Exporting opportunity

By Katherine Palmer Gordon, September 2012

While fleets of log-laden ships depart our shores in growing numbers, scores of mills have closed resulting in massive job losses in BC. With so few mills left to send logs to, logging companies claim exports are the only way to stay in business. With the removal of the requirement that forest companies holding tenure on Crown forestland must mill that timber locally, there’s little or no impetus for them to invest in much-needed infrastructure that would provide an alternative to log exports. What will it take for BC to stop exporting so much home-grown opportunity to Asia?

"Advocates of raw-log exports in British Columbia claim log exports create employment. The truth of the matter,” the United Steelworkers Union declared bluntly in a May 2012 publicity campaign linking massive BC job losses to record volumes of log exports, “is that raw-log exports kill BC jobs.” 

A few months earlier, the Truck Loggers’ Association had kicked a similar but opposing crusade to support log exports into high gear. “Many people continue to insist that exporting logs means we are exporting BC jobs,“ stated TLA Executive Director Dave Lewis in a February 2012 press release. “This is simply not the case. Log exports support jobs in the logging and transportation sectors. The last thing we should be doing,” insisted Lewis, “is sacrificing the jobs we already have by banning log exports.”

It’s an acrimonious battle line between BC’s manufacturing sector and harvesting companies that goes back a long way. It’s not just an economic issue; it’s a highly emotional one in a province where trees and wood products have been the backbone of the economy for more than a century, and where protection of both our forests and our manufacturing jobs is dear to the heart of most British Columbians. 

Log exports were banned as far back as 1891, but have also always been a cash cow for those in the harvesting and transportation business; hence the introduction of exemptions less than 20 years later, in 1909. The war has raged back and forth ever since. When times are good in the manufacturing business here, the angst over exports naturally loses its intensity. When things are tough going, as they have been for the last few years, the fight hits the front pages on a regular basis. 

By the end of 2011, with record-breaking levels of log exports headlining the news, the battle had taken on a whole new level of intensity. In 2010, more logs were shipped to China alone from this province than in the preceding 20 years combined. By May 2011, the volume of log exports to that country had already exceeded 2010 totals. By the end of the year, they had exceeded those totals by a third again. 

In the meantime, manufactured wood product exports had dropped in value from $16.6 billion in 2000 to $7.6 billion in 2009. Over 50,000 timber-based jobs had vanished since 1991, a decline of 52 percent. For every job opening in the forestry sector in 2011, there were 34 unemployed workers lining up for it, and over the year, forestry employment dropped a further 2.3 percent from 2010 figures: another 1,660 people out of work in just twelve months. 

Were record export volumes responsible, or were they helping maintain what few jobs were left in the forestry sector? 

 

First, some background

Bill Dumont is a registered professional forester and a consultant in forestry policy and economics based in Cobble Hill. In 2006, with export volumes on the rise and BC’s manufacturing sector in economic freefall, the provincial government commissioned Dumont and former deputy minister of forests Don Wright to undertake a review of log exports and their impact on the forestry industry. 

Those two analysts concluded that trying to correlate job losses with log exports simply doesn’t work. Increases in exports, they wrote, lead to increases in harvesting and export-related jobs but a decrease in processing positions. With constantly fluctuating numbers, added Dumont and Wright, “It isn’t possible to say anything definitive about the net effect.” 

Dan Schrier agrees with that assessment. Asked if it was possible to do an objective mathematical analysis of the data, Schrier, who is the manager of trade and business statistics for BC Statistics, said “no” immediately. “I suppose it would technically be possible,” he admitted after some thought, “but it would be enormously complicated. You’d have to make so many assumptions about so many variable aspects that it would be almost impossible to rely on the outcome.”

But that doesn’t mean a link can be dismissed out-of-hand, especially when it comes to the coast. Here, for instance, are a few more facts and figures to toss into the mix, along with a little history to consider. 

According to BC Statistics, in 2011 log exports comprised only about ten percent of BC’s overall annual forestry revenues (pulp is the dominant export, followed by processed softwood products). For the coast, however, that ten percent figure is misleading. The term “log exports” can only mean coastal log exports. There is virtually no log export market for BC’s interior wood harvest, because of the high cost of transportation to export hubs. In that context, the figures look quite different: last year, while record numbers of unemployed forestry workers lined up to collect EI cheques, 31 percent of all trees harvested on BC’s coast were being exported in log form. 

