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Why Canadian forestry companies are one card short of a royal flush


Why Canadian forestry companies are one card short of a royal flush

It’s been a tough year for the Canadian forestry industry. A combination of factors has seen both the price and demand for lumber drop, leading to the closure of several mills and a significant drop in output.

This can be seen, in part, as a strategic move by the timber companies owing to the unique way in which the Canadian timber market operates and their liability to the Crown.

In difficult market conditions, regular and accurate data is the missing card to a winning hand.

The Canadian Timber Market

The vast majority of forested land in Canada is owned by the Crown. Timber companies typically lease this land on a long-term cycle, allowing them management and harvesting rights. In return, the timber companies pay the Crown stumpage fees (calculated at the start of the lease period and fixed for the duration), as well as face a quota on how much timber can be cut for the duration of the lease, known as the Annual Allowable Cut (AAC).

In the situation where the price of logs or lumber falls and crown stumpage fees remain unchanged, this will lead to lower margins – even losses – and, so, decreased viability. The natural reaction is to reduce operations and wait for the price of lumber to stabilise; however, this means reduced revenue, inefficiency and the loss of livelihood for employees.

What’s causing the fall in lumber prices

There are a number of factors that have adversely affected the price of Canadian logs and lumber in the first half of 2019:

US housing market
There has been a drop in demand for lumber due to a slowdown in the US housing market. Fewer houses are being built leading to a decrease in demand.

Canadian lumber is subject to US tariffs, making it more expensive to sell into the US market. Additionally, the escalating trade war between the US and China has had ramifications for lumber prices across the whole of North America. With less US timber being exported to China, there is greater domestic supply.

Low inventory
Log inventories have been adversely impacted by wildfire-related logging curtailments, particularly in the Pacific North West. Wet weather and pest have also had adverse effects.

How to beat the dealer

One option would be to sit it out and wait for the price of lumber to increase but, with AAC quotas to meet and shareholders to report into, this is not an attractive proposition for most forestry leaders.

A more beneficial solution is to improve your hand and find a way to operate profitably through even the toughest of market conditions, and maximise margins using new technology and better data.

Satellite data and machine learning algorithms are providing valuable new insights into forestry operations. Having up-to-date data on forest inventory; being able to accurately forecast 5-year cycles; and mitigate the risk of fire, pest and disease allows forestry leaders to improve the efficiency of their operations and identify the most profitable parcels of land for harvesting and acquisition.

Rezatec’s forest monitoring and management data services enable improved margins, enhanced competitive advantage and optimised forest management. Many of the leading forestry companies are already adopting this technology and capitalising on the insights it provides. Those that don’t risk being left in the dark.

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