Canadian pulpmills are paying higher wood costs as supply tightens
13/10/2008 - 10:11
Softwood wood fiber prices are currently close to a 12-year high in British Columbia,
according to the market report North American Wood Fiber Review. As chip prices in BC
tend to follow pulp prices, wood costs have remained practically unchanged in 2008, but
were over 30% higher in the 3Q/08 than they were two years ago.
Wood costs continue to be much lower for pulpmills in British
Columbia and Alberta as compared to the provinces in Eastern Canada. In the 3Q, there
was more than a 30% fiber cost discrepancy favouring Western Canada. Historically,
pulpmills in Eastern Canada have had substantially higher wood costs with the exception
of a few quarters in 2001 when costs were on par. Since wood costs account for between
40-50% of the variable production costs when producing wood pulp, there are likely to be
the most casualties in the pulp industry in Eastern Canada in 2009 when pulp and paper
prices are expected to decline.
Lumber production in Canada is continuing its downward spiral with no end in sight,
reaching a new low in the 2Q. Production was down 22% from a year ago and was 27%
lower than two years ago. In recent months, sawmills in Ontario and Quebec have been
harder hit than in the western provinces, which is a turn-around from earlier in the year.
The reduced supply of residual chips from sawmills is a major problem for pulpmills
throughout Canada as they historically have relied to a large extent on this relatively
inexpensive fiber source to stay competitive with US and European pulp and paper mills.
Three years ago, pulpmills in British Columbia consumed 95% residual chips from
sawmills; today, they are using 30-40% roundwood chips, which are coming mostly from
beetle-killed timber in the Interior of the province. This new more expensive wood fiber
source will continue to be very important until housing starts (and lumber demand) in the
US are on the rise again, and this is not expected to occur anytime soon. Unless the
Canadian dollar weakens against the US dollar and sawmills are becoming more
competitive in Canada, pulpmills will continue to rely on costly roundwood chips and
total wood costs will stay high well into 2009.
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