The tension between would-be exporters and the manufacturing industry also intensified in early 2003. That’s when the Liberal government’s Forest Revitalization Act removed what was known as the “appurtenancy” requirement from provincial forestry tenures, a condition that had previously required tenure holders to use the trees in local sawmills. It was a huge blow to an industry that had already seen 15 medium to large sawmills close on the coast since 1990 (and another 18 in the interior). 

By 2003, there were 28 active sawmills in that category left on the coast, processing 2.3 billion board feet per year. By 2006, another five sawmills had closed. Three years later, only 19 medium to large coastal mills remained, processing 1.2 billion board feet annually. The estimated figures for 2011 are much the same.

In the meantime, coastal log export volumes spiked immediately after the removal of the appurtenancy clause, increasing by 20 percent over 2002 volumes. There was a sharp drop in 2004, but that seems to have been an anomaly: the rate doubled again in 2005 and stayed at that level through 2006. It dropped again in 2007 following the burst of the US housing bubble, nonetheless remaining at higher levels than 2003. Since then, the volume has kept steadily climbing, while employment rates, as we already know, continue to decline. 

 

How log exports work...in theory

A permit from the provincial government is required for the export of any trees harvested from provincial Crown lands. There are limits on how many logs harvested from provincial Crown lands can be exported, as well as on which species, and before a permit can be issued, the log must be harvested, graded, and ready for shipment. 

It must also first be offered for sale to BC buyers, to determine whether it is surplus to the needs of the domestic manufacturing sector. Any offer to purchase the log is reviewed by the Timber Export Advisory Committee, or TEAC, a panel of individuals from various sectors of the industry. TEAC’s job is to determine whether the offer is fair, based on the current price being paid for logs on the domestic market. An export permit will only be issued if no offers are received or TEAC rejects the offer as unfair, and declares the log surplus. 

Successful applicants for an export permit must pay the provincial government a fee in lieu of manufacture on the log’s domestic market value, depending on the species and where it is harvested. A Douglas fir harvested on Vancouver Island attracts a 20 percent fee, for example; for all species on the north coast, the fee is just five percent. 

Export limits are also set higher on the north coast, where, since the mid-1980s, it’s been permissible at times to export 100 percent of the harvest from some areas. In other words, government has essentially waived the fees and normal volume limits in locations where, thanks to the loss of local mill capacity, it’s too expensive for the harvesting companies to ship logs profitably to the few domestic mills that remain.

If the log is leaving Canada, a federal export permit must also be obtained. The federal government also regulates all exports out of BC from private and federal lands. The surplus test is essentially the same, but no fee in lieu of manufacture is charged and there are no constraints on which species may be exported, although limits are placed on the total volume that can be applied for in any one permit.

 

…and how they work in practice

The fee in lieu of manufacture has proved to be little disincentive for harvesting companies that can earn close to double the domestic price in export premiums. 

For 2007, the last year for which specific figures are available, the province earned a paltry $1.3 million in fees from coastal exports. But revenues to the industry that year were $369 million. By 2011, revenues were $588 million. It’s unsurprising that in February 2012, Minister of Forests Steve Thompson admitted the provincial government was receiving an average of 1000 export permit applications every month. 

And there is no fee charged on logs exported from private and federal government lands. Given that 65 percent of exported logs came from private forest lands in 2011—even though they comprise only about five percent of BC’s forested lands—it’s a lost revenue opportunity and a regulatory issue that is begging to be addressed.

The surplus test is also under fire. Cowichan Valley MLA Bill Routley, NDP critic on the forestry file, says something’s gone fundamentally wrong when BC mills are “crying out for wood” while record volumes of logs are being shipped offshore. In March, Teal Jones Group CFO Hanif Karmally told the media that the company could put another 100 to 115 people to work at its Surrey sawmill if it could get more logs. Routley says this is just one example of many he has heard: “Around two dozen offers are made by BC buyers every month to buy logs for which export permit applications have been made, but only three or four succeed. The rest are being categorized as surplus, despite the purchase offer, and exported regardless.” 

The same month, news also broke that Minister of Forests Steve Thomson had overruled a TEAC decision that logs should be sold to Teal-Jones, handing the exporter a permit instead. On further investigation, it was revealed that a total of 86 TEAC decisions originally made in favour of local purchasers had been overturned. 

