Independent B.C. lumber producers are calling for closer scrutiny of the province's trend toward supermills as the industry grapples with increased global competition.
"If the people of this province really want big, monstrous mills all over the place, I would rather they tell me sooner than later, so I can go and do something else," says Ken Kalesnikoff, owner of the Kalesnikoff Lumber Co. Ltd. mill based near Castlegar in the Kootenays.
Supermills refer to facilities that can produce hundreds of millions of board feet of lumber per year.
But the trend toward supermills will not slow down anytime soon, predicts Craig Campbell, a partner with PricewaterhouseCoopers LLP. Campbell told a recent Vancouver Board of Trade forum on the future of the lumber industry that B.C.'s move to embrace large mills will continue as the province grapples with rising global competition for wood.
Large mills are becoming more prolific in the B.C. Interior and Cariboo regions near Prince George, Quesnel and Williams Lake.
Before it was defeated by a non-confidence motion, the federal Liberal government announced a $1.5-billion lumber industry aid program that included financial assistance for communities that face mill closures.
Kalesnikoff says industry and government players must find a way to reap the maximum value from the province's timber supply and find a balance between "spaghetti mills" - the supermills that produce mostly two-by-fours all day long - and "higher-value mills" that produce specialty products.
The lumber producer wants to know where the province's forestry industry is going over the next 10 to 20 years so he can prevent his family's history, he says, "from going in the toilet.”
His grandfather Pete started the company with his brothers Koozma and Sam in 1939 and then passed it down to Pete's son Peter and, in turn, to Ken.
Kalesnikoff Lumber - which manufactures softwood products from fir, larch, white pine, hemlock and lodgepole pine - employs 150 people to produce 250,000 to 350,000 board feet per year, but he says a supermill operator can employ the same number of people to produce hundreds of millions of board feet.
Although he is against "social engineering," he says the provincial government should monitor more closely mergers and acquisitions, which have resulted in giant companies and mills.
"In order to remain competitive as an industry, we need some sort of consolidation or expansion, but maybe we've had enough now," says Kalesnikoff. "The government needs to decide what they want this industry to look like."
His company has had $5 million worth of countervailing duties withheld as part of the softwood lumber dispute with the U.S.
The company lost 48 of 50 U.S.-based piano makers as customers because countervailing duties made his wood too expensive. Since 2003, his firm's U.S. sales have dropped 30 to 40 per cent, and he has shifted attention to other markets.
But the mill boss admits he is not likely to leave the industry anytime soon. "We're not going anywhere without kicking and screaming - that's for sure," says Kalesnikoff.
Bill Downing, president and CEO of BC Wood, which markets value-added softwood and hardwood products worldwide, says the trend toward the larger mill is designed to allow industry giants to deal with an overload of pine beetle-infested wood and sell their product at lower prices on the global market.
"If you're a small independent mill, you're not going to be able to keep up with the West Frasers and Canfors of the world," says Downing, adding smaller producers do not have the same economies of scale.
He says a healthy primary industry, which produces lumber mainly for the construction industry, is vital to the secondary industry. But the trend toward the supermill is also cause for concern for BC Wood members, whom Downing considers part of the secondary industry because they have fewer sources of fibre to purchase from - creating the potential for higher wholesale prices.
There are now just three or four large companies in B.C. and about 10 in the next tier, whereas "there used to be literally hundreds" of companies, says Downing.
He says large producers have run into difficulties such as the softwood dispute because they have focused their attention on markets outside B.C.
"We'd like to see the primary industry of British Columbia view the secondary industry of British Columbia as a major customer and treat them that way," says Downing.
Jake Kerr, managing partner of Lignum Forest Products LLP, a trading company that buys and sells wood for large and small companies, says the current consolidation has been a long time coming. Company operators who know what they're doing, have enough capital and focus on niche markets will be able to take advantage of new opportunities, he says.
"There is room in the industry for smaller companies," he adds.
Kerr, a 30-year veteran of the lumber industry, formed Lignum Forest Products in September. His former family-owned company, Lignum Ltd., operated a sawmill at Williams Lake and a marketing and distribution office in Vancouver before it was acquired for $100 million by Kelowna-based Riverside Forest Products Ltd. A short time later, Vernon-based Tolko Industries Ltd. acquired Riverside as part of a hostile takeover.
The new Lignum dedicates itself exclusively to trading and has formed a strategic partnership with Pope & Talbot Inc., which is based in Portland, Ore., and also operates mills in B.C. Lignum also deals with Canfor and West Fraser.
But Kerr says he does not view consolidation as particularly negative because larger companies needed better efficiencies.
"The key to (smaller companies surviving) is to make sure you raise enough funds and understand the market you're dealing with and realize you're up against large companies," says Kerr.
Analyst Campbell told the Vancouver Board of Trade breakfast meeting the future trend will be to open large mills and close small ones.
"What we're seeing here is companies taking disparate portfolios and putting them together, so we're getting more mills under control of those single companies, and they're able to shut down the high-cost operations and ramp up the better-performing mills," said Campbell.
Supermills have an average potential 35-per-cent capital-cost benefit over small mills, he added, because large facilities contain more modern technology and can operate 24 hours per day.
Ten years ago, he said, the world's largest mill produced 350 million board feet. Today, it produces 600 million board feet.
In the near future, Campbell predicted, B.C. will face increased competition from Southern Hemisphere countries that produce wood once considered inferior, but is now marketable because of technological advancements in paper-making.
"In terms of production capacity, we're seeing more and more mills being set up in emerging markets and that's probably going to continue because costs are much cheaper in terms of the fibre costs, energy costs and labour costs," said Campbell. "So we're going to see more pulp and paper mills shut down in the north and more and more open in the south."
Ray Schultz, B.C.'s assistant deputy forest minister in charge of the mountain pine beetle emergency response division, said the trend toward large mills "can only be a good thing" for uptake or utilization of beetle wood.
"The larger mills tend to be low-cost production mills," said Schultz. "Those are the ones that can compete the best in the international lumber markets. So to the extent they remain strong and profitable, it'll be a good thing for the uptake of dead beetle wood."
(Monte Stewart can be reached at monte@businessedge.ca)
