Analysis: Canadian wildfires shutter sawmills, drive up lumber prices

Canfor

12/06/2023 11:00

By Rod Nickel
       WINNIPEG, Manitoba, June 12 (Reuters) - Canada's
worst-ever spring wildfire season has forced its forestry
industry to shutter sawmills, driving up lumber prices and
setting production back for months just as housing construction
has slowed due to higher costs and a tight labour market.
    Canada has the world's third-largest forest area and is the
second-largest softwood lumber producer, according to Canadian
government estimates, making it a key supplier of a critical
housing material. 
        
    This year's unprecedented fires
     have already consumed at least 4 million hectares, or 1% of
Canada's forest, according to the Forest Products Association of
Canada (FPAC), an industry group.
    The fires are blazing through Alberta, British Columbia and
Quebec, all provinces with active forestry industries.
    The fires have also forced thousands of people to evacuate
their homes and blanketed cities with smoke as far away as
Toronto, New York and Washington.
    Fires in British Columbia and Alberta have forced
significant downtime at sawmills, and "ground zero" has now
shifted to Quebec, FPAC CEO Derek Nighbor said. 
    "It's significant. Closing mills and having to restart them
is a lot of work and that's people who have to be laid off
temporarily," said Nighbor, who did not have an overall estimate
of lost production.
    Chicago lumber futures for July delivery  LXRN3  have
climbed 7% since June 1.
    The unexpected disruption to the lumber industry risks
further slowing new home construction, adding to Canada's acute
housing shortage. Investment in residential building
construction, after adjusting for inflation, fell in March to
its lowest level since June of 2020.
    Resolute Forest Products  RFP.TO  has temporarily shut four
Quebec sawmills due to nearby fires and a related log shortage,
Resolute Vice President Seth Kursman said. Workers were digging
trenches near the facilities to suppress the fires.
    Kursman said it was premature to say if the company may need
to declare force majeure - unexpected circumstances that prevent
a business from meeting contract obligations - or could make up
the lost production later in the year. The closed mills mainly
produce softwood lumber for North American markets.
    
    SUPPLY CONSTRAINTS
    Resolute has also paused harvesting activities in areas near
fires. 
    Long-term damage to forests will require up to eight weeks
to assess once the fires abate, Nighbor said.
    "Is there anything that's salvageable? Is it younger trees
that have been taken out or is it 60-to-80-year-old trees,
because that will impact future operations," he said.
    Wildfires can temporarily boost lumber prices as supplies
are constrained and buyers increase inventories, although prices
tend to revert later in the year, RBC Capital Markets analyst
Paul Quinn said in a note.
    Chantiers Chibougamau was forced to shut its Nordic Kraft
pulp mill in Lebel-sur-Quevillon, Quebec after fire spread
within 500 meters (1,640 feet) of it, but it expects to resume
production this week, company spokesperson Frederic Verreault
said.
    Forest fires are partly a natural phenomenon, culling debris
and creating new growth. But big blazes can also reduce timber
supply for the long term, Quinn said.
    Nighbor said as Canada's wildfires worsen, federal and
provincial governments should allow for expanded tree
harvesting, especially of older trees, to reduce fire risk.
    Prime Minister Justin Trudeau's government has set a goal of
protecting 30% of Canada's lands by 2030. About 13% is currently
protected, Nighbor said.
    "There's this sense in some political circles that
protecting trees is going to be some solution for climate. We
need to be looking (at forestry) through a fire lens," he said.
    Forests can become more fire-resilient by thinning them of
dying trees, prescribed burning and retaining tree species that
are fire-resistant, said Michelle Ward, vice president at Canfor
 CFP.TO . The forestry company has not had to shut facilities
due to fire.
    The government will continue to protect natural lands, but
responsible forestry practices can also support fire resilience,
said Keean Nembhard, a spokesperson for the Canadian natural
resources department. 
    Joe Foy, protected areas campaigner with the Wilderness
Committee, an environmental group, said protecting communities
from fire is better left to governments than forestry companies.
    "Unleashing forest companies to build hundreds of kilometers
more road to do more clear-cutting results in a worse situation,
not a better one," Foy said.

 (Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by Paul
Simao)
 ((rod.nickel@tr.com; Twitter: @RodNickel_Rtrs;))