British Columbia lumber producers are among the best in the world, in part because of large capital investments that have created more efficient and larger mills with a focus on producing solid wood products, says a forestry expert.

But challenges remain, an international forestry conference heard in Vancouver last week.

"B.C.'s excellent performance in 2004 was in the face of adverse conditions - the U.S.-Canadian dollar exchange rate, duties imposed by the softwood lumber dispute, a railcar shortage, plus the damage incurred by the pine beetle," Craig Campbell of PricewaterhouseCoopers (PwC) told the Global Forest and Paper Industry Conference.

In a speech to about 600 international delegates, the senior forestry consultant said the high Canadian dollar has resulted in a revenue decline of $2 billion for the industry, while cash deposits paid by producers during the softwood lumber dispute with the U.S. have tacked on another $1 billion.

He also predicted the pine beetle epidemic will ultimately lead to job losses and more sawmill closures in B.C.

B.C.'s lumber sector also has gone through merger and acquisitions in excess of $5 billion US last year and has spent $1 billion US upgrading and expanding facilities, he noted. This has caused the shutdown of high-cost facilities, but has resulted in the province having the most efficient sawmills in the world.

Producers also improved their performance, thanks to higher lumber prices. Average lumber prices increased 44 per cent last year, when compared with prices in 2003. And it shows in the bottom line, Campbell noted in an analysis of first-quarter earnings for this year by three strong performers. Canfor Corp., Ainsworth Lumber and West Fraser Timber showed a combined profit of $164 million, compared with $37 million for the same period last year.

"We expect lumber prices to level off at around $325 US though the balance of 2005.

"The fundamentals for lumber are still very strong: Mortgage rates continuing at record lows and U.S. and Canadian housing starts remaining at, or near, record levels," Campbell said. "However, volatility is still the order of the day, due in large part to fragmentation, the fact that no major player controls the market and entry is relatively easy."

Statistics show the return on capital employed for the B.C. forest and paper industry was the highest in the world at 11 per cent last year, compared with 3.2 per cent in 2003.

Campbell said it looks like 2004 will be a record year for earnings for the B.C. forest and paper industry. "Our preliminary estimate is that the B.C. industry earned $1.5 billion in 2004, compared to $340 million in 2003, he said.

Another speaker, Thomas Russo, vice-chairman of Lehman Brothers Inc. of New York, added the outlook for the U.S. housing industry remains strong as low interest rates allow people to finance their dreams to own their own homes.

Russo noted that the U.S. economy should continue to do well in the short term. "When you think of the U.S., you have to think of the rest of the world, because the U.S. economy is so important," he added.

But Richard Nilsson, a financial analyst for Enskilda Securities in Stockholm, Sweden, told the conference that the European pulp and paper sector is in trouble after earnings have declined for the fourth year in a row.

Industry executives will have no choice but to undertake more cost cutting and shut down plants, he added. "European companies have undertaken these measures in their North American operations, but now they will have to focus on their European operations," he said.

In its analysis of worldwide forest and paper revenues, PwC said there has been an improvement of eight per cent. Total revenues rose to $343 billion US last year, compared with $319 billion US in 2003. Net profits almost doubled to $14 billion US from $7.3 billion US in 2003.

In Canada, PwC figures show the industry's fortunes are improving dramatically. Profits rose to $201 million in the first quarter of 2005, compared with a loss of $101 million for the first quarter of 2004.

"We are slowly returning to earnings levels last seen in 2000," said Campbell. "But a lot of the sectors are still struggling with overcapacity due to new production coming onstream in the southern hemisphere. Further consolidation and closure of high-cost production is needed to make the industry attractive to investors."

Meanwhile, outside the conference, a protest drew attention to the need for eco-system based logging practices and greater protection for forests and the animals they protect.

"It is ironic that more than 20,000 acres across Canada, an area almost the size of Vancouver, will be logged during this three-day forest summit on sustainability," said Tzeporah Berman, program director for a group called ForestEthics. "This summit is not about creating real change - it's a forum for the same empty talk we've been hearing for years."

Added Gwen Barlee, policy director for the Western Canada Wilderness Committee: "As the forest industry talks about 'vision' to enhance its public relations activities, more endangered species habitat is being destroyed."

(George Froehlich can be reached at george@businessedge.ca)