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° During each year of the Canada-U.S. softwood umber agreement, the four covered provinces of British Columbia, Alberta, Ontario and Quebec will be limited to a total of 14.7 billion board feet of tax-free ex-

ports to the U.S.

Impact of markets

Continued from previous page

provinces in 1996 are expected to be 15.5 billion board feet. And when the unrestricted shipments from the non-covered provinces are included, 95 percent of all Canadian lumber imports into the USS. will enter tax-free.

It is clear that the recent media stories regard- ing the devastating impact of the U.S.-Canada lum- ber agreement are untrue. Those stories allege that the Canadian industry will have to find new markets for 2 billion board feet of lumber that had been shipped to the U.S. in 1995.

First, the number calculations are in error. Sec- ond, the availability of triggered tax-free quota and the ability of most Canadian sawmills to continue shipping an additional 650 million board feet by payment of a $50.00 (U.S.) per thousand feet ex- Port fee will substantially raise the total volume of shipments to the United States.

Third, the record 16.950 BBF in Canadian ex- ports to the U.S. in 1995 was based largely on the collapse of the offshore and Canadian domestic markets. In 1996 these markets have revived.

Fourth, major B.C. companies have adjusted to the U.S. quotas by developing more offshore mar- kets and increased value-added lumber produc- tion. For instance, some B.C. Interior companies have been splitting 2x10-inch economy grade lum- ber into a 2x4 and a 2x6 by removing the defects. The much higher prices received for upper grades More than covers the cost of remanufacturing. And the elimination of the defects removes about 30 percent of the board volume that would have counted against the company’s U.S. quota.

As a result, the impact of the U.S.-Canada agree- ment on the B.C. and Canadian softwood lumber industries will be much less than recent negative media reports have been saying.

QUOTAS UNDER THE U.S.-CANADA AGREEMENT d

The national research department has been in- volved in the efforts to set up the administrative structure required to implement the U.S.-Canada lumber trade agreement. Given the highly compli- cated nature of the U.S. marketing and distribution system employed by the softwood lumber indus- try, great care must be taken to ensure that the en- forcement mechanism which is put in place is fair to all provinces and companies. é

The most difficult issue involves the question as to whether quotas should be allocated exclusively to the primary sawmills, or whether they should be shared with the wholesalers. In order to permit Canadian sawmilling companies to maintain effi- cient control over their production and shipments to the United States, it is crucial that the primary producers be granted exclusive quotas. Without that control, there is no way to prevent whole- salers from using up the sawmills’ limited quotas by flooding the U.S. market with lumber which could better have been shipped to non-U.S. desti- nations. Moreover, the wholesalers could easily blackmail their EA aE etd on price, there- by putting jobs in jeopardy.

Once he 4 major provincial governments agree with the primary sawmilling industry on that issue, the federal government reserved exclusive control to the mills when the quota program was an- nounced on September 10, 1996. But the regula- tions do include provisions for the protection of

the wholesaling industry.

Because the U.S.-Canada agreement establishes a tax-free base quota of just 14.7 billion board feet for the 4 major producing provinces of British Co- lumbia, Alberta, Ontario and Quebec, the federal Export-Import Control Bureau had to determine how that volume will be allocated to Canadian companies. Although in past cases involving other industries the Bureau has traditionally assigned the quotas by company, regardless of province of origin, British Columbia led the effort to have the allocations carried out first by province, and then by company within each province. Provincial quo- tas are necessary in order to ensure that expanded sawmill capacity in eastern Canada does not erode the quotas which B.C. and Alberta companies should receive based on their historical shipment patterns during the mid-1990’'s.

The quota program released by the federal Ex- port-Import Control Bureau on September 10 rep- resents a compromise. Initial provincial quotas will be based on the historical percentage shares that were set in 1995. However, various provisions were included in the regulations which will allow for growth in new capacity in eastern Canada. Not only has a reserve quota been created to cover new sawmill capacity that was already in the ground by April 1, 1996, but mechanisms have also been set up to provide for new capacity that is added in future years.

It is important to emphasize that this is not an issue that pits current sawmill capacity and jobs in Ontario and Quebec versus current capacity and jobs in B.C. and Alberta. Rather, the issue pits po- tential new capacity in eastern Canada against cur- rent capacity and jobs in western Canada. No one will get all that they want, but no one should be aiming to take 150 percent of what they deserve, either.

Although both quota issues are quite complicat- ed, the terms of the U.S.-Canada agreement origi- nally required that individual corporate quotas must be allocated by September 30. However, once they are assigned they should provide some stability to the U.S. market because companies will be better able to plan for expanding into off- shore and value-added production. Unfortunately, the lack of individual quotas during the second and third quarters of 1996 has caused a rush to the border on a first-come-first-served basis.

ALOOK AT 1997 i Although U.S. lumber consumption during 1997

may be slightly less than the 1996 level, upward pressure on lumber prices will be maintained by

The dramatic increase in lumber prices which began in March, 1996 represents the shortfall in North Amer- ican timber supply and not

the impact of the U.S.- Canada lumber agreement

the continuing decline of federal, state and private timber supplies in the U.S. West. On December 31, 1996 the legislative authority for the federal emer- gency salvage law runs out. During 1995 and 1996 the salvage program only generated a small vol- ume of additional sales. However, there is ab- solutely no chance that the U.S. Congress will re- new the legislation for 1997.

And because of tight competition for timber supplies in the U.S. South, softwood lumber prices will continue to come under upward pressure. Al- though B.C. and Canadian exports to the United States will fall slightly below the record 16.950 BBF shipped in 1995, the dollar return on the re- maining volume will be much higher because of the U.S. timber supply shortfall. And the average cost to B.C. sawmills of paying the $50.00 (U.S.) per thousand board feet for 650 million board feet of additional quota will be just $7.00 (U.S.) per thousand board feet. There is no question that the incremental cost of U.S. lumber shipments under the quota system is much less than a $50 to $60 per thousand board foot tariff which was likely to have been imposed under another countervailing duty action.

OFFSHORE MARKETS

Unfortunately, until recently the Japanese mar- ket for B.C. coast hemlock lumber had deteriorat- ed during 1996 because of stiff competition from Scandinavian and Russian whitewoods and lami- nated beams. As a result, 1996 will be a less favor- able year for the coastal industry. However, the market for B.C. Coast hemlock lumber will revive over time. During early September the prices re- ceived for Japanese baby squares improved sub- stantially.

¢ Provincial quotas are necessary in order to ensure that expanded sawmill capacity in eastern Canada does not erode the quotas which B.C. and Alberta companies should receive based on their historical ship- ment patterns during the mid-1990’s.

LUMBERWORKER/NOVEMBER 1996/9