BC pine beetle report clarified

Apr. 20, 2010, Vancouver – The response from the initial press release summarizing
some of the highlights and projections from the recently published report, BC
Interior – Mountain Pine Beetle Attack, has been exceptional but with
numerous interpretations. The industry response has been to accept many of the
assumptions and projections presented, as it is on the front line in dealing
with the realities of processing dead trees in the forest and at sawmills. Some
non-industry groups and the media, however, have misinterpreted some of the
report’s key findings or have taken some results partly out of perspective. For
others, seeing this independent analysis, which works through a variety of
logical assumptions with detailed projections, has provided some clarity,
including a number of positive and negative aspects related to the mountain
pine beetle (MPB) epidemic over the short, medium, and long terms.

In the first comprehensive impact analysis of the MPB’s devastation of the British
Columbia Interior forests and the blow to its lumber industry, the report incorporates
a number of critical timber supply and economic implications in a base scenario
that the B.C. Interior industry will soon be facing. Based on key assumptions,
the report’s base case analysis combines traditional perspectives on the annual
allowable cut (AAC) determinations together with critical analysis on the
economics of MPB timber use and market demand to predict the mid- to long-term
effects on the B.C. lumber industry. The bottom line is that there is a good
news story for the remaining B.C. forest industry.

To address some possible misinterpretations of the report’s findings and to
provide additional perspectives on one of the world’s greatest environmental
catastrophes, four topics are further clarified.

1.  The report indicates that B.C. lumber
production will fall significantly by the end of the decade. This is good news
for remaining mills, as North America supply will be constrained.
The report forecasts the MPB sawlog harvest to derive B.C.’s lumber production in
relation to North American demand and the economics or positioning of other
regional supply sources. With a declining supply of economic sawlogs, the base
case scenario predicts a peak in B.C. lumber production in the next three to
five years. However, new processing technology, higher byproduct prices (chips,
wood pellets, bioenergy, etc.), or higher lumber prices could extend the shelf
life of the dead timber and lumber production incrementally during the forecast
period. The best case scenario for B.C. lumber production at the end of the
decade is near the distressed 2009 level of about nine billion board foot (bf).
This compares to pre-beetle levels of about 10.5 billion bf and peak levels of
almost 15 billion bf in 2005. With stronger U.S. demand coupled with reduced
lumber output forecast, higher prices are expected that should allow the
remaining sawmills to be very profitable over the next decade.
Net Outcome: The B.C. lumber industry will see a permanent downsizing by the end of
the decade, but a lumber “supply gap” that should lift prices in North America
will significantly benefit the remainder of the B.C. lumber industry.

2.  The report forecasts that without the
implementation of proactive mitigation strategies, the sawlog timber harvest
will drop by almost 20 million m3 from 2005 to 2018.
Simply put, more than 70% of the pine trees in the B.C. Interior are forecast to be
killed by the MPB, and this will lead to reductions in both the AAC and sawlog
availability. Sawmills and veneer plants can only use sawlogs, so with the
forecast 35% or more decline in the available sawlog supply in the B.C.
Interior (2005 base), or about 20 million m3 of sawlogs by 2018, mill closures
are inevitable. On a more positive note, dead trees that do not make sawlog
grades could have other uses such as wood chips for pulp, wood pellets, and
biomass energy. However, these uses depend on the economics of harvesting and
processing, commodity prices, and government support related to renewable
energy. Consequently, the total timber harvest could be higher. Public comments
confirm that the decline projected for B.C. sawlogs is reasonable based on the
assumptions used; the wildcard is how quickly or slowly mill closures will
occur.
Net Outcome: The base case forecast is for the B.C. Interior sawlog harvest to
decline by approximately 35% by about 2018 from that seen in 2005. However, the
harvest of biomass material could increase dramatically if new businesses can
be established.

3.  Without improvements in the mid-term
timber supply forecasts or higher end product prices, the report forecasts that
16 B.C. sawmills could eventually close.
In the Interior, there are 77 major sawmills and 13 veneer mills included in the
forecast that were in operation in 2005. The average sawmill produces about 200
million bf (range of 15 to 600 million bf). In addition, there are a variety of
sawlog-consuming smaller mills scattered throughout the Interior that are
included in the total modelled demand for sawlogs. Since the start of the North
American market collapse in 2005, 12 B.C. Interior mills (lumber and plywood)
have already closed and are assumed to remain closed through the forecast
planning horizon. From the base case, 16 additional mills are projected to
close by about 2018 due to log shortages (three are currently not operating and
are assumed to restart and then permanently close again). This means that
another 13 mills operating today could permanently close by about 2018 because
of a lack of sawlogs as a result of the MPB. The 16 mills forecast to close
represent the equivalent of 3.5 billion board feet of lumber (and veneer)
production (an average of 225 million bf per mill) and a total of 11 million m3
of sawlog consumption annually.
Net Outcome: Based on the assumptions in the base case analysis, about 16 B.C.
sawmills are forecast to close by about 2018. However, B.C.’s efficient
sawmilling industry and infrastructure will remain intact and that could limit
additional mill closures after 2018.

4.  The economics of MPB-killed wood shelf
life is a major variable to determining the future of harvesting MPB-killed
logs in B.C.
Specific assumptions are used to forecast the shelf life of dead standing timber used in
sawmills and veneer plants and to model the potential drop in sawlog
availability; this is different than the overall AAC forecasts that are always
higher than the sawlog forecast. MPB-killed
wood shelf life varies by the type of growing site, tree diameter when killed,
and moisture content of the site. The analysis assumes a different shelf life
by area based on these variables and, in some cases, allows for the shelf life
of dead timber to be extended beyond 20 years by assuming a 20% sawlog recovery
in individual stands of trees (which normally would be uneconomical). The most
critical variables to the longevity of MPB-killed wood shelf life are the
economics of harvesting and cost of processing the logs. As a result, commodity
forest product prices, including residual products, are a key variable to any
harvest projections. This is identified and modelled in great detail for
sawlogs, the most valuable log in the forest.
Net Outcome: The timing or shelf life of MPB-killed timber is tied to industry
economics and commodity prices (as well as new uses for the fibre) that are
unpredictable and are only related indirectly to the overall AAC projections.

While there have been some pessimistic perceptions about the report circulated in the
media, the reality of reduced sawlog harvests and lumber production was
accepted long ago by the B.C. industry and most companies have a clear and
well-developed strategy to deal with the changes.

We are also entering a period of evolving global timber supply disruptions, as the
full effects of the global recession are now showing a fractured forest
products supply chain. These and other developments bode well for the B.C.
lumber industry in the next decade. The sawmills that remain are expected to do
very well, as a tighter supply and improved product prices in North America are
forecast for much of the coming decade.

B.C. Interior – Mountain Pine Beetle Attack: Impact & Outlook on B.C. Timber
Availability & Wood Products Production is a strategic analysis that
assesses the critical effects of the mountain pine beetle epidemic on the key
timber and wood products producing regions in British Columbia. The report is a
result of the combined efforts of three B.C.-based consulting firms and four
consultants: Jim Girvan (MDT Management Decision and Technology Ltd.); Murray
Hall (Murray Hall Consulting Ltd.); and Gerry Van Leeuwen and Russell Taylor
(International Wood Markets Group Inc.).

For more information, see the International Wood Markets Group.