there were a number of hold-outs.
At 2 p.m., Campbell and Harper announced separately that Canada was ready to accept the framework agreement.
The Tories got the credit for the agreement but the mechanics of the deal had roots in a plan brokered in November 2005 under the Liberals by Frank McKenna, former Canadian ambassador to the U.S.
McKenna's deal faltered when the Liberal minority government fell and the Stephen Harper Conservatives were elected in January 2006.
But it was soon resurrected when former Canfor president David Emerson jumped from the Liberals to the Conservatives and was named minister of international trade. Despite solid wins at NAFTA dispute settlement panels and a final victory on the horizon in American courts, settlement of the dispute became part of a larger policy of repairing relations between the two nations.
Companies reluctantly supported the deal, most recognizing that a negotiated settlement was inevitable despite Canada's legal victories. They got back 80 per cent of the duties they had paid, leaving $1 billion US with their American rivals.
But outstanding issues remained, specifically an exemption for lumber made from logs harvested from private lands in this province. The industry in the U.S. South did not want it and out-voted members from the West, who supported the exemption.
The private land exemption was only one of a number of irritants that almost caused the deal to unravel over the summer as Harper and Emerson cajoled and bullied industry players to stay on board.
Canfor Corp., the largest Canadian lumber producer, agreed to support the deal but its board had concerns that, should lumber prices slip, the tax burden would be onerous on the company.
There was opposition from other companies. Canada had been winning its arguments that the U.S. duties were illegal. The negotiated settlement put an end to those court cases. Plus, coastal forest companies had not received what they believed they needed to survive.
"This is the way the world ends. Not with a bang but a wimper," said lumberman David Gray, of the B.C. producer Mill & Timber, commenting on the outcome of the legal battle.
"Welcome to the world of managed trade," Rick Jeffery of the Coast Forest Products Association said on Oct. 12, the first day of the new agreement. That's when a 10.7-per-cent American duty was replaced with a 15-per-cent Canadian tax, threatening the ability of the coastal saw-milling sector to attract new investment.
It wasn't supposed to work that way when Harper announced the framework deal six months earlier.
Then, a robust American housing market in need of Canadian lumber, was supporting prices above $355 US a thousand board feet, the trigger price for an export tax that escalates as prices fall. Harper could crow then that Canadian companies would be paying no tax at all under the agreement.
But the U.S. housing market was already starting to sputter and by the time the deal was implemented, prices had dipped below $315 US a thousand board feet, the trigger price for the maximum tax of 15 per cent. At a time when revenues were declining, Canadian manufacturers faced an additional cost of 15 per cent. Within two weeks of the deal being implemented, 11 Canadian sawmills announced closures or curtailments.
Shutdowns have escalated since. Prices finished the year at $293 US and analysts forecast little improvement for the first half of 2007.
"There is simply too much sawmilling capacity in North America chasing a declining lumber market," Russ Taylor, president of International Wood Markets Group said in his December report. "Between four and five billion board feet of capacity must be taken out of the market to match supply with anticipated demand.
"This means that continued sawmill downtime and permanent closures will be a fact of life for much of 2007 until the housing market rebounds."
With the burden of a 15 per cent tax, Interior B.C. producers, even though they are the most efficient in North America, will feel the pinch of declining demand. After several years of gains through the mountain pine beetle harvesting program, production will fall marginally in 2007, Taylor forecasts.
The concern Canfor's board expressed about paying a 15-per-cent tax has become a reality.
"You never want to live with a tax that big," said Ken Higginbotham, Canfor's vice-president of forestry and environment. "We, like everyone else, are really struggling right now."
But Canfor has taken the position that, over the business cycle, the tax will not remain at 15 per cent and that the certainty provided by the deal outweighs the risks.
Higginbotham noted that had lumber prices remained stronger, the return of the duties might have prompted more mergers and acquisitions within the Canadian industry. Instead, investments in existing operations to reduce costs are more likely, he said.
On the B.C. Coast, the issue of logs from private lands, which are now largely being exported to the U.S., remains unresolved.
On Dec. 13, the B.C. government released a report on log exports that foreshadows a continuing battle with the United States.
Log prices in British Columbia are depressed because of trade barriers and that is a leading reason why more of this province's timber is flowing unprocessed into the United States, according to the report by Don Wright, a former deputy forests minister, and Bill Dumont, former chief forester at Western Forest Products.
"It is the foreign barriers to the export of our lumber, not the restrictions on the export of logs, which cause the reduction in our prices," the two consultants state. The higher the export charge, the more logs will flow to the other country, they say.
Log exports in B.C. are always controversial. There's a perception -- which is difficult to quantify according to the report -- that exporting logs is the equivalent of exporting jobs. The government's own report has tied that volatile issue to softwood, where there is still simmering anger over American resistance to Canada's clear NAFTA victories.
Coleman said that the issue will be dealt with before a yet-to-be-appointed bi-national panel in the New Year. The log export report is his ammunition. The Americans are also preparing their case.
Despite lingering irritants, the settlement of the softwood dispute has had an upside for the Canadian industry: mainly the return of $4.3 billion US in duties. Some Canadian companies have wasted little time in putting that money to work.
In late November, with its $260 million US in duty refunds already in its pocket, West Fraser Timber went on a buying spree, announcing it was purchasing 13 sawmills in the Southern U.S. for $325 million US.
The purchase will make West Fraser the continent's second largest lumber producer, smaller only than Weyerhaeuser.
Canfor Corp., which will slip from the No 2. spot to No.3 once the West Fraser deal goes through, has also announced plans for some of its duty refund. Shareholders were rewarded Nov. 30 with an in-kind dividend of 1.49 shares in Canfor's pulp income trust for every Canfor share they hold. The dividend has a value of $233 million, reducing Canfor's holding in its pulp fund from 80 per cent to 51 per cent while leaving intact its $554 million US after-tax duty refund.
That half-billion in cash has prompted Canfor to re-examine its two-year-old strategic focus on lumber and solid wood products before committing to spend it.
Higginbotham said if the focus is to remain on wood products, which is likely, the board wants more specifics. Diversification, such as converting a mill to metric sizes for the Asian or even the European market, are possible examples of the details the board wants to examine. Mergers and acquisitions have not been ruled out.
Other companies that have announced plans for the cash include Western Forest Products, which has used $88 million US of its $109.6 million US refund to pay down long-term debt. The remaining $21.6 million is to be used for working capital purposes.
Pope & Talbot, a U.S. company with most of its operations in Canada, is also paying down debt.
Interfor, which has been refocusing its business away from the B.C. Coast and into the U.S. market, has announced no plans for its $70 million U.S. in after-tax refunds.The Vancouver Sun
