British Columbia’s forest products sector saw some notable swings in commodity prices in 2018 as disruption continued to impact the industry throughout the year. Major forces at work included a shrinking timber supply, higher log prices, transportation challenges, duties on exports and uncertainty around government regulation. A relatively cheap Canadian dollar throughout the year was a positive factor for Canadian producers.

Most of the province’s major public companies operating in the forest products sector saw market trading prices reach all-time highs by mid-2018, which was in line with the overall rise in commodities. But with lumber prices falling sharply in the fourth quarter of 2018, most companies saw their share prices fall dramatically by the end of the year.

In the solid wood subsector, most B.C. lumber producers were forced to curtail production at mills late in the year. To put the issue in perspective, the province’s annual allowable cut (AAC) peaked at about 90 million cubic metres in 1987. The long-term forecast is for an AAC of approximately 58 million cubic metres by 2025, with a return to more historically normal levels by some time close to 2075. As a result, most players are making acquisitions in other markets to grow or just to maintain production levels. For the pulp and paper subsector, pulp prices were strong throughout the year due to global demand and the B.C. coast region saw some major announcements with acquisitions and changes in government forest policy around wood waste and improvements in harvest performance.

Merger and acquisition (M&A) highlights for the B.C. forest products sector in 2018 included:

  • West Fraser Timber Co. Ltd., Canfor Corp., Conifex Timber Inc., Interfor Corp., the Teal-Jones Group, Tolko Industries Ltd. and Western Forest Products Inc. all acquired businesses or mill assets in the United States.

  • Canfor and Mercer International Inc. acquired assets in new international markets (Sweden and Australia, respectively).

  • Mercer International and Paper Excellence Canada made moves to acquire B.C. pulp and paper assets (DMI and Catalyst Paper Corp., respectively).

  • TimberWest Forest Corp. and Island Timberlands completed an affiliation agreement.

So what’s our outlook for 2019? We believe M&A activity will continue to be strong as B.C. players look to grow in international markets. In addition, regulatory and tariff uncertainties remained the leading risk for dealmakers in 2018, and this could push more consolidation within the industry. Finally, it is expected that the U.S. South region will be the low cost wood fibre supply basket for the foreseeable future and capital will continue to go there as a result. This should drive additional deal activity as B.C. players look to add capacity in this region.