Declining Profitability for Canadian Pulpmills as Wood Costs Increase in Early 2008

According to the North American Wood Fiber Review, wood costs for pulpmills in Canada, calculated in U.S. dollar terms, have gone up between 15% and 20% the past 12 months. Alberta and the Maritime provinces have the lowest wood fiber costs in Canada, with conifer chips and pulpwood averaging around U.S. $95/oven-dry metric tons (odmt) in the 1Q/08. In British Columbia, conifer chip prices remained unchanged from the 4Q/07, while pulpmills in Ontario and Quebec continue to have some of the highest wood fiber costs in North America.

Pulp companies in Canada are struggling to keep their plants running at full capacity because the residual fiber supply in most provinces is dwindling and there are concerns that higher-cost roundwood chips will increase the production costs to a level not justified by the current pulp and paper prices.

Market pulp, newsprint and other paper grades are typically sold in US dollars. Therefore, as the Canadian currency has strengthened and costs for wood fiber and energy have increased, many pulpmills have seen their profits squeezed. Higher wood fiber costs, which account for between 40-50% of production costs when manufacturing pulp, have lead pulpmills to cut back production rather than to go after high-costs fiber.

Lumber production in Canada continues to fall, with no end in sight to this downhill slide. From a peak of 15.4 million m3 in the 1Q/06, total production has fallen practically every quarter the past two years and was down by 25% to 11.5 million m3 in the 4Q/07. The worst month was December 2007, when production was down over 21% in British Columbia, 23% in Nova Scotia and 38% in Ontario compared to the same month in 2006. The reduced operating rates at Canada's sawmills have had a detrimental impact on the pulp industry as sawmill residuals are the most important and least expensive wood fiber source for pulp manufacturers.

In the Interior of British Columbia, many pulpmills that historically relied almost entirely on residual chips from a large sawmill sector, are now consuming 5-15% roundwood chips. With the bleak outlook for housing starts in the U.S. in 2008 and 2009, it is likely that the roundwood share of the wood fiber furnish will increase from the current levels, resulting in higher wood raw-material costs and therefore possibly reduced operating rates at many pulpmills in the coming months.

The North American Wood Fiber Review, established in 1982 and utilized by most of the major forest companies in the U.S. and Canada, tracks pulpwood and wood chip prices in 17 key markets of North America.

Contact Information:

Wood Resources International

Hakan Ekstrom

Seattle, USA

info @ wri-ltd.com

www.woodprices.com

Declining Profitability for Canadian Pulpmills as Wood Costs Increase in Early 2008

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Declining Profitability for Canadian Pulpmills as Wood Costs Increase in Early 2008

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