TEAC had started making its decisions based on excluding the costs of shipping the logs to the buyer, a policy change that favours the competitiveness of domestic buyers over would-be exporters. When he learned of it, Thomson brought the new practice to a rapid end. By February, the government had ceased referring any applications to TEAC from the west coast of Vancouver Island, saying it expected the decisions would be overturned anyway. 

 

The industry’s argument

“The global industry is ultra-price sensitive and ultra-competitive,” says Rick Jeffery, president and CEO of the Coast Forest Products Association, who also describes forestry markets as “brutal.” Jeffery insists: “It’s very simplistic to say that the export of logs is the export of jobs and that it’s easier to export logs than to sell them here, so that’s why companies do it, but neither of those things are true.” 

He says that BC’s log exports are simply a response to market demand. “Log exports have always been part of the mix in BC. On any given day companies look at the costs and the margin return they can get on a particular log, and that’s what determines whether it goes to a mill or to the docks. Not every log has a market in BC that the company can make a profitable return from. If that’s the case, it isn’t going to sell the log here. It might not even cut it.”

Some forestry companies say that a ban on log exports would simply cause more mill closures and job losses, because it isn’t worthwhile to cut logs for the domestic market unless they can also cut higher value export logs at the same time—it can cost up to $78 to harvest a log that only sells for $50 in BC but up to $90 offshore. Without the export premium, they can’t afford to take what they claim is almost always a loss on domestic sales. Dumont thinks that’s an indisputable fact: “I have absolutely no doubt there would be no logging going on without log exports.”  

On the north coast, where the nearest mills are simply too far away to transport logs economically to them, companies like Coast Tsimshian Resources Ltd claim that they are utterly dependent on being able to export their harvest. In July, CEO Wayne Drury told the Vancouver Sun: “If we and others in the northwest couldn’t do it, none of us [up here] would be in business.” Bill Sauer of the Northwest Loggers Association added: “If log exports were banned today, we might as well close the doors and throw away the keys.” 

Coastland Wood Industries Ltd President Hans de Visser confronts the tough realities of the business from the other side of the table. He says his Nanaimo-based veneer manufacturing plant has gone through some very difficult times recently: “Especially with China on fire—we had great difficulty finding logs of a suitable quality because all the best logs were going offshore. It’s been a bloodbath for us for the last couple of years.”

As a manufacturer, de Visser could be forgiven for having harsh views on the subject of log exports. But he says a reality check is required: “When times are tough, everyone starts running around looking for someone to blame and pointing fingers. But in North America, we only have about half the normal home construction going on. The long-term average is 1.5 million housing starts a year. We’re still only at 700,000 or so.” When there’s no building going on, says de Visser, no one wants wood products. “That’s just the way it is. So the companies start exporting logs to China instead. At least the companies are logging,” he adds. “I think things would look a lot worse for the coast,” he admits frankly, “if we didn’t have any log exports at all.”

 

Taking the easy way out

But is that really true, or is it just the easiest default option? It sounds reasonable: it’s certainly true that right now, exporting companies are keeping thousands of forestry workers employed. But it also begs this question: if there were more domestic manufacturing mills buying logs, wouldn’t that make it economical to harvest for the local market?

You bet, says Ben Parfitt, a forestry analyst for the Canadian Centre for Policy Alternatives. “It strikes me that the more investment we get in manufacturing mills here in BC,” says Parfitt, “the more domestic demand there will be, and with increasing demand come higher prices. That’s to everyone’s advantage to see that happen, and soon. The longer we go without investment here, the more exports there will be. That’s what we really can’t afford.”

In 2011, Parfitt undertook a detailed analysis of ways to boost manufacturing jobs in BC, picking up on a question that had been posed by UBC business management professor Rob Kozak: “Why is one of the world’s leading manufacturers of Douglas fir window frames, with about 1,500 employees, located in Manitoba?” 

BC, says Parfitt, continues to seek out new markets for its pulp, logs and low-end commodity products like rough-cut lumber. Parfitt says the better strategy would be to focus instead on diversifying BC’s product base into a much broader range of high quality secondary wood products—everything from specialized laminated materials to cabinets and mouldings—that are also in big demand in global markets, and which fetch considerably higher prices. 

