|Photo:© Greg Pickens - FOTOLIA|
The U.S. and Canada finally signed a deal on Sept. 12 that would end a dispute over Canadian exports of softwood lumber that has dragged on for over two decades. The deal, which has been in the works since last May, still needs to be approved by the Canadian Parliament and Canadian lumber firms have to agree to drop all litigation. Both steps are widely expected to happen.
While the deal offers something for both U.S. and Canadian producers it offers very little to contractors. With both price and implicit quota triggers, the new accord is designed to prop up prices. Analysts fear that it will lead to greater volatility in lumber pricing. The National Association of Home Builders, Washington, D.C., says the agreement will “destabilize the U.S. lumber market.”
At the heart of the complicated pact is a price trigger tied to the composite lumber price published by Random Lengths, Eugene, Ore. When this price is above $355 per thousand board ft there are no restrictions on trade. However, as this price falls penalties start to kick in, giving Canadian producers two options. They can pay a stiff export tax or a lower tax tied to a hard-cap quota.
In August, the Random Length trigger price was $296, meaning that if the agreement were in effect Canadian producers would pay the maximum penalty.
Based on their current market share, producers in western Canada would most likely pay the 15% export tax with unrestricted volume in exports, the so-called “Option A,” says Paul Jannke, an analyst with Bedford, Mass.-based forecasting firm Resource Information Systems Inc. Producers in eastern Canada would most likely choose “Option B,” which is a 5% export tax tied to a 30% hard-cap quota, based on current price levels, Jannke adds.
In addition, there is a surge mechanism, which prevents “Option A” firms from shipping too much lumber to the U.S. If their shipments exceed their 2004-05 average market share, then their export tax increases by 50%.
In contrast, current duties on Canadian lumber are 11%. In addition, a surge in European imports, not covered by the agreement, reduced Canadian lumber to 33.4% of U.S. consumption in 2005, the smallest market share in more than a decade, says Barry Rutenberg, a member of NAHB’s executive committee.
A major provision of the deal is that Canada will collect any new export taxes as opposed to the U.S. collecting tariffs. The U.S. has collected an estimated $5 billion from Canadian lumber producers, but will return $4 billion to the Canadian firms under the deal. However, the end result on lumber prices for consumers is the same whether the U.S. or Canadian governments bank the penalty.
“Initially, the trade deal is going to throw a lot of uncertainty into the marketplace,” says Jannke. “Dealers traditionally build inventory between December and February and this year we think they will be buying at higher prices because they don’t know what is going to happen. The Canadians will want to feed through that 15% tax.”
The trade deal comes at a time when overwhelming market forces are pushing prices down, the result of a slowdown in the housing market and overcapacity in the industry (see related story). “Western spruce prices have fallen from $327 per thousand board ft in July of 2005 to around $278, where they seem to have stabilized,” says Jannke. “If I had to pick between supply or demand I’d say supply is the bigger problem,” he adds.
Industry capacity on the U.S. west coast since last year has increased from 12.4 billion to 12.9 billion board ft. In British Columbia, it rose from 18.6 billion to 19.2 billion board ft. Industry wide, U.S. capacity is up 3.2% from a year ago, to 19.2 billion board ft. “There is a lot of capacity in the industry and that is keeping prices down,” says Jannke. “Dealers are drawing down their inventory because they know that as soon as prices pick up a little production will shoot right back up again.”