Export Policy Forum Submission
Submitted on behalf of the Truck Loggers Association (TLA)
September 15, 2011
The Truck Loggers is pleased to have the opportunity to provide the following input regarding the export of logs from BC.
The volume of logs being exported from our province to Asia has increased dramatically over the past two years. This has brought the issue of log exports to forefront of the political debate as it is politically charged. Those within the harvesting and timber management sector are seeking a greater degree of freedom, efficiency and certainty of export as foreign buyers have filled a void that has been created due to falling domestic demand. Those within the manufacturing sector are asking to maintain or increase controls on log exports to facilitate their ability to secure logs at prices that they can afford to pay for logs. These two interests from the two sectors generally do not align with one another and create friction whenever changes to the current system are proposed. Historically the default position has been to leave the current system in place, not because it is without warts, but simply because it is the most convenient path forward.
While labour, industry, and all levels of government have not found common ground with regard to specific export policy criteria or objectives, they have all expressed an opposition to the industry’s ongoing erosion. Given the historic difficulty in changing policy, perhaps the most benefit can be gained by applying the existing policies in a manner that serves to increase the economic and social well being of all participants. If a way can be found to do this, we will eliminate some of the extreme polarization that exists around this issue (ban log exports) and can proceed with the objective of “how to best manage and control the export of logs from BC.” As Bob Matters of the United Steel Workers said at a recent forum “Log exports that strategically support jobs is something we can support and is a good place to start.”
The TLA feels that the current review of log export policy could be divided into the following three distinct components in order to accommodate the diversity of stakeholder interests, while still meeting the government’s social and economic policy objectives.
1) How do we best apply or target the existing policy to meet current objectives?
2) How do we change individual components of the existing policy in order to improve its efficiency, certainty and cost to stakeholders in the short-term?
3) What does a durable export policy that meets stakeholder’s long-term objectives look like?
This submission speaks to the first component:“how best to apply the existing policy”, in the best interests of the Province. The single biggest issue that has plagued the coastal forest industry over the past two decades has been the alarming and increasing negative trend of undercutting our coastal AAC. This proposal seeks to address that issue. We have provided some background documentation as well that hopefully provides useful information for politicians as they wrestle with this sensitive topic.
How do we best apply the existing policy to meet current objectives?
While changing policy requires either consensus from stakeholders or courageous decision makers, applying the existing policy in a differential manner is not only possible – it is the norm. Presently an opportunity exists to utilize current policy in a targeted fashion to address the undercut issue that has plagued the coast for two decades. While there is interest in changing some of the current policy, not all aspects of current export policy are bad or require change. The government should continue to apply the existing policy in an effective and efficient manneras it undertakesthe current policy review.
The TLA proposes that current export policy could be targeted towards forest stands with characteristics that make them uneconomic to harvest, so that they are provided greater certainty of access to higher value international markets. Despite widespread disagreement amongst stakeholders on how to change existing export policy, there seems to be at least an initial universal acceptance towards this sort of application of the existing policy.
A Common Problem
The coastal Annual Allowable Cut (AAC) has not been harvested since 1992. Since 2005, annual harvests have fluctuated between 50% and 80% of our ACC and 46 million m3 of sustainable timber harvest has been neglected. The gap between our sustainable harvest level and our economically viable harvest level has been widening for at least three market cycles. Market prices do not seem to have enough impact to change the trend towards an ever-increasing undercut of typically lower grade timber in high cost operating areas; and the current surplus test does not provide the certainty of access to export premiums that are required by licensees to justify the millions of dollars that must be invested to plan, develop and harvest this timber. As a result, the majority of the timber stands that languish around the economic margin of profitability are left unharvested.
Stands of lower value old growth on Vancouver Island typically require an investment of $100/m³before they can be sold. More isolated areas on the coast or those that require special management or aerial harvesting can be upwards of $150/m³ of cost. Typcially the lower value timber that dominates these stands carries domestic prices that are less than $70/m³. In the past two years, foreign buyers were paying almost double what domestic manufacturers were for some of this lower value timber. The current system however, did not provide guaranteed access to these prices, so often the timber went unharvested as operators were not prepared to take the risk. This lack of certainty not only impacts sub-marginal timber stands, but it also impacts the timber stands that are within $10/m³ of the marginas the time that it takes to develp this timber exposes it to market fluctuations.(Typically on a pro-forma basis, stands with less than $10/m3 positive return are avoided.)
