VANCOUVER – Despite China’s increasing appetite for Canadian forest products, there will be no solid recovery for Canadian sawmillers until Americans start building more houses, leading industry experts told a Vancouver forestry conference Wednesday.
Forest companies worldwide have pulled out of the recession and are now profitable, but the recovery is fragile and they are still not earning enough money to attract new capital, said Fred Bouchard, a partner in consulting firm PwC’s forest paper and packaging practice.
"It’s small steps toward a more profitable industry," Bouchard told 450 people attending PwC’s annual global forest industry and paper products conference.
"I think we are not completely out of the financial crisis but progress has been made."
Canadian producers still face a stagnant U.S. economy, a high Canadian dollar and challenges from digital media, he said.
The prospect of a weak U.S. market for Canadian lumber is expected to bring a change in direction in the forest sector toward more higher-valued products, stimulating mergers within the industry and cross-industry partnerships to develop new products.
New alliances with other industries and mergers should result in better access to capital to expand the number of products derived from wood.
In the meantime, the Canadian industry faces at least two more years of depressed demand in the U.S.
Forest companies have climbed out of the deep hole they were in during 2009, when Canada’s forest companies were the world’s worst performers for return on capital employed (ROCE). It was negative three per cent, Bruce McIntyre, Canadian leader of PwC’s forest and paper practice, said in an interview.
In 2010, it had ROCE of 3.8 per cent. B.C. outperformed Canada in 2010, going from negative 1.7 per cent in 2009 to 4.6 per cent.
"We are hoping that performance will hold. It’s still nowhere where it needs to be, with the cost of capital at 10 to 12 per cent, but it’s certainly turning in the right direction," McIntyre said.
B.C. companies are making money, he said, but it’s largely driven by Asian demand and it’s not enough to meet the cost of borrowing, essential if the industry is to grow.
"To really return the industry to strong financial health, we do need that U.S. housing sector," he said. "The expectation is that the U.S. housing market will not come back in any significant way for probably another two to three years."
Canfor president Don Kane responded to the outlook in an email, saying the lumber giant remains "very cautious" regarding the U.S.
"It will likely be mid-year 2012 before we see any measurable recovery in the housing sector. Our ongoing and increasing success in developing Asian markets, specifically China, is very promising in mitigating some of these effects."
Lynn Michaelis, senior economist with the research firm RISI, put some numbers on the depth of the U.S. housing crisis, telling the conference that U.S. families have suffered a "massive" $7-trillion loss as a result of the collapse of housing prices.
Further, Americans are moving away from home ownership to renting. A key statistic indicating a turnaround, he said, is new household formations and in the U.S. they have fallen from 1.1 million a year six years ago to 350,000 a year in 2010.
"We are still years away from a tight lumber market," he said.
ghamilton@vancouversun.com
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