Greens Deserve Thank-You Note
Efforts of environmentalists to restrain cutting of old-growth forests in both the United States and Canada boost lumber prices, raising corporate profits handsomely
EVERYONE knows there is no love lost between Canada's big lumber companies and the ranks of environmentalists trying to stop the cutting of this nation's old-growth forests.
But politics aside, some industry analysts are suggesting the unthinkable: That the companies should send environmental groups a thank-you note at year's end - for the strong profits they made.
"The companies will be profitable this year mainly because the environmentalists want park land and wilderness areas set aside, and that creates a shortage," says Stephen Atkinson, a forest industry analyst at Burns Fry Limited in Montreal, a stock brokerage.
Mr. Atkinson is quick to make clear that he is talking about Canada's lumber industry, the healthiest sector of this country's mammoth $33 billion (Canadian; US$25 billion) forest products industry. Lumber sales last year were $7.5 billion, or about 23 percent of total forest product sales, according to the Council of Forest Industries, a Vancouver, British Columbia-based trade association. Massive losses
The forest products industry, which includes depressed commodities like wood pulp, paper products, and newsprint as well as profitable lumber, lost $1.4 billion last year. Analysts expect another overall loss this year for forest products. By contrast, lumber posted $199 million in net earnings last year and Atkinson expects those profits to more than double this year.
"There's no question [higher prices] have helped the industry come out of the red," says Sheila Foley, spokeswoman for the Council of Forest Industries. "People think the price will remain higher because of the shortage of lumber."
She warns that environmental challenges may cut back the timber harvest and make it impossible for the Canadian lumber industry to ramp up production for when the US and Canadian economies bounce back and home building accelerates. Some predict that higher lumber costs could add US$5,000 or more to the cost of a new home.
Yet lumber prices are relatively low right now, having been "up and down like a yo-yo" this year, says a lumber executive. Driving the volatility has been a weakening Canadian dollar and environmental victories in the northwest of the United States and weak housing starts in the US.
"This year is totally different from anything we've ever seen before with these highs and these lows," says Leah McNutt, an assistant editor of Madison's Canadian Lumber Reporter, an industry newsletter.
Prices soared in February as speculators, anticipating a home-building boom in the US, snapped up lumber futures on the Chicago Mercantile Exchange. The price of two-by-fours - a standard building block watched by Ms. McNutt and others - rose from US$305 per 1,000 board feet in January to US$475 by March. But when new home sales in the US did not boom this spring, the bottom fell out. The price of two-by-fours hit a low of US$220 in July, now up to US$275. Timber shortage
President Clinton's decision to spare huge tracts of old growth forest in the US Northwest from logging had a big impact, eliminating about 3 billion board feet of timber from coming to market, some analysts estimate. It created a shortage of lumber in the western US, causing Canadian companies to ship more lumber at higher prices early this year.
Meanwhile, environmentalists in British Columbia pushing to stop the logging of old growth rain forest on Vancouver Island in a place called Clayoquot Sound have created a threat of Canadian shortages in the future. In April the government in British Columbia, attempting to find a compromise with environmentalists and loggers, put some areas of Vancouver Island off bounds to logging. Neither group was happy.
Canadian companies worry that if in the future Clayoquot and other prime areas are placed off limits, logging jobs and the most profitable areas to log will be lost forever. Clayoquot's huge trees produce a high volume of lumber per acre, they say, providing the maximum number of jobs and income per acre.
So far, however, shortages and the threat of them have had the unexpected effect of making the industry more profitable, analysts say. Even though prices fell from a speculative peak in March and are near this year's low, that level is still higher than in past years, thus enhancing lumber industry profits, McNutt says.
"A lot of [the wild price variation] has to do with supply, and perceptions of supply," she says. "What's happening in Clayoquot and what's happening in Oregon with their cutting rights - it's all relating to what's happening to supply."
Canada's prime economic beneficiaries are major western companies that focus on lumber production and which have acquired rights to cut forests on large tracts of public land. The losers, Atkinson says, are mostly the big eastern companies whose public supplies of wood no longer include the kind of huge old growth trees found out west that produce the most revenues. Some companies lose out
As a result, International Forest Products, Pacific Forest Products, MacMillan Bloedel, and other western companies will make hundreds of millions of dollars this year, Atkinson says. Meanwhile, Canadian Pacific Forest, Abitibi-Price, and other eastern-based companies stand to lose millions, he says.
John Sereny, chairman of Green Forest Lumber Corporation, the largest lumber wholesaler in Canada, sells much of what he gets to Grossman's and others big chain lumberyards in the US. As middleman between the companies and the retailers, his business is booming, he says.
When lumber prices surged early in the year, his sales soared. Even now that prices have fallen back, he says this year's sales of around $300 million will be "very good" compared with $245 million only two years ago.
In the long run, rising environmental concerns will begin to register in Canada and limit timber supplies, though it will also help keep lumber prices up, say Mr. Sereny, McNutt, and Atkinson.
"Even though industry is battling with environmentalists, its the environmentalists that are making them profitable," Atkinson says. "The environmentalists are their best friends."