Most old growth stands contain a variety of species and grades of timber. They are able to be harvested without exports if the higher value timber can subsidize the cost of taking the low value timber. Fewer and fewer stands have enough higher value timber to offset the low value timber. While each region has its own specific challenges, this problem has largely been characterized as the Hemlock/Balsam issue on the coast. The cost of old growth log production on the BC coast is generally between $400 and $650/thousand board feet. The current market price for commodity lumber destined to China is $250/thousand board feet. The average price paid for logs (to the same market) is roughly $630 per thousand board feet. Coastal stands that are largely comprised of low value timber are generally uneconomic to harvest (even when stumpage is negligible) given commodity lumber prices, unless a significant component of export is allowed. In the absence of high value timber in the stand, export premiums act as a surrogate subsidy for lower value stands.
Over the past two years the mechanism that has been most successful in terms of adding value has been the sale of logs on the export market. Over time, the price of finished goods has not kept pace with the raw material cost so while demand exists for finished goods, coastal manufacturers are economically challenged in terms of acquiring fibre. It would appear that Asian manufacturing facilities have significantly lower production costs and tend to get more value out of low grade logs than our domestic coastal mills given the fact that they pay significantly more for logs than lumber. Interior mills seem to be able to supply a commodity product at that market price due to their lower manufacturing costs and lower log cost. To improve the economics of the current coastal situation, we need to either reduce costs or increase revenues. Cost cutting measures continue to be a focus; however, after reducing costs 20% over a ten year period from 1998 to 2008 (Russ Taylor), most of the low hanging fruit has been plucked, This would tend to indicate that the solution lies on the revenue side of the equation. Most log export critics espouse that exporting logs leaves domestic mills short of fibre. That is simply not the case.
Coastal Log Demand
Summarized below is the log demand data over the past 6 years together with a forecast through 2028 and charted it by type of consumer against the coastal AAC inclusive of private contributions to available log supply.
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When operating at historic capacity, BC coastal mills can consume approximately 16 million m3 of logs per year. BC’s sustainable coastal harvest level is 24 million m3 (including private land). If every coastal mill got every log that they needed, there would still be approximately 8 million m3 of timber left over for export. While it is true that we are exporting more and more timber, it is also true that there is still considerable timber that is in excess of demand, still left over.
TLA Proposal
The TLA policy proposal is structural in nature and is not seeking to conduct a block-by-block analysis of timber stands in an effort to determine what must occur to make any particular stand viable. It is also not intending to provide a blanket exemption for all licensees to ensure that every operator is treated equally. Rather, it is seeking to identify a broad classification of stands that comprise a component of our AAC that have historically had little chance of harvest under previous and current conditions and then provide the means to make them economically attractive. If government wants harvesters to invest millions of dollars to develop and harvest marginal timber stands, it is imperative that the stand value not only be maximized but also that enough revenue certainty is provided – which is currently lacking. To that end, the TLA has already identified what portion of the forest profile has been undercut—by Timber Supply Area (Appendix Two). The analysis is now into the second phase of work which is seeking to understand what the physical characteristics or parameters are that are causing this portion of the profile to be uneconomic and hence left behind. It is our hope that a specific set of criteria can be identified which will allow for an Order in Council (OIC) to be applied which will facilitate the harvest of previously uneconomic timber.
We see the following as attributes that could be included in the OIC:
Export Allowance: A portion of the timber from qualifying stands would be allowed to be sold without having to go through the surplus test. The percentage of export would largely depend on the economic hurdle that needs to be overcome. (Rarely if ever is 100% of an old growth stand targeted for export. The most economically challenging stands on the north coast historically contained <30% of desirable timber for export.)
Grade and Species exceptions: As this timber would otherwise not be harvested (in the absence of this policy), a case could be made for allowing the export of any species or grade of timber. This will be contentious and we suggest that balance amongst the species that are allowed to be exported without advertising is critical. The objective should be to utilize the timber with the highest export premium to subsidize the overall harvest. In many cases, this may be timber species and grades that are currently restricted from export. We would suggest that a portion of this timber would have to be exported in order to achieve economic viability for the stand. If a portion is retained for domestic needs, it would be incremental fibre – thus justifying and validating this approach.
