Canadian producers to appeal U.S. softwood ruling.

‘Quite stunned’ by U.S. claim of injury

CALGARY • Lumber producers in British Columbia say they will appeal a ruling Thursday by the U.S. International Trade Commission that imports of subsidized Canadian softwood have hurt U.S. companies.

“I’m quite stunned that there’s a decision that says the industry is injured because the industry in the U.S. is experiencing and enjoying record levels of operating profitability — more than they ever have in the 35 years we’ve been having this dispute,” Susan Yurkovich, president of B.C. Lumber Trade Council, said shortly after the ruling was made public.

Yurkovich said she was disappointed by the ITC’s ruling, in which a four-person panel sided unanimously with a coalition of U.S. forestry companies that an anti-dumping duty should be imposed on Canadian softwood lumber imports.

Throughout this longstanding dispute, U.S. companies have argued their Canadian competitors have an unfair cost advantage because they cut trees on public rather than private land.

In response, Canadian firms have argued any advantage is misconstrued because they pay a fee for each tree stump to the government.

As a result of the ruling, most Canadian forestry companies will pay a combined 20.83 per cent duty and antidumping tariff to sell their products into the U.S.

Yurkovich said her group, which represents major forestry companies such as Vancouver-based West Fraser Timber Co. Ltd. and Canfor Corp., is already working to appeal the decision to the World Trade Organization and under the North American Free Trade Agreement, which is currently being renegotiated.

“I went to the hearing and listened to the U.S. industry talk about how they were injured. Then, in our presentation, the case we presented for Canada, we had their same companies crowing on their analyst calls that the future looked very bright and demand was fantastic and profitability hadn’t been so good since 2004,” Yurkovich said. “So I don’t know how you can square those things.”

The duties on Canadian wood will remain in place while the appeal process is underway and even if the WTO sides with Canadian companies, there is no possibility of financial reimbursement for Canadian producers through that process, said Kevin Mason, managing director of ERA Forest Products Research. He expects “at least a year before we get any movement on any front” with respect to appealing Thursday’s decision.

Shares in West Fraser and Canfor both jumped almost 2 per cent to close at $76.82 and $25.01, respectively, in Toronto — a sign, analysts say, the duty will largely be passed onto U.S. consumers rather than the companies’ shareholders.

A report from Moody’s Investor Service last week estimated the duties would cost Canadian companies $1.2 billion next year, but U.S. homebuilders will drive increased demand amid an expected 6 per cent increase in housing starts thanks to rebuilding effort following hurricanes in Texas, Florida and Puerto Rico.

“This is credit positive for our rated Canadian and U.S. lumber producers, as high prices will outweigh the cost of the duty,” Moody’s senior vice-president Ed Sustar said in its release before the ITC ruling.

He added that U.S. lumber companies like Spokane, Wash.-based Potlatch Corp. and Atlanta’s Georgia-Pacific LLC would see the most upside from the duties. Potlatch shares were up roughly 1 per cent to US$51.15 each at mid-day on the Nasdaq.

Prices for Western Spruce/Pine/Fir (SPF) products have recently hit historic highs, ERA’s Mason said.

Data from Bloomberg show lumber traded at US$425.70 per thousand board feet on Thursday, which is off the high of US$460 per mbf set in October, but still far above historical averages.

Mason said he expects Western SPF prices to average close to US$400 per mbf this year and decline slightly to average US$390 per mbf next year.

“Right now prices are high enough, and we think they’ll continue to be high enough, that we think the majority of Canadian producers are going to keep going,” Mason said.

“We’re going to have record-breaking fourth-quarter (earnings) numbers coming out.”

BMO Capital Markets analyst Mark Wilde recently boosted estimates for West Fraser, Canfor and Interfor Corp. due to the high prices the industry has enjoyed in recent months, noting that “almost everything went right” in the quarter.

He noted that Western SPF prices are up because summer forest fires across British Columbia limited the supply of wood while demand is expected to continue to rise as major U.S. population centres like Houston rebuild after devastating hurricanes.

Still, Wilde cautioned investors that he retains a “market-perform” rating on the stocks because “chasing commodity stocks in ‘peaky’ markets is seldom a good investment strategy.”