Canadian Pulp Mill Wood Costs Higher than U.S.

Nov. 3, 2009 - Wood fiber supply to Canadian pulp mills has shifted from lower-cost residual chips from local sawmills to higher-cost wood chips manufactured from roundwood, said Wood Resources International (WRI) in its North American Wood Fiber Review.

According to the review, low operating rates for many sawmills has decreased the availability of relatively inexpensive residual chips, which has forced many pulp mills to either reduce production or to furnish their mills with high-cost fiber.

Lumber production in Canada has been substantially lower in 2009 as compared to earlier years. However, production levels in both western and eastern Canada are probably close to the bottom, and with the U.S. lumber market predicted to improve in the latter half of 2010, Canadian sawmills are likely to be running at higher operating rates a year from now, WRI said.

Because lumber production has declined by about 50% over the past three years, but pulp production has only fallen by 25%, many pulp mills throughout Canada have increasingly had to rely on more expensive chips manufactured from roundwood.

Residual chip prices, in Canadian dollars, have stayed practically unchanged the past three quarters through all provinces of Canada. In British Columbia and Alberta, where softwood residual chip prices are often linked to the market pulp price (NBSK), fiber prices reached bottom this summer and are likely to move up in the 4Q. In the Eastern provinces, wood chip prices have remained flat this year while roundwood costs have declined slightly and were in the 3Q, 5-8% lower than a year ago, WRI noted.

Many Canadian paper companies sell their products into the U.S. market and are therefore competing with the U.S. domestic pulp and paper manufacturers. Pulp mills in Eastern Canada have been at a big disadvantage the past few years, partly because of having substantially higher wood fiber costs. In the 3Q/09, pulp mills in Eastern Canada had approximately 70 percent higher conifer fiber costs than the low-cost region of North America — the U.S. South. As a result, many pulp and paper mills in Ontario, Quebec and the Maritime Provinces have been forced to reduce production more than other regions of North America the past 12 months.

NOTE: Pulpwood and wood chip market updates are included in the 24-page publication "North American Wood Fiber Review." The report, established in 1982 and with readers in most of the large forest companies in North America, tracks wood chip and pulpwood prices in 15 key markets of the US and Canada.

SOURCE: Wood Resources International LLC

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