Fees-In-Lieu: Given that the intent of this proposal is to increase the economic viability of uneconomic stands, adding a fee-in-lieu to them is somewhat counterproductive. One possible approach might be to have a nominal fee-in-lieu for timber that is exported under exemption and then have a more significant fee-in-lieu for any incremental timber that is exported from the same block under the surplus test. Exporters could also be required to report sales data to help determine the efficacy of the initiative. A sliding scale on fees-in-lieu could also be developed so that it would discourage export for profit as opposed to export for viability.
Qualifying stands: It is anticipated that the following physical characteristics/descriptors might be some of the criteria that are used to help define what a qualifying stands is (by location):
- species composition,
- age,
- elevation
- stand height
- cost of road development
- transportation distance
- method of harvest
- stand AMV
Proposal Benefits
If this approach is successful we see the following benefits that will flow from this approach:
Harvest Sector Employment: TLA statistics indicate that for every 1000m3 of timber that is harvested, 0.28 direct harvesting jobs is created. Our inability to harvest our AAC since 2005 has resulted in an elimination of more than 2,100 direct jobs in the timber harvesting sector each year. When indirect employment is factored in, more than 6,000 harvesting sector jobs have been lost annually because we could not afford to harvest our cut. (Much of this job loss was realized as fewer months of work per year per employee, which has led to an exodus of workers to more stable employment in other resource industries.) Presently we are underharvesting our AAC by approximately 8 million m3/year. If this approach were to make 25% of this timber accessible, that would create 580 new coastal harvesting jobs. When indirect employment is factored in, more than 1200 annual jobs are created. Anything less than 100% export would also contribute to domestic manufacturing jobs as well.
Economic Benefit: TLA figures indicate that a 2 million m3 harvest response as a result of this policy application would generate an additional $680 million dollars towards GDP. A portion of this would go to government in terms of direct and indirect revenues stemming from taxation, stumpage and fees. (earlier analysis indicated that it would be about 25% of the contribution to GDP however, the economic backdrop has changed significantly since that time and we are speaking about lower grade stands that would probably have lower stumpage rates attached to them)
Investment: Much is made about the need to attract investments in new mills. Little consideration is given to the investments that are made by the harvesting sector. Annually, the coastal harvesting sector invests over $100 million dollars of capital for equipment and infrastructure. An additional 2 million m3 of harvest would generate an additional $15 million in investment. Over the typical lifespan of a mill, this would equate to an additional $300 million investment.
Forest Management: The chief forester has identified that the undercut is a significant problem on the coast. Good forest management practices would seek to revitalize our forest growing stock regularly. Many of the stands in question are decadent stands that are net emitters of carbon. The road and bridge infrastructure in many areas continues to deteriorate as a result of non-use, which reduces public safety and recreational opportunities. It also increases the cost of future operations if they ever seek to utilize such roads again.
Domestic Fibre Supply: It is anticipated that less than 50% of the targeted stands would contain fibre that would likely be exported or at least allowed guaranteed export status. This means that the rest of the stand would be sold into the domestic marketplace.
As the major concern of many manufacturers is access to fibre, at affordable prices; this policy application would seemingly support that objective.
MPS pricing system benefits: Presently, BC Timber Sales has issues selling stands of timber that are dominated by low value timber as they are not allowed to sell blocks at less than their variable cost to develop. They also have less ability to blend cut blocks than major licensees. This prevents a significant portion of the low value timber from being priced into the database and hence skews the equation to overprice the component of that lower grade timber that is sold. This impacts licensees ability to go after the low value timber in turn – which perpetuates the undercut. Providing an export premium would help to ensure that stands with higher ratios of lower value timber could be sold and increasing the depth and breadth of the database which would in turn improve the accuracy of the pricing signals being generated by MPS.
While a broad variety of stakeholders from all interest groups have indicated support in principle for our proposal, they have expressed concern with regard to how our proposal would address the following considerations: