Anticipated duties on softwood lumber dampen Canadian wood products outlook

The imposition of U.S. duties on softwood lumber will slow export growth and weigh on the industry's bottom line

OTTAWA /CNW/ – Canada’s wood products manufacturers are on track to post pre-tax profits of $1.4 billion this year – their highest levels since 2004, according to the Conference Board of Canada’s Canadian Industrial Outlook: Canada’s Wood Products Manufacturing Industry.

Going forward, however, the imposition of U.S. duties on softwood lumber will slow export growth and weigh on the industry’s bottom line.

“With no end in sight for the longstanding trade dispute between the U.S. and Canada on softwood lumber and increasingly protectionist sentiment south of the border, it is more likely that Canadian producers will face trade action by the U.S. and heightened restrictions in the coming year,” said Michael Burt, director, industrial trends. “Trade action will likely come in the form of import duties, which would increase the costs of exporting to the U.S. With softwood lumber accounting for more than half of industry’s wood product exports to the U.S., various producers must evaluate whether they can continue to export to the U.S. profitably.”

Highlights:

• After seeing pre-tax profits shrink in 2015, wood products manufacturers can expect to see pre-tax profits reach $1.4 billion this year.

• With no new agreement in sight, it is increasingly likely that Canadian producers will face heightened restrictions on lumber exports to the U.S. in the coming year.

• In addition to potential trade protectionism from the U.S., the Canadian lumber industry will have to contend with decreased demand from China and an aging workforce.

In the near-term, duties are expected to cut Canada’s shipments to the United States. However, the severity of the production cuts will depend on factors such as the location and size of the sawmills.

Producers in Central and Eastern Canada are heavily dependent on U.S. demand. In the case of Ontario, over 95 per cent of wood exports are destined south of the border. Smaller firms will also face greater difficulties in adapting to the new import duties as they typically have less ability to redirect production to distant markets.

Western Canadian producers will also be made worse off by the new tariff, but in contrast to the rest of Canada, B.C. producers have made great inroads in diversifying their trading partners, with more than one-third of its wood product exports destined for markets beyond the U.S. Moreover, large companies have been able to make significant investments in U.S. mills, diversification that should allow these companies to better manage the duties when they come into play.

Current economic conditions also play a role. In the current economic climate, a relatively healthy U.S. economy is supporting a strong housing market, with housing starts forecast to grow to 1.79 million units by 2021.

Domestic American firms would likely only satisfy 65 to 70 per cent of U.S. lumber demand. As a result, the U.S. will continue to need to source a decent portion of their lumber demand through imports.

Revenues will record a sturdy gain in 2016 as both production and prices are forecast to push higher, resulting in an uptick in industry margins and profitability this year. Starting in 2017, the financial picture of the industry is expected to moderate, as the imposition of U.S. duties on softwood lumber slow export growth and weigh on industry margins.

But barring the outright imposition of quota restrictions in the U.S. market, stronger housing demand south of the border should continue to provide underlying support for Canada’s wood products manufacturers and allow the industry to register a stronger financial performance between 2018 and 2021.