Trade war over trees looms as Canada, US remain at impasse

[WINNIPEG] Canada and the US are gearing up for another fight over trees.

US Trade Representative Michael Froman will meet Canadian Trade Minister Chrystia Freeland and Canadian industry groups in Toronto Wednesday in an attempt to end gridlock in a softwood lumber dispute that has been simmering for decades.

The US could seek tariffs that top 30 per cent against Canadian producers such as West Fraser Timber Co as early as next week. The duties could prompt Canadian companies to curtail output or shut down mills.

"It's going to be ugly," said Kevin Mason, managing director of ERA Forest Products Research, a Vancouver-based financial research company. "There's going to be mill closures. It's going to be messy."

The dispute over softwood lumber has been one of the thorniest between the world's two largest trading partners, with the spat gathering steam in the early 1980s when US companies claimed Canada gave producers access to cheap timber on government land. The battle ended when both signed the Softwood Lumber Agreement in 1996, establishing tariffs and quotas on Canadian imports.

A second accord expired in October 2015, allowing Canada to ship lumber tariff-free for a year to give both parties time for talks on a new deal.

Both countries have until Oct 12 to iron out a new accord, after which US companies can file new trade cases against Canadian imports. Canada is the world's top softwood lumber exporter and the US is its biggest export market, where it's primarily used for home construction.

The US Lumber Coalition backs the position that any new agreement should maintain Canadian exports at or below an agreed US market share. Producers in British Columbia have argued for an ability to choose between an export tax model and a hard cap volume restriction, similar to the structure of the 2006 agreement.

Monthly softwood exports to the US are up 24 per cent on average since the pact expired a year ago, data compiled by Bloomberg show. The US dollar value of softwood lumber exports to the US rose 27 per cent in the first seven months of this year to C$4.2 billion (S$4.4 billion) compared with C$3.3 billion in 2015, according to Statistics Canada.

The two sides last met in September and made little headway in resolving the dispute, according to Bloomberg BNA. Any agreement must reflect the realities of softwood lumber, including the differences in communities across Canada, Alex Lawrence, a spokesman for Freeland said in an e-mail.

"The fact is we are not looking for any deal; we are looking for a good deal for Canada," Mr Lawrence said. "Right now the US industry is not where we need them to be."

It would be an "absolute miracle" if an agreement is reached before the Oct 12 deadline, Mr Mason said. While the lack of a deal and uncertainty regarding tariffs will depress share prices for the next couple of quarters, producers with exposure to sawmills in the US south will benefit from higher volumes and low log costs, according to a Sept 23 ERA note.

Lumber production will be profitable for companies such as Weyerhaeuser Co and Deltic Timber Corp. Higher margins in the US south will offset some of the negative impact for Canadian firms with US assets, including Interfor Corp, Canfor Corp and West Fraser Timber, Mr Mason said.

Lumber shares in Canada have trailed the 12 per cent gain for the S&P/TSX Composite Index this year. Canfor has fallen 31 per cent in Toronto, while West Fraser has declined 25 per cent. Interfor has climbed 1.8 per cent to Oct. 4.

Interfor, which generated nearly 70 per cent of its revenue in the US last year, is poised to see earnings rise more than 20 per cent in the 2017 calendar year, while Canfor's profit will likely drop almost 10 per cent, according to ERA.

Canfor, West Fraser and Interfor declined to comment.

Lumber prices will probably be volatile, and small, independent producers in eastern Canada and the British Columbia coast that rely on the US market will be the biggest losers, he said. Lumber prices have rallied 31 per cent this year amid increasing demand from the US housing market.

"I think there's going to be some volatility," Mr Mason said. "Some of these firms are definitely at risk." If the US initiates a case for anti-dumping and countervailing duties against Canadian softwood lumber, Canada will probably fight back through the North American Free Trade Agreement or the World Trade Organization, said Bloomberg Intelligence analyst Joshua Zaret.

A dispute would usher in a "long messy haul" that will not help North American industry operate, he said.

"This isn't good for anyone because what it creates is a lot of uncertainty," Mr Zaret said. "It will be very volatile."

BLOOMBERG