Parfitt analyzed industry data and concluded that investment in the kind of infrastructure required for that level of production—along with ramped-up bio-energy production from wood waste, greater integration of infrastructure for improved efficiency, and reforestation management improvements to see older, higher- quality wood being harvested—would create as many as 2,630 additional manufacturing jobs and another 2,400 jobs in waste-wood recovery in the short term, an additional 5,200 seasonal silviculture jobs, and more than 10,000 jobs over the long term in higher-end value-added product manufacturing.

 

An untaken opportunity 

These are compelling figures. But the big BC players have yet to invest a dime in new infrastructure of the kind Parfitt describes. “No-one has spent a cent on large mills in BC for 20 years,” agrees Dumont. That has also left the coast with virtually no mills capable of processing much of the second-growth wood that is now being exported. In a July editorial in the Vancouver Sun, Ancient Forest Alliance Executive Director Ken Wu quoted forestry analyst Peter Pearce, who in 2001 said that at as many as 14 new large mills would need to be built in BC over the next decade to cope with the changing pattern from old-growth to second-growth harvesting. 

Eleven years later, however, Teal-Jones’ Surrey mill is the only operation on the coast with that specific capability. Western Forest Products has done some upgrade work to two of its Vancouver Island sawmills, and says it plans to put another $200 million into further improvements to all of its mills and manufacturing plants over the next three years. But it is the exception. Instead, for the most part, says Parfitt, the industry—including Western Forest Products—has simply defaulted to the easy cash represented by log exports. “That represents a huge lost opportunity for a much greater return on our wood supply, and nothing’s being done to take it.” 

Wu says we need to learn from history. As with our fisheries, if we simply keep logging at the rate we are now, we can expect one day to see all of our old-growth forests vanish. “That’s why we need to retool the mills to be able to process high quality second-growth and develop high-end value-added manufacturing capability,” says Wu. “You don’t have to cut as much, but at the same time, you create more jobs in manufacturing. That, and protecting our remaining old growth forests, are the most important things to do right now.” 

But short-term profit goals are also trumping long term management planning to increase the inventory of older, higher-quality wood. Bowing to corporate pressure, the provincial government announced earlier this year that it is considering opening up protected areas of old-growth forests for logging activity. As Ken Wu succinctly puts it: “That’s like burning up parts of your house for firewood after you’ve used up all your other wood sources.” In the meantime, smaller and smaller trees are being taken off private lands and increasingly, from provincial Crown lands. With no mills capable of processing them, they are heading straight offshore.

Opening up old-growth protected areas to logging is also completely counterintuitive to this statistic: nature-based commercial tourism that relies on forests provides an estimated 19,400 jobs in BC. That’s more than 40 percent of the total number of forestry jobs in the province in 2011. But if the government is aware of the threat it is posing to those jobs through this short-sighted strategy, there’s little sign of it.

 

Can anything be done about all this?

Export critics like Parfitt believe that more export disincentives are required and that a higher fee in lieu of manufacture, applied to both provincial Crown lands and federally-regulated private lands, would help rejuvenate local mill activity and provide government with much-needed revenue for investment. 

Rick Jeffery, on the other hand, believes the solution is to remove regulatory constraints, not add to them: “We’re over-regulated in BC, and we need to have a free market and competitive pricing to create a really healthy sector.” 

That, of course, won’t necessarily result in new mills, and Jeffery does agree there is an urgent need for infrastructure investment. With sufficient investment, acknowledges Jeffery, there are “huge” opportunities for BC mills to process and develop wood products that will justify paying domestic prices for logs that are competitive with export prices. “That’s the way the wind is blowing,” concurs veneer manufacturer Hans de Visser. “It just makes sense. I’m always bellyaching about having to compete against international buyers able to afford higher prices, but the reality is that sooner or later we are all going to have to compete with global prices. That’s the trend, whether we like it or not, so we’re just going to have to figure out how to do that.” 

De Visser thinks the government has to step up to the plate on the policy side. “They need to encourage the domestic manufacturing industry to spend the money, whether that’s through favourable taxes or subsidies—most other countries around the world do it, and BC would be remiss to turn a blind eye to that. That may smack of protectionism, but that’s just the reality.” 

Ben Parfitt says that the government is completely failing to provide regulatory drivers to ensure a viable domestic manufacturing industry across the board, especially with respect to logs taken from provincial Crown lands. “These are public resources and we should be able to dictate the terms on which they are used,” he argues. Parfitt advocates bringing log exports to an end through an escalating tax system that acts as a significant disincentive, and says government policies to encourage more manufacturing are essential: “We should insist on a minimum threshold of investment in local manufacturing, and if that isn’t met, then reallocate the resources to someone who will invest.”

