NDP continuing to hollow out B.C.’s invaluable forest industry (BIV)

We close out our regular monthly columns for the year by revisiting the economic role and contributions of the province’s largest export industry: forestry.

The Provincial Crown owns 95 per cent of all land in B.C., albeit subject to near-ubiquitous unsettled First Nations claims, meaning the government has preponderant control over the majority of forest resources. The industry itself relies heavily on government -- for land tenures, access to the resource, cutting permits, and much else besides. Policymakers in Victoria decide who can harvest timber on Crown land, under what conditions, and how much they must pay for the right to do so.

B.C.’s exceptionally high proportion of public ownership of forest resources, coupled with the private sector’s dominant role in harvesting and processing, is unique in North America. This structure ensures that government policy and its implementation are principal determinants of the domestic business climate for the industry.

Prior to 2018, forest companies in B.C. produced around 30 million cubic meters of lumber annually. In more recent years, despite record high lumber prices during certain periods, annual production has hovered around 21 million cubic meters, amounting to roughly a 30 per cent reduction.

The pine beetle infestation that ravaged more than half of B.C.’s merchantable pine forest explains much of the production decline. But government policies have aggravated the powerful headwinds confronting the industry, by further diminishing access to fibre and making it increasingly difficult for companies to operate day-to-day. This unappetizing mix has resulted in many mill closures and substantial job losses, affecting both logging and wood products manufacturing.

The latest blow to the forest sector is the NDP government’s “old growth deferrals” policy, announced in stages over the last couple of years. This will remove an additional 2.6 million hectares of old growth from the ever-shrinking harvesting land base. Efforts to protect caribou habitat, tenure redistribution from larger to smaller operators, and a return to a more prescriptive forestry practices regime have also raised costs and limited access to timber for lumber producers, undermining investment and dampening employment in the industry.

B.C.’s forest products sector is highly integrated. The logging and harvesting industry (sustained by forestry management, including horticulture, replanting, and forest management) feeds into lumber, panel and other wood products manufacturing, and the by-products from such manufacturing (as well as lower quality logs) provide fiber for the pulp and paper industry. This means any curtailment of wood fiber supply has widespread implications for business activity, jobs, and community well-being.

Despite its contraction over the last decade or so, forestry is still number one among B.C.’s traded industries. It generates about one-third of the province’s merchandise export earnings and supports tens of thousands of direct jobs that pay some of the highest wages in the province. Forest companies also purchase many billions of dollars worth of “inputs” from other B.C. businesses each year. Forestry is the backbone of dozens of communities across the province, and it represents an important (if diminishing) slice of the corporate head office economy concentrated in the lower mainland.

Given its contributions to province-wide prosperity, one could expect the economic health of the forest industry to be a top-of-mind concern for government. But B.C. is different. Here, government policies have led to serially higher operating costs, serial reductions in fibre supply, a misalignment of timber resources, and growing uncertainty. The net result: in both logging and wood products manufacturing, B.C. has the highest operating costs and the least attractive investment climate in North America. No wonder leading equity analysts describe our province as essentially “un-investable” across most segments of the forest products business.

Being competitive in the North American context requires large capital investments to sustain and upgrade lumber-producing facilities. Pulp mills too are very capital intensive. Without exception, major B.C. producers have diversified into the United States and, to a lesser degree, other parts of Canada. Beyond necessary maintenance, very few companies are allocating fresh capital to B.C. operations.

Unfortunately, the mandate letter for newly appointed Forest Minister Bruce Ralston signals that the NDP government’s policy priorities are likely to remain misaligned with the commercial success of B.C.’s biggest export industry. To us, this suggests that capital will continue to leak out of the province and that more forestry-related jobs are likely to disappear in the coming years.

This article appeared on December 19th in the print edition of Business in Vancouver.