What’s different this time?
The basis of Lumber V* does not differ much from the last one. The US Department of Commerce (DOC) announced countervailing duties (CVD) on April 24, 2017 and antidumping duties (AD) on June 26, 2017. What is new is that in both instances the duties are retroactive 90 days.
While four Canadian producers (Canfor, Resolute, Tolko and West Fraser) are exempt from retroactive CVD and AD, almost all other exporters are now paying 19.88 percent CVD on their shipments going back to end of January 2017, 26.75 percent (combined duties) from late March to the end of August 2017, and then 6.87 percent AD pending final determinations later this year (please refer to the timeline on page 3).
In addition to duties, we anticipate the US will likely be seeking a quota on Canadian lumber exports at a level significantly lower than 2016 volumes, which were approximately 32 percent of the total US demand.
Trade and politics
Lumber V also coincides with the arrival of the new US administration, led by a President who favours protectionist policies. On May 18, the US triggered the 90-day notice period to renegotiate NAFTA. At the earliest, NAFTA negotiations can begin in mid-August, making it doubtful that anything substantial in the softwood lumber negotiations will occur between now and then.
Because Canada can only challenge the US DOC rulings once final CVD and AD determinations are set, which will probably be in January 2018, an early resolution of Lumber V is unlikely.
There has been repeated mention in the US about having Chapter 19 removed from NAFTA. Canada has used this tool since 1988 to appeal US CVD, AD and injury rulings, sometimes on its own or in conjunction with a World Trade Organisation (WTO) appeal.
The Government of Canada’s $867m aid package to the sector announced on June 1, to be dispersed in a variety of ways including loans and loan guarantees, provides some support to companies in the interim.
All roads lead to change
Who will be most impacted?
Smaller producers may be the hardest hit by the duties. However, the entire industry, from the largest to the smallest player, is going to be impacted. In the face of uncertainty and confusion on tariffs, potential quotas and the likelihood of protracted negotiations, numerous questions come to mind for those sitting on huge swathes of tenured forest:
- are you harnessing technology to optimize your business?
- will your inventory lose value?
- what’s your risk profile, (i.e. exposure to US market and duties)?
- will you be able to maintain your debt covenants?
- what other export markets can you access?
For those with segmented product lines and US sawmills:
- how much capacity should you shift to your US sawmills?
- which other segments of your business should you focus on?
As the majority of softwood lumber is priced in US dollars (USD), the relative strength of the USD compared to the Canadian dollar (CAD) may provide some temporary relief to exporters, as these products generate more revenue in CAD terms.
In light of the uncertainty, companies must look to do more than simply survive, they need to uncover opportunities for growth in order to thrive in disruption.
Past, present and future
While the Canadian forestry industry has seen many changes in the past and found ways of surviving, analysis of the trends around company performance over the past twenty years paints a portrait of impending disruption. The sector is still in a recovery phase post 2009, with a higher level of financial instability and performance-related stress. The average level of stress for a company in the sector has risen steadily year over year (Figure 1). As of Q4 2016, approximately 88 percent of the publicly traded companies exhibit some form of moderate financial distress (Figure 2).
While a moderate level of stress does not in and of itself mean the industry is in an unhealthy state, it does indicate that disruption is a very potent reality.
Now is the time to understand how your business stacks up against the overall health of the industry – and your competitors. Knowing which dynamics have changed since Lumber IV will help you identify what path to take in 2017 and beyond.
What can you do right now?
Companies aiming to be successful should look to better data and analytics to support smarter, more efficient and effective decisions and strategies to navigate the current uncertainties. Guesswork is not sufficient in today’s market conditions.
When used and applied correctly, data analytics will help you to understand the past and the present in order to better predict the future of your business. There are a number of areas where data analytics can assist you, such as:
- conducting a health check diagnostic and identifying potential weaknesses and their trigger points
- discovering insights and enabling you to rapidly respond to stress points
- undertaking business case scenario planning to inform your strategy in response to the CVD and AD and over the coming years
- helping identify new sources of growth
- obtaining the best from any potential deals
- improving performance.
Click here to view graphs and timeline.