Last but not least, says Bill Dumont, on top of investments in the manufacturing sector, a gap he agrees needs to be addressed, there’s also a need for investment at ground level. “There’s a complete lack of government and industry interest in investing in the forest before the trees are cut,” says Dumont. “There are a lot of things we can do to manage better for value at the forest level as well as the manufacturing level, to increase prices and margins—fertilizing, pruning, thinning, genetic improvements.” 

Dumont says one of the issues facing workers in the manufacturing sector is increasingly sophisticated mechanization of production, reducing the need for labour. But the ground-level investment activities he is describing were all high employment activities in BC 30 years ago, and could be again. “Government hasn’t supported forestry work in the field since the 1970s, so we stopped. That was very short-sighted.” 

 

What is government doing?

What little government has been doing has been counterproductive, says Dumont. “Governments have successively monkeyed with export policy over time, opening up markets when times are tough and when the going gets better again, closing them down. As things stand, no one is going to build new mills on the coast without certainty about where government policy is going to land on this issue.”

Both the federal and the provincial government fund product development research, and in July $2.3 million was allotted to the Wood First! Program to promote use of BC value-added wood products. But that’s a drop in the bucket of the estimated $200 million plus required as just a starting point for essential infrastructure upgrades in BC. While the government’s Forest Sector Strategy speaks of “encouraging” investment, there appears to be no hard cash attached to that. 

In the meantime, as Dumont has pointed out, the government remains all over the map in its stance on log exports. It has publicly stated its preference that “all logs remain in BC to be manufactured into other products.” In an interview for this story, Minister Thomson repeated that is his ideal goal. But Thomson also admitted: “We recognize log exports are a critical component of the industry on Vancouver Island. There will always be log exports on the coast.” 

Thomson initiated a log export policy review in 2011. The report was expected this spring, but as of August, there was no committed date set for its release other than a vague “sometime this fall.” The behind-the-scenes scuttlebutt is that the draft report contains some nasty thorns that may need pruning out. Thomson would only say that “no decisions have yet been made on adjustments to the policy. The analysis of the impacts of potential adjustments is still a work in progress.” Whether the review will do anything to change the status quo in any significant way seems unlikely. 

NDP forestry critic Bill Routley is adamant some change is required. “I’m not talking about banning log exports,” he says. “There have always been exports. I’m talking about how we maximize the value-added opportunities here in BC first. The surplus test clearly isn’t working and the fee in lieu isn’t a sufficient disincentive because exports are growing.”

Routley wants forest policy adjusted so that all sectors of the industry can benefit, but is light on specifics as to how that’s to be achieved, including the issue of stimulating investment in new infrastructure. “I do know we need to have the right policy tools, with incentives built in and strings attached to them, like requiring investment. I believe in a carrot-and- stick approach. We will increase the fee in lieu of manufacturing, but we have to get it right. We want to add jobs, not take them away.”

 

Where does that leave things?

With polls suggesting an NDP government will likely to be running the forestry file after May next year, it’s probable that Routley’s carrot-and-stick approach to log exports will win the day. That may not be soon enough to save the last remaining protected old-growth forest in the province, says Ken Wu: “It remains to be seen whether the BC Liberals want to leave behind a legacy as the despoilers of BC or not in the last few months of their term.” 

Wu is also worried about whether the NDP is really prepared to step up to the plate. “Is the war in the woods simply going to carry on under their tenure?” Unless a new government is prepared to put its money where its mouth is on infrastructure investment, it may simply find itself, like its predecessors, stuck in what is now a decades-old tug-of-war between the manufacturing sector and harvesting companies as they all struggle to stay afloat.

One thing’s clear: it would be a rare individual who wouldn’t be in favour of seeing all of BC’s logs being used in a thriving manufacturing industry in BC. But unless and until something changes at a more fundamental level than policy tweaks and tax adjustments, we should expect to see newspaper headlines about job losses in the forestry sector and log-laden ships leaving our shores for some time to come.

Katherine Palmer Gordon is an author and freelance writer based on Gabriola Island. She’s written five books with a sixth to be published by Harbour exploring the connections between culture and self through the stories of young aboriginal Canadians. Her history of land surveying in BC, Made to Measure, won the Haig-Brown prize at the 2007 BC Book Awards.